In August 2019, a group of nearly 200 chief executives issued a statement, arguing that the role of corporations should be redefined from solely maximizing shareholder value to also "invest[ing] in their employees, protect[ing] the environment and deal[ing] fairly and ethically with their suppliers."1 Making that shift is hard when boards of directors are subject to the standard fiduciary duties applicable to Delaware corporations, but being a standard Delaware corporation is hardly the only option available to a profitable business, even a publicly traded company.
Public benefit corporations (PBCs)2 are a special flavor of Delaware corporation. They are statutorily required to pursue the creation of one or more public benefits as set forth in their certificates of incorporation, including, potentially, considering the interests of stakeholders such as employees, customers, and members of the community.3 Accordingly, the board of directors of a PBC has a fiduciary duty to weigh additional considerations when taking corporate action, beyond those of a board of directors of a traditional Delaware corporation.4 In times of plenty, this additional fiduciary obligation rarely creates a tension for PBC directors, as companies and shareholders that have opted into the PBC standards often have business models where social or environmental impact and financial returns inherently tend to be aligned.
However, in periods of economic stress—which we face today as a result of the coronavirus pandemic—directors may be required to make difficult decisions if a PBC faces a tradeoff between pursuing its social or environmental mission and protecting shareholder value. This article outlines some of the key issues that PBC directors should consider when balancing these interests.
Defining "public benefit" – A public benefit is defined in the Delaware PBC statute as "a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than shareholders in their capacities as shareholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature." Each PBC sets forth its unique public benefit, or benefits, in its certificate of information, so it is important for PBC directors to examine the nature and scope of the PBC's stated public benefit, in addition to the PBC's business model, to understand where tensions may arise, particularly as a result of changes in overall economic circumstances. For example, in bull markets, an obligation to consider worker well-being may go hand-in-hand with financial return, to the extent a well-trained, well-treated workforce may be more productive and reduce human resources costs. However, in bear markets, such an obligation may make it more difficult to furlough or lay off workers. Similarly, an obligation to donate a portion of profits may be a key feature of a company's marketing efforts that may not be financially prudent when customers aren't buying. In these times, it may be worthwhile for directors of PBCs to consider recommending that shareholders amend the certificate of incorporation to refine the public benefit and reduce such tension.5 That said, any such decision should also take into account the potential for dissenting shareholders to attempt to bring an appraisal rights claim in an effort to redeem their shares in an early "exit," which may add further financial burdens to the PBC. An alternative option would be for the PBC directors to review and revise the PBC's public benefit reporting framework (see discussion below).
PBC director obligations – The Delaware PBC statute requires that PBC directors manage the PBC in a manner that "balances the shareholders' 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." In addition to protection under the standard business judgment rule,6 under the Delaware PBC statute, a PBC director's choices in balancing these requirements are deemed to have satisfied the director's fiduciary duties if such choices are "both informed and disinterested and not such that no person of ordinary, sound judgment would approve." This statutory standard affords a high degree of discretion to PBC directors in making decisions and presumably allows for PBC directors to prioritize promotion of public benefits over shareholder value, but such prioritization has not been tested in court. In normal times, even for standard corporations, traditional fiduciary duties do not automatically mandate that all management decisions be made for the purpose of maximizing the immediate value of a corporation's shares, as directors may look to the long-term best interests of the corporation. However, Delaware courts have held that in certain situations, the focus of the board's fiduciary duties may change. For example, when a company is facing a sale of control, the central obligation of the board is to seek the best price for shareholders, and when a company is facing insolvency, the board's duties shift to include creditors as well.7 In both situations, an underlying theme is to maximize the pecuniary interests of those receiving a return in the transaction at hand. It is as yet untested in Delaware courts how the duties of PBC directors may change in these contexts, including whether courts will deemphasize directors' obligations to promote the company's public benefits. Facing this uncertainty, PBC directors, when confronted with a decision implicating the PBC balancing requirements, should carefully document the material factors they considered to clearly demonstrate that their decision is both informed and disinterested.
PBC reporting requirements – In addition to PBC directors' decision-making obligations, a PBC is required to report biennially to its shareholders with respect to its promotion of the public benefits, which must include: (i) the objectives set forth by the PBC directors to promote the public benefits; (ii) the standards used to measure progress in promotion of the public benefits; (iii) objective, factual information based on those standards regarding the success of the PBC in meeting its public-benefit objectives; and (iv) an assessment of the PBC's success in meeting its objectives and promoting its public benefits. The PBC is not required to publish this report but may elect to require, in the PBC's certificate of incorporation or bylaws, that the report be published or that a third-party certification be used in the aforementioned assessment. Further reporting obligations may also be set forth in the certificate of incorporation or shareholder agreements. The coronavirus pandemic is highly likely to affect the ability of PBCs to achieve their stated public benefits, in both positive and negative ways, depending on the nature of a PBC's business. PBC directors should carefully consider the impact of coronavirus in their PBC reports covering this period of time. Specifically, it is important to avoid overstating the effect of the pandemic, in either direction, so that shareholders (and, if published, the public) have an accurate understanding of the scope of the impact on a PBC's public benefits. In addition, PBC directors should review the objectives and standards previously approved by the board of directors, with respect to the reporting requirements, and make adjustments where appropriate given the current context.
