Oct 9, 2020
Certified B Corporation, Public Benefit Corporations and the Impact to Corporate Governance
A basic tenet of U.S. corporate law is that a corporation exists to maximize shareholder wealth, and it is the primary duty of a corporation’s directors and officers to achieve that goal. As succinctly explained in the oft-cited Michigan Supreme Court case over 100 years ago, Dodge v. Ford Motor Co., 204 Mich. 459, 507 (Mich. 1919):
“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. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholder in order to devote them to other purposes.”
Subject to certain leeway provided to directors and officers under what’s known as the business judgment rule, this duty to maximize shareholder wealth has continued to this day.
However, over the past several years, there has been a growing movement in the corporate world to focus not only on the bottom line for a company’s shareholders, but also the societal and environmental impact of its operations. This movement is championed by a private, non-profit organization called B Lab, as well as by several state governments that have adopted “public benefit corporation” statutes.
Formed in 2006, B Lab has developed the “Certified B Corporation” certification mark (“B Corp” for short) with the “B” standing for “benefit” working toward what they call a “B economy” consisting of more socially conscious companies. B Lab certifies companies as a “Certified B Corporation” that have committed to a social or environmental mission, agreed to take steps to legally include this mission into its governing documents, and agreed to provide biannual impact reports to B Lab to measure its social or environmental impact. This certification is available to limited liability companies as well. In addition, a certified company must convert into a “public benefit corporation” or “public benefit limited liability company” in their state of incorporation to the extent their state has a “public benefit corporation” statute as discussed below, and pay an annual fee to B Lab ranging from $500 for companies with up to $499,999 in annual revenue to $50,000 for companies with over $1 billion in annual revenue. Over 2,500 companies have become Certified B Corporations to date, including Patagonia, Seventh Generation, Method Products, and Ben & Jerry’s, and you will notice the “Certified B Corporation” logo certification mark on their products.
State governments have also recognized that private companies desire to include social and environmental impacts into their decision-making process, at least in part due to lobbying from B Lab. Over the past 10 years, thirty-six states, including Delaware, New Jersey and New York, have adopted “public benefit corporation” or “benefit corporation” statutes. Certain states, such as Delaware, have also adopted “public benefit limited liability company” statutes. Pursuant to these “public benefit corporation” statutes, companies can initially incorporate as, or convert or merger into, public benefit corporations (“PBC”), which allow their directors to expand their focus beyond just the pecuniary interests of the shareholders. Instead, a PBC and its directors can and are in fact required to manage the business and affairs of the corporation in a manner that balances (1) the pecuniary interests of the shareholders, (2) the best interests of those materially affected by the corporation’s conduct, including the corporation’s employees, vendors, customers, the communities in which it operates and society at large, and (3) the specific public benefit or public benefits identified in its certificate of incorporation. States require the directors to take into account these and other societal factors when making its business decisions, and PBC’s are generally required to provide its state of incorporation and shareholders with biannual reports outlining the corporation’s performance and results to accomplish its stated social or environmental mission. Given the overall change in interests between a typical corporation and a PBC, including the changes to its director’s fiduciary duties, many states require that a majority of the directors and two-thirds of the shareholders must approve a corporation converting or merging into a PBC. In addition, although a Certified B Corporation is required by B Lab to become a PBC if its state of incorporation has a “public benefit corporation” statute, a PBC is not required to become a Certified B Corporation.
One thing to note is that a PBC is not to be confused with a nonprofit company. A PBC may share some of the same public benefit interests as a nonprofit, but a PBC is still a “for profit” company that issues dividends to its investors and is governed by different laws than nonprofits. Further, becoming a PBC or public benefit limited liability company does not affect the underlying tax status of the entity, and it will still be taxed in the same manner as a normal C Corp., S Corp. or limited liability company.
While the movement toward Certified B Corporations and PBC’s is still in its infancy, these alternatives in corporate structure are useful considerations for those companies, directors, and impact investors that are looking to have a legal basis to address social and environmental issues while also making a profit.
For more information, contact Jamie Taub, Esq. at email@example.com or at (973) 967-3221.