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A benefit corporation or B corporation is a corporate form in the United States designed for for-profit entities that want to consider society and the environment in addition to profit in their decision making process. Benefit corporations differ from traditional corporations in regards to their purpose, accountability and transparency. The purpose of a benefit corporation is to create general public benefit, which is defined as a material positive impact on society and the environment. A benefit corporation’s directors operate the business with the same authority as in a traditional corporation, but where in a traditional corporation shareholders with proper standing judge the company's financial performance, here they judge qualitative performance based on the benefit corporation's stated goals. Shareholders in a benefit corporation determine if the benefit corporation has achieved a material positive impact. If a dispute occurs it is up to the courts to determine if the benefit corporation did achieve a material positive impact. Additionally, through the issuance of an annual benefit report to the public, consumers are provided information to determine if they agree or disagree with the benefit corporation’s methods of achieving a material positive impact on society and the environment.
The additional accountability provisions found in a benefit corporation require the director and officers to consider the impact of their decisions not only on shareholders but also on society and the environment. Benefit corporations also provide shareholders with a private right of action, called a benefit enforcement proceeding, that they can use to enforce the company’s mission when the business has failed to pursue or create general public benefit.
The added transparency provisions of a benefit corporation require that the company produce an annual benefit report on its overall social and environmental performance using a comprehensive, credible, independent and transparent third-party standard. Benefit corporations do not need to be certified or audited by the third party standard. Instead, benefit corporations utilize third party standards similarly to how the Generally Accepted Accounting Principles (GAAP) are applied during financial reporting, solely as a rubric a company uses to measure its own performance. A benefit corporation, must also make the annual benefit report available to the public by posting it on the public portion of the company’s website and in some states the company must also submit the report to the Secretary of State. However, the Secretary of State has no governance over the annual benefit report. There are around twelve third-party standards that meet the requirements of the legislation.
In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. As of January 2013 California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia, and Washington had all passed legislation allowing for the creation of benefit corporations. Legislation is also pending in Illinois that establishes a new type of entity called the “benefit LLC,” making available to limited liability companies the same opportunities afforded to Illinois corporations under the state’s Benefit Corporation Law. Passage of the bill would make Illinois the first state to offer a social enterprise the opportunity to be a benefit L3C.
Historically, United States corporate law has not been structured or tailored to address the situation of for-profit companies who wish to pursue a social or environmental mission. While corporations generally have the ability to pursue a broad range of activities, corporate decision-making is usually justified in terms of creating long-term shareholder value. A commitment to pursuing a goal other than profit as an end unto itself may be viewed in many states as inconsistent with the traditional perspective that a corporation’s purpose is to maximize profits for the benefit of its shareholders.
The idea that a corporation has as its purpose the maximization of financial gain for its shareholders was first articulated in Dodge v. Ford Motor Co. in 1919. Over time, through both law and custom, the concept of “shareholder primacy” has come to be widely accepted. This point was recently reaffirmed by the case eBay Domestic Holdings, Inc. v. Newmark, in which the Delaware Chancery Court stated that a non-financial mission that “seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders” is inconsistent with directors’ fiduciary duties.
In the ordinary course of business, decisions made by a corporation’s directors are generally protected by the business judgment rule, under which courts are reluctant to second-guess operating decisions made by directors. In a takeover or change of control situation, however, courts give less deference to directors’ decisions and require that directors obtain the highest price in order to maximize shareholder value in the transaction. Thus a corporation may be unable to maintain its focus on social and environmental factors in a change of control situation because of the pressure to maximize shareholder value.
Mission driven businesses, impact investors and social entrepreneurs are constrained by this outdated legal framework that is not equipped to accommodate for-profit entities whose mission is central to their existence.
Even in states that have passed “constituency” statutes, which permit directors and officers of ordinary corporations to consider non-financial interests when making decisions, legal uncertainties make it difficult for mission-driven businesses to know when they are allowed to consider additional interests. Without clear case law, directors may still fear civil claims if they stray from their fiduciary duties to the owners of the business to maximize profit.
By contrast, benefit corporations expand the fiduciary duty of directors to require them to consider non-financial stakeholders as well as the financial interests of shareholders. This gives directors and officers of mission-driven businesses the legal protection to pursue an additional mission and consider additional stakeholders besides profit. The enacting state's benefit corporation statutes are placed within existing state corporation codes so that it applies to benefit corporations in every respect except those explicit provisions unique to the benefit corporation form.
Typical major provisions of a benefit corporation are:
Right of Action
Change of Control/Purpose/Structure
Benefit corporations are treated like all other corporations for tax purposes.
Benefit corporation laws address concerns held by entrepreneurs who wish to raise growth capital but fear losing control of the social or environmental mission of their business. In addition, the laws provide companies the ability to consider factors other than the highest purchase offer at the time of sale, in spite of the ruling on Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. Chartering as a benefit corporation also allows companies to distinguish themselves as businesses with a social conscience, and as one that aspires to a standard they consider higher than profit-maximization for shareholders.