Nuts and Bolts of Delaware Public Benefit Corporations
The Delaware is steadily becoming the go-to jurisdiction for the formation of benefit corporations. Over the past 12 months, the number of Delaware public benefit corporations has increased approximately 60%. No other state has seen such an increase.
The Delaware public benefit corporation statute differs in some material respects from the model benefit corporation statute that has been the basis of most benefit corporation statutes enacted in other states (including Massachusetts).
Delaware-based public benefit corporations have more flexibility and fewer requirements when compared to benefit corporations organized under the model statute. This flexibility—combined with the weight and credibility of Delaware as a home to a significant percentage of the businesses in the United States—appears to make the Delaware public benefit corporation a compelling option for social entrepreneurs.
It is worth noting that Colorado’s benefit corporation statue includes many of the features of the Delaware statute discussed below. Colorado and Delaware currently are the corporate home to 526 and 812 benefit corporations, respectively. This means that between Delaware and Colorado, over 30% of all benefit corporations formed in the United States are governed by this alternate form of legislation. For these reasons, the Delaware statute merits attention.
The Delaware public benefit corporation provisions are contained in Subchapter XV of Title 8 of the Delaware General Corporation Law,
A Delaware public benefit corporation must identify in its certificate of incorporation the specific public benefit(s) the corporation will promote. With the approval of two-thirds of each outstanding class of securities (voting or nonvoting), existing Delaware corporations may elect public benefit corporation status and amend their certificate of incorporation 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 public benefit corporation status.
Fiduciary duties of directors
The Delaware statute imposes a balancing test on directors of public benefit corporations. They must manage the corporation in a manner that balances (i) the stockholders' pecuniary interests, (ii) the interests of those materially affected by the corporation's conduct, and (iii) the public benefit(s) identified in the corporation's certificate of incorporation.
In practice, this means that the directors of a Delaware public benefit corporation must balance the pecuniary interests of its stockholders with the interests of other persons, entities or communities and the specific public benefit(s) identified in the certificate of incorporation.
This confers on the directors of a Delaware public benefit corporation the discretion to make decision-specific determinations regarding which persons, entities or communities may be affected by a particular decision.
Directors of Delaware public benefit corporations are protected against stockholder claims that challenge disinterested decisions and will be deemed to have satisfied this balancing requirement and fulfilled their duties to stockholders and the corporation if the decision was both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
Stockholders of a Delaware public benefit corporation may sue derivatively to enforce the directors' duty to meet this balancing requirement but only if at the time suit is filed those stockholders individually or collectively own (i) at least 2 percent of the corporation's outstanding shares, or (ii) as to corporations with shares listed on a national securities exchange, the lesser of (i) 2 percent of the outstanding shares or (ii) shares with a market value of at least $2 million.
Statement to shareholders
At least every two years, a Delaware public benefit corporation must issue to stockholders a statement as to the corporation's promotion of (i) the public benefit(s) identified in the certificate of incorporation and (ii) the best interests of those materially affected by the corporation's conduct.
This statement must include:
- the objectives that the board of directors has established to promote such public benefit(s) and interests;
- the standards the board of directors has adopted to measure the corporation's progress in promoting such public benefit(s) and interests;
- objective factual information based on those standards regarding the corporation's successes in meeting the objectives established by the board; and
- an assessment of the corporation's success in meeting the objectives established by the board and in promoting such public benefit(s) and interests.
Additional standards and/or disclosure requirements, such as the use of a third-party standard in making the assessment or the requirement that the statement to shareholders be made more frequently than once every two years, may be included in the certificate of incorporation or bylaws of a Delaware public benefit corporation. However, unlike the model benefit corporation statute, these are not required under Delaware law.
Comparison between Delaware and the model statute
A Delaware public benefit corporation may be an attractive choice of entity for social entrepreneurs and carries certain advantages compared to benefit corporations formed under laws that are based on the model statute, such as MGL Chapter 156E in Massachusetts.
A Delaware public benefit corporation must state a specific public benefit in its certificate of incorporation, while the model statute merely requires that the purposes of the benefit corporation include creating general public benefit and leave the naming of specific public benefits optional.
However, the Delaware law does not include certain requirements that are imposed under the model statute. For example, Delaware does not require:
- the appointment of a benefit director and/or a benefit officer charged with overseeing and assessing the corporation's efforts to achieve its stated public benefit(s);
- the corporation’s directors to consider the impact of each corporate decision on specifically identified stakeholders (e.g., shareholders, employees, customers, suppliers, the community, the environment);
- the public disclosure of the shareholder public benefit report or submission of the report to the secretary of state;
- the disclosure of compensation data or shareholder identities in the public benefit report to shareholders;
- the use of a third-party standard or a third party assessment in connection with the assessment of the corporation's success in meeting its public benefit objectives; or
- the annual publication of the public benefit report to shareholders.
In addition, the model statute merely provides that directors are not required to prioritize any particular stakeholder's interests over those of another stakeholder. As a result, the model statute could be interpreted to mean that, in certain cases, the interests of some stakeholders, even shareholders, could be downplayed depending on the circumstances.
It is possible that certain entrepreneurs will prefer organizing their benefit corporations in a jurisdiction that follows the model statute, due in part to this flexibility regarding establishing priorities in the context of corporate decision making.
In contrast, the balancing requirement imposed on directors of a Delaware public benefit corporation involves an affirmative to balance the interests of stockholders with the interests of those materially affected by the corporation's conduct and the specific public benefit(s) identified in the corporation's charter. As a consequence, shareholder interests need to be factored into all decisions made by the directors of a Delaware public benefit corporation. For this reason, a Delaware public benefit corporation may be a more attractive corporate vehicle to investors.
If you would like more information regarding benefit corporations, please contact Sharon C. Lincoln or your Casner & Edwards lawyer.