Benefit Corporations Flashcards
What are benefit corporations?
Benefit corporations are a corporate form designed to pursue profits and a specific public benefit while operating responsibly and sustainably.
Approximately 40 states have statutes allowing for some kind of benefit corporation, but the names and treatment of these benefit corporations can vary between states.
(Note that, confusingly, “public benefit corporations” in California actually refer to nonprofit entities. California’s mission-focused for-profit corporate form is called a Social Purpose Corporation.)
What is a Delaware Public Benefit Corporation?
A Delaware Public Benefit Corporation (PBC) is Delaware’s version of a benefit corporate form. PBCs operate for profit while also pursuing a specific public benefit. The board of directors and management for a Delaware PBC must balance the interests of the stockholders, the specific public benefit they have chosen, and the company’s impact on stakeholders (e.g, employees and customers).
Examples of Delaware PBCs include: Allbirds, Ben & Jerry’s, Vital Farms, and Warby Parker.
Why choose a Delaware Public Benefit Corporation?
For startups interested in raising venture capital while also preserving a social impact focus, the Delaware Public Benefit Corporation (PBC) is the clear entity choice.
Venture capital firms and law firms are already familiar with Delaware governing law and forms, and the PBC formation documents are identical to the C Corporation formation documents, except for the public benefit specified in the certificate of incorporation. Incorporating in Delaware can increase efficiency since most documents are drafted with Delaware laws in mind, and the Delaware Secretary of State’s office is often faster and easier to work with than other states. Additionally, because PBCs are treated like regular Delaware corporations in all matters not specifically outlined in the PBC subchapter (DGCL §§ 361-368), investors, founders, and lawyers tend to be more comfortable with the Delaware PBC than similar corporate structures in other states.
How are Delaware Public Benefit Corporations different from traditional Delaware C Corporations? What are the requirements?
The biggest difference between Delaware Public Benefit Corporations (PBCs) and traditional Delaware C Corporations is that in addition to pursuing stockholder value, PBCs must also pursue a specific public benefit.
Delaware PBCs have expanded fiduciary duties compared to Delaware C Corporations: the board of directors for a Delaware PBC must balance the interest of the stockholders (financial return), the specific public benefit they have chosen, and the company’s impact on stakeholders (e.g, employees and customers).
A PBC is required to provide its stockholders with a report every two years including (1) the objectives set forth by the board to pursue the stated public benefit, (2) the board’s standards for measuring progress for these goals, (3) objective information regarding the corporation’s success in meeting these goals, and (4) an assessment of the corporation’s success in meeting these goals. These reports are not required to be in any particular format, are not public documents unless the PBC chooses to make them public, and there is no third-party certification or auditing requirement.
Benefit corporations are a corporate form designed to pursue profits and a specific public benefit while operating responsibly and sustainably.
Approximately 40 states have statutes allowing for some kind of benefit corporation, but the names and treatment of these benefit corporations can vary between states.
(Note that, confusingly, “public benefit corporations” in California actually refer to nonprofit entities. California’s mission-focused for-profit corporate form is called a Social Purpose Corporation.)
What are the pros and cons of incorporating as a Delaware Public Benefit Corporation?
Pros of incorporating as a Delaware Public Benefit Corporation (PBC) include the freedom to prioritize mission and drive positive impact (defined more broadly) in addition to shareholder value, branding, and greater attraction of customers, talent, and investors with aligned interests.
Cons of incorporating as a PBC include the money and time required for additional reporting requirements, the potentially more complicated decision making given the need to balance the interests of shareholders, stakeholders, and the public benefit, and the legal uncertainties of this new structure (namely, how mission & financial returns interact in a company’s later stages when board and share ownership structure is more complicated).
Incorporating as a PBC may also negatively impact valuation or the ability to attract traditional VC investors, though it may improve fundraising prospects from impact investors. Fundraising impacts will vary depending on whether and to what extent the public benefit focus impacts profits.
In Delaware, what are the difference between a nonprofit corporation, a Public Benefit Corporation, and a traditional corporation?
Delaware Traditional Corporation
Delaware Public Benefit Corporation (PBC)
501(c)(3) Nonprofit
Purpose
Value creation for stockholders.
Creating value for stockholders while simultaneously pursuing a specific public benefit and operating in a sustainable and responsible manner.
To serve a public benefit (without benefiting private interests or individuals)
Governance
Directors have fiduciary duties to manage the corporation according to the best interests of the shareholders. The two main fiduciary duties are the duty of care and the duty of loyalty.
In addition to the fiduciary duties of traditional corporations, the directors and managers of PBCs also have the fiduciary duty to balance the interest of the stockholders with their chosen public benefit.
Nonprofits are governed by a board of directors and do not have shareholders. The board of directors for a nonprofit have fiduciary duties to pursue the best interests of the organization.
Transparency
Shareholders of the corporation have a limited ability to inspect the books and records.
The corporation has additional requirements to report on its social and environmental performance to either shareholders or the public.
Specifically, PBCs are required to provide stockholders with a report every two years including (1) the objectives set forth by the board to pursue the stated public benefit, (2) the board’s standards for measuring progress for these goals, (3) objective information regarding the corporation’s success in meeting these goals, and (4) an assessment of the corporation’s success in meeting these goals.
