NOTES
Sustaining the Sustainable Corporation: Benefit
Corporations and the Viability of Going Public
MATTHEW J. DULAC*
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172
I. A PRIMER ON BENEFIT CORPORATIONS . . . . . . . . . . . . . . . . . . . . . .
173
A.
THE GROWTH OF FOR-PROFIT SOCIAL ENTREPRENEURSHIP
.......
173
B.
THE BENEFIT CORPORATION
..........................
175
C.
DELAWARE’S PUBLIC BENEFIT CORPORATION STATUTE
.........
177
II. THE IPO PROCESS: ACCESS TO CAPITAL . . . . . . . . . . . . . . . . . . . . .
179
A.
SOCIALLY RESPONSIBLE INVESTMENT AND THE GROWTH OF THE
.......................................
179
..........................
182
III. FIDUCIARY DUTIES AND THE SHAREHOLDER PRIMACY NORM . . . . . . .
184
MARKET
B.
DEFINING INVESTOR UTILITY
A.
PBCS AND THE SHAREHOLDER PRIMACY NORM
..............
B.
FIDUCIARY DUTIES AS RESTRAINTS ON DIRECTORS’ DISCRETION
185
..
186
IV. TAKEOVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
188
A.
ARE PUBLIC BENEFIT CORPORATIONS RIPE FOR ACQUISITION?
....
188
B.
REVLON, UNOCAL, AND RESPONSES TO TAKEOVER THREATS
.....
190
C.
DELAWARE LAW ALREADY PROTECTS THE PUBLIC PBC
.........
193
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
194
* Georgetown Law, J.D. 2015; Indiana University, B.S. 2011. © 2015, Matthew J. Dulac. I would
like to thank Professors Joshua Teitelbaum, Alicia Plerhoples, and Jeffrey Bauman for their assistance
in selecting this topic and their guidance in developing this Note. Thank you kindly to the editors and
staff of The Georgetown Law Journal for their thoughtful advice throughout the publication process.
Finally, I would like to thank my family and friends for their unwavering support throughout my
education, without whom this Note would not have been possible.
171
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INTRODUCTION
The Delaware public benefit corporation is a relatively new for-profit legal
entity that allows for the explicit pursuit of a corporate social or environmental
mission.1 The public benefit corporation requires its directors and managers to
balance the interests of its shareholders and beneficiaries of its corporate social
or environmental mission.2 These competing interests implicate the shareholder
wealth maximization norm, throwing directors’ legal obligations into question.
Critics of the public benefit corporate form argue that the fiduciary duties
created by the public benefit corporation statute conflict with traditional common law fiduciary duties; namely, that the duty to maximize shareholder value
cannot legally coexist with the duty to consider the interests of other constituents.3 Supporters argue that in practice the shareholder wealth maximization
norm does not conflict with a director’s fiduciary duties because Delaware law
already supports the notion that directors may consider non-shareholder constituent interests in making both day-to-day and anti-takeover corporate decisions.4
Because public benefit corporations are only increasing in number, and
demand for their products and services is growing, addressing these questions is
critically important. It is only a matter of time before a benefit corporation looks
to tap into the resources of the public capital markets; but is there enough
investor interest in public benefit corporations to support an IPO? After a public
benefit corporation goes public, its directors owe significant obligations to the
corporation’s shareholders and constituents—obligations that might be in tension with one another. Thus, can a public benefit corporation legally be a public
company under current Delaware law? And fearing the violation of their
fiduciary duties, public benefit corporation directors may believe they are
unable to defend against activist investors and hostile takeovers; thus, can a
public benefit corporation survive as a public and independent company?
This Note addresses each of these questions in turn. It argues that a Delaware
public benefit corporation can successfully go public and remain a viable independent
public entity under the current public benefit corporation statute. Part I examines the
growth in social entrepreneurship and the advent of the public benefit corporation.
Parts II through IV address the three main concerns of the public benefit corporation:
whether public benefit corporations have sufficient access to capital to go public
(Part II); whether the fiduciary duty concerns of public company directors
prohibit public benefit corporations from going public (Part III); and whether
takeovers or change-of-control transactions effectively extinguish the notion of
a long-term publicly traded public benefit corporation (Part IV).
1. See generally Alicia E. Plerhoples, Delaware Public Benefit Corporations 90 Days Out: Who’s
Opting In?, 14 U.C. DAVIS BUS. L.J. 247, 251–54 (2013) (describing the public benefit corporation).
2. DEL. CODE ANN. tit. 8, § 362(a) (2013).
3. See generally WILLIAM H. CLARK, JR. & LARRY VRANKA, THE NEED AND RATIONALE FOR THE BENEFIT
CORPORATION: WHY IT IS THE LEGAL FORM THAT BEST ADDRESSES THE NEEDS OF SOCIAL ENTREPRENEURS,
INVESTORS, AND, ULTIMATELY, THE PUBLIC (2013).
4. Id. at 12–13.
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SUSTAINING THE SUSTAINABLE CORPORATION
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I. A PRIMER ON BENEFIT CORPORATIONS
Social and environmental sustainability is by no means a new concept.
Sustainability is understood as “the ability to meet current needs without
impairing the ability to continue to do so in the future.”5 A sustainable corporation then aims to meet the current needs of its customers while considering its
social, cultural, and economic environment. In other words, sustainable corporations pursue some public mission in addition to, or at the expense of, profits,
depending on their corporate form. Dual-mission corporations—those that pursue profits and social good—are increasing in number, and many have taken on
the benefit corporation label. Sections I.A and I.B below describe the rise in the
sustainable corporation movement and the advent of the benefit corporation,
respectively. Section I.C introduces Delaware’s approach to addressing the
emerging concerns of benefit corporations and their directors.
A. THE GROWTH OF FOR-PROFIT SOCIAL ENTREPRENEURSHIP
Entrepreneurs seeking the dual mission of making a profit and pursuing a
social or environmental mission have long been able to organize as a limited
liability company (LLC), a limited partnership (LP), or multiple entities.6 In
Delaware, for instance, social entrepreneurs can utilize the contractual freedom
afforded LLCs under Delaware law to mold operating agreements tailored to
managers’ needs.7 Public companies can use their profit-making business to
fund affiliated nonprofit entities.8 And states with constituency statutes permit
directors of publicly traded companies to consider certain non-shareholder
constituents when fulfilling their fiduciary duties.9 Social entrepreneurs, then,
choose the form and the forum that best fit their needs.
In 2008, Vermont became the first state to pass a social enterprise statute,
creating the low-profit limited liability company (L3C).10 The L3C was created
5. See Judd F. Sneirson, The Sustainable Corporation and Shareholder Profits, 46 WAKE FOREST L.
REV. 541, 542 (2011).
6. See Cassady V. (“Cass”) Brewer, A Novel Approach to Using LLCs for Quasi-Charitable
Endeavors (A/K/A “Social Enterprise”), 38 WM. MITCHELL L. REV. 678, 680 (2012) (observing an
increased use of LLCs by social entrepreneurs).
7. See Mohsen Manesh, Contractual Freedom Under Delaware Alternative Entity Law: Evidence
from Publicly Traded LPs and LLCs, 37 J. CORP. L. 555, 557 (2012) (finding that LLCs and LPs in
Delaware can contractually modify, limit, or eliminate the fiduciary duties of their managers).
8. J. Haskell Murray, Choose Your Own Master: Social Enterprise, Certifications, and Benefit
Corporation Statutes, 2 AM. U. BUS. L. REV. 1, 19 (2012). For example, Chick-fil-A, Starbucks, and
Google “use both profit and nonprofit entities to achieve their ultimate objectives, which include certain
social goals.” Id. at 19 n.83.
9. See Jacob E. Hasler, Note, Contracting for Good: How Benefit Corporations Empower Investors
and Redefine Shareholder Value, 100 VA. L. REV. 1279, 1282 (2014); see also Eric W. Orts, Beyond
Shareholders: Interpreting Corporate Constituency Statutes, 61 GEO. WASH. L. REV. 14, 26–31 (1992)
(describing various state constituency statutes).
10. See J. William Callison & Allan W. Vestal, The L3C Illusion: Why Low-Profit Limited Liability
Companies Will Not Stimulate Socially Optimal Private Foundation Investment in Entrepreneurial
Ventures, 35 VT. L. REV. 273, 273 (2010).
