August 11, 2021

Shareholder Proposals Requesting Conversion to Public Benefit Corporations: A Fleeting Trend or the Future?

In the past year, at least 16 public companies1 received shareholder proposals requesting they convert to benefit corporations. Benefit corporations (known in Delaware as public benefit corporations or “PBCs”) are for-profit corporations that are intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner. Generally speaking, the applicable state enabling statute requires benefit corporations to be managed in a manner that balances the shareholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct (including stakeholders), and the public benefit or benefits identified in its certificate of incorporation. Currently, there are only ten publicly traded benefit corporations subject to SEC reporting obligations, all of which are incorporated or organized in Delaware: Amalgamated Financial Co., AppHarvest, Broadway Financial Co., Coursera, Laureate, Lemonade, Sustainable Development Acquisition I, Veeva, Vital Farms, and Zymergen Inc. A recent trend in shareholder proposals, however, may indicate that this number will increase in the future.

Proposals

Fifteen public companies received and voted on proposals to convert to benefit corporations at their 2021 annual meetings of shareholders2, a dramatic shift from the previous year, when not one of these companies received a proposal to convert. Shareholder proponents requested companies approve an amendment or take the necessary steps to amend their certificates of incorporation and, if necessary, bylaws to become a benefit corporation. The Shareholder Commons, a nonprofit that states it is seeking to catalyze a movement of shareholders that insist on responsible business, assisted the shareholder proponents with these requests. Accordingly, although each proposal was uniquely tailored to the specific company, the proposals exhibited a common rationale — prioritizing stakeholder interests in addition to shareholder interests is vital.

Twelve of the 15 companies receiving proposals had previously signed the Business Roundtable Statement of the Purpose of a Corporation (the “Statement”). The Statement proclaimed that signatories “share a fundamental commitment to all … stakeholders” and sets forth commitments in five key areas: delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, supporting the communities in which the signatories work, and generating long-term value for shareholders.

The shareholder proponents asserted that, because these 12 companies are conventional Delaware corporations (or, in the case of S&P Global, a conventional New York corporation), directors must operate under the “shareholder primacy” model, in that each director has a fiduciary duty to prioritize the company and its shareholders over stakeholders, except to the extent they create value for shareholders over time. In particular, proponents asserted that when the interests of shareholders and stakeholders clash (such as workers or customers), the company’s legal duties will exclude all but shareholders. Proponents therefore argued that the legal duty to uphold the best interests of the corporation and its shareholders first, rather than the interests of stakeholders, contradicts the commitment made in the Statement. By converting to a benefit corporation, companies would be legally required to “balance” the interests of shareholders, stakeholders and a specified benefit. In doing so, companies would give legal teeth to the commitments they made by signing the Statement.

The remaining three companies that received proposals that went to a vote — Alphabet, Facebook and Yelp — did not sign the Statement. Instead proposals they received emphasized the companies’ global footprints and responsibilities to society. Proponents for the Yelp conversion focused on the company’s recent commitment to stand against racism and support black-owned businesses, while proponents for Alphabet and Facebook drew on the companies’ “capacity to link people around the globe.”3

Proponents at almost all of the 15 companies further suggested that the “shareholder primacy” model results in substantial social and environmental costs to the economy, lowers GDP, reduces equity value and ultimately harms the diversified shareholders that pay these costs. The proponents asserted that, although companies may profit by externalizing such costs, because the majority of these companies’ shareholders are beneficial owners with broadly diversified interests, the diversified shareholders ultimately bear these costs and, therefore, companies should convert to public benefit corporations so that they can prioritize reducing these “externalized” costs to the benefit of their shareholders.

Responses

In their proxy statements’ opposing statements, most companies expressed that: (1) a change in corporate form was unnecessary because their existing corporate form provided appropriate flexibility to promote the interests of stakeholders, and they were already operating in a manner that considers the interests of shareholders and stakeholders; (2) the benefit corporation model is new and untested, which creates much uncertainty; (3) conversion would be costly and would require resources that should be allocated elsewhere; or (4) some combination of these three.

