August 10, 2022

Futureality

Future Depends on What You Do

Benefits of a Delaware Public Benefit Corporation

This article is geared towards founders who have an idea for a mission-driven business and want to know what to do next.

Why does this article focus on Delaware?

Delaware has become internationally recognized as home to over a million legal entities, including the majority of all Fortune 500 companies. With a well-respected and established corporate court system and business-friendly tax, legal, and regulation policies, Delaware is an ideal location for incorporation with key incentives, including tax benefits, efficiency, and privacy. The state’s statutes, such as the Delaware General Corporate Law (“DGCL”), are highly regarded for providing stockholders and corporations with maximum flexibility and a business-friendly legal environment.

What is a “traditional” corporation?

A corporation is a legal entity that is separate and distinct from its owners (stockholders) and the individuals who run the business (the board of directors). Often referred to as a “legal person,” a corporation possesses many of the same rights and responsibilities as individuals, which means that it can own assets, enter contracts, sue and be sued, pay taxes, and loan and borrow money.

What does “incorporate” mean?

Incorporation refers to the legal process of forming a corporate structure or company. This process involves various stages, such as creating articles of incorporation, implementing bylaws, electing officers, and issuing stock to shareholders. By definition, corporations are completely separate entities from their owners (stockholders). This means that corporations are limited liability entities, so their owners are not personally responsible for the company’s debts but may take part in the profits through dividends and stock appreciation. Care should be taken to ensure “corporate formalities” are followed to maintain this limitation of liability.

What is a “PBC”?

A public benefit corporation (“PBC”) is a corporation created to generate a public good (“Public Benefit”) and to operate in a sustainable and responsible manner. A corporation may be formed as a PBC from the outset, or it may be converted to a PBC. Unlike traditional corporations that prioritize the maximization of shareholder value, PBCs balance stakeholders’ financial interests, the interests of those who are involved and affected by the corporation (such as employees, customers, creditors, and suppliers), and the advancement of their intended Public Benefit. Furthermore, PBCs are required to undergo auditing and accountability assessments and report their progress on delivering their Public Benefit. While the terms are sometimes used interchangeably, PBCs are distinct from B Corporations (“B Corps”). The term B Corp refers to those for-profit entities (including corporations and LLCs) that have paid a fee to be reviewed and certificated by a national nonprofit organization called B Labs.

Do you have a handy chart comparing the two?

Why yes, we do.

 

Corporation

PBC

Who owns the company?

Stockholders.

Same.

Who runs the company?

Board of Directors, who may designate officers to manage day-to-day operations. Some decisions must also be approved by stockholders.

Same.

Will venture funds invest?

Yes.

Same.

Name

Must include “association, “company,” “corporation,” “club,” “foundation,” “fund,” “incorporated,” “institute,” “society,” “union,” “syndicate,” “limited,” or an abbreviation thereof.

Must include the words “public benefit corporation” or the abbreviation “PBC.”

Purpose

Any lawful act or activity for which corporations may be organized and incorporated under the DGCL.

A PBC is intended to produce one or more Public Benefit(s) and to operate in a responsible and sustainable manner. Accordingly, a Delaware PBC shall identify within its statement of business or purpose one or more specific Public Benefits, i.e., a positive effect or reduction of negative effects on one or more categories of persons, entities, communities, or interests (other than stockholders in their capacities as stockholders), to be promoted by the corporation.

A PBC must balance the financial interests of its stockholders as well as promote its Public Benefit and operate in a responsible and sustainable manner.

Duties of Directors

Manage in the best interests of the corporation and its stockholders.

Manage in a manner that balances the financial interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific Public Benefit(s) identified in its certificate of incorporation (the “Balancing Requirement”).

Directors of a traditional Delaware corporation may ordinarily take actions that they believe are not in the best interests of the stockholders in the short term, at least if they believe that the action is in the long-term best interests of the corporation. The Balancing Requirement for directors of a PBC might more readily permit, but does not require, directors to take actions that stockholders consider not to be in their financial best interest, if they are in support of the PBC’s Public Benefit.

Suits to Enforce Public Benefit Duties of Directors

N/A

Recent amendments to the DGCL have strengthened director protections so that a director’s failure to satisfy the Balancing Requirement does not constitute an act or omission not in good faith or a breach of duty unless otherwise specified in a PBC’s certificate of incorporation. A Delaware PBC could be subject to a derivative action by stockholders for failure to pursue its Public Benefit(s) established in its certificate of incorporation. However, this risk is mitigated because stockholders bringing an action must individually or collectively own at least 2% of the corporation’s outstanding shares.

PBC Reporting

N/A

A PBC shall no less than biennially provide its stockholders with a statement as to the corporation’s promotion of its Public Benefit(s) identified in the certificate of incorporation and of the best interests of those materially affected by the corporation’s conduct.

Common Law Fiduciary Duties in Transactions for Corporate Control

In the context of certain transactions involving a sale of control of a company, Delaware common law generally imposes on directors of a traditional corporation a duty to maximize stockholder value.

In response to all sale transactions, the directors of a PBC are required to consider the Balancing Requirement in addition to maximizing stockholder value. In the context of competing offers to acquire a PBC, however, the board of directors could choose to accept a lower offer with a bidder who aligns in with the PBC’s Public Benefit. Conversely, in the same circumstance, the directors of a traditional corporation might be compelled by their fiduciary duties to accept the higher offer, even if the bidder were a less desirable match.

Other Considerations

Regulators are most familiar with corporations, and there is a well-developed body of case law and statutes that govern what corporations can do.

PBCs are relatively new corporate forms, and there is room for improvement in service platforms and capital resources to tailor these tools to PBC needs.

Do I need to make this decision now?

No – Delaware law allows for conversion from a corporation to a PBC but this adds additional costs (filing fees and legal fees) and approval requirements.

OK, so should I make this decision now?

If you think you might want to be a PBC, incorporating as one from the get-go will save you time and money.


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National Law Review, Volume XII, Number 199