Doing Well by Doing Good?
Delaware has recently become the 19th state to permit the formation of “public benefit corporations”. Unlike the regular business corporation which is governed by its directors to serve the best interest of its shareholders, a PBC is a for profit entity organized to produce a public benefit and to operate in a responsible and sustainable manner. Under Delaware law, public benefit means a positive effect (or reduced negative effect) on persons, entities, communities or interests (other than stockholders) of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, technological or similar nature. The PBC is required to be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct and the public benefit for which it has been formed.
The law imposes special requirements upon the PBC to call attention to the fact that its mandate is not entirely pecuniary. Prospective and current shareholders are provided ample statutory notice of the special nature of the corporation. The name of the corporation must include “public benefit corporation” or “PBC”. Shares of stock must conspicuously note that the corporation is a PBC. Every notice of meeting of stockholders also must include a statement that the corporation is a PBC.
Since financial statements will not show how a PBC is doing at achieving its public interest goals, the law imposes a separate reporting requirement. At least every other year, the corporation must provide its stockholders with a statement of the objectives the board of directors has adopted to promote the public benefit, the standards the board has adopted to measure progress, objective factual information, based upon those standards, regarding the corporations success and an assessment of that success by the board. Shareholders owning at least 2% of the corporation’s shares (or $2 million of market value for publicly traded companies if less) may sue derivatively to enforce the boards obligation to manage the business in a manner that balances pecuniary interest of the stockholders and the best interest of those materially affected by the corporation conduct.
A corporation that is not a PBC can only become a PBC either directly through an amendment to its certificate of incorporation or indirectly through merger with the approval of 90% of its shareholders. Dissenting shareholders would have appraisal rights. A corporation that is a PBC must obtain the support of 2/3 of its shareholders to remove the special PBC purpose from its certificate of incorporation or merge with another entity that does not contain the identical public benefit purpose.
It is no surprise that many of the PBC’s being formed are companies providing consumer goods and services to markets that are sensitive to messages of public interest. But questions remain. Will this new form of business entity capture a tide of cause-related capital? Will a significant number of investors be willing to support an enterprise that is managed to achieve something in addition to return on investment? Will investors value doing good as much as doing well? If so, we may see significant growth in this middle ground arena of “for profit” enterprise. If not, the public benefit corporation will be nothing more than a curiosity.