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Introduction to Benefit Corporations
Elizabeth K. BabsonDrinker Biddle & Reath LLP
One Logan SquarePhiladelphia, PA 19103
(215) [email protected]
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Purpose
• shall create general public benefit (defined as “a material positive impact on society and the environment, as measured by a third party standard”)
• may create specific public benefit (defined by the company as a specific intent of the company; does not supersede creating general public benefit)
Accountability
• directors and officers shall consider effect of decisions on stakeholders
• shareholders and directors have right of action (no third parties)
Transparency
• publish annual Benefit Report in accordance with independent, transparent, third-party standards for defining, reporting, and assessing social and environmental performance
• must distribute Benefit Report to all shareholders and make available on website
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The Context•60 million conscious consumers•$2.7 trillion available from socially responsible investors•100,000+ social entrepreneurs and sustainable businesses
The Problem•Current corporate law lacks the framework to fully support businesses focused on sustainability and social impact•No standards to distinguish good companies from good marketing
The Opportunity20th Century 21st Century
Shareholder corporation Stakeholder Corporations(maximizes shareholder value) (creates social and shareholder value)
The NeedSupport high-impact entrepreneurs
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The three founders of B Lab were college classmates at Stanford and two of them were DBR clients while principals in And1.
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The nonprofit behind the legislation
> B Lab> Three interrelated initiatives:
– Building a community of Certified B Corporations to make it easier for all of us to tell the difference between “good companies” and just good marketing
– Accelerating the growth of the impact investing asset class through use of B Lab’s GIIRS Ratings & Analytics by institutional investors
– Promoting legislation creating a new corporate form that meets higher standards of purpose, accountability and transparency.
> DBR’s pro bono work
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important note
benefit corporation≠
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a little history, first, by way of introduction
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the corporation is a medieval construct that has evolved to serve the needs of society– the oldest existing stock corporation is Stora
Enso, a Swedish mining company oldest share dates to 1288 royal charter was a method of allocating shares/right to use mining
equipment
– Beretta was established in 1526 and has been owned by the same family continuously since then
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corporations were the agents of empire in the Age of Exploration:
– agent of monarchy - monarchs bestowed royal charters/monopoly
– extended European Empires in the 1400s to 1700s
– allowed financing beyond the limits of royal treasuries
– monarchs were external conscience and source of capital to avoid creating political and economic rival
– e.g., Hudson’s Bay Company controlled 15% of North American landmass
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the power to charter corporations was transferred from monarchs to government bodies in the Age of Enlightenment:– divine right of kings
debunked – European monarchies
diffused authority to charter corporations to legislative and administrative bodies
– legislature became the de facto external conscience with power to revoke charter
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America inherited English common law and concept of a corporation in 1776:
– Framers of Constitution feared power of corporations
– creating corporation required an act of legislature – thus legislature as external conscience
– many checks and balances to power of corporations:
personal liability for debts and actions
often limited to terms of 10-20 years
– very few in America before 1800
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first widespread use of corporations in America came during the Age of Westward Expansion when they were used to organize public utilities such as:– bridge– canal– ice– mining– railroad– sewer– street railway– telegraph– turnpike
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the corporation became the agent of the Age of Industry in the later 1800s as the checks and balances of an external legislative conscience were removed:
– free incorporation – limitations on state power to revoke charter– adoption of concept of limited liability for officers, directors and
shareholders– courts impose common law of fiduciary duties upon directors to
prevent abuse by directors of shareholders
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20th Century Corporation – Shareholder Primacy
“A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”
- Dodge v. Ford (Mich. 1919)
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“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
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> By law or custom, businesses feel they must maximize profits
> Corporate statutory law may allow for a company to alter traditional purpose in its articles, but there is no case law testing the application of this approach
> On the other hand, there is developed case law regarding fiduciary duties as they are commonly understood: in the context of shareholder primacy
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“Directors cannot defend a business strategy that openly eschews stockholder
wealth maximization.”
- ebay v. Newmark, Sept. 2010
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Age of Exploration
Age of Enlightenment
Age of Westward Expansion
Age of Industry
?? Age of Sustainability ??
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the current story begins almost 30 years ago
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Constituency Statutes
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since the adoption of the Pennsylvania constituencies statute, 30 some states have adopted similar statutes
some states, such as Maryland and Missouri, limit the application of their constituency statutes just to situations involving a change of control:• for example, a Maryland corporation may include in its
charter:
“A provision that allows the board of directors, in considering a potential acquisition of control of the corporation, to consider the effect of the potential acquisition of control on:
”(i) Stockholders, employees, suppliers, customers, and creditors of the corporation; and
”(ii) Communities in which offices or other establishments of the corporation are located.”
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the great irony behind these issues
Constituency statutes were purely discretionary.
Their purpose was simply to provide excuses to reject hostile takeovers.
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The consideration of other interests is becoming prevalent.
What began as a purely self-interested protection of management has become the basis for an outward focus on the interests of others.
