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Benefit Corporations: Balancing Social Responsibility with Shareholder Obligations

Benefit Corporations: Balancing Social Responsibility with Shareholder Obligations

New York, like a number of other states, has a special category for companies seeking to be socially responsible, namely “benefit corporations,” or B Corps. B Corps are for-profit corporations, but solve a problem confronting corporations that, for whatever reason, wish to “do good” while “doing well.” They have become increasingly popular in recent years and can be found in a wide variety of industries. Notable B Corps include Kickstarter, Farmigo, King Arthur Flour, Klean Kanteen, Sun Light & Power, Danone, Eileen Fisher, Greyston Bakery, American Prison Data Systems, Patagonia, Raven + Lily, RE:Vision Architecture, Selecta Auto Body, Solberg Manufacturing, and Varsity Technologies.

 

Under Article 17 of the New York Business Corporation Law, New York B Corps must have the purpose of creating “general public benefit,” meaning a material positive impact on society and the environment from the business and operations of the B Corp, assessed against a “third-party standard” (more on that below). In addition, a B Corp’s Certificate of Incorporation must identify one or more “specific” public benefits in addition to the underlying business purpose. The specific public benefit can be any one of the following: (1) providing low-income or  underserved individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; or (7) the accomplishment of any other particular benefit for society or the environment. While these goals broadly correspond to those of ESG investments (i.e., investments having environmental, social, and/or corporate governance considerations), they are more particularized.

 

The problem B Corps solve is freeing such corporations from the tyranny of the “business judgment rule” applicable to for-profit corporations by expanding the scope of considerations that directors are allowed to consider in making decisions.

 

Generally, decisions made by the directors of “normal” for-profit corporations (or C Corps) are protected by the business judgment rule, under which courts are reluctant to second-guess operating decisions made by directors. The application of the business judgment rule has evolved to be interpreted as focused on shareholder value, and the deference accorded to directors only operates if directors are making decisions for that purpose; no deference is given if the directors’ purpose is to promote any other interest. Moreover, in a change of control situation, courts do not give business judgment deference, but instead require directors to show that they acted reasonably to obtain the highest price for the shares. Thus, regardless of its mission, a C Corp may not consider social and environmental factors in a change of control.

 

In contrast, the directors of B Corps are required by law to consider the effects of any action on the ability of the B Corp to accomplish its general and specific public benefit purposes; its effect on the shareholders, employees and workforce of the B Corp and its subsidiaries and suppliers; on the interests of customers as beneficiaries of the general or specific public benefit purposes of the B Corp; community and societal considerations including those of any community in which offices or facilities of the B Corp or its subsidiaries or suppliers are located; the local and global environment; and the short-term and long-term interests of the B Corp, including benefits that may accrue to the B Corp from its long-term plans; and the possibility that these interests may best be served by the continued independence of the B Corp.

 

Note that directors of a B Corp have no fiduciary duty to the public beneficiaries of the B Corp’s general or specific public benefit purposes, unless otherwise stated in the Certificate of Incorporation or the By-Laws of the B Corp.

 

Another requirement of New York B Corps is the submission and publication of an annual “benefit report” measuring the benefits provided against a “third-party standard,” and detailing, among other things, the ways in which the B Corp pursued general and specific public benefits, and any circumstances inhibiting the provision of such benefits. The benefit report must be sent annually to each shareholder within 120 days following the end of the fiscal year of the B Corp, and must post its most recent benefit report on its website.

 

The measurement of the B Corp’s benefits against a “third-party standard” provides for accountability, and prevents the B Corp from simply being a dodge from the default requirement of acting to maximize shareholder value. The third-party standard is defined under New York law as a recognized standard for defining, reporting and assessing general public benefit that is developed by a person independent of the benefit corporation, and is transparent by virtue of publicly available information about the factors used to evaluate the performance of a business and the relative weightings of those factors.

 

One of the most popular ways of satisfying the third-party standard requirement is to use a standard such as the free B Impact Assessment developed by B Lab, a non-profit that certifies B Corps as fulfilling their social missions. While the B Impact Assessment is free, full certification requires an evaluation of the legal structure of the company, and an assessment against an 80-point standard of review. Annual fees for certification are on a sliding scale tied to the company’s revenues. To date, there are approximately 4,000 Certified B Corps.

 

The above is an overview only, and there are additional details and requirements for B Corps under New York law. If you are interested in starting a B Corp, converting an existing business into a B Corp, or want additional information, please contact Catania, Mahon & Rider, PLLC.

 

The foregoing does not constitute legal advice. Consult an attorney for legal advice specific to your needs.

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