What is a Delaware public benefit corporation?
A Delaware public benefit corporation (PBC) is a for-profit corporation intended to produce a public benefit and operate in a responsible and sustainable manner. A PBC must be managed in a way that balances the interests of the stockholders, the company’s key stakeholders, and a specific public benefit that the company commits to in its charter.
How is a PBC different from a traditional Delaware corporation?
PBCs enjoy the traditional benefits of incorporating in Delaware, including the robust corporate law framework. However, there are four primary differences between a PBC and a traditional corporation in Delaware:
Corporate Purpose: A PBC adopts a specific public benefit purpose in its charter. This is specific to the company and can be as simple as the company’s mission statement, its raison d’etre.
Governance: A PBC must balance the pecuniary interests of the stockholders, the interests of those materially affected by the company’s conduct, and the company’s specific public benefit identified in its charter.
Reporting: PBCs must deliver a report to stockholders every two years on how the company is promoting its public benefit and the best interests of its key stakeholders. This report is not required to be made public.
Accountability: Stockholders can bring a derivative suit to enforce the company’s public benefit purpose; however, this right is limited to only those holding at least 2% of the company’s outstanding shares.
How does a company become a PBC?
New companies can incorporate as a PBC. Existing corporations can convert to a PBC by amending their charter and bylaws, which requires board and majority stockholder approval. Until recently, a PBC conversion required two-thirds supermajority stockholder approval, and dissenting stockholders were entitled to appraisal rights, however, Delaware law was amended in the summer of 2020 to make it easier for traditional corporations to become PBCs.
Can a PBC convert to a traditional corporation?
Yes. With board and majority stockholder approval, a PBC may file a charter amendment to convert to a traditional corporation.
Why are companies choosing to become PBCs?
For many mission-driven companies, the PBC becomes an integral part of the company’s branding and storytelling. Increasingly, society is calling for corporations to be responsible citizens and managed in a way that delivers value to multiple stakeholders: customers, employees, suppliers and the communities in which businesses operate. The PBC enables a company to enshrine its mission into its legal DNA, a powerful signal to the marketplace that the company is committed to sustainable and responsible growth. PBC executives report that there is a “halo effect” associated with PBC status, similar to that for nonprofits, which creates an advantage in attracting and retaining talent and building trust with consumers and the community. Directors of a PBC also have increased legal protection to balance financial and non-financial interests when making decisions—even in a sale scenario or as a publicly traded company.
Do PBCs need to be audited or certified?
No. PBCs do not have to be audited or certified. PBCs must report to their stockholders on how the company pursues its public benefit purpose and the impact of its activities on its key stakeholders but there is no requirement that this benefit report be audited or certified by a third-party. Some PBCs choose to become “Certified B Corporations” for branding and marketing purposes.
Can a third-party sue to enforce the public benefit purpose?
No. Only stockholders have standing to challenge board decisions. Stockholders must hold at least 2% of the company’s outstanding shares to bring a derivative lawsuit for breach of PBC fiduciary duties.
Are there any cases or guidance interpreting the balancing requirement for PBCs?
No. There is no guidance from legislature or case law on how to balance the different interests of a PBC. However, there is a legal presumption that a PBC director will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if the decision at the time was rational, informed and disinterested (“Business Judgment Rule”). For that reason, most practitioners believe PBC directors have greater flexibility than traditional corporate directors and are better insulated against shareholder fiduciary duty litigation.
Is it more challenging for a PBC to raise capital?
PBCs have raised capital from traditional venture capital and private equity funds, as well as social impact funds. Investors in PBCs include: Andreessen Horowitz, Benchmark, Founders Fund, First Round Capital, New Enterprise Associates, Sequoia, General Catalyst, Softbank, GV, Kleiner Perkins, KKR and TPG. The fact that PBCs have raised capital from top-tier venture capital and private equity funds implies that the PBC form itself is not a deterrent to potential investment. Some entrepreneurs believe the PBC form actually opens up additional pools of capital from mission-driven investors, including private foundations and public charities. However, the newness of the PBC form often still requires investor education.
Can PBCs go public?
Yes, the PBC form was designed to protect the mission of a company when it goes public. There are now three publicly-traded PBCs: Laureate Education, a higher education company, Lemonade, an insurance company, and Vital Farms, a sustainable food company. The relative lack of public PBCs is primarily due to the newness of the PBC, not an inherent deficiency in the PBC as a corporate form for the public capital markets. We have seen an uptick in PBC IPOs recently, with both Lemonade and Vital Farms going public in the summer of 2020. In addition, there are a few other late-stage PBCs that are expected to be contemplating an IPO in the next year or two. There are also a number of wholly-owned PBC subsidiaries of publicly traded companies, including Athleta, Plum Organics and Danone North America. Given the recent removal of the two-thirds supermajority stockholder consent requirement, we expect there may be interest for existing publicly traded corporations to become PBCs and there is general consensus that private PBCs will IPO and the market for publicly traded PBCs will become more robust.
Can PBCs be acquired by or merge with traditional corporations?
Yes. There have been several PBC mergers and acquisitions to date.
How are stockholders’ financial interests protected in a PBC?
Stockholders of a PBC retain all of the protections and governance rights that they have under traditional corporate law. Stockholders of a PBC can bring the same types of lawsuits they can bring against a traditional corporation, including demands to review the company’s books and records, election review proceedings to make sure elections are being conducted fairly, and derivative suits against directors for breach of fiduciary duties, subject to the statutory minimum ownership threshold.
Can a PBC prioritize stockholder financial returns?
A PBC must balance the interests of its key stakeholders and its public benefit purpose in addition to stockholder interests, but it is generally accepted that PBCs can pursue a strategy that prioritizes financial growth and creation of stockholder wealth. Directors of a PBC are ultimately accountable to the corporation’s stockholders.
Is it harder for PBCs to get D&O insurance?
No. PBCs have not had difficulty obtaining D&O (director and officer) insurance. Several major D&O insurance carriers have even suggested that PBCs could have reduced rates over time as a result of their enhanced governance regime and stakeholder engagement.