Public Benefit Corporations

WORKING FOR GOOD SERIES
Public Benefit Corporations: What You Need To Know

Recently, I had the pleasure of brainstorming with a longstanding client whose Advisory Board I am on how to formalize his vision of serving his community, clients and industry beyond profits through the business’s legal structure. In the process, we discussed a number of options, including Public Benefit Corporations, B Corp Certification, establishing a stewardship or coop model, and some web-3 solutions. Ultimately, he converted his regular corporation into a PBC, at least as the first step.

What is a PBC?

In short, a PBC is a corporation created specifically to benefit the public in general and specific ways. In Delaware it has been around since 2013, and when I refer to PBCs in this post, I refer to a Delaware PBC. However, many other states have adopted similar statutes. A PBC is similar to a traditional corporation but has more requirements, specifically the business must commit to social, environmental or other public benefit missions, not just to maximizing stockholder value. PBCs also take into account how other stakeholders such as communities and the environment will be affected by their actions. Organizing as PBCs helps these businesses to stick with their mission long-term even if leadership and shareholders change.

Thousands of companies, private and publicly held, in many industries have been incorporated as PBCs, and some recognizable names are Kickstarter, Method and my all-time favorite, Patagonia.

Public Benefit

A PBC may choose to promote any public benefit, so long as that benefit fits within the broad parameters of the PBC statutes (such as artistic, cultural, educational, environmental, literary, medical, religious, scientific, or technological). The PBC statutes require the directors to balance the monetary interests of the stockholders with the specific benefits identified in the charter and the best interests of other stakeholders who are affected by the business’s conduct.

Duties of Directors

Like in a regular corporation, the board of directors is responsible for overseeing the business and affairs of a PBC. However, unlike directors of a traditional Delaware corporation, directors of a PBC have a statutory duty to consider interests other than those of its stockholders. They must balance the pecuniary interests of stockholders, the best interests of those materially affected by its conduct (stakeholders such as employees, creditors, customers, and suppliers), and the specific public benefits identified in its charter.

Before PBC statutes, directors had some limited leeway to consider other aspects such as a social or environmental mission, but they were ultimately required to act for the purpose of maximizing the stockholder value and if they deviated, they were potentially exposed to stockholder law suits for violations of their fiduciary duty. In corporate sale situations, the situation is even more pronounced: directors of traditional corporations must act for the sole purpose of maximizing stockholder value in the short term. Under the PBC statutes, directors must balance the interests of stockholders with those of other stakeholders and its specific mission in both sale and non-sale situations.

Statutory Business Judgment Rule

The PBC statutes expressly provide that the business judgment rule applies to all disinterested balancing decisions made by directors. If a stockholder initiates a suit against the directors for failing to balance the three categories of interests, the directors are presumed to have satisfied their fiduciary duties as long as the directors are informed and disinterested and the balancing decision has a reasonable purpose.

Reports

PBCs must provide stockholders a biennial report on the objectives and performance metrics that the board has established to promote its specific mission and on how the company has fared in the last two years. See one of Patagonia’s: Pantagonia Works: Annual Benefit Corporation Report.

Converting to a PBC

Businesses can organize as a PBC from the outset, or a traditional corporation can be converted to a PBC relatively easily. To convert, the corporation must amend its corporate charter, which requires stockholder approval.

PBCs vs. Nonprofits

PBCs are neither nonprofits nor hybrid nonprofits. PBCs are for profit corporations that just need to consider its stakeholders and mission in addition to generating profits for its stockholders.

PBCs vs. B Corporations

PBCs and B Corporations are similar in that they both pursue social, environmental or other public goals in addition to earning profits. B Corporation is a certification provided by B Lab, a PA nonprofit that provides the certification to companies that meet their set of criteria. Many but not all public benefit corporations are also B Corporations.

In Summary:

More and more companies have the desire to demonstrate to their stockholders, employees, customers, potential investors, local communities, competitors, the general public etc. etc. that they are committed to creating some good in the world in addition to generating profits for stockholders. The PBC is an excellent tool that allows a company’s management and Board of Directors to balance those stockholder interests with a specific mission and the best interest of those affected by its conduct. Kind of a win-win. I hope it goes mainstream.