Enforcement of the public benefits – Critically (and in contrast to many states' benefit corporation statutes), the Delaware PBC statute does not permit a third-party enforcement right with respect to the public benefit requirements, meaning that potential beneficiaries, certifying bodies, and commercial partners do not have the ability to bring a statutory claim against the PBC or PBC directors for failure to pursue or achieve impact goals. However, under the Delaware PBC statute, PBC shareholders owning, individually or collectively, at least 2% of the PBC's outstanding shares (or, in the case of a corporation with shares listed on a national securities exchange, the lesser of such percentage or shares of at least $2,000,000 in market value) may bring a derivative lawsuit to enforce the statutory obligations of PBC directors. Directors are generally protected from shareholder litigation by the business judgment rule, absent demonstration of breach of the traditional fiduciary duties of care, loyalty, and good faith. It has been argued, however, that the Delaware PBC statute imposes an additional duty on PBC directors to consider non-shareholder interests, and that the failure to observe such duty would threaten such directors' ability to rely on the business judgment rule. 8 Thus, it is vital for PBC directors to consider the PBC's stated public benefits in all material decisions, and for the minutes of all board of director meetings and resolutions to clearly document such considerations. This is particularly true given the current economic climate created by the coronavirus pandemic, where the PBC's actions may have divergent impacts on the interests of shareholders versus those stakeholders intended to benefit from the PBC's public benefits.
PBC director liability – Delaware law generally permits all corporations (including PBCs) to protect directors against personal liability for acts performed in their capacity as directors, with customary exceptions for acts that constitute self-dealing, knowing violations of law, etc. Furthermore, under the Delaware PBC statute, PBC directors may be shielded from personal liability for a failure to satisfy their statutory duties with respect to decisions implicating the balancing requirements described above, specifically that, absent conflicts of interest, such failure will not constitute an act or omission not in good faith, or a breach of a PBC director's duty of loyalty. As such, PBC directors should review the certificate of incorporation and bylaws to ensure such a provision is included or whether it should be added. Separate from Delaware's statutory protections, every PBC should enter into a customary indemnification agreement with each of its directors (if one is not already in place) as well as provide full directors and officers insurance, and PBC directors should review each carefully to ensure that the protections and coverage are adequate and specifically cover PBCs. However, since PBCs are still fairly novel, these provisions are untested, and standard insurance packages generally do not include coverage for PBC-related claims, which heightens the need for PBC directors to carefully document their balancing considerations in all corporate actions.
Key takeaways, in light of uncertainty from coronavirus:
- PBC directors should review the nature and scope of the public benefit(s) set forth in the PBC's charter documents, as well as provisions providing liability protections, and if these are problematic, consider amending them.
- PBC directors should, when making any decision or taking any action implicating the PBC balancing requirements, carefully document each of the factors the directors considered to clearly demonstrate that their decision both is informed and balances not only shareholders' pecuniary interests, but also the PBC's identified public benefits.
- PBC directors should review and, if appropriate, update the objectives and standards used to measure the achievement of the PBC's public benefit(s) to determine if any changes are warranted.
- PBC directors should review their indemnification agreements and directors and officers insurance plans to ensure adequate coverage, specifically for PBCs.
2. As formed under Subchapter XV of Chapter 1, Title 8 of the Delaware General Corporation Law.
3. While we focus on the fiduciary duties of PBC directors, these obligations regarding "public benefit" also apply to managers of public benefit limited liability companies (PBLLCs) formed under Subchapter XII of the Delaware Limited Liability Company Act, although we note that PBLLC managers retain some flexibility with respect to traditional fiduciary duties.
4. This article discusses the Delaware PBC since the majority of benefit corporations are formed in Delaware; benefit corporation statutes in states other than Delaware apply different (often conflicting) standards, and directors of such entities should discuss their fiduciary obligations with counsel.
5. Note that such a change requires at least two-thirds of the PBC's outstanding voting stock, in addition to any other voting rights contained in the certificate of incorporation or shareholder agreements.
6. Under Delaware law, the business judgment rule functions as a presumption that the decisions of directors are in the best interests of the corporation unless a specific breach of fiduciary duty can be shown by a party challenging the directors' decisions.
7. See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986); Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 47 (Del. 1994); N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).
8. See, e.g., Ian Kanig, Sustainable Capitalism Through the Benefit Corporation: Enforcing the Procedural Duty of Consideration to Protect Non-Shareholder Interests, 64 HASTINGS L.J. 863, 898 (2013); https://repository.uchastings.edu/cgi/viewcontent.cgi?article=1206&context=hastings_law_journal.
Originally published 23 June, 2020
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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