Benefit Corporations
Benefit Corporations versus Certified B Corporations
Benefit corporations should not be confused with Certified B Corporations, even though both are sometimes called “B Corps.” Benefit corporations are an entity type created by the relevant state whereas Certified B Corporations are a private designation bestowed by a nonprofit organization called B Lab for a fee. Some benefit corporations, like Patagonia and Kickstarter, are also Certified B Corporations, but benefit corporation statutes do not require certification by B Lab. Further, B Lab will certify traditional for-profit business types such as limited liability companies, S-Corporations, and C-Corporations, along with benefit corporations.
Benefit Corporation Variations
The benefit corporation form is the most popular social enterprise entity type in the United States. Some version of benefit corporation legislation has been passed in well over 30 states and the District of Columbia with Maryland’s 2010 statute being the earliest. Two major models for benefit corporation statutes have emerged: the B Lab Model and the Delaware Model. Delaware calls its benefit corporations “Public Benefit Corporations” (PBCs). The B Lab Model existed first, and the vast majority of benefit corporation laws have been based on some version of this model legislation. Instead of working from the B Lab Model, Delaware legislators went in a different direction with some attention to early legislative efforts in Colorado. Colorado’s early legislative efforts stalled, but after the passage of the Delaware’s PBC law Colorado finally passed a similar statute.
Purpose
Due to cases like eBay v. Newmark (which appears at the end of this unit) some proponents of benefit corporations have questioned whether C-corporations are flexible enough to accommodate businesses that veer away from a shareholder wealth maximization purpose. Given this uncertainty in the C-corporation form, benefit corporation statutes make clear that social purposes are allowed, and even required. Statutes following the B Lab Model require a broad social purpose for benefit corporations. Specifically, the B Lab Model defines the required “general public benefit” as “[a] material positive impact on society and the environment, taken as a whole, from the business and operations of a benefit corporation assessed taking into account the impacts of the benefit corporation as reported against a third-party standard.” In contrast, the Delaware Model requires “one or more specific public benefits” in the certificate of incorporation (emphasis added). The broader statement of the B Lab Model and the narrower purpose allowed by Delaware is a major difference between the two models. Some Delaware PBCs, however, have reportedly used the B Lab general public benefit statement as their specific purpose, muting the differences. Delaware also has some general purpose language elsewhere in its statute, including a statement that PBCs are intended “to operate in a responsible and sustainable manner” and the broad obligations of directors that are discussed in the next section.
Duties
Despite requiring more specific purpose statements in the certificate of incorporation, the Delaware Model provides more general language related to directors’ duties. Delaware requires that PBCs “shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.” The B Lab Model does not use the word “balance” in describing director duties, opting for the softer command to “consider” the interests of various corporate stakeholders. The B Lab Model provides a longer list of the stakeholders who directors must consider: (1) shareholder, (2) employees (including employees of its subsidiaries and suppliers), (3) customers, (4) community and society, (5) local and global environment, (6) short and long term interests of the benefit corporation, (7) ability to accomplish its general public benefit purpose and any specific public benefit purpose.
Reporting
The B Lab Model requires annual social reporting and the use of a third-party standard to measure public benefit. B Lab provides its popular third-party standard on its website for free. Certification, which includes periodic audits by B Lab, is costly, but the law does not require certification. The B Lab Model requires public posting of the annual benefit report on the company’s website. The B Lab Model reporting requirements include a narrative regarding creation of public benefit, any hinderances in the creation of public benefit, the process and rationale of selecting or changing a third-party standard, and “an assessment of the overall social and environmental performance of the benefit corporation determined taking into account the impacts of the benefit corporation reported against a third-party standard.” The Delaware Model only requires biennial reporting and does not require the use of a third-party standard or the public posting of the report. A Delaware PBC, however, can require the use of a third-party standard or the public posting of the report by adding mandatory provisions to its certificate of incorporation or bylaws. Delaware PBC reports must include: “(1) The objectives the board of directors has established to promote such public benefit or public benefits and interests; (2) The standards the board of directors has adopted to measure the corporation’s progress in promoting such public benefit or public benefits and interests; (3) Objective factual information based on those standards regarding the corporation’s success in meeting the objectives for promoting such public benefit or public benefits and interests; and (4) An assessment of the corporation’s success in meeting the objectives and promoting such public benefit or public benefits and interests.” Under both the B Lab Model and the Delaware Model, shareholders have a clear right to receive the report.
Standing and Enforcement
To enforce obligations under these statutes, the B Lab Model expressly provides for benefit enforcement proceedings. Yet, directors and benefit corporations are not subject to monetary damages for failing to pursue or create a public benefit. Further, standing to sue is not expanded to external stakeholders beyond shareholders. Under the B Lab Model, shareholders must own two-percent or more of the company’s outstanding shares to bring a benefit enforcement proceeding. The B Lab Model benefit enforcement proceeding language is included for reference in Additional Materials below. Similar to the B Lab Model, the Delaware Model does not expand standing to external stakeholders beyond shareholders, and directors are not subject to monetary damages for statutory violations. Neither the B Lab Model nor the Delaware Model provide express penalties for not producing a benefit report, and early studies on benefit reports showed less than 10% compliance. A few states, including Florida, Massachusetts, Minnesota, Nevada, New Hampshire, and New Jersey provide additional enforcement mechanisms such as fines, summary proceedings, loss of benefit corporation status, or administrative dissolution to ensure benefit report compliance.
Number and Size of Benefit Corporations
Reliable, updated data is not kept on the number of benefit corporations, but a 2015 study showed over 2000 active benefit corporations and the numbers have likely increased significantly since that year. There are also a handful of publicly-traded benefit corporations, including Laureate Education, Lemonade, Vital Farms, Coursera, and Amalgamated Bank. To date, the vast majority of publicly-traded benefit corporations have chosen Delaware as their state of incorporation. There are also over 4000 Certified B Corporations, though Etsy, one of the more notable companies, dropped its certification after going public. While B Lab will certify any entity type, companies formed as a C-Corporation in a state without a constituency statute must eventually convert to a benefit corporation or move its incorporation to a state with a constituency statute. Etsy, as a Delaware C-Corporation, was unwilling to make that transition and eventually dropped its B Corp certification.
