INTRODUCTION
Model Benefit Corporation Legislation
The model benefit corporation legislation is what many states look at to draft their
own statutes for benefit corporations. The model benefit corporation legislation
provides a baseline for states to use for corporate purposes, accountability and
transparency. However, there are issues in the way it is currently drafted. The
largest issues I see in the legislation are: the option to choose shareholders over
stakeholders; the lack of accountability for officers and directors; and the lack of a
monetary incentive to sue the benefit corporation. Although the model benefit
corporation legislation has some flaws, it is entering new territory in the business
corporate law realm. Through time, the kinks should be worked out to provide a
better crafted body of law. Below is a summary and discussion of the model benefit
corporation legislation. (model benefit corporation link
http://benefitcorp.net/attorneys/model-legislation)
SECTION 1 PRELIMINARY PROVISIONS
Section 101 Application and Effect
Section 101 (a) limits the applicability of the benefit corporation legislation to
benefit corporations. Section 101 (b) further states that this legislation will not
affect a statute or rule that does not apply to benefit corporations. Section 101(c)
makes clear that the enacting state’s business corporate law will generally be
applicable to all benefit corporations but the specific provisions of benefit
corporation legislation will control over general provisions of the state’s business
corporate law. Section 101(c) also states that a benefit corporation may be subject
to this legislation and a state’s business corporate law at the same time. Section
101(d) states that a benefit corporation’s articles of incorporation or bylaws can’t
limit, be inconsistent with, or supersede a provision of the benefit corporation
legislation.
The drafters did recognize that the model benefit corporation legislation is not a
complete overhaul of a state’s business corporate law. The drafters acknowledged
that benefit corporations may still be subject to provisions of a state’s business
corporate law. However, I see an issue with Section 101 (c), but I am not sure if it
can be addressed in drafting. Because a benefit corporation can be subject to a
states’ business corporate law and benefit corporation legislation at the same time,
what if the provisions of each set of laws are both specific and conflicting? The
model benefit corporation legislation does not answer this question. The model
benefit corporation legislation only addresses a conflict if the general provision of
state business corporate law is general. However, because the model benefit
corporation legislation is silent, states may be free to assume that state business
corporate law would trump model benefit corporation legislation.
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Section 103 Incorporation of benefit corporation (see Appendix A)
This section is straightforward, it simply states that a benefit corporation must
follow the guidelines provided by its state’s business corporate law and must place
in its articles of incorporation that it is a benefit corporation when it becomes
incorporated. This section applies to corporations that are being newly formed, not
pre-existing entities that want to become benefit corporations.
Section 104 Election of benefit corporation status (see appendix A)
This section addresses the procedures for an existing business corporation or an
existing entity that is not a corporation that wants to become a benefit corporation.
Section 104(a) states that an existing corporation can become a benefit corporation
by amending its articles of incorporation to include a statement that it is a benefit
corporation. The section further states that the amendment must be approved by at
least the “minimum status vote”. Section 102 states that a “minimum status vote” is
satisfied when 2/3 of all the shareholders of every class have approved the
amendment. If a limited liability company is merging into a benefit corporation than
2/3 vote of approval is needed by the members of the limited liability company.
Section 101(d) states that the benefit corporation legislation trumps the
corporation’s articles of incorporation. Section 102 “minimum status vote” gives
every shareholder the power to vote regardless of what the articles of incorporation
or bylaws say. For example, If a corporation had written in its articles of
incorporation that only a 50% vote was needed to amend them, and the amendment
got a 50% approval vote then the corporation would not qualify as a benefit
corporation under this legislation. 2/3 vote is the minimum threshold that the
model benefit corporation legislation proposes. For example, if the state business
corporate law requires an 80% vote to amend articles of incorporation or for
fundamental changes (such as a merger) then the corporation must abide by that
state business corporate provision. Another conflict arises when a corporation’s
articles of incorporation require more than 2/3 vote for fundamental changes. For
example if the articles of incorporation require an 80% vote for a merger, then 2/3
vote would not be enough for the actual merger but would be enough to satisfy
Section 104. So basically, the articles of incorporation would trump the modern
benefit corporation legislation. This is the conundrum-Section 101(d) states that the
benefit corporation legislation trumps a corporation’s articles of incorporation,
however there is a loophole when it comes to mergers.
