The Massachusetts benefit corporation statute went effective today.
I have updated my benefit corporation statute chart to include Massachusetts’ substantive provisions. The updated chart is posted on SSRN and is available for free download here.
Two provisions that set the Massachusetts benefit corporation statute apart from most of the other states relate to (1) the appraisal rights for minority shareholders when converting from a traditional corporation to a benefit corporation by amendment of the articles or by merger and (2) the prohibition on holding your organization out as a benefit corporation if your organization is not in full compliance with the statute.
Currently, California’s and South Carolina’s benefit corporation statute are the only active benefit corporation statutes, other than Massachusetts, that expressly provide for appraisal/dissenters’ rights. California and South Carolina call these rights “dissenters’ rights” and Massachusetts calls them “appraisal rights” but they operate similarly. In my Choose Your Own Master article I approve of the California dissenters’ rights provision, even though the Benefit Corporation White Paper explains that the Model Legislation chose not to create dissenters’ rights in the benefit corporation context (pages 26-27). The authors of the Benefit Corporation White Paper argue that dissenters’ rights may be inappropriate because becoming a benefit corporation is not usually a liquidity event, and benefit corporations may be “cash-poor” and unable to pay dissenters. While many benefit corporations may be “cash-poor,” I think that becoming a benefit corporation is such a fundamental change that dissenting minority shareholders should be provided a reasonable exit in all states. If the change in form is a good thing the corporation should be able to find new money to replace the dissenters.
I am glad to see Massachusetts joining California and South Carolina by providing appraisal/dissenters’ rights in its benefit corporation statute. Interestingly, however, the Massachusetts and South Carolina statutes only expressly apply when the a traditional corporation converts to a benefit corporation, but not when a benefit corporation converts to a traditional corporation. I would require appraisal rights in both instances (as California does), because converting out of the benefit corporation form could be just as important to certain shareholders as converting into the form.
Comply Fully with the Statute or Do Not Hold Out as a Benefit Corporation.
Massachusetts appears to be the only active benefit corporation statute to expressly state that a business organization “shall not hold itself out as, advertise as, or indicate in any way that it is a benefit corporation unless it was organized under and in full compliance with [the benefit corporation statute].” This provision could prove important in dealing with benefit corporations that do not file their annual benefit report or otherwise violate the statute. Based on my preliminary research, a number of benefit corporations have failed to make available their annual benefit reports in the required time period (usually 120 days after the end of their fiscal year) or have published a annual benefit report that does not comply with the statutory requirements. Unfortunately, most states do not have an enforcement mechanism related to the annual benefit corporation report requirements. New Jersey is an exception and states that a benefit corporation will lose its status if it does not file a benefit report for two years. This Massachusetts provision would impact the benefit corporation immediately (instead of after two years), but it does not describe the consequences if a benefit corporation does hold itself out as a benefit corporation while it is out of compliance with the statute.
As always, please feel free to contact me with any comments.
Updated: Thanks to an e-mail from Suffolk law student Kate Acello, this post has been updated to add South Carolina to the states offering appraisal/dissenters’ rights. Also, on 3/20/13 I posted on the proposed amendments to the Delaware General Corporate Law, which deal with “public benefit corporations” and include appraisal rights.