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to allow social entrepreneurs to operate for profit and generate returns for
investors; however, an L3C’s primary purpose had to be charitable or educational.11 Consequently, the L3C’s profit potential was small and investor returns
were minimal.12 Although this form worked for some social entrepreneurs,
others wanted to operate for greater profits while still maintaining a social or
moral foundation. Entrepreneurs increasingly turned to certifications in order to
differentiate their company from competitors. Independent, nonprofit groups
like B Lab began offering managers the chance to certify their respective
entities as B Corporations (B Corps). Thus, without changing the corporate
form or creating a new legal entity, B Corp certification provided businesses
with an assessment that measured its social and environmental impact, treatment of employees, and overall transparency and accountability.13
The B Corp certification is related to, but separate and distinct from, a benefit
corporation: a B Corp is a certification administered by B Lab, whereas a
benefit corporation is a corporate legal entity.14 The B Corp certification was
designed as a way to credibly communicate to the world that a company was a
socially responsible entity.15 Consumers and investors alike could look to the B
Corp logo and the businesses’ assessment scores when deciding whether to
purchase from or invest in these companies. Yet in the first four years that B
Corp certifications were offered, not a single one of the 287 companies that
acquired the B Corp certification was publicly owned.16 Directors of B Corps
(and their lawyers) were afraid that taking the B Corp pledge meant violating
their fiduciary duty to put shareholders’ profits first.17 There remains considerable debate over whether it is legally possible for a publicly held company to
obtain B Corp certification without violating a director’s duty to his
shareholders.18
11. See VT. STAT. ANN. tit. 11, § 3001(27)(A)(i), (B) (West 2014) (requiring that the L3C “significantly furthers . . . one or more charitable or educational purposes” and that “[n]o significant purpose of
the company is the production of income”).
12. See Malika Zouhali-Worrall, For L3C Companies, Profit Isn’t the Point, CNN MONEY (Feb. 9,
2010, 10:49 AM), http://money.cnn.com/2010/02/08/smallbusiness/l3c_low_profit_companies (describing one L3C whose beneficiaries receive 90% of the profits each month, whereas investors only receive
their return upon exiting the L3C).
13. Hasler, supra note 9, at 1283.
14. See The Non-Profit Behind B Corps, BCORPORATION.NET (last visited May 17, 2015), https://www.
bcorporation.net/what-are-b-corps/the-non-profit-behind-b-corps (“B Lab is a 501(c)3 nonprofit that
serves a global movement of entrepreneurs using the power of business to solve social and environmental problems.”).
15. The B Corp insignia is akin to obtaining a LEED (Leadership in Energy and Environmental
Design) certification for a building or using a fair trade or organic label on a food package. Id.
16. See Susan Adams, Capitalist Monkey Wrench, FORBES (Mar. 25, 2010, 1:20 PM), http://www.
forbes.com/forbes/ 2010/0412/rebuilding-b-lab-corporate-citizenship-green-incorporation-mixedmotives.html.
17. See Sneirson, supra note 5, at 548.
18. See William H. Clark, Jr. & Elizabeth K. Babson, How Benefit Corporations are Redefining the
Purpose of Business Corporations, 38 WM. MITCHELL L. REV. 817, 828 (2012) (“[C]urrent law views
shareholder wealth maximization as a duty that directors are prohibited from abandoning.”). But see
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SUSTAINING THE SUSTAINABLE CORPORATION
175
Attempting to address these uncertainties, B Lab, with the help of lawyer
William H. Clark, Jr., promulgated in 2010 the model benefit corporation
legislation, or Model Legislation, that shaped many of today’s state benefit
corporation statutes.19 The Model Legislation was designed to accommodate
for-profit, mission-driven companies so that “existing corporation code applie[d] to benefit corporations in every respect except those explicitly stipulated
in the Model Legislation.”20 Furthermore, the Model Legislation comforted
directors who feared that using the traditional corporate form to pursue social
goals would violate their duty to prioritize shareholder wealth. State legislatures
responded to the concerns of social entrepreneurs and investors, beginning with
the passage of the first benefit corporation legislation in Maryland in 2010.21
B. THE BENEFIT CORPORATION
State benefit corporation legislation creates a new type of legal entity—the
benefit corporation. A benefit corporation is a for-profit corporation with a
stated public benefit that operates in a responsible and sustainable manner; in
other words, it pursues the dual mission of making a profit and achieving some
social good.22 A public benefit means some “positive effect (or reduction of
negative effects) on 1 or more categories of persons, entities, communities, or
interests” other than those of the stockholders.23 A public benefit can include,
but is not limited to, charitable, educational, environmental, artistic, scientific,
or religious contributions.24 Directors of benefit corporations must balance the
corporation’s public mission with its shareholders’ financial interests, as well as
other primary stakeholder interests.25 Thus, benefit corporations modify the
traditional purpose of the corporation by mandating that its directors consider
constituents other than, but including, the corporation’s shareholders.
To date, twenty-six states plus the District of Columbia have adopted some
sort of sustainable business or social enterprise legislation.26 Although the
Barnali Choudhury, Serving Two Masters: Incorporating Social Responsibility into the Corporate
Paradigm, 11 U. PA. J. BUS. L. 631, 657 (2009) (“[A] corporate decision that promotes the interests of
any corporate stakeholder, but fails to align with profit goals, will likely still find protection under the
business judgment rule.”).
19. CLARK & VRANKA, supra note 3, at 16; see also The Model Legislation, BENEFIT CORP INFORMATION CENTER, http://www.benefitcorp.org/legislators/draft-legislation-for-your-state (last visited June 21,
2015).
20. CLARK & VRANKA, supra note 3, at 15.
21. See State by State Legislative Status, BENEFIT CORP INFORMATION CENTER, http://www.benefitcorp.
net/state-by-state-legislative-status (last visited June 21, 2015).
22. See, e.g., DEL. CODE ANN. tit. 8, § 362(a) (2013); see also CLARK & VRANKA, supra note 3, at
1–20 (providing an overview of benefit corporation legislation).
23. § 362(b).
24. Id.
25. Id. § 362(a).
26. State by State Legislative Status, supra note 21 (those states are: Arizona, Arkansas, California,
Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Minne-
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statutes differ from state to state, they share three fundamental characteristics
that address corporate purpose, accountability, and transparency:
A benefit corporation: (1) has the corporate purpose to create a material,
positive impact on society and the environment; (2) expands fiduciary duty to
require consideration of nonfinancial interests; and (3) reports on its overall
social and environmental performance as assessed against a comprehensive,
credible, independent, and transparent third-party standard.27
Benefit corporations are not far removed from the traditional corporate form.
Though they pursue some social or environmental mission, they do not receive
favorable tax treatment under the law. Benefit corporations are very much
for-profit corporations and share with traditional for-profit corporations many of
the same goals and concerns.
Benefit corporation legislation is not without criticism. Many critics argue
that the state benefit corporation statutes do not prescribe any content or
standards against which to objectively measure a company’s performance in
pursuit of its social mission.28 Although many states tried to solve the issue by
requiring an independent and transparent third-party assessment, the statutes do
not describe who the assessor should be or how they should set their standards.29 There are also inherent conflicts of interest in using a third-party
assessor. An assessor must be funded and presumably would collect fees from
the companies it examines. It therefore is incentivized to lower its standards in
order to attract more business and retain the business it has.30 Thus, “it is
conceivable that some third-party [assessors] will establish very low, but transparent, standards,” greenwashing the entire concept of public benefit.31
Others have argued that benefit corporation statutes create a false dichotomy
between good and bad companies. That is, the public may perceive traditional
corporations as bad merely because they are not labeled benefit corporations
sota, Nebraska, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Rhode Island,
South Carolina, Utah, Vermont, Virginia, and West Virginia).
27. Clark & Babson, supra note 18, at 838–39.
28. See J. William Callison, Putting New Sheets on a Procrustean Bed: How Benefit Corporations
Address Fiduciary Duties, the Dangers Created, and Suggestions for Change, 2 AM. U. BUS. L. REV.
85, 94 (2012) (noting benefit corporation legislation “fails to state how standards are applied or by
whom”).
29. See id.
30. These arguments parallel those made against credit rating agencies like Standard & Poor’s
(S&P), Moody’s, and Fitch. Credit rating agencies, whose clients are the issuers themselves, see higher
earnings from higher debt ratings, and are tasked with accurately rating their client’s debt for the benefit
of the buyer, who provides no revenue to the agency. See Rupert Neate, Ratings Agencies Suffer
‘Conflict of Interest’, Says Former Moody’s Boss, THE GUARDIAN (Aug. 22, 2011, 1:18 PM), http://www.
theguardian.com/business/2011/aug/22/ratings-agencies-conflict-of-interest.
31. Callison, supra note 28, at 94. For clarity, “greenwashing” refers to the “creation or propagation
of an unfounded or misleading environmentalist image.” Greenwashing Definition, OXFORD ENGLISH
DICTIONARY (3d ed. 2002).
