Delaware is the 20th state to adopt a corporate business form for enterprises that wish to combine "for profit" pursuits and "public benefits." On August 1, 2013, Delaware began permitting the organization of for-profit corporations that are managed to produce public benefits. Delaware's action is perhaps the most significant measure to date addressing the growing demands of business leaders, investors, social activists and others calling for an alternative to the business corporation organized and operated exclusively to make money for shareholders. The authorizing provisions of the new public benefit corporation law are part of a new Subchapter XV of the Delaware General Corporation Law, or DGCL.
Central to the new scheme for public benefit corporations are the definitions of "public benefit corporation" and "public benefit." The DGCL defines a public benefit corporation as "a for-profit corporation ... that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner." Further, the company must be "managed in a manner that balances the stockholders' pecuniary interests, the best interests of those materially affected by the corporation's conduct, and the public benefit or public benefits."
Public benefit is defined as "a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature."
The public benefit corporation must identify in its certificate of incorporation the one or more specific public benefits it is promoting, and it must include in its name "public benefit corporation," "P.B.C." or "PBC." If a public benefit corporation issues a stock certificate, it must contain a legend that the company is a public benefit corporation organized under the DGCL. Any notices sent with regard to uncertificated stock must state conspicuously that the company is a public benefit corporation.
Every two years, a public benefit corporation must send its stockholders a statement regarding the board of directors' objectives established to promote the public benefit and the best interests of those materially affected by the company's conduct. The benefit statement must include the standards the board adopted to measure the company's progress, the objective factual information based on those standards and an assessment of the company's success in meeting the objectives. The company's certificate of incorporation and bylaws may require more frequent benefit statements, that the statements are made public and that the company uses third-party standards and attains third-party certifications.
In addition, every notice of a stockholders' meeting must contain a statement to the effect that the company is a public benefit corporation.
Conversions and Mergers
A company that is not a public benefit corporation must receive the approval of 90 percent of the outstanding shares of each class of its stock to amend the company's certificate of incorporation to become a public benefit corporation or to merge or consolidate with or into another entity if the resulting company would be a public benefit corporation. Stockholders that do not vote in favor of such amendment, merger or consolidation will be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock.
A company that is a public benefit corporation must receive the approval of two-thirds of the outstanding shares of each class of its stock to amend the company's certificate of incorporation to no longer be a public benefit corporation or to change its stated public benefits, or to merge or consolidate with or into another entity if the resulting company would not be a public benefit corporation or have different public benefits.
The new Delaware law for public benefit corporations requires the board of directors to manage or direct the business and affairs of the company in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation's conduct and the company's specific public benefits.
No director of a public benefit corporation, however, will have any duty to any person (other than the stockholders) on account of any interest of such person in the public benefits or on account of any interest materially affected by the corporation's conduct. Any decision of a director will be deemed to satisfy such director's fiduciary duties to stockholders and the company if such director's decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
The certificate of incorporation of a public benefit corporation may include a provision that any disinterested failure by a director to discharge his or her duty shall not, for the purposes of eliminating or limiting director liability for indemnification, constitute an act or omission not in good faith, or a breach of the duty of loyalty.
The new Delaware law allows business managers and investors to articulate and formally adopt socially minded goals for their business, in addition to pursuing the pecuniary interests of stockholders. Prior to the introduction of public benefit corporations, the law imposed a uniform duty on corporate management to act in the best interest of stockholders, which translated into pursuing measures maximizing the money value of their stock. What may be viewed as the perfect hybrid between traditional for-profit and nonprofit corporations, the public benefit corporation stands as an attractive alternative for enterprises that want to pursue socially responsible business practices and a growing socially conscious investment community looking for socially responsible investments. As the jurisdiction of choice for many of the nation's most vital business organizations, Delaware's adoption of the public benefit corporation option will likely be closely monitored to gauge the popularity of the new form and the extent to which it is actually conducive to building sustainable businesses, attracting capital, creating employment and fostering new technologies.
If you have any questions about this Alert, please contact Steven J. Gray, any member of the Corporate Practice Group or the attorney in the firm with whom you are regularly in contact.
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