Delaware just made it easier for businesses to do well and do good.
A new Delaware law, signed on July 17 by Gov. Jack Markell, allows companies to be formed as public benefit corporations (PBCs), which balance stockholders’ returns, the impact on other people affected by a company’s business activities, and the creation of an overall public benefit. Starting on August 1, Delaware companies will be able to form or reincorporate as PBCs, or merge with PBCs.
This is a symbolic moment for benefit corporations in the United States, as Delaware is home to more than 50% of the country’s publicly traded companies and 61% of the Fortune 500 companies. It is also the 19th state to pass benefit corporation legislation.
To qualify as a Delaware PBC, companies will need to (a) state in their charters the public benefit they seek to promote, (b) receive a vote by 90% of their stockholders to approve forming as a PBC (or switching from a traditional corporation), and (c) send a statement to their stockholders every two years assessing their social and environmental benefits. A Delaware PBC includes some of the obligations of a California Benefit Corporation and much of the permissiveness of a Washington State Social Purpose Corporation. See below to compare these three corporate forms.
Pros and Cons of Incorporating as a Delaware PBC
Entrepreneurs can now take advantage of Delaware’s corporate laws and enjoy legal flexibility, predictability and insulation for their corporate decisions.
- Per the PBC law, directors do not violate their fiduciary duties for decisions based on enumerated public benefits so long as their decisions are informed and made with ordinary sound judgment.
- Investors may favor PBCs over other hybrid entities because of a historical preference and familiarity with Delaware corporate law.
- To echo a comment we received from Jay Coen Gilbert, a co-founder of B Lab, with regard to our previous blog post, PBCs may allow companies to build a sense of trust and accountability with the general public, which traditional corporations often struggle to develop.
Choosing to incorporate as one of the hybrid entities, such as a PBC, will create uncertainty.
- Founders may be exposing themselves to new liability if stockholders believe the company is not achieving the claimed benefits or is not being managed to adequately balance its varied goals.
- Many investors will continue to prefer traditional Delaware C Corps over hybrid entities, as investment firms seek to maximize returns to their own investors with relatively short-term horizons.
For social enterprises that primarily do business in other states, it may make sense to incorporate in the state where formed.
- Delaware’s filing fees, franchise taxes and reporting requirements, along with the costs of qualifying to do business in other states, will make it more expensive to incorporate in Delaware rather than the state where the company is headquartered.
- Familiarity with Delaware law may not stretch to PBCs because the new entity will spur a new series of case law specific to its revised fiduciary duties.
We also discussed pros and cons of choosing a hybrid corporate form in our previous blog post.
| Public Benefit Corporation (DE) |
Benefit Corporation (CA) |
Social Purpose Corporation (WA) |
Certified B Corporation (by B Lab) |
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| LEGAL STANDARD |
Company must also be managed for the benefit of other persons, communities, entities or interests. |
Company must endeavor to create a “material positive impact on society and the environment.” |
Company organized to promote positive (or minimize negative) effects of company’s activities on constituents, the community or the environment. |
None. However, if possible, company must be a Benefit Corporation under state law in state of incorporation. |
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| FORMATION/ CERTIFICATION |
Charter must state that it is a PBC. Status election must be approved by SHs (90% of SHs for existing corporation; 2/3 of SHs to terminate status). Company must identify the specific public benefit. |
Articles must state that it is a Benefit Corporation. Status election must be approved by SHs. Company may identify a specific public benefit. |
Articles must state that it is an SPC. Status election must be approved by 2/3 of SHs. Company must designate a social purpose (can be specific or general). |
Certification process managed by B Lab, a non- profit. Certification based on self- reported performance metrics; annual fee ($500-25K). |
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| MANAGEMENT | Company must balance stockholders’ pecuniary interests, the impact on others materially affected by company, and the public benefit identified in the charter. |
Directors must consider the interests of: stockholders, employees, customers; the community and society, and the environment. |
Directors/officers may consider stated social purpose in all decision-making (SPCs may require this consideration). |
Company subject to random audits to assess the accuracy of its self-assessment. |
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| TRANSPARENCY | Company must conduct an evaluation at least every two years (PBCs may use own metrics or require third-party audits). Annual report may be public. |
Company must conduct an annual evaluation (PBCs may use own metrics or require third party audits). Annual report must be public. |
Company must conduct an annual evaluation (SPCs may use own metrics or require 3rd party audits). Annual report must be public. |
Self-assessment scores are made public. Factors are the governance, workers, consumers, the community and the environment. |
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| AVAILABLE IN | Delaware | CA HI IL LA MD MA NJ NY PA SC VT VA (Pending in 20 other states) |
Washington (SPC); California (Flexible Purpose Corporation – similar to SPC |
Anywhere (Etsy, Patagonia, Method, Ben & Jerry’s, Seventh Generation) |
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Thank you to Mikhail Brandon, a summer associate and USC law student, for his assistance with this blog post!
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