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SUSTAINING THE SUSTAINABLE CORPORATION
177
under the statute.32 Moreover, benefit corporations were generally created on
the premise that existing corporate law prevents directors from considering
interests other than those of its shareholders. The good versus bad dichotomy
will only compound the inference that corporations that are not benefit corporations must act solely in ways that maximize shareholder profit.33 Thus, the
benefit corporation label not only perpetuates the shareholder primacy misconception that directors must act to maximize share price, but also undermines the
corporate responsibility movement by creating a “bipolar world of regular
corporations that maximize private profits and other corporations that consider
social and environmental sustainability.”34
C. DELAWARE’S PUBLIC BENEFIT CORPORATION STATUTE
Delaware amended its General Corporation Law on August 1, 2013, to allow
businesses to incorporate in Delaware as public benefit corporations, or PBC.
Public benefit corporations must intend to “produce a public benefit or public
benefits” and “operate in a responsible and sustainable manner.”35 Directors of
public benefit corporations are required to “balance[] the pecuniary interests of
the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its
certificate of incorporation.”36 However, although the law requires a statement
of a specific public benefit within the charter, failure to satisfy the stated specific
public benefit, without more, does not constitute a breach of good faith.37
Stockholders of a public benefit corporation must receive a biennial benefit
report describing the corporation’s social objectives, the standards the corporation uses to measure the corporation’s success in meeting those objectives, and
an assessment of how well the corporation performed in meeting those objectives.38 Like the Model Rules, the benefit report does not require that public
benefit corporations retain an independent third party to conduct an assessment
of how well the corporation is meeting its social objectives.39 Furthermore,
directors have no fiduciary duty to non-shareholders to create a public benefit,
32. See Mark A. Underberg, Benefit Corporations vs. “Regular” Corporations: A Harmful Dichotomy, HARV. L. SCH. FORUM CORP. GOV. & FIN. REG. (May 13, 2012, 8:31 AM), http://blogs.law.harvard.
edu/corpgov/2012/05/13/benefit-corporations-vs-regular-corporations-a-harmful-dichotomy (corporations
would be labeled bad because of “the law that governs their conduct rather than on the choices made by
those who run them”).
33. Callison, supra note 28, at 105.
34. Id. It was for this reason that benefit corporation legislation was opposed and defeated in
Michigan and North Carolina. See Plerhoples, supra note 1, at 249 & n.6.
35. DEL. CODE ANN. tit. 8, § 362(a) (2013).
36. Id. § 365(a).
37. See id. § 365(c) (“The certificate of incorporation of a public benefit corporation may include a
provision that any disinterested failure to satisfy [the stated public benefit] shall not . . . constitute an act
or omission not in good faith, or a breach of the duty of loyalty.”)
38. Id. § 366(b).
39. See CLARK & VRANKA, supra note 3, at 25 (“Benefit corporations are not required to have their
benefit report certified or audited by a third party.”).
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so shareholders alone have standing to bring a derivative suit for failure to
pursue a public benefit.40
Beyond the change in fiduciary duty considerations and the required benefit
report, the Delaware public benefit corporation statute does not significantly
alter Delaware corporate law—presumably, Delaware’s extensive corporate
case law applies to public benefit corporations just as it does to traditional
corporations.41 Thus, for example, directors receive the benefit of the business
judgment rule but must also adhere to their duty to maximize shareholder
wealth during a takeover or sale.42 This presents a problem because the public
benefit corporation statute has an effect similar to a constituency statute,
allowing directors of public benefit corporations to consider non-shareholder
interests.43
Delaware is particularly interesting in this context because Delaware will
likely be the first state to host a publicly held benefit corporation. Currently,
there are no benefit corporations that are also publicly held companies, so the
success of a benefit corporation in the public market remains untested. However, The Honest Co., a certified B Corp and maker of eco-friendly baby
products, has “committed” to registering in Delaware as a public benefit corporation.44 After a third round of venture capital financing, The Honest Co. is
reportedly gearing up for an initial public offering with a valuation just shy of
$1 billion.45 The company’s CEO and co-founder recently remarked that “being
a public company is the best path for us going forward.”46 And in 2013, Rally
Software Development Corp. (“Rally Software”) went public as a Delaware
corporation and a B Lab-certified B Corp.47 Rally Software’s website states that
although the company is run for-profit, it “should be a force for good” and is
40. See Plerhoples, supra note 1, at 257.
41. This Note is most concerned with the corporate legal concepts of a director’s fiduciary duties and
the protection of the business judgment rule. A director owes to his or her corporation a fiduciary duty
to remain loyal to the corporation, avoid conflicts of interest, and act in good faith by applying his or
her best business judgment and promoting the success of the corporation. A director facing litigation
over a business decision receives the benefit of the business judgment rule—a legal presumption that
his or her conduct was bona fide in the interest of the corporation—if he or she satisfies his of her duty
of good faith. See Douglas M. Branson, The Rule That Isn’t a Rule - The Business Judgment Rule, 36
VAL. U. L. REV. 631, 632, 635 (2002).
42. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (“The
duty of the board . . . changed from the preservation of [the company] as a corporate entity to the
maximization of the company’s value at a sale for the stockholders’ benefit.”).
43. See Plerhoples, supra note 1, at 252.
44. Mike Hower, Record 17 Companies Register as Delaware’s First Benefit Corporations, TRIPLE
PUNDIT (Aug. 5, 2013), http://www.triplepundit.com/2013/08/delaware-benefit-corporations.
45. Lizette Chapman, Jessica Alba’s the Honest Co. Raises $70M, Preps for IPO, WALL ST. J. (Aug.
26, 2014, 1:22 PM), http://blogs.wsj.com/venturecapital/2014/08/26/jessica-albas-the-honest-co-raises-7
0m-preps-for-ipo.
46. Id.
47. Ariel Schwartz, Shaking Up the Corporate Structure to Go Beyond the Profit Motive, FAST
COMPANY (Jan. 14, 2014, 7:10 AM), http://www.fastcoexist.com/3024770/world-changing-ideas/a-publiccompany-will-become-a-benefit-corporation.
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SUSTAINING THE SUSTAINABLE CORPORATION
179
striving for “shared and durable prosperity.”48 It seems only a matter of time
until a public benefit corporation tests the public market.
II. THE IPO PROCESS: ACCESS TO CAPITAL
The lifecycle of a corporation has many stages. Early startups often require
an angel investor’s help to get their ideas off the ground, and venture capitalists
typically assist in the financing during a corporation’s growth stages. After that,
the costs of becoming a publicly held company and maintaining that status are
even greater. Between the fees paid to investment bankers and the money left on
the table after the IPO,49 it is common for a company going public in the U.S. to
give away 5% of its value on the day of the IPO.50 Significant and ongoing
costs are also spent on satisfying reporting and disclosure requirements as well
as the staffing and infrastructure needs to support it. Thus, access to sufficient
capital at the venture capital and private equity stages is critically important for
any corporation looking to undergo an IPO.
A potential problem for a public benefit corporation embarking on an IPO is
its access to sufficient capital. Not only must investors help fund its IPO, but
they must also be able to support its stock price going forward. This requires a
robust and active investment pool, and as detailed below, there is evidence
today that such a market exists. Investors are increasingly aware of companies’
social and moral activities, and are increasingly basing their decisions on those
considerations.51 Section II.A below describes the growth of the socially responsible investor movement, and section II.B argues for an alternative to the classic
notion that investors are solely self-interested and profit-driven.
A. SOCIALLY RESPONSIBLE INVESTMENT AND THE GROWTH OF THE MARKET
Without adequate investor interest in for-profit social entrepreneurship, there
could be no public PBC. But for benefit corporations generally, access to capital
used to be more limited than it is today. There is ample evidence today that the
size of the socially responsible investment (SRI) movement is more than large
enough to sustain a benefit corporation’s IPO. The estimated size of the global
SRI market is at least $13.6 trillion today, and in the U.S., it is estimated to be
around $3.7 trillion, or more than 10% of total assets under management in the
U.S.52 SRI has clearly evolved in the U.S. over the past thirty years to become a
48. Certified B Corporation, RALLY SOFTWARE, https://www.rallydev.com/about/certified-b-corporation
(last visited May 17, 2015).
49. “On the table” in this context refers to the number of issued shares multiplied by the capital gain
per share on the day of the IPO. Jay Ritter, Why Is Going Public So Costly?, FORBES (June 19, 2014,
4:29 PM), http://www.forbes.com/sites/jayritter/ 2014/06/19/why-is-going-public-so-costly.
