August 1, 2013

Delaware Embraces Doing Business in a Responsible and Sustainable Way

By William H. Clark, Jr. and Elizabeth K. Babson

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 maximizing the profitability of a business as measured by the "triple bottom line" of people, planet, and profits.  On August 1, 2013, Delaware became one of 20 jurisdictions that have authorized the creation of a new form of business corporation designed for triple bottom line businesses.  Delaware calls the new form of corporation a “public benefit corporation” and describes it as intended “to operate in a responsible and sustainable manner.”

Unlike a standard Delaware business corporation, public benefit corporations are required to pursue a public benefit purpose and to be managed in a manner that balances the financial interests of stockholders with the interests of "those materially affected by the corporation’s conduct" and the public benefit or benefits of the corporation.  Businesses that elect public benefit corporation status will 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.

What is a public benefit corporation?

A public benefit corporation is a business corporation that is incorporated under and subject generally to the provisions of the Delaware General Corporation Law, but that also makes an election to be subject to the new provisions on public benefit corporations.  The new provisions control over the generally applicable rules, but otherwise all the usual provisions of the Delaware General Corporation Law continue to apply to a public benefit corporation.  As a new variation on a familiar form, public benefit corporations have most of the characteristics of a traditional business corporation, but are subject to new requirements discussed below with respect to purpose, accountability and transparency.


A public benefit corporation is required to identify one or more specific public benefits to be promoted by the corporation in its certificate of incorporation.  The statute defines "public benefit" as "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."  In addition to identifying one or more specific public benefits that are to be pursued by the corporation, every public benefit corporation is also subject to the general requirement to operate in a responsible and sustainable manner.

Accountability and Fiduciary Duties

The fiduciary duties of directors of public benefit corporations are different from the traditional stockholder focused duties of directors of a regular Delaware corporation.  The directors of a public benefit corporation are required to manage the business and affairs of the corporation in a responsible and sustainable manner that balances the interests of the corporation’s various stakeholders.  Specifically, the directors are required to balance (1) the pecuniary interests of the stockholders; (2) the best interests of those materially affected by the corporation’s conduct (i.e. the stakeholders); and (3) the specific public benefit or public benefits identified in its certificate of incorporation.

The statute does not prescribe how the directors should balance the interests in any particular instance.  The decisions that the directors of a public benefit corporation will face during the course of its business will be varied and the statute does not attempt to dictate a particular outcome, but instead focuses on ensuring that the interests of the corporation’s stakeholders and the corporation’s stated public benefits are balanced during the decision-making process.  Additionally, directors will be deemed to satisfy their fiduciary duties to stockholders and the corporation if a decision by the directors is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.

As with a traditional corporation, directors of a public benefit corporation may be held accountable for their management of the corporation.  The new provisions do not, however, create a duty to any person solely by virtue of their status as a beneficiary of the public benefit or public benefits of the benefit corporation.  Instead, a derivative lawsuit to enforce the duties of directors of a public benefit corporation may only be brought by stockholders owning two percent or more of the outstanding shares of a public benefit corporation or, in the case of a public benefit corporation with shares listed on a national securities exchange, the lesser of two percent or shares of at least $2 million dollars in market value.

Transparency and Reporting

A public benefit corporation must provide periodic reports at least every two years to stockholders regarding the corporation’s performance in promoting the public benefits identified in its certificate of incorporation and the interests of its various stakeholders.  The report is required to contain the following information:

(1) the objectives the board of directors has established to promote those purposes and interests;

(2) the standards the board of directors has adopted to measure the corporation’s progress in promoting those purposes and interests;

(3) objective factual information based on those standards regarding the corporation’s success in promoting those purposes and interests; and 

(4) an assessment of the corporation’s success in meeting the objectives.

Just as investors look at a company’s financial statements to evaluate its financial performance, the report provides investors with the information needed to evaluate a public benefit corporation’s social and environmental performance.  A public benefit corporation may also elect to meet higher standards of transparency by (1) providing the performance report more frequently than biennially, (2) making the report available to the public, and/or (3) using a third-party standard or attaining third party certification in connection with the corporation’s promotion of and reporting on its public benefit or public benefits and its stakeholders.  These higher standards of transparency are similar to the requirements under benefit corporation laws that have been adopted in other states.

How to become a public benefit corporation

A public benefit corporation may be formed in the same manner that any other corporation is formed under the DGCL, except that the certificate of incorporation must also include one or more specific public benefits that the corporation chooses to promote and the name of the corporation must contain the words "public benefit corporation" or the abbreviation "P.B.C." or "PBC."

An existing corporation may elect to become a public benefit corporation by amending its certificate of incorporation to include the public benefit information and changing its name to include the required words.  An existing corporation may also become a public benefit corporation through a merger or consolidation where the new or resulting corporation is a public benefit corporation.  Any such amendment, merger, or consolidation to become a public benefit corporation must to be approved by 90% of the outstanding shares of each class of the corporation.  Appraisal rights are available to any dissenting stockholders that do not vote in favor of the amendment, merger, or consolidation.

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The Delaware public benefit corporation statute enables socially and environmentally responsible and mission-driven businesses to elect a corporate form that is tailored to their commitment to do well by doing good.  New public benefit corporations will have the advantages of increased clarity and legal protection for directors, maintenance of corporate mission over time, attraction of capital and new investors, differentiation of brand and increased transparency for shareholders.

Drinker Biddle’s Role in Benefit Corporation Legislation

Drinker Biddle has provided hundreds of pro bono hours to B Lab, a nonprofit 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, assisted by associate Elizabeth Babson, drafted model legislation that has been used as the basis for most of the 20 state statutes on benefit corporations that have been enacted and also participated in the drafting of most of those state statutes. An article that Bill and Lizzie authored titled “How Benefit Corporations are Redefining the Purpose of Business Corporations” is available here.


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