On August 1, 2013, the Delaware legislature added a potentially important new subchapter to the General Corporation Law, allowing corporations to elect to be formed as, or convert to, a public benefit corporation (PBC) (Subchapter XV of Chapter 1, Title 8 of the Delaware Code). What are the requirements for becoming a PBC? And why would a corporation choose to become one?
Background (for Non-Delaware PBCs)
Traditionally, directors of corporations have had a fiduciary duty to maximize stockholder value in making decisions. However, PBCs, or social purpose corporations as they are known in some jurisdictions, permit a corporation’s directors to also take into account the social purposes of their actions. PBCs are typically required to pursue a general public benefit and make available to the public an annual report measuring their performance in meeting their social goals.
Delaware’s PBC statute differs from the traditional model in key aspects. Delaware PBCs are required to state a specific public benefit, which means “a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.” Such specific benefit must be identified in the charter of the entity. A PBC’s name must include the words “public benefit corporation” or the designation “PBC” or “P.B.C.” Stockholder notices and stock certificates, if any, must also clearly identify the entity’s PBC status.
Subject to the above requirements, Delaware corporations may be formed as, or convert to, PBCs. Prior to converting, established Delaware corporations must obtain the approval of at least 90% of the outstanding shares of each class of stock of such corporation, whether voting or nonvoting, but PBCs need only a 66 2/3% vote to terminate their status.
Unlike the public annual reports typically required of PBCs outside Delaware, a Delaware PBC must provide only its stockholders with a statement regarding the progress of its social goals at least once every two years. PBCs may elect to use a third-party standard or certification to address how they have met their goals, instead of the mandatory third-party certification in other jurisdictions.
Directors of a PBC have a duty to balance the pecuniary interests of the stockholders, the best interests of those materially affected by the PBC’s conduct and the specific public benefit identified in the PBC’s charter. Delaware addressed the potential liability regarding these duties by allowing only stockholders holding at least 2 percent of the PBC’s shares or, if a corporation is publicly traded, at least $2,000,000 in market value to maintain a derivative lawsuit for breach of such duties. A director will be deemed to have met his or her fiduciary duties if the director acted in a manner that is “informed and disinterested and not such that no person of ordinary, sound judgment would approve.” In addition, the PBC charter may include a provision that any disinterested failure to satisfy such duties will not constitute an act or omission not in good faith or a breach of the duty of loyalty.
Candidates for PBC Status
PBC status will be attractive to corporations that wish to pursue social good while also seeking profit for their stockholders. Entities without a clearly defined social benefit may not be interested in PBC status. In addition, publicly traded entities, even those with identifiable benefits to the public, may find the 90% stockholder approval threshold in Delaware too high a bar. However, private corporations that see social good as being complementary to, rather than at odds with, stockholder maximization may find PBC status an attractive option.