On July 16, 2020, Delaware adopted new amendments to its public benefit corporation statute, continuing a trend to make this relatively new corporate form more accessible. The amendments, among other things, (i) reduce impediments to use of the public benefit corporation form by eliminating supermajority voting requirements and appraisal rights in connection with converting to, or merging with, a public benefit corporation, (ii) clarify the conflict of interest rules and provide statutory default protection for directors in connection with their duty to balance interests and (iii) clarify shareholder ownership requirements for bringing a lawsuit to enforce the balancing requirements required of public benefit corporations.
Public benefit corporations (PBCs) are for-profit corporations that are intended to produce one or more public benefits and to operate in a responsible and sustainable manner. A key distinction between a public benefit corporation and a conventional corporation is that a board of directors must manage a PBC in a manner that balances (1) the stockholders’ pecuniary interests, (2) the best interests of those materially affected by the corporation’s conduct (e.g., employees, customers, suppliers, local communities, etc.), and (3) the public benefit or public benefits identified in the public benefit corporation’s certificate of incorporation. The amendments to Sections 363, 365 and 367 of the Delaware General Corporation Law (DGCL) are described in more detail below:
- Elimination of Super-Majority Voting Rights. The amendments to Section 363 of the DGCL reduce from two-thirds to a simple majority the stockholder vote required for (1) amendments to a certificate of incorporation to effect a conversion of a conventional corporation into a public benefit corporation (and vice versa) and (2) mergers that result in the conversion of shares of a conventional corporation into shares of a public benefit corporation (and vice versa).
- Elimination of Appraisal Rights. The amendments to Section 363(b)(2) of the DGCL eliminate appraisal rights for (1) amendments to a certificate of incorporation to effect a conversion of a conventional corporation into a public benefit corporation (and vice versa) and (2) mergers that result in the conversion of shares of a conventional corporation into shares of a public benefit corporation (and vice versa).
- Clarification of Interested Director Provisions. The amendments to Section 365(c) clarify that a director will not be considered “interested” in connection with a balancing decision required by Section 365(a) based solely on his or her ownership of, or interest in, stock of a public benefit corporation, except to the extent such ownership would create a conflict if the company were not a public benefit corporation. The amendments also provide that, absent a conflict of interest, a failure to satisfy the balancing requirement will not constitute an act or omission not in good faith for the purposes of Section 102(b)(7) (the statutory section permitting corporations to include provisions in their certificates of incorporation eliminating monetary damages for a director for a breach of fiduciary duty) or Section 145 (addressing indemnification of officers and directors), unless the certificate of incorporation specifically provides otherwise. The change eliminates the need to include a separate provision in the certificate of incorporation to protect directors for breaches under Section 365(c) by instead making it the statutory default.
- Standing for Enforcement Actions. The amendments to Section 367 clarify that any lawsuit to enforce the balancing requirement must be brought by plaintiffs owning at least 2% of the public benefit corporation’s outstanding shares or, in the case of certain listed companies, shares with a value of at least $2,000,000 if that number is lower.
The amendments (other than to Section 363(b)(2)) became effective upon enactment into law. The amendments to repeal Section 363(b)(2) will be effective with respect to a merger or consolidation consummated pursuant to an agreement entered into (or, with respect to a merger consummated pursuant to Section 253, resolutions of the board of directors adopted) on or after July 16, 2020.
To date, most corporations that have adopted the benefit corporation model are private, closely-held companies. The 2020 amendments, however, significantly reduce the statutory hurdles for public and widely-held companies to become public benefit corporations and may open the door for more companies to consider this option.
The broad economic and social disparities brought increasingly to light by the COVID-19 pandemic and broad-based social and political unrest have highlighted for many the potential benefits of a stakeholder-based model. As investors and other stakeholders increasingly focus on social responsibility and environmental, social and governance (ESG) considerations and impact investing, the benefit corporation model is gaining in popularity and garnering national attention from legal scholars, large institutional investors and the business community. In 2019, The Business Roundtable released a statement on the purpose of a corporation signed by over 180 CEOs — though it didn’t mention benefit corporations explicitly, the statement endorsed a stakeholder-focused approach. In his annual letter to CEOs, Larry Fink, leader of BlackRock, the world’s largest institutional investor, has asked companies to be “deliberate and committed to embracing purpose and serving all stakeholders.” Some companies have already taken the plunge: the innovative insurance company Lemonade, Inc., which some have referred to as an insurtech unicorn, just went public as a benefit corporation this month. It joins Laureate Education as one of a small handful of companies to do so. Legal heavyweight Leo Strine, the former Chief Justice of the Delaware Supreme Court, has praised the benefit corporation model and called for The Business Roundtable and mainstream institutional investors to rally behind it. Although it remains to be seen how broadly the benefit corporation model will be embraced, especially among public companies, with the recent Delaware amendments, it will be much easier for existing companies to take him up on the challenge.