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Brad Reid

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What Does the Future Hold for Benefit Corporations?

Posted: 02/15/2012 7:04 pm

The traditional for-profit corporation requires directors and officers to make decisions that maximize shareholders' profit while the traditional nonprofit corporation lacks shareholders and accumulates income to fulfill stated charitable or educational purposes. The very recently developed "Benefit Corporation" -- in 2010 Maryland had the first legislation -- combines the capital-raising potential of the for-profit corporation and an obligation to demonstrate social performance. The "B" corporation demonstrates the growing interest in socially responsible business practices.

A handful of states have enacted benefit corporation legislation, and there are websites to track this legislation. Broadly speaking, the corporate charter may identify one or more specific public benefits as well as having the purpose of creating a general public benefit. A key feature of the legislation specifically allows directors to consider not only the interest of stockholders but also the interests of employees, suppliers, customers, the community, and the environment in a non-exhaustive list.

When reasonably performing duties according to these standards, directors are immune from liability and are immune from suit by third party beneficiaries of the stated goals. The corporation is to provide an annual benefit report to shareholders and the public utilizing consistent third-party standards. The Maryland authorizing statute does not specify a precise percentage of benefit corporations' profits that must be used for the stated purposes. By shareholder vote a corporation may move in and out of benefit corporation status.

The classic 1919 Michigan Supreme Court decision in Dodge v. Ford Motor Co. contained the statement: "A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end." This has been interpreted to mean that directors who fail to maximize profit may be sued by the shareholders. Nevertheless, courts have typically granted directors broad discretion under the business judgment rule to engage in charitable giving. For example, in Kahn v. Sullivan, the Delaware Supreme Court in 1991 approved a settlement of a shareholders' suit involving the use of corporate funds to construct an art museum with a statement that the business judgment rule would have likely protected the directors. Delaware corporate statutes allow corporations to "make donations for the public welfare or for charitable, scientific, or educational purposes..." (8 Del. C. Sec. 122). This language has been part of the widely enacted Model Business Corporation Act for many years. Nevertheless, investors in benefit corporations will explicitly understand that some corporate profits will be used for the public benefit.

The benefit corporation seems reflective of a broad trend favoring socially responsible business practices and the power of modern social media to allow like-minded individuals to band together in support of a common cause. Since legislation permitting this entity is so newly created, a host of legal issues have not been addressed. Here are three examples. The precise fiduciary standards for directors have not been litigated. The reach of federal and state securities laws is unknown. The operation of shareholder derivative suits on behalf of the benefit corporation is unknown.

To what extent will there be tension between the newer benefit corporation and traditional nonprofit corporations and public foundations? Will investments in a benefit corporation reduce these investors' engagement with other charitable entities? Will the benefit corporation produce changes in how businesses designate themselves as "green" or "socially responsible"? Additionally, what consequences will flow from the legislative protection granted the directors of a benefit corporation? Since director accountability has become an ever louder cry from the public, it would be tragic if the benefit corporation becomes an investment and retail marketing tool that further insulates managers and directors from shareholder accountability. Let us hope that never occurs.