September 5, 2013

By Devin McDougall

Overview

On August 1, 2013, Delaware’s new benefit corporation law came into effect,¹ making Delaware the 19th state² to authorize the formation of benefit corporations. Benefit corporations, as discussed in further detail here,³ are a special type of corporation that requires directors to consider the advancement of certain specified public benefits when making management decisions for the company.

Delaware’s adoption of the benefit corporation model is significant, because Delaware has historically been a leader in American corporate law. Although Delaware is the second smallest state, more than 50%⁴ of publicly traded companies in the United States are Delaware corporations, in part due to the predictability and flexibility which characterize Delaware corporate law.

Consequently, Delaware’s laws, and the decisions of Delaware courts interpreting them, have broad implications for corporations in business all over the country.⁵ Moreover, some observers, including B Lab, a nonprofit advocate for the benefit corporation model, believe that a benefit corporation organized under Delaware law may also have more ready access to public capital markets,⁶ due to investors’ familiarity and comfort with Delaware’s corporate law.

General Features

The new statute implements the benefit corporation model through a series of amendments to Delaware’s General Corporation Law (“DGCL”).⁷ In the main, these provisions follow the approaches used in other major jurisdictions such as New York⁸ and California ⁹ and the model benefit corporations statute¹⁰ prepared by B Lab.

To start, section 362(a) of the DGCL¹¹ provides that the new corporate form will be called a “public benefit corporation.” A public benefit corporation is defined as a “for-profit corporation…intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”

Under the new law, a Delaware public benefit corporation must identify the specific public benefits it is pursuing in its certificate of incorporation.¹² The directors of the corporation are then required to manage the corporation 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 or public benefits identified in its certificate of incorporation.”¹³ To set a standard for evaluating this balancing, section 365(b) of the DGCL provides that directors’ balancing decisions must be “informed and disinterested and not such that no person of ordinary, sound judgment would approve.”¹⁴

The new law provides that stockholders, under certain circumstances, can take legal action to force directors to properly adhere to the public benefits mission of the corporation, although beneficiaries of that mission may not. In order to take such legal action, shareholders must, individually or collectively, own 2% of the corporation’s outstanding shares, or at least $2,000,000 worth of shares.¹⁵

Reporting Requirements

Notably, however, Delaware’s requirements for a benefit corporation’s reporting on its progress in advancing its public benefits mission differ in key ways from other leading jurisdictions. First, where New York, California and the B Lab model legislation require that a benefit corporation’s benefits reports be made public, Delaware’s benefit corporation law requires only that they be distributed to shareholders.¹⁶

Second, where New York, California, and the B Lab model legislation require benefit corporations to use third party standards in preparing their benefits reports, Delaware does not. ¹⁷. Instead, Delaware benefit corporations can produce their benefits reports according to their own standards.

Formation

Delaware public benefit corporations can be formed¹⁸ with a process largely similar to that for a traditional Delaware corporation.¹⁹ However, a Delaware public benefit corporation must identify itself as such in its certificate of incorporation and must list the specific public benefits the corporation is to advance. The corporation must also include in its legal name the phrase “public benefit corporation” or the abbreviation “PBC.” An existing Delaware corporation can convert itself to a benefit corporation by means of a 90% vote of all outstanding shares.²⁰

Additional Resources

• Subchapter of Delaware General Corporation Law addressing benefit corporations

• Delaware legislature’s report on new benefit corporations law

• Delaware Division of Revenue’s Legal Business Structures Table

References