While US capital markets and judicial decisions have historically been driven by the typical for-profit or ‘C’ corporation, there is a growing trend among the individual states to provide for a new type of limited liability entity where ‘profit’ is not the only motivator – B Corps. B Corps are legal entities authorised by individual states through amendments to their for-profit corporation statutes to engage in ‘triple bottom line’ accountability (focusing on benefits to society and the environment, not just economic returns to shareholders as required of C corporations – ergo the ‘B’ for ‘benefit’ or ‘beneficial’ designation).
Six states have adopted B Corp statutes (Maryland adopted the first B Corp statute in April 2010, followed by Vermont, New Jersey, Virginia, New York, and California). At the time of publication, B Corp legislation has been introduced or is pending in Michigan, North Carolina, and Pennsylvania. The states that have adopted B Corp legislation have largely based their B Corp statutes on model legislation (the ‘Model B Corp Act’ or the ‘Model Act’) – but to varying degrees. Under the statutes enacted to date, a corporation becomes a B Corp by adopting charter provisions that commit the corporation to create a ‘material positive impact on society and the environment’ (a ‘general public benefit’) and to consider the interests of non-shareholder ‘corporate constituencies’ (for example, employees, suppliers, customers, local communities, etc.) in addition to the interests of shareholders. The Model B Corp Act consists of four proposed subchapters to be added to a state’s business corporation statute (covering the process of becoming a B Corp, the meaning of benefit purposes, the standard of accountability for officers and directors, and the added reporting requirements to assure transparency). Both the Model Act and all of the statutes passed to date treat B Corps as a new type of business entity.
B Corp proponents suggest that the adoption of benefit purposes redefines the fiduciary duty of directors to require consideration of nonfinancial interests and non-shareholder constituencies when making decisions. Many times the corporate charters of B Corps are amended to explicitly state benefit purposes as in the ‘best interests of the benefit corporation’. But the Model B Corp Act and state statutes generally provide little guidance as to the scope of any expanded fiduciary duties imposed upon corporate management in considering such non-shareholder value driven purposes.
The variation in fiduciary duties as between the various state statutes is most striking in change of control situations. The Model Act both requires directors to consider whether the interests of the corporation are best served by its continued independence and permits directors to consider the intent and conduct of an acquirer. Some states require companies to consider the intentions of the acquirer and the level of independence post-acquisition, while others are silent or permissive in this regard. Ultimately, however, none of the existing state B Corp statutes offers any specific guidance to directors on how to balance competing ‘benefit’ versus ‘shareholder valuation’ interests in the context of a sale of the corporation. Most of the statutes simply incorporate Model Act provisions suggesting that directors generally need not give priority to the interests of any specific corporate constituencies over the interests of any other corporate constituency. Such an approach could effectively relieve B Corp directors from potential liability for favouring the interests of non-shareholder constituencies over the interests of shareholders. However, B Corps remain a form of business entity owned by shareholders (many of whom would typically assume that their interests would be directors’ highest priority in considering a sale of the company). While with complete disclosure of B Corp status shareholders would have purchased stock with notice that directors need not always place priority in change of control transactions on shareholder value, there may be continuing evidentiary issues from (or a shift of the evidentiary burden to) directors who assent to sell transactions for less than top value to shareholders (regardless of the apparent ‘public benefit’ or advantages for other corporate constituencies).
Even in the absence of an authorising state statute for B Corps, there is a ‘benefit’ certification process for corporations that choose to consider non-shareholder interests. The certification process is administered by B Lab. The stated mission of B Lab is to: (i) certify and support B Corps who achieve a minimum score on their ‘B Ratings System’ and expand the responsibilities of their corporation to include consideration of the interests of employees, community, and environment; and (ii) build mission-aligned capital markets and tax, procurement, and investment incentives for B Corporations.
Benefit Corporations and Certified B Corporations are often confused (and both are sometimes called B Corps). Certified B Corporations have gone through the B Lab certification process, while a ‘benefit corporation’ is a new legal status/entity authorised by state statutes (and such corporations do not need to be certified by B Lab). Recognising that entities domiciled in states that have not passed B Corp legislation could face challenges in reconciling the goal of B certified companies to consider all ‘stakeholders’ (as opposed to just economic return to shareholders), B Lab states that “[d]ecisions by the board of directors, managing members or general partners of [B certificated companies] will be evaluated pursuant to standards of reasonableness, good faith and fair dealing within the relevant jurisdictions of organization”.
In summary, B Corps present a unique way to address societal concerns and individual company commitments to such societal concerns. In the absence of authorising state legislation, B certification also indicates an express intent by companies to expand their strategic decision-making process beyond just economic returns to shareholders. However, the law in the US is in its infancy with respect to how specific types of B corp/B certified decisions will be evaluated from a shareholder liability perspective and directors of B corps/B certified companies still remain at risk with respect to actions by shareholders against such companies for decisions based upon anything other than return to investors.
Kelly L. Frey is a member and Michael L. Powell is of counsel at Dickinson Wright PLLC. Mr Frey can be contacted on +1 (615) 620 1730 or by email: KFrey@dickinsonwright.com. Mr Powell can be contacted at +1 (202) 659.6963 or by email: MPowell@dickinsonwright.com.
© Financier Worldwide
Kelly L. Frey and Michael L. Powell
Dickinson Wright PLLC