One of the key components considered by entrepreneurs prior to the formation of their business is the type of legal entity that is most suited for their goals. In additional to identifying a business as, among others, a corporation, limited liability company or partnership, thirty-one (31) States and the District of Columbia have introduced the concept of a “Benefit Corporation” (“B Corp”). [1] Eight (8) States, including Alaska, Oklahoma, Iowa, Georgia, Kentucky, New Mexico, Mississippi and Kansas, have pending legislation. [2]
B Corps are for-profit corporations that serve to benefit the general public, society and/or the environment. [3] This gives entities the opportunity to make the societal impact of the company one of the primary focuses rather than focusing merely on profit for the shareholders. By way of example, New York has defined a “Specific Public Benefit” to include: (1) Providing low-income or underserved individuals or communities with beneficial products or services; (2) Preserving the Environment; or (3) Promoting the arts, sciences or advancement of knowledge. N.Y. Bus. Corp. Law § 1703(e). [4]
Under standard corporate laws, a director or officer of a corporation has a duty to act in the best interest of the shareholders to assure profitability. For instance, in Guth v. Loft, Inc., the Supreme Court of Delaware, found that directors “stand in fiduciary relation to the corporation and its stockholders.” [5] In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., a seminal Delaware Supreme Court case, the Court clarified that “obtaining the highest price for the benefit of the stockholders should have been the central theme guiding director action.” [6] Citing, Unocal Corp. v. Mesa Petroleum Co., the court clearly articulated that a board’s concern over impact on “various constituencies” other than the shareholders was “inappropriate.” [7] Thus, prior to B Corps, the sole consideration for corporations in making decision has been and must be the maximization of profits for their shareholders as a matter of law.
B Corps on the other hand, permit directors and officers to consider the mission of the entity in conjunction with, among other thing, “the local and global environment”, “the interest of customers as beneficiaries” and the “community and societal considerations” without being exposed to potential derivative suits from its shareholders. [8] In fact, some States, like New York, not only permit directors to consider all stakeholders but mandate it. [9] This of course leaves the unanswered question of whether a corporation would then be exposed to potential breach of fiduciary duty claims from stakeholders versus shareholders. Given the novelty of B Corps, these issues have not yet been addressed by the Courts.
Notwithstanding the lack of precedent, studies have demonstrated the growing popularity of B Corps could benefit an entity by attracting certain employees and, more importantly, investors. Pursuant to a study conducted by Deloitte Touche Tohmatsu Limited, “Millennials will grow to 75% of the workforce by 2025.” [10] Out of all millennials surveyed, 77% said their “company’s purpose was part of the reason they chose to work there.” [11] Most significantly, “[w]hile [millennials] continue to express a positive view of business’ role in society and have softened their negative perceptions of business’ motivation and ethics compared to prior surveys, Millennials still want businesses to focus more on people (employees, customers, and society), products, and purpose—and less on profits.” [12]
The same growing trend applies to investors, who are focusing on Environmental, Social and Corporate Governance factors as well as sustainability of an entity. [13] Moreover, every States which permits B Corps requires annual filings to assure that the corporation is continuing to maintain its societal or environmental mission. This gives investors assurance that the corporate mission of the entity will be the driving force, regardless of its size or fiscal growth. Further still, fifteen (15) States plus the District of Columbia require each B Corp to also file a “Benefit Report” with that State’s Secretary of State. [14] According to a 2015 Ernst and Young Global Study of Institutional Investors, “64% of investors say businesses do not adequately disclose non-financial risks and nearly half of investors would rule out investment based on certain non-financial disclosures,” [15] which undoubtedly impacts entrepreneurs’ thinking when incorporating a new entity. By way of example, the percentage of investors surveyed in the Ernst and Young study “who consider mandatory board oversight of nonfinancial performance reporting ‘essential’ or ‘important’ increased from 36% in 2014 to 80%” in 2015. [16]
Regardless of the benefits or potential ambiguities due to the lack of judicial review, the decision as to whether to incorporate as a B Corp is entirely up to the entity and its shareholders and officers. [17] As the popularity of B Corps increases, so will the development of legal precedent, which will give entrepreneurs direction in considering this new-aged type of entity when deciding to open a new business.
The article was originally published by the American Bar Association at:
http://www.americanbar.org/content/dam/aba/administrative/young_lawyers/committee_newsletters/ABA
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[1] Benefit Corporations, State by State Status of Legislation, http://benefitcorp.net/policymakers/state-by-state-status?state=california#chosen-state.
[2] Id.
[3] What is a Benefit Corporation, http://benefitcorp.net/what-is-a-benefit-corporation
[4] See also Benefit Corporations, 2013 State by State Summary Chart, http://benefitcorp.net/sites/default/files/documents/State%20by%20State%20Analysis_0.pdf
[5] 5 A.2d 503, 2010 (Del. 1939)
[6] 506 A.2d 173 (Del. 1986)
[7] Id.
[8] N.Y. Bus. Corp. Law § 1707(a)
[9] Id.
[10] Big demands and high expectations: What generation Y wants from business, government, and the future workplace, https://www2.deloitte.com/uk/en/pages/press-releases/articles/big-demands-and-high-expectations-what-generation-y-wants.html; Why You Can’t Ignore Millennials, http://www.forbes.com/sites/danschawbel/2013/09/04/why-you-cant-ignore-millennials/#6bfa21d16c65
[11] Millennials want business to shift its purpose: The Deloitte Millennial Survey 2016, https://www2.deloitte.com/global/en/pages/about-deloitte/articles/gx-millennials-shifting-business-purpose.html#report
[12] Millennials and their employers: Can this relationship be saved?: Businesses at risk of losing top talent, according to Deloitte’s global annual survey, https://www2.deloitte.com/global/en/pages/about-deloitte/articles/millennials-employers-relationship.html
[13] Why Do Investors Like Benefit Corporations, http://benefitcorp.net/investors/who-investing-benefit-corps
[14] Id. (the fifteen (15) States currently requiring the filing of a Benefit Report are Arizona, Arkansas, Idaho, Indiana, Massachusetts, Minnesota, Nebraska, Nevada, New York, New Jersey, Pennsylvania, Rhode Island, South Carolina, Tennessee and Utah.
[15] Investment Rules 2.0: nonfinancial and ESG reporting trends Global institutional investor survey 2015, http://www.ey.com/gl/en/services/specialty-services/climate-change-and-sustainability-services/ey-tomorrows-investment-rules-2
[16] Id.
[17] B Corps do to not obtain any favorable tax treatment and are still required to elect as an S Corporation or a C Corporation both on the Federal and State levels.