On October 24, 2012, Pennsylvania Governor Tom Corbett signed into law the Pennsylvania Benefit Corporation Act (the “Act”), making Pennsylvania one of 12 states1 that have authorized the creation of a new type of corporation known as a “benefit corporation.”
A growing sector of the economy, led by “social entrepreneurs,” is embracing a new understanding of a corporation’s responsibility to focus on more than just bottom-line earnings. These businesses are committed instead to pursuing a “triple bottom line” that includes people, planet and profits.
The Act provides an alternative choice of entity for Pennsylvania businesses that are seeking higher standards for their purpose, transparency and accountability. Unlike a standard Pennsylvania business corporation, benefit corporations are required to consider the effects of corporate actions on the interests of other stakeholders of the corporation (including, for example, employees, customers and suppliers). In turn, the businesses that elect benefit corporation status receive greater protection to pursue their sustainable business goals and to maintain their business purpose over time, as well as a way to differentiate their business and transparently report on their social and environmental performance.
In short, the Act provides the growing community of mission-driven businesses in Pennsylvania with a new form of corporation designed to support the pursuit of a “triple bottom line” business model.
What is Different About Benefit Corporations?
Benefit corporations are a new variation on a familiar form; they have most of the characteristics of a traditional business corporation, but are subject to new requirements with respect to purpose, accountability, and transparency:
- they must have a corporate purpose to create a material, positive impact on society and the environment;
- the fiduciary duties of directors are expanded to require consideration of non-financial interests; and
- they must report on their overall social and environmental performance as assessed against a comprehensive, credible, independent, and transparent third-party standard.
How to Become a Benefit Corporation
Under the Act, there are three ways to become a benefit corporation:
- New Business. A new business can form as a benefit corporation under the Business Corporation Law of 1988 by stating that it is a benefit corporation in its articles of incorporation.
- Existing Business. An existing corporation may amend its articles of incorporation to include a statement that it is a benefit corporation if approved by a two-thirds vote of the shareholders.
- Fundamental Transaction. A business that wants to become a benefit corporation through a fundamental transaction (e.g. a merger, consolidation, division, or share exchange) must approve the transaction by a two-thirds shareholder vote.
The Act also permits close corporations and professional corporations to elect benefit corporation status.
The Additional Purpose
A benefit corporation must have a purpose to create “general public benefit” in addition to any other lawful purpose. The Act defines a general public benefit as a material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.
A benefit corporation may also have a “specific public benefit” purpose. The Act includes the following non-exclusive list of specific public benefit purposes:
- providing low-income or underserved individuals or communities with beneficial products or services;
- promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business;
- preserving the environment;
- improving human health;
- promoting the arts, sciences or advancement of knowledge;
- promoting economic development through support of initiatives that increase access to capital for emerging and growing technology enterprises, facilitate the transfer and commercial adoption of new technologies, provide technical and business support to emerging and growing technology enterprises or form partnerships that support those objectives;
- increasing the flow of capital to entities with a public benefit purpose; or
- the accomplishment of any other particular benefit for society or the environment.
Changes in the Duties of Directors and Officers
The Act expands the duties of directors and officers from the traditional shareholder focused approach by requiring them to consider the long- and short-term effects of their decisions and resulting actions on the corporation’s various stakeholders. The interests that must be considered are:
- the shareholders of the benefit corporation;
- the employees and work force of the benefit corporation and its subsidiaries and suppliers;
- the interests of customers as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation;
- community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or its subsidiaries or suppliers are located;
- the local and global environment;
- the short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation; and
- the ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose.
The Act provides clarity for directors with respect to their required considerations, but does not prescribe how the directors and officers should balance these interests in any particular instance. The decisions that the directors of a benefit corporation will face during the course of its business will be varied. The Act does not attempt the impossible task of prescribing the results of those decisions but focuses instead on ensuring that the interests of all of the corporation’s constituencies are considered during the decision-making process.
