By Maria Stracqualursi
What do Method Products, Kickstarter and Patagonia all have in common? They are all public benefit corporations (“PBCs”)! PBCs, also known as benefit corporations, are for-profit companies that balance maximizing value to shareholders with a legally binding commitment to a social or environmental mission. In contrast with other for-profit entities, which by law must focus exclusively on increasing investor returns, a PBC is required to consider other factors. A PBC’s charter identifies a public benefit, namely a positive effect or reduction of negative effects flowing to stakeholders, that is “artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological” in character. When making business decisions, in addition to considering the value to shareholders, PBCs also must consider other stakeholder interests, which may include employees, customers, certain communities, or the environment.
More than three thousand companies are now registered as public benefit corporations, comprising approximately .01% of American businesses. In 2010, Maryland became the first state to pass legislation creating public benefit corporations. Thirty states, including Delaware and Massachusetts, as well as the District of Columbia, now have laws allowing business to register as public benefit corporations, and seven more states have pending legislation. Public benefit corporations span the full range of industries and company sizes, from retail to education, and one-person businesses to multinational corporations.
Public benefit corporations are frequently confused with B-Corporations. Although the two are similar in name (the B also stands for benefit), they are very different in their legal significance. B-Corp status is a certification created and administered by B-Lab, a non-profit organization that assesses and verifies companies’ social and environmental performance and publishes a public B-Impact Report measuring the company’s social and environmental impact. There are currently over two thousand B-Corps. The cost of obtaining B-Lab certification can range from $500 to $50,000 depending on the company’s revenues, and recertification is required every two years. In contrast, it costs only $70 to $500 to register as a public benefit corporation. In order to qualify for B-Corp certification, a company must have a stated social or environmental mission with a legally binding fiduciary duty to consider the interests not only of shareholders but also of workers, the environment and the community. Whereas PBCs may elect to self-report on their performance, B-Corps are audited by B-Lab and need to earn a minimum score on the B-Impact Assessment to maintain certification. Furthermore, rather than establishing a legally binding responsibility to pursue a public benefit, B-Lab certification is simply a marketing tool that lends credibility to the advertising of the social focus of the company to its customers. According to B-Lab rules, businesses that are incorporated in states that have public benefit corporation laws are required, within four years from the date such legislation was passed or two years after B-Corp certification, to elect PBC status in their state of incorporation in order to retain B-Corp certification. Two American B-Corps, Etsy and Rally Software (which was later acquired) have gone public. Etsy, a Delaware corporation, must register as a public benefit corporation by August 2017 in order to keep its B-Corp certification.
So why should an entrepreneur consider registering their startup as a public benefit corporation? There are several benefits associated with registering as a PBC, especially for those companies whose social or environmental mission is essential to the way they operate their business. C-corporations and S-corporations are legally required to base their decisions solely on maximizing financial returns for shareholders. This can be constraining for companies who are driven by a social mission or who wish to be more environmentally conscious in their decision-making. By forming as a PBC, the company’s board of directors is actually obligated to go beyond their fiduciary duties and consider social and environmental factors when making business decisions. Directors and officers will be legally protected when they balance both financial and non-financial interests and pursue the company’s public benefit.
This protection creates added flexibility when directors are evaluating the sale of the company. C-corporations and S-corporations in Delaware must follow the Revlon standard, which establishes the duty of the board of directors to make business decisions based on increasing the short-term financial gains of the company. PBCs, on the other hand, can consider other factors besides whether the offered price and terms maximizes value for shareholders when making a determination of whether to sell the company and to whom, such as how the other company treats its employees or its environmental practices. This also means that there is less risk of a hostile takeover. Furthermore, companies can keep or terminate their status as a PBC either before or after a sale should the new owner wish to do so and can garner two-thirds of stockholder votes.