  1. Unnecessary Change. Some companies took the opportunity to further expand on their current practices to support the notion that they were already promoting stakeholder interests. For example, 3M, Citigroup, Facebook, S&P Global, Tractor Supply Co. and Yelp provided specific examples of how they operate in a responsible and sustainable manner or are already fulfilling the Statement’s commitments. Wells Fargo even noted that it had previously conducted a feasibility report and concluded that converting to a PBC would not be in the best interests of the corporation or its shareholders because, among other reasons, its existing corporate form is appropriately flexible and permits it to manage important public benefit issues.
  2. Generates Uncertainty. With only ten benefit corporations currently listed on U.S. national exchanges, companies argued that the long-term impact of conversion, or how institutional and retail investors would react to the change was uncertain. Additionally, companies noted that, because the enabling legislation allowing corporations to be formed as, or convert to, a public benefit corporation was only added to the Delaware General Corporation Law in 2013, Delaware case law does not yet provide guidance regarding the obligations of a public benefit corporation’s board of directors with respect to balancing the interests of different stakeholders, shareholders and a specified benefit.
  3. Too Costly. Public companies are subject to regulation and oversight by various federal and state governments, regulatory agencies, and self-regulatory bodies around the world, including the Securities and Exchange Commission in the United States, and any significant change in corporate form would require legal and regulatory review, which could be costly.

Results

All 15 companies recommended their shareholders vote against the proposal to convert to a public benefit corporation. In general, the proposals received little support with approximately 1-3% voting to convert to a public benefit corporation. Yelp received the most support, with nearly 12% support (as percentage of votes cast, not including abstentions or broker non-votes).The small proponent group and limited support indicate a lack of widespread shareholder support for conversion; and moving forward, it will be interesting to see whether the proponent pool expands or otherwise garners more active and vocal support.

Key Takeaways

Although the proposals to convert to benefit corporations were not approved in 2021, the influx in proposals this year could indicate an upward trend that will carry forward into the future. Additionally, as we covered in an earlier alert, “New Amendments to Delaware General Corporation Law Will Make It Easier for Companies to Become Public Benefit Corporations,” recent amendments to the Delaware General Corporation Law make it easier for companies to become public benefit corporations, which could strengthen future proposals or result in more conversions.4

As such, companies may find it useful to evaluate the feasibility of transitioning to the public benefit corporation form. Anticipating receipt of proposals to convert will allow companies to proactively consider their responses. In particular, for signatories of the Statement, reflecting on whether current practices align with their commitments made in the Statement may prove prudent. And it will be beneficial for companies to stay informed of newly formed or converted public benefit corporations, particularly peer group members or other companies within their industries.

Only time will tell whether the public benefit corporation structure will become the norm, but this emerging shareholder proposal trend suggests it will continue to be part of the conversation.

  1. 3M, Alphabet, Amazon, Bank of America, BlackRock, Caterpillar, Chevron, Citigroup, Facebook, Goldman Sachs, S&P Global, Salesforce, Tractor Supply Co., UPS, Wells Fargo and Yelp.
  2. Amazon was permitted to exclude the proposal from its proxy statement because the shareholder proponent failed to establish sufficient share ownership to be eligible to submit a shareholder proposal under Rule 14a-8.
  3. The Alphabet and Facebook proposals were unique, however, because they made the shift in structure contingent on their controlling shareholders converting a sufficient number of their high-vote shares to low-vote shares to ensure that at least 60% of the company’s voting power is not beneficially owned or controlled by high-vote shares.
  4. The standards for converting to the benefit corporation legal form vary by state and are generally more onerous and demanding than the Delaware requirements. A majority of states that have adopted benefit corporation legislation require a supermajority (typically two-thirds) vote to approve conversion to benefit corporation status, and several states provide for appraisal rights.
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