Corporate Law
& Accountability
Report™
Reproduced with permission from Corporate Accountability Report, 13 CARE 16, 04/17/2015. Copyright 姝 2015 by
The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
DELAWARE LAW
Amendments to the DGCL Remove Obstacles to Adoption of Public Benefit Status
the U.S. have adopted similar legislation allowing for
benefit corporations, although Delaware’s statute differs in several ways from the model provisions adopted
in most states (the ‘‘Model Provisions’’). Adoption of
the proposed changes may accelerate this trend by
making use of the PBC form more practical in Delaware, the leading jurisdiction for U.S. corporate law.
Public Benefit Corporations Generally
Social Purpose
BY FREDERICK H. ALEXANDER
n April 2, 2015, the Corporation Law Council of
the Delaware State Bar Association announced
proposed amendments to the Delaware General
Corporation Law which, if approved by the Executive
Committee of the DSBA, will be proposed to the state
legislature in the current session. Those amendments
include important changes to Subchapter XV of Title 8,
which governs public benefit corporations (‘‘PBCs’’).
Subchapter XV was initially adopted in 2013. Since that
adoption, 265 Delaware corporations have chosen to
become PBCs. Twenty-six of the states and territories in
O
Frederick H. Alexander recently joined B Lab
as Advisor for Legal Policy. This follows a
25-year career in private practice advising companies on corporate governance
issues and transactions, including mergers
and acquisitions, capital raising and corporate
control contests. Mr. Alexander formerly
chaired the Council of the Corporation Law
Section of the Delaware State Bar Association
and the General Review Task Force of the
ABA Committee on Corporate Laws. He currently serves as Co-Chair of the ABA Task
Force on Two Step Mergers and on the Advisory Committee for the Securities Regulation
Institute. He authors Bloomberg BNA’s portfolio on Delaware law.
COPYRIGHT 姝 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
Broadly stated, the public benefit provisions allow a
corporation to expand its corporate purpose beyond
maximizing share value to explicitly include social and
environmental goals.1 This expansion provides significant legal advantages for a corporation. First, it expands the business judgment rule by allowing directors
to consider public benefits, including social and environmental factors, as a final goal in their decisionmaking process. Secondly, a PBC may extend liability protection for directors to their balancing of social and environmental benefits and the pecuniary interests of
their stockholders. In addition, the provisions give corporations greater flexibility in sale scenarios. Rather
than being required solely to maximize share value under the ‘‘Revlon’’ doctrine, directors can consider the
corporation’s mission in a sale process.2 Similarly, being a PBC expands a board’s flexibility in dealing with
takeover threats, as independence can be preserved for
the benefit of all stakeholders in addressing such
threats in a defensible manner.3 In sum, use of the PBC
structure enables corporations to use a for-profit struc1
8 DEL. C. § 362.
See Revlon Inc. v. MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173 (Del. 1986) (holding that in change-of-control
transactions, the board has a duty to maximize the value received by the stockholders).
3
See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946
(Del. 1985) (holding that when a board takes action in response to the threat of a hostile takeover, directors bear the
burden of showing (1) that the defensive measure was adopted
in response to a reasonably perceived threat to corporate
policy and effectiveness (i.e., the reasonableness test), and (2)
2
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ture without being forced to sacrifice principles or
mission.
Stockholder Protections
It is important to note that these benefits do not deprive stockholders of protection. They retain all of their
rights, and the benefit provisions actually provide additional rights. First, stockholders in a PBC are entitled to
receive a biennial report with respect to the public benefits.4 The report must include the board’s objectives
with respect to the promotion of public benefits, the
standards it uses to measure progress, objective factual
information based on those standards and an assessment of the corporation’s success in meeting those objectives. This differs from the specifics of the report required for benefit corporations in states that have adopted the Model Provisions, which provide for an
annual report based on a third party standard. However, a Delaware PBC may specifically provide in its
charter for an annual, third party-based report.5
Secondly, stockholders can enforce the obligations of
directors to balance various stakeholder interests. However, in order to avoid nuisance lawsuits, the statute requires that plaintiff stockholders satisfy a minimum
ownership threshold of 2 percent, or, for publicly traded
companies, the lesser of 2 percent of the shares or $2
million in market value.6 Generally, the charter can provide that such actions may only seek injunctive relief
and not damages.7 Most importantly perhaps, stockholders retain all of their corporate governance rights,
including the right to elect directors and vote on major
corporate transactions.