Section 105 Termination of benefit corporation status (See Appendix A)
This section states what will be considered a termination of benefit corporation
status. Section 105(a) states that a corporation can terminate their benefit
corporation status by deleting the statement that the corporation is a benefit
corporation in the articles of incorporation. This can only be achieved through an
amendment and at least a 2/3 vote is required. Section 105(b) states that if a
merger will terminate the benefit corporation status then the merger must be
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approved by at least a 2/3 vote. Similarly, a sale, lease, exchange or disposition of all
or substantially all the assets (unless in the regular course of business as
determined by the state’s business corporate law) of a benefit corporation will not
terminate the benefit corporation status unless approved by 2/3 vote. Although
there may be tax benefits and other incentives to not go through with a “formal
merger”, an indirect merger will not result in the termination of benefit corporation
status. Section 105(b) still leaves such a corporation open to liability.
SECTION 2 CORPORATE PURPOSE
Section 201 Corporate Purposes
Section 201 (a) states that the purpose of a benefit corporation must be to create a
general public benefit in addition to its purpose under state business corporate law.
Section 102 defines a “general public benefit” as a material positive impact on
society and the environment taken as a whole, assessed against a third party
standard from the business and operations of a benefit corporation. This section
shows that the drafters did not want to eliminate the purposes of the corporation
that have already been established through corporate law but simply want to
expand the purpose to include things other than profit. Section 201(b) states that a
benefit corporation can include specific public benefits in its articles of
incorporation but those specific benefits will not limit the general public benefit
purpose.
Section 102 states that a specific public benefit includes: giving beneficial services
or products to low income or underserved individuals or communities; promoting
economic opportunities for individuals beyond creating jobs in normal course of
business; protecting/restoring the environment; improving human health;
promoting arts, sciences, or advancement of knowledge; increasing flow of capital to
entities with purpose to benefit society or the environment and conferring any
other particular benefit on society or the environment. Section 201(c) states that the
general public benefit and specific public benefit should still be in the best interests
of the corporation. Section 201 (d) reiterates that amendments to the articles of
incorporation must be approved by at least 2/3 vote. Section 201(e) relieves a
professional corporation, such as a law firm, from violating a law that restricts the
business in which a professional corporation can engage by having a general public
benefit or specific public benefit.
The general public benefit definition is ambiguous. What counts as having a material
positive impact? Is it enough that a corporation recycles and thus reduces waste? Is
it enough that a corporation implements more diversity in its workplace? Who is the
third party’s standard from which the assessment will be made? Perhaps the
drafters thought it would be more beneficial to write a more inclusive definition of
public benefit than exclusive. Even more troubling is the specific public benefit
definition that the model benefit corporation legislation provides. The last example
under section 102 of what includes a public benefit is “anything that confers a
particular benefit on society”. The issue with this inclusive definition is that it is
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subjective. For example, what if the corporation Westboro Corp., believes that
“giving people Jesus” is a benefit to society. Westboro Corp. wants to force its
religious views on others. Westboro Corp. believes that homosexuals are an
abomination, abortion is immoral, and everyone that does not believe in Jesus Christ
is going to hell. What if their specific purpose is to “save souls”. What if Westboro
Corp. lobbies against same sex marriage in order to protect the sanctity of marriage?
What if the Westboro Corp. does nothing more than hire some preacher to stand on
a street corner with a microphone to “bring people to Jesus”. Well according to the
model benefit corporation legislation Westboro Corp. is conferring a benefit to
society.
SECTION 3 ACCOUNTABILITY
Section 301 standard of conduct for directors
Section 301(a) states that directors of a benefit corporation must consider how their
decisions will impact: shareholders; employees; customers as beneficiaries of the
general public benefit or specific public benefit; community; society; environment
short and long term interests of the corporation; and its ability to accomplish its
general public benefit and specific public benefit. The directors may consider the
interests that are listed in a state’s business corporate law and other important
factors or interests of other groups. This section further states that the corporation
does not have to give priority to certain groups over others unless it is written in the
corporation’s articles of incorporation.
The model business corporation legislation gives corporations the power to still
give deference to shareholders over stakeholders. This seems to be counterintuitive.
If all corporations have to do is place what groups get priority in the articles of
incorporation, then what would be the incentive to not rank shareholders above
stakeholders and basically perpetuate the same system of shareholder wealth
maximization. What good does it do to have to take into consideration stakeholders
when the consideration is unfairly weighted. For example, if a corporation gives ten
times as much deference to shareholders than it does its stakeholders, what is the
likelihood that the corporation will do the bare minimum to satisfy the general
public benefit requirement. This legislation essentially allows a corporation to gain
all the benefits of being a benefit corporation without any of the sacrifice and good
will.
