LAW AND SOCIAL ENTREPRENEURSHIP

DELAWARE PUBLIC BENEFIT CORPORATION LEGISLATION

Thanks to Professor Brian Quinn (Boston College Law School) for sending the link to Richards, Layton & Finger’s (“RLF”) alert about public benefit corporation legislation in Delaware

The relevant portions of the RLF alert, about the proposed amendments to the Delaware General Corporation Law, are pasted below.  

Public Benefit Corporations

In a development that may be of significant interest to social entrepreneurs, the proposed legislation would add a new subchapter XV to the DGCL (Sections 361 through 368) to enable Delaware corporations to be incorporated as or, subject to certain restrictions, to become, “public benefit corporations.” Such corporations would remain subject to all other applicable provisions of the DGCL, except as modified or supplanted by the new subchapter.

In general, under the proposed legislation, a public benefit corporation would be a corporation managed in a manner that balances the stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct, and one or more public benefits identified in its certificate of incorporation. To this last point, each public benefit corporation would be required, in its certificate of incorporation, to identify itself as a public benefit corporation and to state the public benefits it intends to promote. The proposed legislation generally defines “public benefits” as positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature.

Central to the proposed new subchapter’s operation is the statutory mandate that would be imposed on directors. The new subchapter would provide that directors, in managing the business and affairs of the public benefit corporation, shall balance the pecuniary interests of the stockholders, the interests of those materially affected by the corporation’s conduct, and the identified public benefits. The new subchapter also would provide that directors shall not have any duty to any person solely on account of any interest in the public benefit and would provide that, where directors perform the balancing of interests described above, they will be deemed to have satisfied their fiduciary duties to stockholders and the corporation if their decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.

The new subchapter would impose special notice requirements on public benefit corporations, mandating periodic statements to stockholders regarding the corporation’s promotion and attainment of its public benefits. The new subchapter also would provide a means of enforcing the promotion of the public benefits. By statute, stockholders holding at least 2% of the corporation’s outstanding shares (or, in the case of listed companies, the lesser 2% of the outstanding shares or shares having at least $2 million in market value) would be able to maintain a derivative lawsuit to enforce specified requirements in the subchapter.

The new subchapter would contain limitations on the power of public benefit corporations to adopt amendments to their certificates of incorporation or effect mergers or consolidations if the effect would be to abandon their public benefit purpose. These limitations would be imposed through a 66 2/3% vote of each class of the public benefit corporation’s outstanding stock.

The new subchapter would also contain limitations on the power of corporations that are not public benefit corporations to amend their certificates of incorporation to become public benefit corporations or to effect mergers or consolidations that would result in their stockholders receiving shares in a public benefit corporation. These actions would require a 90% vote of each class of the corporation’s outstanding stock. New subchapter XV would also provide appraisal rights to any stockholder of a corporation that is not a public benefit corporation that, by virtue of an amendment to the corporation’s certificate of incorporation or any merger or consolidation, receives equity interests in a public benefit corporation. Corresponding changes to Section 262 of the DGCL, the appraisal section, would also be made.

 

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