Formation

Get to Know the Delaware Public Benefit Corporation

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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)
NUMBER OF
COMPANIES		 ~0 (the law goes into effect
on August 1, 2013)		 ~70 companies since
1/2012 (as of 4/1/13)		 ~60 SPCs in WA a
s of 7/29/13		 ~725 companies
(~$4 billion/annual
revenue) [NTD:
Update]
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.
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).
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.
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.
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)

Thank you to Mikhail Brandon, a summer associate and USC law student, for his assistance with this blog post!