Nuts and Bolts of Massachusetts Benefit Corporations
Massachusetts followed the model benefit corporation statute developed by B Lab when drafting MGL Chapter 156E. Most states have opted to follow this model statute. Delaware opted to pursue a different approach when drafting its public benefit corporation statute. The following discussion is therefore applicable to most states, not including Delaware (and Colorado, which followed the Delaware example).
Benefit corporations are for-profit enterprises, incorporated under Chapter 156A or Chapter 156D of the Massachusetts General Laws (MGL), which elect to be benefit corporations under Chapter 156E, the Massachusetts Benefit Corporation Act.
Massachusetts benefit corporations are similar to traditional for-profit corporations but they differ in a few important respects. They provide broadened fiduciary discretion for directors and officers, establish formal oversight of a public benefit mission, and involve increased accountability on the part of the directors and officers in connection with pursuing this public benefit mission.
Broadened Fiduciary Discretion. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors or risk shareholder lawsuits, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.
Under the Massachusetts statute, a benefit corporation’s directors and officers are not personally liable for monetary damages for any “failure of the benefit corporation to pursue or create general public benefit or a specific public benefit.”
The directors of a Massachusetts benefit corporation are required to consider the effects of their corporate decision-making on the following:
- The shareholders of the benefit corporation;
- The employees and workforce of the benefit corporation;
- The interest of clients;
- Community and societal factors, including those of each community in which offices or facilities of the benefit corporation are located;
- The local, regional and global environment;
- The short-term and long-term interests of the benefit corporation; and
- The ability of the benefit corporation to accomplish its general and specific public benefit purposes.
Some business people might find the expanded fiduciary discretion of directors, as described in the above, cumbersome in practice. The law requires that the directors of a Massachusetts benefit corporation consider the impact of each decision to act or not to act on each of the stakeholders identified in the law, regardless of whether or not each stakeholder is relevant to the subject of the decision. The intent behind this requirement appears to be a desire to ensure that the benefit corporation directors take a wide range of stakeholders into consideration when engaged in making corporate decisions. In practice, however, this requirement might prove distracting.
It is worth noting that the model statute’s statement of director fiduciary discretion differs significantly from the fiduciary discretion of directors described in the Delaware statute, which requires that the directors of a Delaware public benefit corporation balance the interests of various stakeholders.
Formal oversight. Benefit corporations organized in Massachusetts are required to designate one director as the “benefit director” whose primary responsibility is to oversee and report on the corporation’s public benefit aims. On an annual basis, the benefit director must prepare an annual report for the shareholders. This report must discuss whether the corporation, directors, and officers are acting in accordance with the corporation’s general and/or specific public benefit mission and what (if any) impact benefit corporation status may be having on its business.
A benefit corporation may also elect to have a “benefit officer” who is primarily responsible for preparing and submitting an annual benefit report.
Increased accountability. Chapter 156E requires benefit corporations to issue an annual “benefit report” to shareholders that includes, among other things, all of the following:
- A narrative description of the ways in which the benefit corporation pursued a general and/or specific public benefit during the year and any circumstances that may have hindered the creation by the benefit corporation of general and/or specific public benefit;
- An assessment of the overall social and environmental performance of the benefit corporation against a third-party standard (discussed below);
- The name of all directors and officers of the benefit corporation;
- Compensation paid by the benefit corporation during the year to each director; and
- The name of each person who owns 5% or more of the outstanding shares of the benefit corporation.
The annual benefit report must be provided to shareholders at the same time that the benefit corporation delivers any other annual report to its shareholders, or within 120 days following the end of the benefit corporation’s fiscal year. In addition, a benefit corporation must post its most recent annual benefit report on its website (with compensation and other confidential or proprietary information redacted) and it must provide a similarly redacted copy to the Secretary of the Commonwealth of Massachusetts when it files its annual report.
Electing Benefit Corporation Status
Newly-formed corporations electing to be benefit corporations must make a statement in Article II of their Articles of Organization that the entity is to be a “benefit corporation” or that “the corporation shall have the purpose of creating a general public benefit.” The corporation may also identify specific public benefits that it aims to create.
A general public benefit is broadly defined in Chapter 156E as “a material, positive impact on society and the environment, taken as a whole, as measured by a third party standard, from the business and operations of a benefit corporation.”
Specific public benefits as defined in Chapter 156E may include any of the following:
- Providing low-income or underserved individuals or communities with beneficial products or services;
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
- Promoting the preservation and conservation of the environment;
- Improving human health;
- Promoting the arts, sciences, access to and advancement of knowledge;
- Increasing or facilitating the flow of capital and assets to entities with a general public benefit purpose; or
- Conferring any other particular benefit on society or the environment.
With the approval of two-thirds of each outstanding class of securities, existing corporations may elect benefit corporation status and amend their articles of organization accordingly. This voting threshold is also required (i) if an existing entity intends to convert to benefit corporation status via merger, conversion or share exchange or (ii) if it intends to elect out of benefit corporation status.