A benefit corporation must have a designated benefit director who, in addition to the powers, duties, rights, and immunities of the other directors, is responsible for preparing an opinion, each year on the corporation’s performance and compliance with the Act and its public benefit purposes. A benefit corporation may also elect a benefit officer who is responsible for preparing the corporation’s annual benefit report.
The shareholders and directors of a benefit corporation have the exclusive right to bring an action called a “benefit enforcement proceeding” against the corporation or its directors for failing to pursue or create general or specific public benefit or for a violation of a duty or standard of conduct under the Act. Although subject to greater accountability, the directors and officers, and the corporation itself, are not liable for monetary damages for any of the above actions, and instead, injunctive relief or similar equitable remedies are available.
Each year, a Pennsylvania benefit corporation must publish a benefit report to inform both its shareholders and the public about its success in meeting its general and specific public benefit purposes.
To provide an objective basis for evaluating its social and environmental performance, the benefit corporation must select a comprehensive, credible, independent, and transparent third-party standard against which it can assess and measure how successfully it achieved its goals. There are numerous third party standards the corporation may choose from such as B Impact Assessment, GRI, Green Seal, Underwriters Laboratories (UL), ISO2600, and Green America.
The report must include:
- the ways in which the benefit corporation pursued general public benefit (and specific public benefit, if any) during the year and the extent to which it was created;
- any circumstances that may have hindered the creation of public benefit;
- an assessment of the overall social and environmental performance of the benefit corporation against a third-party standard (the assessment does not need to be audited or certified by a third-party standards provider);
- the process and rationale for selecting or changing the third-party standard used to prepare the benefit report;
- the name and address of the benefit director and the benefit officer, if any;
- the compensation paid during the year to each director;
- the name of each person that owns 5% or more of the benefit corporation;
- the opinion of the benefit director regarding whether the benefit corporation acted in accordance with its general and any specific public benefit purpose and whether the directors and officers complied with their respective duties and standards of conduct under the Act;
- and a statement of any connection between the organization that established the third-party standard and the benefit corporation.
The Act requires that the benefit corporation send the annual benefit report to each shareholder following the end of each fiscal year or at the same time it delivers any other annual report to shareholders. The benefit corporation must also post all benefit reports to the public portion of its website: if the corporation does not have a website, it must file each annual benefit report with the Pennsylvania Department of State and must provide a copy of its annual benefit report, without charge to anyone who so requests.
Just as investors look to a company’s financial statements to evaluate its financial performance, the annual benefit report provides consumers and investors with the information they need to evaluate a benefit corporation’s social and environmental performance. This transparency helps to combat “greenwashing,” which occurs when an organization portrays itself as “green,” “responsible,” or “sustainable” to attract socially and environmentally conscious consumers without following through on its commitment to sustainable business practices.
The Pennsylvania Benefit Corporation Act enables socially responsible and mission-driven businesses in Pennsylvania to elect a corporate form that is tailored to their commitment to achieve greater social and environmental impacts. New benefit corporations will have the advantages of increased clarity and legal protection for directors, maintenance of the corporate mission over time, attraction of capital and new investors, and increased transparency for their shareholders and customers.
The Pennsylvania Benefit Corporation Act will go into effect on January 22, 2013. For more information on matters discussed in this alert, please contact William H. Clark, Jr. at William.Clark@faegredrinker.com or (215) 988-2804, or Elizabeth K. Babson at Elizabeth.Babson@faegredrinker.com or (215) 988-2698.
Our Role in Benefit Corporation Legislation
Drinker Biddle has provided hundreds of pro bono hours to B Lab, a non-profit organization dedicated to using the power of business to solve social and environmental problems, including through the advancement of benefit corporation legislation. Partner William Clark and associate Elizabeth Babson, have drafted model legislation and worked to get that legislation passed throughout the United States. Both Bill and Lizzie have been recognized with awards for their efforts. An article they authored for the William Mitchell Law Review, titled “How Benefit Corporations are Redefining the Purpose of Business Corporations,” here.
1The other 11 states are California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, South Carolina, Vermont, and Virginia.