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Benefit Corporations
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Purpose
• shall create general public benefit (defined as “a material positive impact on society and the environment, as measured by a third party standard”)
• may create specific public benefit (defined by the company as a specific intent of the company; does not supersede creating general public benefit)
Accountability
• directors and officers shall consider effect of decisions on stakeholders
• shareholders and directors have right of action (no third parties)
Transparency
• publish annual Benefit Report in accordance with independent, transparent, third-party standards for defining, reporting, and assessing social and environmental performance
• must distribute Benefit Report to all shareholders and make available on website
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Purpose
• one of the purposes of a benefit corporation is to create general public benefit– material positive impact on society and the
environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation
• corporation may also elect to create specific public benefits
• creation of public benefit is defined as being in the best interests of the corporation
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• directors MUST consider the interests of certain constituencies – although the weight to be given those interests is not prescribed– shareholders of the corporation– employees and workforce of the corporation, subsidiaries and
suppliers– customers to the extent they are beneficiaries of the public
benefit purposes of the corporation– community and societal considerations– local and global environment– long-term and short-term interests, including the possibility
that those interests may be best served by the continued independence of the corporation
• Officers must also consider these interests in certain situations
Accountability
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• some states provide for the election of a “benefit director”– must be independent– must prepare an annual evaluation of the
corporation’s performance, which must be included in the annual benefit report
• some states also provide for a “benefit officer”– will be responsible for preparing the annual benefit
report– will have other duties assigned by the board
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• Benefit enforcement proceeding– Shareholders and directors have standing
• No personal liability for monetary damages for failure to create general public benefit
• No duty to beneficiary of general public benefit (i.e. other constituencies may not sue or bring claims)
• No personal liability (same as corporate law, but automatic application)
• Relief under the statute is likely to be equitable rather than monetary
Liability and Enforcement
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A major concern when designing the statute was to avoid “greenwashing”:
public benefit must be measured by an independent third-party standard
directors are free to choose the standard
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• corporation must prepare an annual benefit report on its creation of public benefit
• Report must be given to the shareholders and posted on the public portion, if any, of the corporation’s website
• Assessment must be against an independent, transparent third-party standard– E.g. B Impact Assessment, Green Plus,
Sustainability Quotient
Transparency
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• Description of:– The ways in which the company pursued general public benefit
and the extent to which it was created– Any circumstances that hindered the creation of general or
specific public benefit– The process and rationale for selecting the third party standard
used to prepare the report
• An assessment of the overall social and environmental performance
of the benefit corporation against a third-party standard • Name and address of benefit director and officer and compensation
of directors (in their capacity as such) during the year• Name of 5% or more owners• Statement of benefit director re: compliance with duties• Statement of connection of relationship between a director or officer
and the third party standards provider
Contents of Benefit Report
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a few technical issues• Provisions of corporate code apply,
except where the benefit corporation statute provides a different rule
• elections in/out of benefit corporation status articles must contain a statement that the corporation is a benefit corporation2/3 super majority vote usually required dissenters rights available in some states
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Significant momentum:
23 Passed since 2010
including Delaware, New York, and California
Others Introduced
(CT, FL, NH, etc.)
Additional states aligning for 2015/2016
Floor Votes:
91% approval on all floor votes
23 Unanimous Votes
Why?
100% voluntaryNo regulationsNo cost Market-based
A national movement with broad support from entrepreneurs, investors and legal experts; bi-partisan policy support
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23 laws passed
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Five years from now, ten years from now, we’ll look back and say this was the start of the revolution. The current system doesn’t work – this is the future.”
Yvon Chouinard, Patagonia
Are Businesses Registering as Benefit Corporations?
On the first day . . .12 in CA13 in NY17 in DE32 in OR
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Who are the benefit corporations?
• Ventura, CA
• 1300 Employees
• Apparel and Outdoor Wear Company Pioneer in organic and PCR textiles Founded 1% for the Planet Leader in supply chain transparency
• Yonkers, NY
• 55 Employees
• Baked Goods Open hiring policy = opportunities for
individuals with barriers to employment 100% profits to community development 100% facilities LEED Certified
• Hyattesville, MD
• 10 Employees
• Eco Friendly Pet Store Organic, humane, and local food Partnered with animal welfare orgs 100% Renewable Energy
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Creates supportive legal framework for high-impact entrepreneurs – and promoting a new kind of business
Why does all this matter?
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Why does all this matter?
Creates supportive legal framework for high-impact entrepreneurs – and promoting a new kind of business
Benefit Corporations | June 21, 2012
Why companies are becoming benefit corporations
For mission-driven companies, benefit corp
> Provides clarity to directors
> Offers legal protection to directors and officers
> Helps maintain mission over time
> Creates accountability to be a good company
Benefit Corporations | June 21, 2012
two themes to reflect on
mission
profit
Benefit Corporations | June 21, 2012
what is the mission?
charitable focus? constituencies focus? a combination?
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What resources are available?
•www.benefitcorp.net
•Business and legal FAQ
•Listing of known benefit corporations
•Guidance for Directors
•Information on available third party standards
•Model Legislation and State by state analysis
•Publications
•White Paper
•Lexis Corporate Attorney’s Practice Guide
•William Mitchell Law Review Article
•Bloomberg/BNA Online portfolio (2013)
•Template documents
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Drinker Biddle & Reath LLPOne Logan Square
18th and Cherry StreetsPhiladelphia, PA 19103-6996
(215) 988-2700(215) 988-2757 fax
www.drinkerbiddle.com
CALIFORNIA | DELAWARE | ILLINOIS | NEW JERSEY
NEW YORK | PENNSYLVANIA | WASHINGTON DC | WISCONSIN
© 2012 Drinker Biddle & Reath LLP | All rights reserved.A Delaware limited liability partnership
Elizabeth K. Babson(215) 988-2698
