New Delaware and Rhode Island Laws Define Benefit CorporationsJuly 23, 2013
Legislation signed into law in both Delaware and Rhode Island last week has created a new hybrid form of business entity: benefit corporations. Benefit corporations (also known as “B-corps”) are a new category of for-profit corporation, in which boards of directors must take into account societal and environmental benefits when making decisions. About 20 states now permit B-corps, including New York, Massachusetts, and Vermont.
Benefit corporations possess a mixture of characteristics from both non-profit and for-profit business entities. They are taxable like a for-profit business. However, a societal benefit is central to their purpose, much like a traditional non-profit business.
Rhode Island’s new law enumerates statutory characteristics common to B-corps, including:
- Societal Value. Requires a general public benefit defined as a “material positive impact on society and the environment, taken as a whole, assessed against a third-party standard.” Examples of public benefit in the statute include:
a. promoting the arts;
b. providing underserved communities with beneficial products/services; and
c. improving human health.
- Expanded Director Duties and Indemnity. Requires board members to consider the impact of decisions on the following:
a. shareholders of the corporation;
b. employees and the work force and suppliers to the corporation;
c. community and societal factors; and
d. the local and global environment.The new law does not, however, require the directors of a benefit corporation to prioritize the interests of any of the above persons or groups over the interests of any of the other specified persons or groups, unless so stated in the corporation’s charter documents. Except as set forth in the corporation’s charter documents, directors are also not personally liable for the corporation’s failure to pursue or create a general public benefit, and directors are personally liable only for self-dealing, willful misconduct, or a knowing violation of law.
- Specific Shareholder Approval Rights. Certain corporate actions (i) entitle the shareholders of every class or series to vote regardless of any other restriction on voting, and (ii) require at least two thirds of the votes entitled to be cast by such shareholders to approve such actions, including:
a. election of benefit corporation status;
b. termination of benefit corporation status; and
c. amendments to the corporation’s specific public benefit.
- Annual Benefit Reporting. Requires preparation of an “annual benefit report” for each shareholder to be filed with the Secretary of State describing the corporation’s “general public benefit during the year,” stating the “specific public benefit” created by the corporation, and listing “circumstances that have hindered” the public benefit.
Another feature of benefit corporations under Rhode Island law is the establishment of a third-party standard to assess “corporate, social, and environmental performance.” Over time, the standard could evolve toward something akin to generally accepted accounting principles (GAAP).
Issues to Consider
The new Delaware and Rhode Island laws raise a number of practical business and legal considerations, among them:
- What will the impact of B-corps be on shareholder expectations?
– Although B-corps are still for-profit businesses, will shareholders of B-corps be more willing to accept less return on their investment if the public benefit is otherwise achieved?
– If the board of directors of a B-corp fails to manage the business in a manner that maximizes shareholder value, will shareholder claims based on that failure be chilled (1) to the extent the B-corp maintained high morale in the workplace or (2) perhaps because it kept its suppliers happy?
– Will B-corps have difficulty recruiting and keeping directors, given the new duties of B-corp directors to multiple constituencies?
- How does a benefit corporation director reasonably weigh his or her consideration of potentially conflicting interests of constituents (shareholders vs. employees, for example) certain of which may not necessarily be aligned?
- Who will develop the third-party standard applicable to particular B-corps; will this requirement give rise to a cottage industry of entities formed for this purpose; and what will this service cost?
- Will traditional non-profit corporations and the charitable contributions they enjoy suffer as a result of shareholder investment in B-corps?
For More Information
Here is a link to the text of the new Rhode Island law: http://webserver.rilin.state.ri.us/BillText/BillText13/SenateText13/S1049.pdf
Here is a link to the text of the new Delaware law: http://legis.delaware.gov/LIS/lis147.nsf/vwLegislation/SB+47/$file/legis.html?open