Over the past few weeks, a handful of attorneys and academics have asked me exactly how specific the specific public benefit purpose(s) required by §362(a) of the DGCL for Delaware public benefit corporations (“PBCs”) must be. Section 362(a) reads, in pertinent part:
“In the certificate of incorporation, a public benefit corporation shall. . . Identify within its statement of business or purpose . .1 or more specific public benefits to be promoted by the corporation”
Some of the early Delaware PBCs have used the general public benefit language from the benefit corporation’s Model Legislation to describe their specific public benefit purpose(s). (See, e.g.,Farmingo, PBC; Ian Martin, PBC; Method Products, PBC; New Leaf Paper, Public Benefit Corporation; and RSF Capital Management, PBC). For those who are unfamiliar, the general public benefit language from the Model Legislation reads:
“A material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
At least one early Delaware PBC has added the following to the general public benefit language
“specific public benefit . . .may be further specified from time to time in the Bylaws of the Corporation . . . or a resolution or resolutions of the Board of Directors of the Corporation.” (Socratic Labs, PBC).
Some Delaware PBCs have been more specific in their certificates of incorporation:
“for the specific public benefit of furthering universal access to the Internet” (Unifi Communications, PBC)
“giving people access to, and the benefit of, health knowledge that is as complete and unbiased as possible.” (Profile Health Systems, PBC)
In my personal opinion, using only the Model Act’s general public benefit purpose as a Delaware PBC’s specific public purpose is a bit risky and possibly conflicts with the drafters’ intent. To be clear, I have not yet spoken with the drafters on this issue, and will update this post if I do. However, if the drafters had intended to allow the general public benefit language to suffice, then I think they would have simply followed the lead of the Model Legislation and would have defined and used the term “general public benefit”.
Further, the FAQ about Public Benefit Corporations circulated by the drafters contained the following question and answer.
Q: “Why does the statute require both the identification of a specific benefit or benefits andthat the corporation be managed for the best interests of all those materially affected by the corporations conduct?” (emphasis in original)
A: “….The requirement of a specific public benefit is intended to provide focus to the directors in managing toward responsibility and sustainability, and giving investors notice of, and some control over, specific public purposes the corporation serves.”
I would argue that the Model Act’s general public benefit language does not give directors the desired focus, and if the specific purpose is regulated to the bylaws then shareholders may not have the notice and control the drafters seemed to have desired.
That said, the Model Legislation’s general public benefit language is more specific than “any lawful purpose” and Section 362(a) has no limit on the number of specific purposes that can be listed, so a Delaware PBC could conceivably list all of the specific interests the Model Legislation requires directors to consider and achieve the same lack of focus as listing the Model Legislation’s general public benefit language.
I have spoken to a few people in the Delaware Secretary of State’s office in an attempt to understand their stance on the specific public benefit issue. The main take-aways from those conversations were:
(1) they are aware of the controversy surrounding whether the Model Legislation’s general public benefit purpose suffices as a specific public benefit under the statute;
(2) they are currently accepting the Model Legislation’s general public benefit language as a valid specific public benefit, until it is formally challenged or they are told to do otherwise;
(3) they will not accept “any lawful purpose” language as a specific public benefit.
Also, for those who are interested, there were 49 public benefit corporations formed in Delaware between the August 1, 2013 effective date and October 16, 2013.
Thanks to Boston attorney Bruce Landay for excellent, in-depth conversation on this topic and for some of the certificates of incorporation cited in this post. As an academic, it is always nice to connect with attorneys who practice in my areas of interest. Thanks to Alicia Plerhoples at Georgetown Law who also provided some of the certificates of incorporation cited in this post.
Cross-posted at the Conglomerate.