CORPORATE TRANSACTIONS & COMPLIANCE BLOG

What is a Benefit Corporation?

By: Teri Mayor, COGENCY GLOBAL INC. on Mon, Oct 01, 2012

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In the last few years, many states are introducing and passing legislation to allow a new type of corporation, the benefit corporation. Benefit corporations are designed to permit for-profit corporations to work toward the goal of creating a general and specific public benefits without risking claims by disgruntled shareholders that they are not fulfilling their fiduciary responsibilities by pursuing an objective that diminishes financial return.  In the model legislation, general public benefit is defined as a material positive impact on society and the environment assessed against a third party standard such as: providing low-income or underserved communities with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business, preserving the environment, improving human health, promoting the arts, sciences or advancement of knowledge, or increasing the flow of capital to entities with a public benefit purpose.

An increasing number of states have enacted or introduced legislation allowing for the creation of benefit corporations

States with Benefit Corporation Laws:

Arizona (effective 12/31/2014)

Arkansas (effective 8/16/2013)

California

Colorado (effective 4/1/2014)

Delaware (effective 8/1/2013)

District of Columbia

Hawaii

Illinois

Louisiana

Maryland

Massachusetts

Nevada (effective 1/1/2014)

New Jersey

New York

Oregon (effective 1/1/2014)

Pennsylvania

Rhode Island (effective 1/1/2014)

South Carolina

Vermont

Virginia

States Where Benefit Corporation Legislation Has Been Introduced:

Alabama

Connecticut

Florida

Iowa

Montana

North Carolina

Texas

West Virginia

There are a few key components in the model legislation that are important to the formation and management of a benefit corporation. In most cases, the states have adopted these into their versions of the legislation, although variations exist among state statutes.

  • Corporate Purpose:  The purpose of the corporation should include a statement that the corporation shall create general public benefit defined as a material positive impact on society and the environment, as assessed against a third party standard.
  • Accountability:  Directors and officers need to consider the effect of decisions not only on the shareholders, but also on the employees, suppliers, customers, community and the environment. 
  • Transparency: Benefit corporations must publish an annual benefit report that assesses their social and environmental performance against a third party standard. The report must be both shared with the shareholders and made available to the general public.
  • Third Party Standard: In the model legislation, government does not play a role in determining the third party standard selected by the entity to assess its performance in meeting its public benefit purposes. The benefit corporation (its directors and shareholders) judges whether a particular third party standard meets the statutory definition. The legislation states that the standard is:
    • Comprehensive: It needs to assess the effect of the business and its operation on employees, subsidiaries, suppliers, customers, the local community and the environment.
    • Independent:  No more than 1/3 of the board of directors can be representatives of the association assessing the benefit corporation’s performance.
    • Credible: The standard must be developed by a person with the expertise needed to assess the performance of the corporation, and uses a multi-stakeholder approach, including public comment, to develop the standard.
    • Transparent:  The criteria considered when creating the standards, as well as the identity of the principals of the organization that developed and manages the standard, are all publicly available.

There are a number of reasons why a corporation might wish to be a benefit corporation. Benefit corporation legislation provides clarity and offers legal protection to officers and directors, confirming that their fiduciary duty includes the creation of a public benefit. It also helps to maintain the company’s mission over time by requiring a 2/3 majority vote of shareholders to remove benefit corporation standards and can help a corporation to differentiate itself in the marketplace as a company truly interested in the public good. As states continue to introduce and pass this legislation, more companies will be able to choose this option and more will be likely to do so for the reasons mentioned above.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Company Formation and Filing Considerations