Two days ago, Delaware enacted benefit corporation legislation that is scheduled to go into effect August 1, 2013. Delaware thus becomes the 19th state to sanction benefit corporations. Although only the 19th benefit corporation state, Delaware’s strong influence on U.S. corporate law indeed makes Delaware’s passage a big deal and conceivably a watershed moment for the social enterprise movement.
Before anyone gets too excited, though, some preliminary observations are in order:
1. A Race to the Bottom? Like Colorado’s benefit corporation law that was adopted in May, Delaware’s statute diverges significantly from the so-called model benefit corporation act published by B Lab (hereinafter the “B-Lab mockup”). In many ways, the Delaware and Colorado acts are “watered down” (pun intended) versions of the B-Lab mockup because they are not as strict in certain respects as prior statutes passed in states (e.g., Arkansas) that closely follow the B-Lab mockup. For specifics, see my high-level comparison table posted here and Professor Haskell Murray’s (Belmont) more detailed chart posted here. On the other hand, as noted below, in at least two respects Colorado and Delaware may be more stringent than the B-Lab mockup.
2. Hard to Become a Colorado or Delaware Benefit Corporation, But Easy to Get Out? Delaware requires a 90% or higher vote (including otherwise nonvoting shares) to elect into benefit corporation status and grants appraisal rights to any dissenters. Colorado and the B-Lab mockup require only a two-thirds vote (including otherwise nonvoting shares) to elect into benefit corporation status. Colorado grants dissenter’s rights upon election into benefit corporation status, while the B-Lab mockup does not. On the other hand, all three (Colorado, Delaware, and the B-Lab mockup) require a two-thirds vote (including nonvoting shares) to terminate benefit corporation status, and none of the three grant appraisal rights to dissenters upon termination of benefit corporation status (apart from any such rights that may exist under the state’s regular corporate law).
Interestingly, however, only the B-Lab mockup requires a two-thirds vote to approve a liquidation or sale of substantially all the assets of a benefit corporation, while Colorado and Delaware require only a majority of voting (not nonvoting) shares to sell assets and/or liquidate.
Therefore, a clever attorney might advise the directors of a Colorado or Delaware benefit corporation that benefit corporation status may be terminated by a simple majority vote so long as the termination takes the form of an asset sale and liquidation. Further, such a transaction could avoid being taxable through a so-called “C” (stock for assets) reorganization. Thus, a carefully orchestrated asset sale and liquidation appears to be an easy escape hatch out of benefit corporation status under Colorado and Delaware law. Perhaps this result was intended, but if so, what is the rationale for such an escape hatch?
3. Only Nonpublic, Biennial Benefit Reports Required Under Delaware Law. A hallmark of benefit corporations is the requirement to produce a “benefit report” that assesses and publicly discloses the corporation’s performance towards achieving social and environmental benefits. The B-Lab mockup explicitly states that the benefit report must be published annually and that it must be made public. Colorado appears to follow the B-Lab approach (although the timing of the publication of the report is not clear under the Colorado statute.) Delaware, however, requires only biennial publication of a benefit report (unless otherwise required by the corporation’s certificate or bylaws). Moreover (unless otherwise required by the corporation’s certificate or bylaws), a Delaware benefit corporation’s biennial report is required to be disclosed only to the corporation’s shareholders, not to the public.
4. No More “Independent” Third-Party Standard (At Least in Delaware). Unlike the B-Lab mockup, Delaware does not require a benefit corporation to adopt a “comprehensive, independent, credible, and transparent” third-party standard for its benefit report. Instead, the board of directors of a Delaware benefit corporation may make up its own standard against which the corporation biennially (not annually) reports. Colorado is not quite as strict as the B-Lab mockup, but implicitly (not expressly) requires a Colorado benefit corporation to adopt a third-party standard created by an organization that is not “controlled” by the adopting corporation or its affiliates. Thus, with respect to requiring a third-party standard, the Colorado benefit corporation statute is more demanding than Delaware’s, but arguably is not as demanding as the B-Lab mockup.
5. Special “PBC” Moniker Under Colorado and Delaware Law. In at least one respect, Colorado and Delaware go further than the B-Lab mockup when it comes to the transparency requirements imposed upon benefit corporations. Specifically, the registered name of a Colorado or Delaware benefit corporation must contain the phrase “public benefit corporation” or the abbreviation “PBC” (or “P.B.C.”). This requirement should promote accountability by making Delaware and Colorado benefit corporations easily identifiable.
6. “Balancing” Versus “Considering” Nonshareholder Interests. Further, in another respect, Colorado and Delaware may demand more of benefit corporations than the B-Lab mockup. My colleague, Professor Murray, points out to me that Colorado and Delaware require the directors of a benefit corporation to “balance” the pecuniary interests of the shareholders with the other interests of nonshareholders, whereas the B-Lab mockup only requires “consideration” of nonshareholder interests. Only time will tell, but the practical difference between “balancing” versus merely “considering” nonshareholder interests could be tremendous.
7. Unfortunately, There Is No Easy Button, Especially in the Law. If (as is probable) future enacting states follow Delaware and Colorado instead of the B-Lab mockup, the status of being a “benefit corporation” may come to mean less and less. Such decay in “uniqueness” ultimately could undermine a central purpose behind the benefit corporation movement: instilling public trust that a benefit corporation truly is different and better for society and the planet.
8. Conclusion. Perhaps the ultimate lesson here is that absent a much more uniform and rigorous qualification and enforcement regime under prevailing law—like the regime that exists for tax-exempt entities—only a few, overly diligent individuals will know whether and which companies genuinely care about stakeholders as opposed to shareholders. If this is indeed the case, then maybe all that is really needed and in fact effective to instill public trust in socially beneficial businesses is a commonly-accepted rating system, not a change in corporate law. B Lab and other such rating agencies already understand and are responding to this reality.
In short, I am not convinced that Delaware’s passage of benefit corporation law truly is a “tipping point in the evolution of capitalism,” especially if the expectation is that the benefit corporation form ultimately will instill public trust in a new way of doing business. Public trust is not a realistic expectation when the qualification and enforcement regime backing up that trust is vastly different from state to state.
Nevertheless, I am pleased that Delaware and Colorado have adopted a significantly different form of “benefit corporation,” even if that different form may be “watered down,” may engender some confusion, and may weaken the brand. Why? Because I believe that experimentation in the law among the states is a very positive development in the evolution of the law of social enterprise. May the best form win!