Section 301(b) states that section 301(a) will not be a violation of the state’s
existing business corporate law and makes directors liable for additional interests
other than what is already stated in the state’s business corporate law. Section
301(c) states that a director will not be held liable for monetary damages if the
corporation failed to create a general public benefit or specific public benefit or if
the director performed in compliance with the model business corporation
legislation and duties assigned by state business corporate law. Section 301(d)
states that a director does not have a duty to those that are beneficiaries of the
general public benefit purpose or specific public benefit purpose. In other words, a
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corporation has no duty to any of its stakeholders. Section 301(e) focuses on the
business judgment rule and states that a director is protected by the business
judgment rule if they make a decision in good faith, isn’t interested, is reasonably
informed and rationally believes that the decision is in the best interest of the
corporation.
Section 301(c) baffles me the most. Directors are exonerated from personal liability
if they do not make decisions that have the corporation pursue a general public
benefit or specific public benefit. What incentive does a director have to do pursue a
general public benefit or specific public benefit if his heart is not in the right place?
What prevents a director from focusing on shareholder wealth maximization? The
exoneration of directors makes this legislation a watchdog without teeth-all it does
is bark but it is completely harmless. Closer reading shows that directors are not
liable for monetary damages, however it seems a director can be sued for injunctive
relief. So basically this legislation allows for a director to focus on shareholder
wealth maximization and if he ignores creating a general public benefit or specific
public benefit then the only recourse is injunctive relief. What a sham! Section
301(d) further adds insult to injury by limiting standing. Section 301(d) removes
any standing from stakeholders. This essentially limits standing to shareholders of
the corporation. I can see why the drafters have limited standing, the floodgates of
the courthouse would open because essentially the entire world would have
standing to sue a corporation. Seeing how litigious Americans are, there would be a
significant waste of judicial resources. However, because directors can only be sued
for injunctive relief it seems that most people would not be interested in taking such
a route because they can not sue for monetary gain.
Section 302 Benefit Director
Section 302(a) states that the board of directors of a publicly traded benefit
corporation must designate a Benefit Director that will have all the powers, duties,
rights, and immunities of the other directors and the additional powers duties rights
and immunities provided in this section. However, other benefit corporations may
designate a Benefit Director that will have all the powers, duties, rights, and
immunities of the other directors and the additional powers duties rights and
immunities provided in this section. Section 302(b) states that a Benefit Director
must be elected but may be removed by the provisions the state’s business
corporate law. The Benefit Director must be independent but may also serve as the
Benefit Officer at the same time. The articles of incorporation or bylaws may give
additional qualifications to the Benefit Director as long as they are not inconsistent
with this section.
Quickly notice that public corporations must elect a Benefit Director while non
public corporations have the option to. What was the drafters’ intent behind having
a more stringent standard for public corporations than private? Section 302(b)
seems to contradict itself-first it states that a Benefit Director should be
independent but then it states that the Benefit Director can also be a Benefit Officer.
But upon closer reading, Section 102 carves out an exception. Section 102 states
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that independent means having no material relationship with a benefit corporation
or subsidy of the benefit corporation. Section 102 further states that serving as a
Benefit Director or benefit officer does not mean that the individual is not
independent. This seems to go against logic. How can an individual that is an
employee of a corporation be considered to not have a material relationship with
the benefit corporation? I think that the definition of “independent” is sloppy and
that the exception should be stated differently. I think better wording would be
“Although Benefit Directors and Benefit Officers do have a material relationship
with the benefit corporation, they shall be deemed independent for the purposes of
this legislation when the only material relationship is serving as Benefit Director
and Benefit Officer within 3 years of each other”, or something along those lines.
Section 302(c) states that a Benefit Director must prepare an annual benefit report
to shareholders. Section 302(d) states that an act or inaction by a Benefit Director
will be an act or inaction of that individual in capacity of Benefit Director. Section
302(e) states that a Benefit Director will not be personally liable for an act or
omission in the capacity of a Benefit Director unless the act or omission constitutes
self-dealing, willful misconduct, or knowing violation of the law regardless of what a
corporations articles of incorporation or bylaws state. Benefit Directors are further
insulated from liability by 302(e). Mere carelessness, or gross negligence is not
enough to make a Benefit Director personally liable for the decisions he makes. This
makes the burden of proof much higher. Basically, in order to make a Benefit
Director liable, one must have not only the smoking gun, but also the dead body and
a witness to the shooting.