50. Id.
51. CLARK & VRANKA, supra note 3, at 3–4.
52. Amy Bell, Redefining Returns: The Impact of an Emerging Investment Model, J.P. MORGAN
(Mar. 17, 2015), https://www.jpmorgan.com/pages/jpmorgan/is/thought/magazine/2Q2013/Redefining;
Rob Kozlowski, $3.7 Trillion Now Following SRI, Survey Finds, PENSIONS&INVESTMENTS (Nov. 14,
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distinct venture capital and private equity industry, made up of institutional
funds and individual investors pursuing both profits and social objectives.53
Some SRI investors use simple screens, such as avoiding tobacco, alcohol, or
gaming companies, when choosing their investments, while other investors
actively engage with their corporations in order to change their behaviors.54 But
a growing number of social investors, often labeled “impact investors,” invest
with the intention of generating social and environmental impact alongside
financial returns.55 For the sake of clarity, creating a public benefit and minimizing a negative impact can be two very different things; the term “impact
investor” is usually used to describe the former, and “social investor” to
describe the latter.56 Furthermore, impact investors are becoming more creative
in the way in which they supply capital and demand returns. Organizations like
the Acumen Fund, Bridges Ventures, and Root Capital channel “patient capital”
to high social return investments.57 Other organizations like Endeavor and
Social Finance help socially conscious entrepreneurs gain access to global
capital markets to fuel growth in employment and social impact.58
Socially responsible companies are not a new phenomenon; in fact, we could
look to the classic case of Dodge v. Ford Motor Co. to find evidence of a chief
executive that cared deeply about the health of the community.59 A substantial
and growing population of consumers today actively seek out companies that
share their desire to positively impact society and the environment.60 And as the
supply of impact investment capital grows, consumer demand for socially
2012, 1:13 PM), http://www.pionline.com/article/20121114/ONLINE/121119957/37-trillionnow-following-sri-survey-finds.
A 2010 report by J.P. Morgan estimated the size of the SRI market opportunity at between $400
billion and $1 trillion. Impact Investments: An Emerging Asset Class, J.P. MORGAN GLOBAL RES., Nov.
29, 2010, at 6, available at http://www.rockefellerfoundation.org/blog/impact-investments-emergingasset.
53. See generally SOC. INV. FORUM FOUND., 2010 REPORT ON SOCIALLY RESPONSIBLE INVESTING TRENDS
IN THE U.S. (2010), available at http://www.ussif.org/files/Publications/10_Trends_Exec_Summary.pdf.
54. CLARK & VRANKA, supra note 3, at 3.
55. About Impact Investing, GLOBAL IMPACT INVESTING NETWORK, http://www.thegiin.org/cgi-bin/iowa/
resources/about/index.html (last visited May 17, 2015).
56. See Alicia E. Plerhoples, Can an Old Dog Learn New Tricks? Applying Traditional Corporate
Law Principles to New Social Enterprise Legislation, 13 TRANSACTIONS: TENN. J. BUS. L. 221, 253
(2012) (describing the differences between impact investors and social investors).
57. Ronald Cohen & William A. Sahlman, Social Impact Investing Will Be the New Venture Capital,
HARVARD BUS. REV. (Jan. 17, 2013), https://hbr.org/2013/01/social-impact-investing-will-b/.
58. Id.
59. 170 N.W. 668, 671 (Mich. 1919) (“‘My ambition,’ declared Mr. Ford, ‘is to employ still more
men; to spread the benefits of this industrial system to the greatest possible number, to help them build
up their lives and their homes. To do this, we are putting the greatest share of our profits back into the
business.’”).
60. One study found estimated that approximately 68 million Americans strongly consider personal,
social, and environmental responsibility when making a purchase. Natural Mktg. Inst., Benefits of
Becoming a Sustainable Business, ECOOFFICIENCY.COM (2007), http://www.eco-officiency.com/benefits_
becoming_sustainable_business.html.
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responsible products and companies is growing too.61 Take, for example, companies like Patagonia, Warby Parker, and TOMS, all of which are certified B
Corps. These companies have garnered significant consumer favor by being
environmentally friendly and giving back to their communities by matching
every purchase with a donated pair of glasses (Warby Parker) or shoes (TOMS)
to people in need.62 And with the prevalence of social media, consumers are
more aware than ever of the impacts these companies make on society and the
environment.
Because of the rise in both the supply of impact investors and the consumer
demand for socially responsible products, socially responsible companies are
increasingly able to raise capital at each stage in their corporate lifecycle. By
way of example, in its Series B and Series C rounds of financing, The Honest
Co. raised $52 million and $70 million, respectively.63 Benefit corporations are
in a unique position to capture both traditional and socially responsible investment capital. Benefit corporations must have a clear “statement of purpose” and
must have “more robust accountability and transparency mechanisms for those
purposes” than that required by other socially responsible corporate forms.64
Legal transparency and accountability may attract some traditional investors
who were otherwise reluctant to invest in socially responsible companies.
From another perspective, the benefit corporation label is perhaps best viewed
as the cost of doing business in today’s market—it is a type of differentiation,
marketing, or branding expense aimed at the socially responsible consumer. We
can view it in this way because, if not for the company’s social mission, it likely
would not occupy its current position in the market. Take, for example, the
TOMS shoe company. TOMS is a for-profit, certified B Corp that sells canvas
shoes and sunglasses. For every pair of shoes or sunglasses sold, a pair is
donated to people in need around the world.65 Where a traditional corporation
would have to advertise and brand its product, TOMS shoes gained popularity
through word of mouth; its social mission grabbed the attention of the millennial generation who took to social media to spread the word.66 The TOMS
61. See Global Consumers Are Willing to Put Their Money Where Their Heart Is When it Comes to
Goods and Services from Companies Committed to Social Responsibility, NIELSEN (Jun. 17, 2014),
http://www.nielsen.com/content/corporate/us/en/press-room/2014/global-consumers-are-willing-to-puttheir-money-where-their-heart-is.html [hereinafter Nielsen Global Survey]; James Epstein-Reeves, Consumers Overwhelmingly Want CSR, FORBES (Dec. 15, 2010, 9:58 AM), http://www.forbes.com/sites/csr/
2010/12/15/new-study-consumers-demand-companies-implement-csr-programs.
62. TOMS, http://www.toms.com/one-for-one-en (last visited May 17, 2015); WARBY PARKER, https://
www.warbyparker.com/buy-a-pair-give-a-pair (last visited May 17, 2015).
63. Chapman, supra note 45.
64. CLARK & VRANKA, supra note 3, at 28.
65. TOMS, http://www.toms.com/one-for-one-en (last visited May 17, 2015). Warby Parker, also a
certified B Corp, runs substantially the same business model, funding one pair of eyeglasses for every
pair sold. WARBY PARKER, https://www.warbyparker.com/buy-a-pair-give-a-pair (last visited May 17,
2015).
66. TOMS Shoes, DRAGONFLYEFFECT.COM, http://www.dragonflyeffect.com/blog/dragonfly-in-action/
case-studies/toms-shoes (last visited May 17, 2015).
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brand was and still is defined by its social mission; without it, TOMS would not
be as successful as it is.67
Thus, with the rise in impact investment and the increasing consumer desire
to purchase from socially responsible companies, benefit corporations will have
more than enough access to the capital necessary to undertake an IPO. As
evidenced by growing investor and consumer demand for socially responsible
companies, it is only a matter of time before the public benefit corporation
becomes a reality, perhaps starting with The Honest Co. in Delaware.68
B. DEFINING INVESTOR UTILITY
Defenders of the shareholder wealth maximization theory argue that “either
(i) shareholders do not derive any utility from their investments other than
through pecuniary interests or (ii) shareholders’ non-pecuniary interests are
diverse and immeasurable.”69 However, public benefit corporations are likely to
attract those individuals or entities—impact and social investors—that place
some value on either creating a public benefit or minimizing a negative impact.
“For socially conscious shareholders, ‘their welfare reflects a combination of
their financial returns and their social or moral satisfaction with corporate
activities.’”70 This does not necessarily mean that those investors expect to
realize any less of a financial return on their investment than they would by
investing in a traditional corporation, though that can be the case.71 Instead,
shareholders invest in corporations of whose practices they approve and avoid
corporations of whose practices they disapprove, including not only financial
return but also the social and moral preferences of the investor.72
Therefore, shareholder welfare, or their utility, gives reason to think that
investors will not shy away from public benefit corporations. To be sure, some
investors today choose their investments after carefully analyzing market conditions or the financial information of a company. But others undoubtedly invest
in companies simply because they like a company’s brand or products, or
because they choose to buy into the hype that surrounds it.73 In other words, a
company’s social cachet has value. Companies like Apple and Google attract
67. See Steve McKee, Corporate Social Responsibility: Distinction or Distraction?, BUSINESSWEEK
(Aug. 9, 2012) http://www.businessweek.com/articles/2012–08–09/corporate-social-responsibilitydistinction-or-distraction (“[TOMS’] social mission is the same as the company mission.”). The article
also compares the success of TOMS’ social mission to the “Refresh Project,” Pepsi’s failed $20 million
marketing campaign to promote “refreshing ideas that change the world.” Id.
68. See Chapman, supra note 45 and accompanying text.
69. Plerhoples, supra note 56, at 252 (citing Brian M. McCall, The Corporation as Imperfect
Society, 36 DEL. J. CORP. L. 509, 545 (2011)).
