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Introduction to
Benefit Corporations
Elizabeth K. Babson
Drinker Biddle & Reath LLP
One Logan Square
Philadelphia, PA 19103
(215) 988-2698
Elizabeth.babson@dbr.com
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Purpose
• shall create general public benefit (defined as “a material positive impact on society
and the environment, as measured by a third party standard”)
• may create specific public benefit (defined by the company as a specific intent of the
company; does not supersede creating general public benefit)
Accountability
• directors and officers shall consider effect of decisions on stakeholders
• shareholders and directors have right of action (no third parties)
Transparency
• publish annual Benefit Report in accordance with independent, transparent, thirdparty standards for defining, reporting, and assessing social and environmental
performance
• must distribute Benefit Report to all shareholders and make available on website
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The Context
•60 million conscious consumers
•$2.7 trillion available from socially responsible investors
•100,000+ social entrepreneurs and sustainable businesses
The Problem
•Current corporate law lacks the framework to fully support businesses focused on
sustainability and social impact
•No standards to distinguish good companies from good marketing
The Opportunity
20th Century
Shareholder corporation
(maximizes shareholder value)
21st Century
Stakeholder Corporations
(creates social and shareholder value)
The Need
Support high-impact entrepreneurs
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The three founders of B Lab were college classmates
at Stanford and two of them were DBR clients while
principals in And1.
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The nonprofit behind the legislation
>
>
B Lab
Three interrelated initiatives:
–
Building a community of
Certified B Corporations to
make it easier for all of us to
tell the difference between
“good companies” and just
good marketing
– Accelerating the growth of the
impact investing asset class
through use of B Lab’s GIIRS
Ratings & Analytics by
institutional investors
– Promoting legislation creating a
new corporate form that meets
higher standards of purpose,
accountability and
transparency.
>
DBR’s pro bono work
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important note
≠
benefit
corporation
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a little history, first, by way of introduction
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 the corporation is a medieval construct that
has evolved to serve the needs of society
– the oldest existing stock corporation is Stora
Enso, a Swedish mining company

oldest share dates to 1288

royal charter

was a method of allocating shares/right to use mining
equipment
– Beretta was established in 1526 and has been
owned by the same family continuously since
then
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 corporations were the agents of empire in the Age
of Exploration:
– agent of monarchy - monarchs bestowed royal
charters/monopoly
– extended European Empires in the 1400s to 1700s
– allowed financing beyond the limits of royal treasuries
– monarchs were external conscience and source of
capital to avoid creating political and economic rival
– e.g., Hudson’s Bay Company controlled 15% of North
American landmass
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 the power to charter
corporations was
transferred from monarchs
to government bodies in
the Age of Enlightenment:
– divine right of kings
debunked
– European monarchies
diffused authority to charter
corporations to legislative
and administrative bodies
– legislature became the de
facto external conscience
with power to revoke charter
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 America inherited English
common law and concept of
a corporation in 1776:
– Framers of Constitution feared
power of corporations
– creating corporation required
an act of legislature – thus
legislature as external
conscience
– many checks and balances to
power of corporations:

