United States: Incorporating As A Benefit Corporation: Talking To Shareholders

Last Updated: March 8 2016
Article by TMF Group

If you're ready to take your organization to the next level and formalize your commitment to public good, then incorporating as a benefit corporation is the right move for you.

Written by: CT Corporation

You know the basics — that the organization can remain for-profit while it focuses on providing a positive social and environmental impact. But what's beyond this, and how do you kick-start the process? Once you've spoken to your board and agreed upon the company direction, there are two additional important conversations that need to occur to get the ball rolling — one is with your shareholders, and the other is with your legal department or representative.

In this post, we'll focus on how to talk to your shareholders, who will want to know what being a benefit corporation means for them and how it will impact the bottom line. But you should be aware that we are presenting a general overview and not focusing on the laws of any particular jurisdiction. However, every benefit corporation is governed by the law of its state of incorporation and each state law is unique. Therefore, when talking to your shareholders about their specific situation you should refer to the benefit corporation law of your incorporation state. With that in mind, here are some of the aspects they may be most interested in, and the information to help you prepare for this discussion:

Bottom Line:

If you've assessed your options for structuring your business (e.g., LLC v. Corporation) and decided on the corporate form right for you, then rest assured that registering as a benefit corporation does not affect your organization's tax status. You can still elect to be taxed as a C or S corporation.

One misconception is that benefit corporations are a nonprofit or hybrid entity that combines for-profit and nonprofit business models, but this is misleading. Traditional corporate law applies to benefit corporations with the exception of the added provisions relating to corporate purpose, accountability, and transparency.

In terms of impact on revenue, this will depend on your business structure. Unlike nonprofit entities, benefit corporations are able to scale their business by taking on capital investments or debt financing while maintaining their mission. By freeing directors to consider more than just short-term profit, they can focus on creating long-term value for their shareholders, society, and the environment. In line with this, benefit corporations can also help you tap into a growing community of social impact investors, attract and maintain talent, cultivate customer loyalty, and build brand trust.

Shareholder Rights:

Many shareholders are concerned about losing their rights in the transition to a benefit corporation. Actually, the opposite is true. They are gaining overall additional rights, improving governance, and increasing transparency. In a traditional corporation, shareholders can sue if the company is not maximizing profit. In a benefit corporation, directors must consider the impact on society, environment, and revenue when making decisions. Because of this, shareholders gain a right of action to enforce this commitment to general public benefit and the consideration of additional stakeholders, not just profit. Shareholders also have access to the benefit report, which increases transparency regarding how the organization is meeting its goals.

Further, shareholders have a right to approve a conversion to benefit corporation status. It is important to note that if a company is converting to benefit corporation status, in some states dissenting shareholders are also provided appraisal rights, allowing them to be bought-out at fair market value.

Acquisitions:

Benefit corporations can be purchased and sold. According to the Revlon Rule, when a traditional corporation is being sold its directors are required to prioritize maximization of shareholder value and sell to the highest bidder.¹ With a benefit corporation, however, factors other than price must be considered by the board when deciding whether to approve the sale (like the buyer's alignment with the company mission, for example).

Going the Extra Mile:

The nonprofit organization B Lab is the driving force behind passing benefit corporation legislation. In addition to (or independent of) legally incorporating as a benefit corporation, a company can also take the extra step to become certified by B Lab as a Certified "B Corp" (please note that this is not required). Certified B Corps meet rigorous standards of social and environmental performance, accountability, and transparency. Once certified, you can use the B Lab logo, which signals to the market that you are a socially responsible company upholding your stated mission. Investors take note of this, and can rely on the information and reports to analyze and make an informed decision to invest in the company.

Of course, a registered public agent can walk you through the process of incorporating as a benefit corporation. Another step you can take when thinking about your company's social and environmental mission or creating your annual benefit report is to take B Lab's free assessment. This looks at quantitative and qualitative metrics and provides a clear view of your perceived and actual impact.

Footnote

1. 506 A.2d 173 (Del. 1986)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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