70. Ian B. Lee, Efficiency and Ethics in the Debate About Shareholder Primacy, 31 DEL. J. CORP. L.
533, 558 (2006) (quoting Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80
N.Y.U. L. REV. 733, 783 (2005)).
71. See Plerhoples, supra note 56, at 254.
72. Lee, supra note 70, at 573.
73. See Marcus Wohlsen, The Real Reason Investors Dump Stocks After Big Gadget Announcements, WIRED (Oct. 13, 2014, 6:30 AM), http://www.wired.com/2014/10/making-money-tech-stocks-
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investors not only because of their financial records and future prospects, but
also because people enjoy their products and services. These shareholders
derive a nonfinancial value from their investment that goes beyond their pecuniary interests. Thus, the value of their utility is equal to the stock’s financial
returns plus the value they place on social or moral satisfaction.
Of course, the argument could be made that professional investors, who
comprise the vast majority of shareholders, do not typically invest for such
reasons74 and are more likely than the unsophisticated investor to demand a
more efficient use of capital or else move their money elsewhere. However,
investment professionals often, and for many reasons, diversify their holdings,
and investment in public benefit corporations may offer some protection in the
event of a market downturn. First, there is substantial evidence that firms that
make greater investments in corporate social responsibility (CSR) initiatives
have more positive returns than peer firms during the same period.75 Second,
evidence shows that firms that make greater investments in CSR initiatives see
less volatility in their stock prices during economic downturns.76 The research
further suggests that those companies have greater brand loyalty—customers
buy their products regardless of the performance of the overall economy.77 And
even if the above findings did not hold, older studies found that stocks of
corporations with committed CSR policies perform statistically similarly to
those corporations that do not have CSR programs.78 Thus, though some
commentators may wax poetic as to whether the market will support robust
CSR programs, practically a CSR program may at worst have no negative effect
doesnt-depend-good-new-product (analyzing the macro and micro stock trading patterns of Tesla and
Apple during the “hype” periods leading up to new product announcements).
74. Professional investors may have similar, but less extreme, reasons for investing, such as an
investor’s relationship with company management or a desire to diversify their portfolio.
75. See CAROLINE FLAMMER, CORPORATE SOCIAL RESPONSIBILITY AND STOCK PRICES: THE ENVIRONMENTAL
AWARENESS OF SHAREHOLDERS 1–5 (2012), available at http://www.corporate-sustainability.org/conferences/
fourth-annual-research-conference/Flammer.pdf (finding that companies reported to behave responsibly
towards the environment experience a significant stock price increase, whereas firms that behave
irresponsibly face a significant stock price decrease); Urs von Arx & Andreas Ziegler, The Effect of CSR
on Stock Performance: New Evidence for the USA and Europe, 14(6) QUANTITATIVE FIN. 977, 977–78
(2008) (finding that environmental and social activities of a firm compared with other firms within a
given industry are valued by financial markets in the U.S. and Europe); Marc Orlitzky, Frank L.
Schmidt & Sara L. Rynes, Corporate Social and Financial Performance: A Meta-analysis, 24(3) ORG.
STUDIES 403, 403–05 (2003), http://community-wealth.org/content/corporate-social-and-financialperformance-meta-analysis (establishing a greater degree of certainty with respect to the CSR-financial
performance relationship than previously assumed to exist by many business scholars).
76. See Tom Snee, Good for the World, Good for Shareholders: Study Finds Social Responsibility
Means Less Risky Stock Prices, SCIENCEDAILY (May 28, 2013), http://www.sciencedaily.com/releases/20
13/05/130528180850.htm (describing a report that models CSR activities as an investment in customer
loyalty and finds that CSR decreases systematic risk and increases firm value).
77. See generally Snee, supra note 76.
78. See Gordon J. Alexander & Rogene A. Buchholz, Corporate Social Responsibility and Stock
Market Performance, 21(3) ACAD. MGMT. J. 479, 485 (1978) (finding no significant relationship
between firms with recognized CSR programs and their stock price).
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on stock price and at best provide protection against market downturns as well
as regular positive returns.
We would expect the market for public benefit corporation stock to operate in
much the same way. In fact, benefit corporation status could offer more predictable corporate social spending behavior than that of firms with similarly robust
CSR programs because investors of the public benefit corporation have knowingly opted in to a defined social purpose of the corporation. In other words,
investors in traditional firms with CSR programs may have less predictability as
to the magnitude of the CSR program over any given time period, whereas a
benefit corporation must have a defined and transparent CSR mission, potentially allowing for greater accuracy in predicting the cost of such programs.79
III. FIDUCIARY DUTIES AND THE SHAREHOLDER PRIMACY NORM
A major issue facing the public benefit corporation is whether its directors’
ability to pursue interests other than those of its shareholders creates an “accountability gap and possibly gives directors unfettered discretion in their decisionmaking.”80 That is, directors have a fiduciary duty to increase their corporation’s
value, and in turn increase their shareholders’ value. But because benefit
corporations are allowed—or in some cases, required—to consider interests
beyond those of their shareholders, director decisions will overwhelmingly get
the protection of the business judgment rule, as nearly any decision could be
justified as in the interest of the corporation’s stakeholders.81 So unless some
action taken is regarded as corporate waste, an extremely high barrier to
liability, directors have uncabined discretion and virtually no accountability to
shareholders—directors thus effectively have no duty to the shareholders, whose
money they are spending. And if shareholders have no way of restraining a
director, shareholders are unlikely to invest in a company. Thus, the issue is one
of shareholder primacy: requiring corporate directors to maximize shareholder
wealth constrains managerial discretion and controls agency costs, raising
societal wellbeing.82 This Part of the Note will address the shareholder primacy
norm as applied to public benefit corporations (section III.A) and examine a
director’s fiduciary duties as restraints on director discretion by comparing the
realities of today’s corporate law environment in Delaware to publicly traded
limited liability companies (section III.B).
79. See DEL. CODE ANN. tit. 8, § 362(a)(1) (2013) (requiring a public benefit corporation to identify
the “specific public benefits to be promoted by the corporation”).
80. Plerhoples, supra note 56, at 228.
81. See, e.g., In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 73–74 (Del. 2006) (“[A] plaintiff
who fails to rebut the business judgment rule presumptions is not entitled to any remedy unless the
transaction constitutes waste.”).
82. See Jonathan Macey, Sublime Myths: An Essay in Honor of the Shareholder Value Myth and the
Tooth Fairy, 91 TEX. L. REV. 911, 918–19 (2013).
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A. PBCS AND THE SHAREHOLDER PRIMACY NORM
The shareholder primacy norm is the widely held and oft-debated idea that
describes the control shareholders have over the corporation and its directors.83
Particularly, it rests on the following principles:
[U]ltimate control over the corporation should rest with the shareholder class;
the managers of the corporation should be charged with the obligation to
manage the corporation in the interests of its shareholders; other corporate
constituencies, such as creditors, employees, suppliers, and customers, should
have their interests protected by contractual and regulatory means rather than
through participation in corporate governance; . . . and the market value of the
publicly traded corporation’s shares is the principal measure of its shareholders’ interests.84
However, it is widely understood that the shareholder primacy norm lacks
clear legal support, even by those who vehemently defend it.85 “Nowhere in the
Delaware General Corporate Law does it explicitly require that directors maximize shareholder value.”86 Furthermore, a Delaware court has never held a
director liable for failure to maximize shareholder wealth.87 Yet regardless of its
legal footing, shareholder primacy is still a widely held perception that discourages directors from considering non-shareholder interests when making significant corporate decisions, particularly in the takeover context.
Unilever’s acquisition of Ben & Jerry’s ice cream company illustrates the
pressure directors feel to maximize shareholder wealth. In 2000, Unilever made
an attractive offer to Ben & Jerry’s whose founders, Ben Cohen and Jerry
Greenfield, though reluctant, felt compelled to accept.88 Ben & Jerry’s, a
Vermont corporation, had the benefit of Vermont’s constituency statute to
consider non-shareholder interests. And although Ben & Jerry’s preferred not to
sell because of fear that a takeover would compromise its corporate mission,89
83. D. Gordon Smith, The Shareholder Primacy Norm, 23 J. CORP. L. 277, 278 n.1 (1998).
84. Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 GEO. L.J.
439, 440–41 (2001).
85. See, e.g., Macey, supra note 82, at 914–16 (defending the shareholder primacy norm but
acknowledging that “the myth of shareholder primacy appears to have been eradicated root and branch
eons ago”).
86. Hasler, supra note 9, at 1291.
87. Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 VA. L. & BUS. REV. 163, 171
(2008). The one exception to this rule may be in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173, 182 (Del. 1986), where the Court found that the board had a duty to maximize
shareholder wealth by getting the highest possible price for the company’s shares. However, Revlon
applies only in very specific takeover scenarios, and so would not apply to a director’s day-to-day
actions. Stout, supra, at 172.