personal liability for debts
and actions

often limited to terms of
10-20 years
– very few in America before
1800
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 first widespread use of corporations in America
came during the Age of Westward Expansion when
they were used to organize public utilities such as:
– bridge
– canal
– ice
– mining
– railroad
– sewer
– street railway
– telegraph
– turnpike
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 the corporation became the agent of the Age of Industry in
the later 1800s as the checks and balances of an external
legislative conscience were removed:
– free incorporation
– limitations on state power to revoke charter
– adoption of concept of limited liability for officers, directors and
shareholders
– courts impose common law of fiduciary duties upon directors to
prevent abuse by directors of shareholders
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20th Century Corporation – Shareholder Primacy
“A business corporation is organized and carried
on primarily for the profit of the stockholders.
The powers of the directors are to be employed
for that end.”
- Dodge v. Ford (Mich. 1919)
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“There is one and only one social responsibility
of business – to use its resources and engage in
activities designed to increase its profits so
long as it stays within the rules of the game.”
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> By law or custom, businesses feel they must
maximize profits
> Corporate statutory law may allow for a
company to alter traditional purpose in its
articles, but there is no case law testing the
application of this approach
> On the other hand, there is developed case
law regarding fiduciary duties as they are
commonly understood: in the context of
shareholder primacy
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“Directors cannot defend a business
strategy that openly eschews stockholder
wealth maximization.”
- ebay v. Newmark, Sept. 2010
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Age of Exploration
Age of Enlightenment
Age of Westward Expansion
Age of Industry
?? Age of Sustainability ??
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the current story begins almost 30 years ago
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Constituency Statutes
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 since the adoption of the Pennsylvania
constituencies statute, 30 some states have adopted
similar statutes
 some states, such as Maryland and Missouri, limit
the application of their constituency statutes just to
situations involving a change of control:
• for example, a Maryland corporation may include in its
charter:
“A provision that allows the board of directors, in considering a
potential acquisition of control of the corporation, to consider the
effect of the potential acquisition of control on:
”(i) Stockholders, employees, suppliers, customers, and
creditors of the corporation; and
”(ii) Communities in which offices or other establishments of
the corporation are located.”
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the great irony behind these issues
 Constituency statutes
were purely
discretionary.
 Their purpose was
simply to provide
excuses to reject
hostile takeovers.
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 The consideration of
other interests is
becoming prevalent.
 What began as a
purely self-interested
protection of
management has
become the basis for
an outward focus on
the interests of
others.
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Benefit Corporations
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Purpose
• shall create general public benefit (defined as “a material positive impact on society
and the environment, as measured by a third party standard”)
• may create specific public benefit (defined by the company as a specific intent of the
company; does not supersede creating general public benefit)
Accountability
• directors and officers shall consider effect of decisions on stakeholders
• shareholders and directors have right of action (no third parties)
Transparency
• publish annual Benefit Report in accordance with independent, transparent, thirdparty standards for defining, reporting, and assessing social and environmental
performance
• must distribute Benefit Report to all shareholders and make available on website
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Purpose
• one of the purposes of a benefit corporation is
to create general public benefit
– 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
• corporation may also elect to create specific
public benefits
• creation of public benefit is defined as being in
the best interests of the corporation
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Accountability
• directors MUST consider the interests of certain
constituencies – although the weight to be given
those interests is not prescribed
– shareholders of the corporation
– employees and workforce of the corporation, subsidiaries and
suppliers
– customers to the extent they are beneficiaries of the public
benefit purposes of the corporation
– community and societal considerations
– local and global environment
– long-term and short-term interests, including the possibility
that those interests may be best served by the continued
independence of the corporation
• Officers must also consider these interests in certain
situations
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• some states provide for the election of a “benefit
director”
– must be independent
– must prepare an annual evaluation of the
corporation’s performance, which must be included in
the annual benefit report
• some states also provide for a “benefit officer”
– will be responsible for preparing the annual benefit
report
– will have other duties assigned by the board
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Liability and Enforcement
• Benefit enforcement proceeding
– Shareholders and directors have standing
• No personal liability for monetary damages for
failure to create general public benefit
• No duty to beneficiary of general public benefit
(i.e. other constituencies may not sue or bring
claims)
• No personal liability (same as corporate law,
but automatic application)
• Relief under the statute is likely to be equitable
rather than monetary
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A major concern when
designing the statute was to
avoid “greenwashing”:
public benefit must be
measured by an independent
third-party standard
directors are free to choose the
standard
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Transparency
• corporation must prepare an annual
benefit report on its creation of public
benefit
• Report must be given to the shareholders
and posted on the public portion, if any, of
the corporation’s website
• Assessment must be against an
independent, transparent third-party
standard
– E.g. B Impact Assessment, Green Plus,
Sustainability Quotient
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Contents of Benefit Report
• Description of:
– The ways in which the company pursued general public benefit
and the extent to which it was created
– Any circumstances that hindered the creation of general or
specific public benefit
– The process and rationale for selecting the third party standard
used to prepare the report
• An assessment of the overall social and environmental performance
•
•
•
•
of the benefit corporation against a third-party standard
Name and address of benefit director and officer and compensation
of directors (in their capacity as such) during the year
Name of 5% or more owners
Statement of benefit director re: compliance with duties
Statement of connection of relationship between a director or officer
and the third party standards provider
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a few technical issues
• Provisions of corporate code apply,
except where the benefit corporation
statute provides a different rule
• elections in/out of benefit corporation
status
 articles must contain a statement that the
corporation is a benefit corporation
2/3 super majority vote usually required
 dissenters rights available in some states
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A national movement with broad support from entrepreneurs,
investors and legal experts; bi-partisan policy support
Significant momentum:
23 Passed since 2010
including Delaware, New York,
and California
Others Introduced
(CT, FL, NH, etc.)
Additional states aligning for
2015/2016
Why?
Floor Votes:
91% approval on all floor votes
23 Unanimous Votes
100% voluntary
No regulations
No cost
Market-based
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23 laws passed
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Are Businesses Registering as Benefit Corporations?
Five years from now, ten years from now, we’ll look back and say this was the start of the
revolution. The current system doesn’t work – this is the future.”
Yvon Chouinard, Patagonia
On the first day . . .
12 in CA
13 in NY
17 in DE
32 in OR
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Who are the benefit corporations?
• Ventura, CA
• 1300 Employees
• Apparel and Outdoor Wear Company
 Pioneer in organic and PCR textiles
 Founded 1% for the Planet
 Leader in supply chain transparency
• Yonkers, NY
• 55 Employees
• Baked Goods
 Open hiring policy = opportunities for
individuals with barriers to employment
 100% profits to community development
 100% facilities LEED Certified
• Hyattesville, MD
• 10 Employees
• Eco Friendly Pet Store
 Organic, humane, and local food
 Partnered with animal welfare orgs
 100% Renewable Energy
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Why does all this matter?
Creates supportive legal framework for high-impact
entrepreneurs – and promoting a new kind of business
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Why does all this matter?
Creates supportive legal framework for high-impact
entrepreneurs – and promoting a new kind of business
Why companies are becoming benefit corporations
For mission-driven companies, benefit corp
> Provides clarity to directors
> Offers legal protection to directors and officers
> Helps maintain mission over time
> Creates accountability to be a good company
Benefit Corporations | June 21, 2012
two themes to reflect on
 mission
 profit
Benefit Corporations | June 21, 2012
what is the mission?
 charitable focus?
 constituencies focus?
 a combination?
Benefit Corporations | June 21, 2012
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What resources are available?
•www.benefitcorp.net
•Business and legal FAQ
•Listing of known benefit corporations
•Guidance for Directors
•Information on available third party standards
•Model Legislation and State by state analysis
•Publications
•White Paper
•Lexis Corporate Attorney’s Practice Guide
•William Mitchell Law Review Article
•Bloomberg/BNA Online portfolio (2013)
•Template documents
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Elizabeth K. Babson
(215) 988-2698
Elizabeth.babson@dbr.com
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
(215) 988-2700
(215) 988-2757 fax
www.drinkerbiddle.com
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