Nonprofits are required to file IRS Form 1023 when they apply for tax exemption and to annually file IRS Form 990, both of which become part of the public record. These forms contain information about the nonprofit’s board of directors and finances.
Accountability
Shareholders can sue for breach of fiduciary duty.
In addition to suing for breach of fiduciary duty, shareholders can sue to enforce the public benefit mission.
While nonprofits do not have shareholders, the required annual filings with the IRS and the need for transparency in fundraising efforts provide accountability.
What is B Corp certification?
B Corp certification is a private certification by the nonprofit B Lab verifying that a company meets B Lab’s standards for social and environmental performance and transparency. A company that gets this certification is labeled a Certified B Corporation.
Examples of B Corps include: Kickstarter, Lemonade Insurance, Patagonia, and TOMS.
Is being a Public Benefit Corporation the same thing as being a Certified B Corporation?
No. A Public Benefit Corporation is a type of corporate entity that exists in many states, while B Corp certification is a private certification process conducted by B Lab, similar to “fair trade” or “organic.”
Does getting B Corp certification require converting to a Public Benefit Corporation?
It depends. The specific legal requirements for a company to qualify for B Corp certification differ based on the company’s legal entity type and domicile. B Lab may require an update to the company’s governing documents, reincorporation as a benefit corporation, or other structural changes within a certain timeframe. If a benefit corporate form is available in the state of incorporation, B Lab requires conversion to that form within a certain period of time in order to maintain B Corp certification.
For a Delaware corporation, B Lab requires conversion to a Delaware Public Benefit Corporation (PBC). A California corporation would be required to convert to a Social Purpose Corporation. B Lab’s legal requirements can be found here.
What are the steps required for B Corp certification?
To be eligible for B Corp certification, a company must be a for-profit entity with at least one year of operations. A qualifying company must then meet B Lab’s legal requirement (which for a Delaware corporation is converting to a Public Benefit Corporation), and complete the B Impact Assessment with a score of 80 or more. While a company awaits verification, it must also provide documentation for all of its answers and information about employees and suppliers. Finally, a company must sign the B Corp Agreement, publish a company profile (including the scores and impact report), and recertify every three years. The annual fee for B Corp certification can be up to $50,000, but it is likely that a small company would pay closer to $1,000.
Can I convert a Delaware C Corporation to a Delaware Public Benefit Corporation (and vice versa)? How?
Yes. In order to convert to a Delaware Public Benefit Corporation (PBC), a C corporation must amend its Certificate of Incorporation. The amended Certificate of Incorporation must identify at least one specific public benefit the corporation will promote, and its heading must identify the corporation as a Delaware PBC. The board and a majority of the stockholders must approve the conversion.
What is a public benefit statement? What are examples?
A public benefit statement outlines the impacts or contributions a Delaware Public Benefit Corporation (PBC) aims to make for a particular public benefit purpose. The statement should be narrow enough to identify a particular cause, but not so narrow that it limits flexibility for future growth.
The following are examples of public benefit statements:
Patagonia: To “build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.”
Laureate Education: “[T]o produce a positive effect for society and students by offering diverse education programs both online and at campuses around the globe.”
King Arthur Flour: “Our mission is to inspire connections and community by spreading the joy of baking.”
What fiduciary duties do the board members and managers of a Delaware Public Benefit Corporation (PBC) have?
The board of directors of a Delaware Public Benefit Corporation owes the same fiduciary duties (Duty of Care and Duty of Loyalty) as the Board of a traditional corporation does. However, the board of directors and management of a Delaware PBC must manage the company in a way 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.” (DGCL § 365)
What do the terms ‘bottom line,’ ‘double bottom line,’ and ‘triple bottom line’ mean?
The traditional term “bottom line” refers to a company’s net income.
The term “double bottom line” proposes that in addition to the traditional bottom line, a company should also consider its social impact.
Lastly, the idea of a “triple bottom line” urges companies to consider social impact and environmental impact in addition to the traditional bottom line. The triple bottom line can be thought to consist of three “Ps:” profit, people and planet.
How does incorporating as a Delaware Public Benefit Corporation impact access to capital?
A major concern founders have in deciding whether or not to convert to a Delaware Public Benefit Company (PBC) is whether or not it is more difficult to fundraise with a PBC. The short answer is “probably.” There is no doubt that most investors are used to investing in C Corps, and that they might view the PBC as an unknown or riskier investment, or a signal that a founder is more focused on mission than profit (which is a “bad” thing from the perspective of many traditional investors seeking purely financial returns). However, a sizable and growing pool of impact-focused investments funds, foundations, and family offices have a specific mandate of backing mission-driven organizations, and when approaching those firms the PBC may in fact be a competitive advantage. For a mission-driven founder who likely wants to partner with like-minded investors, using a PBC is an excellent way to align values and objectives toward impact beyond profit. Recent trends in consumer preferences indicating a desire to support socially responsible companies have been beneficial for PBCs’ capital-raising efforts. So, the pool of investors might be smaller, but they may also be more interested in your business relative to a for-profit, and there may be less competition for their money.
Keep in mind that it is always possible to amend the company’s certificate of incorporation, so a founder can start as a C Corp and become a PBC, or vice versa. Before deciding on C Corp vs. PBC, we recommend seeking the counsel of an experienced corporate startup attorney, as well as another attorney that has experience with mission-driven or impact structures.