88. See Plerhoples, supra note 56, at 237–39.
89. Constance L. Hays, Ben & Jerry’s to Unilever, with Attitude, N.Y. TIMES (Apr. 13, 2000),
http://www.nytimes.com/2000/04/13/business/ben-jerry-s-to-unilever-with-attitude.html (quoting Ben Cohen saying, “I would have preferred for Ben & Jerry’s to remain independent”).
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its board felt it had “no choice but to sell to the highest bidder or get sued.”90
Indeed, Delaware’s public benefit corporate form requires that a benefit corporation balance the interests of all material stakeholders.91 But the Ben & Jerry’s
case illustrates that directors of benefit corporations may feel no less pressure to
maximize shareholder wealth regardless of the constituents they may legally
consider.
Even still, there is considerable debate as to whether the business judgment
rule already protects director decisions that do not maximize shareholder wealth
outside the takeover context. Business decisions by directors generally survive
judicial review if a course of action is reasonably justified by some potential
shareholder benefit.92 Thus, corporations generally can claim that any action
pursuant to their social mission helps them achieve short- or long-term financial
goals.93 So though corporate directors arguably continue to have a fiduciary
duty requiring that they act in the best interest of the corporation and its
shareholders, only an action that constitutes waste will violate the business
judgment rule.
Therefore, the shareholder primacy norm—that directors must maximize
shareholder value—may not truly restrain corporate directors’ day-to-day decisions. Even in the classic case of Revlon, which requires that directors maximize the short-term financial gains of their stockholders during takeovers,94 the
Court held that “[a] board may have regard for various constituencies in
discharging its responsibilities, provided there are rationally related benefits
accruing to the stockholders.”95 In other words, courts will not question rational
judgments about how promoting non-shareholder interests ultimately promotes
shareholder value.
B. FIDUCIARY DUTIES AS RESTRAINTS ON DIRECTORS’ DISCRETION
Investing in a traditional public company should look no different from a
daily fiduciary duty standpoint than an investment in a public benefit corporation: in both traditional corporations and benefit corporations, director decisions
90. Id.
91. See DEL. CODE ANN. tit. 8, § 362(a) (2013) (“[A] public benefit corporation shall be managed in a
manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected
by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of
incorporation.”).
92. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (discussing the deference that the business
judgment rule affords directors).
93. Callison, supra note 28, at 87 n.5.
94. Revlon is discussed more fully below, infra Part IV.B.
95. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986); see also
Aronson, 473 A.2d at 812 (a director’s decisions must be “on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of the company” (emphasis added));
Jonathan Macey, A Close Read of an Excellent Commentary on Dodge v. Ford, 3 VA. L. & BUS. REV.
177, 179 (2008) (boards can take action that may not seem to directly maximize profits, so long as there
is some plausible connection to a rational business purpose that ultimately benefits stockholders in
some way; the benefit to other constituencies cannot be at the stockholders’ expense).
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are similarly restrained (or unrestrained) by the duty to act in the best interest of
the corporation. Thus, although Delaware public benefit corporation law appears to expand the scope of fiduciary duties by allowing public benefit corporation directors to consider the interests of material stakeholders, traditional
Delaware corporate law may already allow directors the discretion to do the
same.96
Because Delaware’s public benefit corporation statute contains few additional
requirements beyond consideration of various stakeholders and the adoption of
a specific public benefit,97 another area of concern on which the statute is silent
is whether shareholders may bring a derivate action against a director for a
failure to either (i) act in the shareholders’ interests or (ii) pursue a public
benefit.98 Critics of the public benefit corporate form have some reason to be
concerned, if only because there is no guiding case law on the subject. As it
stands, the “resolution of litigation by a shareholder seeking maximized financial return against the directors of [public benefit corporations] . . . would be
uncertain at best.”99 However, given the practical reality of Delaware case law,
these concerns may be overstated. A director’s Revlon duties—to maximize
shareholder value during a change of control—only apply during a takeover,
and not to day-to-day decisions. And the court’s more recent decision in eBay
Domestic Holdings, Inc. v. Newmark—making clear that director decisions must
ultimately promote corporate and shareholder value—means that practitioners
are unlikely to recommend a course of action that does not have at least some
rational related benefit accruing to shareholders.100 Because Delaware public
benefit corporation law explicitly states that directors have no duty to beneficiaries to create a public benefit,101 only shareholders, and not stakeholders, have
standing to bring a derivative claim, making directors more accountable to
stockholders than stakeholders.102 Thus, shareholders of public benefit corporations need not worry that directors will not consider their interests before taking
action.
Furthermore, investors are unlikely to shy away from investing in a public
benefit corporation solely because its director’s discretion is unrestricted. Publicly traded LLCs and LPs have long been used as a vehicle to consider the
interests of any number of stakeholders. These companies have also seen plenty
of success and stability as public companies, even though the fiduciary duties of
96. See generally LYNN STOUT, THE SHAREHOLDER VALUE MYTH: HOW PUTTING SHAREHOLDERS FIRST
HARMS INVESTORS, CORPORATIONS, AND THE PUBLIC (2012).
97. See Plerhoples, supra note 1, at 254–55 (outlining the corporate requirements set forth in
Delaware’s benefit corporation statute).
98. CLARK & VRANKA, supra note 3, at 12.
99. Id.
100. Id. at 13. See generally eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010).
101. DEL. CODE ANN. tit. 8, § 365(b) (2013).
102. Plerhoples, supra note 1, at 257.
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their mangers are largely non-existent.103 In a study of the extent to which LLCs
and LPs take advantage of their freedom to contract, 75 out of 85 (88%)
publicly traded LLCs and LPs either waived the fiduciary obligations of managers or eliminated liability arising from a breach of fiduciary duty.104 And
drawing on studies that show that corporate social responsibility has a positive
effect on market returns should only further quell investor fears that benefit
corporations necessarily produce lower returns than traditional for-profit corporations. Therefore, it is unlikely that investors in public benefit corporations will
view PBCs as unable to maximize shareholder wealth, as investors will define
their wealth as financial return plus the value of their social and moral
preferences.
IV. TAKEOVERS
In today’s corporate law environment, “consideration of the effect of corporate actions on various constituencies is not only permitted by law but in some
cases could be a prerequisite to enable directors to discharge their duty of care
obligations to make fully-informed decisions.”105 This is particularly true in
states where constituency statutes require a director to consider stakeholder
interests. But Delaware has no constituency statute. The public benefit corporate
form, however, does have an effect similar to a constituency statute and
arguably allows the directors of a public benefit corporation to consider nonshareholder interests when they might otherwise not be allowed, namely when
facing a change of control or takeover.106 Section IV.A below addresses whether
publicly traded public benefit corporations would face an increased risk of
takeover; section IV.B focuses on the extent to which a PBC director can defend
against a takeover; section IV.C argues that Delaware law is already equipped to
protect the publicly traded PBC.
A. ARE PUBLIC BENEFIT CORPORATIONS RIPE FOR ACQUISITION?
The possibility of a change of control or takeover transaction is perhaps the
most significant problem threatening the sustainability of a publicly traded
public benefit corporation. Because of the stigma attached to the benefit corporation label—that the corporation by definition is not profit-maximizing—public
benefit corporations could face increased change of control or takeover risk.107
If we accept the argument that a public benefit corporation must forgo some
profits to pursue its social or environmental mission, then a public benefit
corporation is inefficient in the eyes of a profit-maximizing investor. That is, the
103. For an overview of the public success of LLCs and LPs see, for example, Manesh, supra note
7.
104. Manesh, supra note 7, at 558.
105. Underberg, supra note 32.
106. Plerhoples, supra note 56, at 252.
107. See Plerhoples, supra 56, at 234 (“[A] social enterprise may face a change in control
transaction precisely because company earnings are not its only bottom line.”).
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money spent in fulfilling the corporate mission could instead be returned to
shareholders. Even if we believe that the public benefit corporation’s mission is
a cause of—and not in spite of—profits, expenditures on the corporate mission
could quickly be scaled back while still allowing the benefit corporation to
retain its label. Even more, a benefit corporation may be acquired by a bidder
who then simply reincorporates it as a traditional corporation before cutting its
social mission entirely. Accordingly, publicly traded public benefit corporations
may become prime acquisition targets because of their perceived lack of
profit-maximization.