Section 303 Standard of conduct for officers
Section 303(a) states that officers of the benefit corporation must consider the
interests and factors listed in section 301(a) if they have the discretion to act and if
it reasonably appears that the matter may have a material effect on the creation of
the general public benefit or specific public benefit. Section 301(b) states that
considering the interests in section 301(a) will not be a violation of state business
corporate law officer duties. Section 303(c) mirrors section 301(c)-it exonerates an
officer from monetary damages, unless stated in articles of incorporation or bylaws,
if the officer was performing in the course of his duties in compliance with this
section or if there has been a failure to pursue or create a general public benefit or
specific public benefit. Section 303(d) mirrors section 301(d) by limiting standing
and not providing it to those that are beneficiaries to the general public benefit
purpose or specific public benefit purpose. Section 303(e) mirrors 301(e) and
provides the business judgment rule, which further insulates an officer from
liability. Sections 303(c)-(e) provide the same limiting liability to officers as Sections
301(c)-(e) provide to directors. The same issues I discussed earlier with limiting
director liability also apply when limiting officer liability. See section 301 of this
paper for discussion of those issues.
Section 304 Benefit Officer
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Section 304(a) states that a corporation has the option of designating a Benefit
Officer. Section 304(b) states that a Benefit Officer will have the powers and duties
provided by the bylaws or by resolutions or orders by the board that relate to the
purpose of the corporation to create general public benefit or specific public benefit.
The Benefit Officer will also have the duty to prepare the benefit report.
Section 305 Right of action
Section 305(a) states that, except for an enforcement proceeding, no one can sue a
benefit corporation, its officers or directors for failure to pursue or create a general
public benefit or specific public benefit. The corporation is also not liable for
monetary damages for any failure to create or pursue general public benefit or a
specific public benefit. Section 305(a) limits claims against the corporation, officers
and directors. The only remedy available is injunctive relief. The issue with
injunctive relief is that it will not correct the damage that has already been done, it
will only stop the bleeding per se. Section 305(a) basically reiterates that a benefit
corporation cannot be used for monetary damages.
Section 305(b) states that a benefit enforcement proceeding can only be
commenced by: the benefit corporation; shareholders that owned at least 2% of the
total number of shares of a class or series outstanding at the time of he act or
omission complained of; a director; equity owners that owned at least 5% of the
outstanding equity interests of the parent company over the benefit corporation
subsidiary at the time the act or omission was complained of; or other people the
bylaws or articles of incorporation wish to give standing to. Section 305(b) serves as
a limit on who can actually sue the corporation. I understand the purpose of limiting
who has the right to drag the corporation into court in the interest of judicial
efficiency. However, I think that holding an arbitrary number of shares or equity
that needs to be possessed as a bar is not a good way to decide who needs to go to
court. What happens to the minority stockholders that have a real interest in seeing
the corporation make a contribution to society? Is it fair that they should be silenced
because they don’t own enough of the corporation? However, if you are a publicly
traded company with several thousand shareholders, I could understand where a
hard line has to be drawn to keep the corporation from wasting money on the
defense of lawsuits.
SECTION 4 TRANSPARENCY
Section 401 Preparation of annual benefit Report
Section 401(a) provides a list of things that need to be listed in the annual benefit
report. Section 401(b) states that the benefit report must exclude any written
correspondence from the Benefit Director that was removed, had resigned or
refused to stand for reelection. Section 401(C) states that an audit is not required
for an assessment of the overall social and environmental performance of the
benefit corporation. It is interesting to me that one of the driving forces of the
benefit corporation is transparency, yet the drafters of the modern benefit
corporation legislation choose to forgo such transparency when it comes to a benefit
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director leaving his position. I also find it interesting that the drafters would forgo
an audit of the social and environmental performance of the corporation. I think the
consequences of not requiring an audit will allow corporations to use puffery,
exaggerations, and inaccurate information to make their corporation look better to
the public.
Section 402 Availability of Annual Report
Section 402(a) states that an annual report must be sent to the corporation’s
shareholders within 120days following the fiscal year and at the same time that the
corporation delivers any other annual report to the shareholders. Section 402(b)
states that the benefit corporation must post the benefit reports to its website if it
has one. Section 402(c) states that if a corporation does not have a website that it
must provide a copy free of charge to any person that requests one. Section 402(d)
states that the corporation must provide a copy of the benefit report to the secretary
of state.
CONCLUSION
The model benefit corporation legislation provides wide discretion to corporations,
officers and directors. I believe that this wide discretion coupled with the lack of a
real judicial enforcement mechanism, other than injunctive relief, provides
loopholes that allow corporations to exploit the benefit corporation title without
putting any real effort or work into creating a general public benefit. I believe that
the drafters of this legislation are being naïve to believe that people will do the right
thing instead of the easy thing. Perhaps, it is my cynical nature that has tainted my
view of humanity. However, I do believe that model benefit corporation legislation is
a step in the right direction.
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