Delaware Considers “Public Benefit Corporation” Legislation

To meet growing demand from entrepreneurs and investors to empower entities to sustain a triple bottom line, state legislatures across the nation have been creating new corporate forms that give businesses legal protection to address social and environmental problems. Delaware, however, declined to consider whether to adopt such a corporate structure…until now.

The Delaware Bar recently published draft “public benefit corporation” legislation. As almost all startups incorporate in Delaware for a variety of reasons, this development lends significant credibility to the hybrid corporate structure movement.

Each state’s approach to serving social enterprise differs (see The (Triple) Bottom Line on New Corporate Forms for a comparison of California’s Benefit Corporation, Washington State’s Social Purpose Corporation, and B Corp certification, which is available in all states and not mutually exclusive from social enterprise legislation). Despite these differences, all benefit corporation legislation, including Delaware’s draft, provide for an overarching general public benefit obligation, accountability to all stakeholders and impact transparency.

Whether Delaware ultimately approves the more stringent (and more common) approach favored by B Lab or the flexible approach available in Washington State remains to be seen ­– stay tuned to Founder Tip of the Week for updates on the proposed legislation in Delaware.

Social Enterprise Corporate Form Considerations
Should you incorporate as or transition your business to one of these new corporate forms? What about pursuing B Corp certification instead of (or in addition to) experimenting with a new corporate structure?

Yes, it’s a terrific opportunity to do well and do good!
Investors: Most big funds have SRI investment portfolios, and social ventures are especially popular with crowdfunders
Marketing: Differentiate brand and communicate values to consumers
Fiduciary Duties: Reduced legal liability for social and environmental decisions of directors/officers
Happy-medium: Ability to quickly scale like a for-profit but with a halo effect like a nonprofit

No, it’s a big risk and could be accomplished through other means!
Investors: Many investors will be deterred by triple bottom line investment strategies (“patient capital”)
Unnecessary: Existing corporate forms allow flexibility for most (all?) protections
Expenses: Costs associated with annual evaluation and reporting
Vagueness: Uncertainty regarding application of new and untested laws in courts

It depends!
• These options are only relevant for certain types of businesses. A company’s industry, consumers, competitors and growth strategy may dictate whether to pursue a unique corporate form, certification, both or neither.
• Electing to become a Benefit Corporation or a B Corp allows founders to integrate and preserve environmental and social objectives into the company’s decision-making process. On the other hand, use of traditional corporate forms may achieve substantively similar outcomes at a lower cost and with fewer reporting obligations.
• Delaware corporations can become certified as B Corps without making any changes to their legal form (at least until DE approves its proposed public benefit corporation legislation).
• Financial incentives may emerge for social enterprises. For example, San Francisco gives Benefit Corporations priority when selecting contractors and Philadelphia offers a one-time $5,000 tax credit to certified B Corps. But these incentives are relatively small and unlikely to accelerate in the near future.

Dealing with “Dead Equity”

“Dead equity” refers to company stock owned by individuals and entities no longer contributing to the company. In general, there are two types of dead equity seen on emerging company cap tables: Departed founders/employees. A co-founder or early employee leaves a company or no longer significantly contributes […]

Blog image

When Should I Form a Legal Entity?

As startup lawyers, we often receive inquiries from passionate entrepreneurs and founders seeking guidance on when they should consider taking their side projects to the next step by forming a legal entity. Forming a company is a “crossing the Rubicon” moment for any startup. It’s an essential step […]