The Proposed Amendments
As noted above, since the adoption of Delaware’s
public benefit provisions, there has been significant interest in PBCs. A number of venture-backed companies
have opted for benefit corporation status and there
have been significant discussions with respect to the
use of the form in the public markets. The proposed
changes to the statute reflect the need to accommodate
this significant movement.
The Corporate Name
The first change involves the naming requirements
for PBCs. In order to protect investors, the original legislation required that the corporate name include a corporate identifier specific to the form: either ‘‘PBC’’ or
‘‘public benefit corporation.’’8 This raised issues in certain jurisdictions when a Delaware PBC filed as a foreign corporation. Some jurisdictions view the term as
referring to nonprofit corporations. Other jurisdictions
view the phrase ‘‘PBC’’ as insufficient to signal corporate identity. As a result, these jurisdictions appeared to
require that a Delaware PBC file fictitious name certificates. Other corporations raised concerns about the
costs incurred in a name change. In response to these
concerns, the proposed amendment to DGCL § 362 prothat the defensive measure was reasonable in relation to the
threat posed (i.e., the proportionality test)).
4
8 DEL. C. § 366(b).
5
8 DEL. C. § 366(c)(3).
6
8 DEL. C. § 367.
7
8 DEL. C. § 365(c).
8
8 DEL. C. § 362(c).
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vides that a PBC can use the specific PBC identifier, but
is not required to. However, there is a new requirement
that privately held PBCs that do not use a PBC-specific
identifier must inform buyers of stock that they are purchasing shares in a PBC. This, together with the requirement that stock certificates identify the company
as a PBC,9 as well as a continued requirement that the
charter identify the company as such,10 should give investors sufficient notice of the fact that the company in
question is a PBC.
Reduced Vote to Convert
The original PBC legislation required a 90 percent
vote to amend a corporation’s charter to provide that it
was a benefit corporation or to effect a merger in which
stockholders of a non-PBC receive stock in a PBC or
benefit corporation. While this high vote was initially
adopted to protect investors in corporations that were
not PBCs, it severely limited the ability of corporations
to use the form. The greatest concern was that the high
vote would make it very difficult for PBC’s (or benefit
corporations from any other jurisdiction) to use their
own stock to effect acquisitions of Delaware corporations. Companies considering converting to a PBC or
benefit corporation were reluctant to take on that burden if their business strategy contemplated acquisitions. Moreover, the high vote could limit the ability of
non-PBC Delaware corporations to enter into transactions with PBCs or benefit corporations, even where the
board and a very large majority of stockholders desired
to enter into the transaction. In response to these concerns, the proposed legislation reduces the vote to twothirds of the voting shares. This vote is still higher than
the simple majority vote required to approve a standard
charter amendment or merger, and will give stockholders extra protection, while permitting companies to
have confidence that they will be able to use their
shares as acquisition currency if they become PBCs or
benefit corporations. Similarly, the 90 percent hurdle
was considered to be a nearly insurmountable obstacle
to converting a public company into a PBC. The proposed amendments provide that stockholders will continue to be protected by a supermajority two-thirds vote
in such a conversion. In addition, the fiduciary duties of
the directors who approve the change will still require
them to conclude that the conversion is in the best interests of the stockholders.
Market Out for Appraisal Rights
The original legislation created appraisal rights in
any situation where stockholders in a corporation that
was not a PBC received PBC or benefit corporation
shares, either through a merger or a charter amendment. The proposed legislation creates a ‘‘market out,’’
which provides that appraisal rights will not be triggered as long as a stockholder has public company
stock before the amendment or merger (and after a
merger). This change mirrors the market out in DGCL
§ 262, Delaware’s appraisal statute generally applicable
to mergers, which provides that there are no appraisal
rights when there is a liquid market for the stock.
9
8 DEL. C. § 364.
8 DEL. C. § 362(a)(2).
10
COPYRIGHT 姝 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
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Conclusion
Changes to the PBC provisions of the DGCL leave its
structure largely in place, but amend provisions that
practice had shown to raise significant obstacles to
implementation. Going forward, entrepreneurs and in-
CORPORATE LAW & ACCOUNTABILITY REPORT
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vestors should have a greater level of comfort that they
can obtain the advantages the PBC provisions offer, and
both public and private corporations should have a
clearer path to conversion.
BNA
4-17-15