Public benefit corporations may face increased takeover risk for reasons
beyond the profit-maximization principle as well. Due to the growth in demand
for socially responsible products and investments, a public benefit corporation
may be targeted by larger companies wishing to gain access to the sociallyresponsible market. This type of acquisition “leads to an immediate immersion
in the market, marked by the legitimacy of the target [benefit corporation].”108
Already this type of acquisition is a reality: Tom’s of Maine, Inc. and Burt’s
Bees, Inc., both certified B Corps, were purchased by the Colgate-Palmolive
Company and The Clorox Company, respectively.109 Ben & Jerry’s, well after
its sale to Unilever, obtained B Corp status to add credibility to Unilever’s
“ambitious sustainability agenda.”110
Outside of the takeover context, the rise in activist investors—or corporate
raiders, depending on your point of view—also spells trouble for the publicly
traded public benefit corporation. Again, because of the dual mission of the
public benefit corporation, activist investors may view public benefit corporations as an easy way to make money—simply buy a controlling block of shares
and force the public benefit corporation to return more money to its shareholders by spending less on its corporate mission. Furthermore, activist investors
like Carl Icahn, Bill Ackman, and Dan Loeb are very famous for what they
do—and when they do it, they attract other investors who purchase the same
stock and buy into their ideas.111 Because activist investors often put quick
money into the pockets of shareholders and hold managers and boards accountable for their decisions, they attract other shareholder-maximization-type
investors.112
Therefore, once an activist investor announces that he has acquired a controlling block and intends to return more money to the shareholders, shares will be
purchased by those investors who value shareholder returns above the social
108. Id. at 235.
109. Id. at 235–36.
110. Ben & Jerry’s Joins the B Corp Movement!, BEN & JERRY’S, http://www.benjerry.com/about-us/
b-corp (last visited May 17, 2015).
111. William L. Watts, Activists Here to Stay as War Chests Near $100 Billion, MARKETWATCH (Apr.
5, 2014, 8:30 AM), http://www.marketwatch.com/story/invest-like-icahn-the-rise-of-the-activist-investor2014–04–02.
112. Id.
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mission, further solidifying the activists’ intentions. Moreover, the target public
benefit corporation is likely to be an early-stage company with a small market
cap, making it easier for activists to purchase controlling blocks. Impact investors could do much the same—buy shares in a public benefit corporation and
ensure that it pursues its social mission. But activist investors are quick, fierce,
and established, and their fans include some of the nation’s largest institutional
investors.113 The resources of the activists’ portfolio, and of those who follow
them, simply exceed the resources of the impact investors willing to engage
them.114
As the corporate market consolidates over time, larger profit-maximization
corporations may systematically target public benefit corporations in order to
enter new industries and gain access to new consumers and investors. Activist
investors may attempt to force changes to the structure or nature of the benefit
corporation with which existing directors do not agree; if unsuccessful, they
may threaten a takeover. The directors of target public benefit corporations are
then faced with an extremely difficult problem: can a director choose to sell to a
bidder who promises to preserve its social mission, or do Delaware’s Revlon
duties apply?
B. REVLON, UNOCAL, AND RESPONSES TO TAKEOVER THREATS
When a corporation goes up for sale in Delaware, the shareholder primacy
norm takes effect. In the case of Revlon, Inc. v. MacAndrews & Forbes
Holdings, Inc., the Supreme Court of Delaware embraced the principle that
once the sale of a company becomes inevitable,115 the duty of the board of
directors changes from the preservation of the corporate entity to the maximization of the shareholder’s wealth.116 Directors must focus “solely on the firm’s
intrinsic value to the exclusion of other considerations, such as employees, the
environment, and other constituencies.”117 There is an obvious conflict between
the public benefit corporation’s social or environmental mission and its directors’ duties under Revlon.
Before the sale of a corporation is inevitable, however, directors have some
discretion to defend against unwanted takeovers. In defensive scenarios, Dela-
113. Id.
114. The size of the activist investor pool is estimated at around $100 billion. Id. In contrast, the size
of the impact investment pool is estimated at around $50 billion. MONITOR INST., INVESTING FOR SOCIAL
AND ENVIRONMENTAL IMPACT 7 (2009), available at http://www.monitorinstitute.com/downloads/what-wethink/impact-investing/Impact_Investing.pdf.
115. Although there is much debate as to when a company’s sale become “inevitable,” a company
goes “up for sale” when (i) it initiates an active bidding process to sell or reorganize itself in a way that
will break up the company, or (ii) in response to an active bidder’s offer, a company abandons its
long-term strategy and seeks an alternative transaction with a third party that will result in a change of
control of the company. Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 (Del. 1989).
116. 506 A.2d 173, 182 (Del. 1986). In contrast, in states with constituency statutes, directors may
be able to consider the interests of some or all of their constituents.
117. Plerhoples, supra note 56, at 237.
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ware courts apply the standards laid out in Unocal Corp. v. Mesa Petroleum
Co.118 Unocal permits a director of a corporation, regardless of the corporate
form, to consider the interests of non-shareholder constituents when making a
corporate decision or defending against a takeover threat, so long as that
decision shows some rationally related benefit accruing to shareholders, thus
implicating the shareholder primacy norm.119 Because Delaware’s public benefit corporate statute explicitly permits directors to consider the interests of
non-shareholder constituents, there is another conflict: to what degree, if any,
may a public benefit corporation director consider non-shareholder constituents
above the interests of shareholders under Unocal?
This Note does not purport to answer the question of whether Revlon or
Unocal duties should apply to publicly traded benefit corporations; either way,
the uncertainty is probably too great for risk adverse public corporate directors
and their lawyers, effectively making both cases applicable to publicly traded
PBCs.120 However, this does not mean that public benefit corporation directors
are necessarily being forced to buy into the shareholder primacy norm. For
instance, when defending a takeover attempt, a director of a public benefit
corporation in Delaware can take any reasonable action and consider the
interests of any constituent, so long as there is some rational benefit to shareholders. Furthermore, directors of a corporation are “not obliged to abandon a
deliberately conceived corporate plan for a short-term shareholder profit unless
there is clearly no basis to sustain the corporate strategy.”121 Conceivably, as
long as a public benefit corporation acts reasonably and in pursuit of the
long-term corporate strategy, directors can consider the interests of the constituents when defending a takeover or change of control scenario.
We should not forget that a director of a public benefit corporation must
always consider the pecuniary interests of its shareholders. In fact, a public
benefit corporation director violates his or her fiduciary obligations if he or she
fails to consider such interests.122 Thus, every decision taken to defend against a
takeover must be, to some degree, in pursuit of shareholder value. The deference that the business judgment rule affords directors should protect a director
under Unocal as long as his or her actions provide long-term value to the
118. 493 A.2d 946 (Del. 1985).
119. See Revlon, 506 A.2d at 182 (citing Unocal, 493 A.2d at 955). For the sake of clarity and
brevity, the Revlon shareholder-maximization duty applies when a corporation is being sold from
disaggregated public control to a single shareholder; if, however, the board adopts a defensive measure
in response to a takeover threat, Unocal applies, and provides the benefit of the business judgment rule
if directors satisfy their duty to adopt in good faith a reasonable and proportionate defensive response.
Id. at 180–82.
120. See generally CLARK & VRANKA, supra note 3, at 13–14.
121. Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. 1989).
122. DEL. CODE ANN. tit. 8, § 362(a) (2013) (requiring that “a public benefit corporation shall be
managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those
materially affected by the corporation’s conduct, and the public benefit or public benefits identified in
its certificate of incorporation” (emphasis added)).
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corporation and its shareholders. In that regard, decisions of directors of public
benefit corporations are safe under Unocal anyway. The typical takeover defenses, then, are available to public benefit corporations just as they are to
traditional corporations, allowing directors to adopt one defense or another if
they rationally believe it preserves the long-term value of the company.123
The tougher question may be in the case of Revlon, when a corporation’s sale
becomes inevitable.124 Before Revlon duties kick in, the board of a public
company has necessarily abandoned the corporation’s continued existence and
yielded control of the company to a third party.125 Therefore, the directors of a
public benefit corporation, when faced with the inevitable sale or change of
control, must seek to maximize the value accruing to shareholders. In the case
of an all-cash deal, there is no difference in a director’s duties for the sale of a
traditional corporation versus the sale of a public benefit corporation; after all,
the current shareholders of the target corporation will not have a continuing
ownership interest after the corporation’s sale.126 Thus, a director’s pricemaximizing Revlon duties apply regardless of the type of corporation.
However, applying the Revlon duties where there is not an all-cash deal is a
more interesting question. The issue here is that, for example, bidding Company
A may offer a higher price to shareholders while bidding Company B may
commit to the continuation of the benefit corporation’s public mission. If the
bids are for approximately the same price, then a public benefit corporation’s
directors may favor one bidder—here, Company B—over the other.127 But
123. There is another way to view the Unocal and Revlon line of cases that would not preclude
directors from considering non-shareholder constituent interests. Professors Bernard Black and Reinier
Kraakman explain Delaware’s takeover jurisprudence as asserting the notion that “the board of
directors, and no one else, must determine the company’s intrinsic value” in a change of control
transaction. Bernard Black & Reinier Kraakman, Delaware’s Takeover Law: The Uncertain Search for
Hidden Value, 96 NW. U. L. REV. 521, 526 (2002); see also Plerhoples, supra note 56, at 247
(summarizing Black & Kraakman’s argument). Called the “hidden value theory,” this necessarily
implicates the discussion above on the applicability of the shareholder wealth maximization norm.
