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Benefit Corporations: A New Corporate Benefit to Society

California is joining a wave of states that have enacted legislation creating new corporate forms that allow for the creation of for-profit companies with a general or specific public benefit.  During the 2011 legislative session, California enacted legislation allowing for the creation of a flexible purpose corporation and a benefit corporation.  As of January 2012, companies can choose between two new corporate forms that provide directors with the flexibility to pursue social and environmental objectives, while profiting from the corporate decisions.  The two new corporate forms differ in many ways despite both benefiting from a legal protection conferred by state statute to pursue social benefits.  This article specifically looks at the advantages of a Benefit Corporation.

The Benefit Corporation form, introduced by Assemblymember Jarred Huffman (D-San Rafael) as AB 361 and signed into law by the Governor in October 2011, provides for a general public benefit that may co-exist with other purposes set forth in the articles of incorporation.  The general public benefit must manifest itself as a material positive impact on society and the environment—a benefit that all Benefit Corporations must pursue.  The new corporate form may also pursue one or more specific public benefit that may include:

a)     Providing low-income or underserved individuals or communities with beneficial products or services;

b)    Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business;

c)     Preserving the environment;

d)    Improving human health;

e)     Promoting the arts, sciences, or advancement of knowledge;

f)     Increasing the flow of capital to entities with a public benefit purpose; and,

g)     The accomplishment of any other particular benefit for society or the environment.

These specific public benefits can exist alongside the general public benefit and, when included in the articles, will be deemed to be in the best interest of the corporation.  The expansive list and range of social benefits bestows companies with extreme flexibility to pursue the stated purpose, and allows them to adjust the impacts to reflect the current needs of society and the company.  While a traditional corporation must maximize profit or risk a shareholder lawsuit, a Benefit Corporation will require a company to consider society, the environment and its shareholders when making decisions.

Corporations that choose the new form will be required to publish an annual benefit report assessing the accomplishment, or lack thereof, of the public benefit purpose.  The progress of pursuing the public benefit is assessed according to a third-party standard.  This third-party standard—scrutinized by some skeptics while praised as a higher legal standard by others—must be developed by an entity entirely distinct and financially disconnected from the benefit corporation.  A company is free to select any third-party standard that meets the requirements specified in statute.  Currently, there are at least 10 standards that are believed to meet these statutory requirements—B Lab, the sponsor of AB 361, is one such entity.

The annual report, that includes the assessment based on a third-party rubric, will be shared with all of the company’s shareholders and the public.  “Investors can look at the report, identify the benefits, and rely on the information without fear that the information has been cherry-picked,” stated Erik Trojian, B Lab Director of Policy.  The report will make it easier for investors to identify mission-based companies that align with their interests—expediting an investor’s due diligence analysis.

Supporters of the new corporate form contend that companies that adopt the Benefit status will attract the interest of entrepreneurs and investors seeking financial and social benefits from their investment.  “The design of the Benefit Corporation gives companies a market distinction, and a built-in economic development plan that investors can easily identify,” said Trojian.  Companies will be able to advertise the dual purposes and differentiate themselves from for-profit companies in order to attract capitol and investors.

The new corporate form also expands the fiduciary responsibility of executive and board members to include interest of employees and the community.  The expansion of these duties imposes a level of dual consideration of the financial interest of shareholders and the non-financial stakeholders outlined in statute.  Specifically, the director and officer must pursue actions that accomplish the stated purposes, and consider the impacts their decision will have upon the shareholders, employees, subsidiaries, suppliers, customers, community, and the long and short-term interests of the Benefit Corporation. The articles may prioritize a specific public benefit purpose; however, if no priority is specified in the articles, a company will not be required to give priority to any interest over another.  Lastly, directors of the new Benefit form will be afforded legal protection for actions that further the public interest purpose, regardless of whether or not there is a financial benefit to shareholders.

According to the California Secretary of State, there is currently one Flexible Purpose Corporation and over 16 Benefit Corporations in California.  Patagonia Inc was one of the first companies to register as a Benefit Corporation in California.

Angélica Salceda, Benefit Corporations: A New Corporate Benefit to Society, Berkeley Bus. L.J. The Network (March 11, 2012), http://thenetwork.berkeleylawblogs.org/2012/03/11/benefit-corporations-a-new-corporate-benefit-to-society/

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