Registering as a PBC can also help emerging companies attract and retain consumers and talented employees. A 2014 study conduct by Horizon Media’s Finger on the Pulse showed that 81% of millennials surveyed “expect companies to make a public commitment to good corporate citizenship.” Thus, today’s companies must seriously consider commitment to social or environmental missions. Companies that organize as a PBC can distinguish themselves from their competition and align their corporate values with those of their consumers. The greater corporate transparency required by PBCs may also draw consumers who want to confirm the company’s commitment to a mission. Such guarantees to engage in promoting social or environmental benefits also may help the company attract employees who want to work for socially mindful businesses and who may sacrifice compensation for a sense of purpose.
There are certainly concerns surrounding PBCs that may cause entrepreneurs pause. Public benefit corporations are subject to more onerous reporting requirements than other corporations. This ensures greater transparency and that efforts are being made by the company to pursue its named public benefit purpose. Most states require PBCs to file annual benefit reports, which must be available to the public on the company’s website, that asses the social and environmental performance of the business. If the company fails to show a commitment to working towards these public goals, it can lose its public benefit status. Furthermore, stockholders of PBCs have the right to bring a derivative action against the company to enforce the business’ stated public benefit purpose. Thus companies must be serious about committing to a mission before registering as a public benefit corporation. Notably, third parties that stand to materially benefit from the company’s mission do not having standing to sue the PBC, unless this right is granted by the company’s stockholders. For example, Plum Organics, a Delaware public benefit corporation, seeks to deliver “nutrient rich, organic food into the hands of little ones in need across America.” Should Plum Organics, however, decide that it wishes to expand its market to sell food targeted to the elderly, “little ones” and their kin would not have standing to file a derivative action.
Given that these corporate entities are fairly new, there is also not a substantial amount of case law clarifying how courts will interpret the requirement that PBCs balance profits with purpose. This uncertainty, as opposed to the significant amount of court opinions especially in Delaware, may be a detractor for investors who fear potential litigation that could not only cost the corporation a significant amount of money, but also hold up funding rounds or exits. That said, both for impact investors and stockholders for whom the mission of the company is very important, this increased transparency and ability to hold the company accountable may actually make the business more attractive. Venture capitalists may also be concerned with the lack of PBCs that have gone public. However, as Laureate Education’s recent IPO shows, it is possible for PBCs to attract major investors and have a successful IPO.
Laureate Education is not only the largest, for-profit higher education institution in the world, it is also the largest public benefit corporation, with over four billion dollars in revenue. Laureate is also a B-Corp and uses B-Lab as a third party standard against which to track its performance as a public benefit corporation. The company, which runs 88 campuses across 28 countries, was a publicly traded C-corporation from 1993 to 2007 when it became private. In October 2015, Laureate Education converted to a Delaware public benefit corporation and filed an S-1 with the SEC. Laureate’s prospectus explained that its public benefit is “to produce a positive effect for society and students by offering diverse education programs both online and at campuses around the globe.” The company aims to provide access to affordable and high quality education in emerging countries, and names its stakeholders as students, regulators, employers, local communities and stockholders. The prospectus also acknowledged that the company has a long-term vision, and that short-term decisions in pursuit of the public benefit may negatively impact the business’ financial performance.
Although the IPO was delayed due to unstable financial markets and regulatory flux, student lawsuits, and controversy following claims that the Laureate had paid $17 million to former president Bill Clinton to serve as honorary chancellor during Hillary Clinton’s stint as Secretary of State, the firm decided to move forward with the public offering after the post-election market swell. The company is backed by major investors including Henry Kravis and Steve Cohen. On February 1, the company began trading between $12.12 and $13.22, less than their offer price of $14. Analysts have pointed to Laureate’s $4.2 billion debt, low revenue and risky for-profit education business to explain the weak demand from investors. Despite these concerns, analysts are excited to see the first IPO of a public benefit corporation, which may lead the way for other companies that make social and environmental improvement a priority.
Where does this leave startup founders? While a public offering will take years of business building for most companies, it is certainly exciting to see a PBC going public. It adds validity to the entity, and hopefully will continue a trend of greater acceptance of mission-driven businesses. Public benefit corporations are certainly viable and smart options for start-ups that wish to distinguish themselves from their competitors and ensure a commitment to a social mission while operating as a for-profit business.
8 Del.C. § 362
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)