Although the hidden value theory does not purport to replace the shareholder wealth maximization
norm, it does provide for director discretion in structuring an acquisition to achieve the maximum
intrinsic value. Black & Kraakman, supra, at 527–28. Thus, although weighing non-shareholder
interests is “not a license to ignore shareholder interests,” the hidden value theory “recognizes the broad
sweep of the board’s discretion to decide what actions will maximize long-run shareholder value,” even
if those actions also consider the interests of non-shareholders. Id at 528.
124. Although there is much debate as to when a company’s sale becomes “inevitable,” a company
goes “up for sale” when (i) it initiates an active bidding process to sell or reorganize itself in a way that
will break up the company, or (ii) in response to an active bidder’s offer, a company abandons its
long-term strategy and seeks an alternative transaction with a third party that will result in a change of
control of the company. Paramount, 571 A.2d at 1150.
125. Id.
126. For an overview of stock versus cash deals, see, for example, Alfred Rappaport & Mark L.
Sirower, Stock or Cash?: The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions, HARV.
BUS. REV. (Nov. 1999), available at https://hbr.org/ 1999/11/stock-or-cash-the-trade-offs-for-buyers-andsellers-in-mergers-and-acquisitions.
127. Paramount, 571 A.2d at 1151 n.14 (“[D]iffering treatment of various bidders is not actionable
when such action reasonably relates to achieving the best price available for the stockholders”).
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when the offers markedly differ,128 directors of public benefit corporations may
be compelled to accept the highest bid—Company A.
In a related scenario, the shareholders of a public benefit corporation may
wish to maintain the status quo, yet the directors of the corporation choose to
sell. In the case of a sell-out, shareholders’ maximum value would be defined,
as argued above, as their total utility—financial return plus the value of their
social or moral preferences. Here, the same Revlon analysis should apply: the
directors have a duty to maximize shareholder value (that is, utility), thereby
necessarily considering the interests of non-shareholder constituents, because
the shareholders’ and non-shareholders’ interests—to preserve the public mission—are aligned. This scenario presumably gives shareholders the right to sue
a director for failure to consider stakeholder interests in a sell-out if there is no
rational relation to the preservation of the public good. This diminishes the
possibility that the public benefit corporation’s public mission will be wholly
abandoned.
C. DELAWARE LAW ALREADY PROTECTS THE PUBLIC PBC
Determining to what extent Delaware law should accommodate or defend
publicly traded PBCs depends on what we believe to be the underlying problem.
Some commentators may believe that uncabined director discretion will inhibit
investment in PBCs;129 others may believe that the fear of violating fiduciary
obligations will prevent directors from pursuing a public benefit or, in the
extreme, deter the public PBC altogether.130 This Note argues that PBCs do not
face substantial hurdles in entering the public market, and the breadth of
discretion afforded directors will not deter continued investment in a public
PBC. However, PBCs may face an increased threat of takeover or change of
control transactions due to the perpetuation of the shareholder primacy norm.
Delaware General Corporation Law, though, is “a broad enabling act which
leaves latitude for substantial private ordering,” and with it, the freedom to
contract.131 Shareholders should be given the opportunity to contract with
PBCs, and the market should be given the opportunity to test the public PBC
before Delaware law reacts.
The law may already give directors some cushion against liability for violating their fiduciary duties when defending a takeover or change of control. The
public benefit corporation statute requires that a PBC identify the specific
128. Of course, deciding when an offer is substantially similar to another offer is a debatable
question in its own right, and one that is not explored in this Note.
129. See Cohen & Sahlman, supra note 57 (“The biggest obstacle to scale for the social sector is this
lack of effective funding models.”).
130. See generally CLARK & VRANKA, supra note 3, at 12–13.
131. See Manesh, supra note 7, at 560 n.21 (citing Williams v. Geier, 671 A.2d 1368, 1381 (Del.
1996)). Delaware’s corporate statute affords investors “broad latitude to privately order the rules of
internal firm governance.” Id. at 560. (citing Leo E. Strine, Delaware’s Corporate-Law System, 86
CORNELL L. REV. 1257, 1260 (2001)).
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benefit or benefits it wishes to pursue.132 Yet in a survey of Delaware public
benefit corporation charters, Professor Plerhoples found that many PBCs simply
restate the statutory definition of a public benefit as their required specific
public benefit.133 PBCs with an eye toward public ownership should be careful
to state the specific public benefit it will pursue in its charter.134 This would put
investors on notice that the PBC and its directors believe that the pursuit of a
social mission is necessary to maximize long-run shareholder value.135 Simply
restating the general statutory definition of a public benefit may not otherwise
be narrowly defined enough to withstand the court’s scrutiny.
Arguably, investors today are not purchasing meaningful fiduciary duties
when they purchase securities, but rather meaningful disclosure. The SEC
ensures that investors are given meaningful and truthful disclosure, and investors themselves police their directors by buying and selling stock.136 In much
the same light, Delaware law should enforce its existing public benefit corporation statute, ensuring that a PBC’s stated public mission is specific and meaningful. Meaningful disclosure by PBCs gives directors the legal leeway necessary
to make decisions (particularly in defense of a takeover) in the best interest of
the corporation and its stakeholders without the fear of violating their fiduciary
duties.
CONCLUSION
The 1980s saw a rise in corporate raiders who would purchase controlling
blocks of shares in companies they believed were undervalued and then use
their voting rights to force changes in a company’s leadership, strip it of its
assets, or threaten it with a takeover.137 That environment was not totally
dissimilar from what public benefit corporations may face today. Public benefit
corporations may be at an increased risk of acquisition, perhaps even systematically being made the targets of hostile takeovers by activist investors. Without
the law affirmatively on their side, directors of public benefit corporations will
132. DEL. CODE ANN. tit. 8, § 362(a)(1) (2013).
133. See Plerhoples, supra note 1, at 252–53 n.18.
134. In fact, Delaware law explicitly states that a specific public benefit must be identified. DEL.
CODE ANN. tit. 8, § 362(a) (2013) (“[T]he certificate of incorporation . . . shall: (1) Identify within its
statement of business or purpose . . . 1 or more specific public benefits to be promoted by the
corporation; and (2) State within its heading that it is a public benefit corporation.”).
135. Other designations, such as “PBC” in the corporation’s name, would also help put investors on
notice regarding a PBC’s corporate status. See id. § 362(c) (“The name of the public benefit corporation
shall, without exception, contain the words ‘public benefit corporation,’ or the abbreviation ‘P.B.C.,’ or
the designation ‘PBC’ . . . .”).
136. “[T]he SEC requires public companies to disclose meaningful financial and other information
to the public” so that “investors can make informed financial decisions.” The Investor’s Advocate: How
the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, SEC,
http://www.sec.gov/about/ whatwedo.shtml (last visited June 15, 2015) (emphasis added).
137. Steven Davidoff Solomon, Poison Pill’s Relevance in the Age of Shareholder Activism, N.Y.
TIMES DEALBOOK (Apr. 18, 2014, 2:31 PM), http://dealbook.nytimes.com/2014/04/18/poison-pillsrelevance-in-the-age-of-shareholder-activism.
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only perpetuate the fear that they violate their fiduciary duties by balancing all
stakeholder interests in such scenarios.
With this view, though pessimistic, it is possible to imagine that the sustainable, publicly traded PBC is no more than a mirage. However, directors of
publicly traded PBCs can take any reasonable action, and consider the interests
of any constituent, that rationally benefits the long-term value of the company’s
shares. And because investors in PBCs are put on notice that those corporations
pursue a mix of shareholder value and public good, investor interests should be
aligned with director interests to pursue a specific and meaningful social
mission. Therefore, directors should not fear a violation of their fiduciary duties
simply by openly considering the interests of non-shareholder constituents even
in a change-of-control or takeover scenario.
A drastic change in Delaware law is not, and should not be, necessary for a
public benefit corporation to sustain itself in the public market. If we believe at
all in the efficiency of the market and its pricing ability, we should encourage a
PBC’s IPO even if we think the PBC’s fiduciary duties are unrestrained.
Publicly traded LLCs and LPs already enjoy success in the public markets, and
nearly all have completely waived the fiduciary obligations of managers. Furthermore, the deference given to directors by the business judgment rule arguably
already displaces the shareholder wealth maximization norm. Investors therefore may not truly be buying meaningful duty on the market but instead
meaningful disclosure. Accordingly, Delaware law should only require that
public benefit corporation disclosure be meaningful and let the invisible hand of
the market do the rest.