Benefits of a Delaware Public Benefit Corporation

This article is for founders who have an idea for a mission-driven business and want to know what to do next.

Why does this article focus on Delaware?

Delaware has become internationally recognized as home to over one million legal entities, including the majority of all Fortune 500 companies. With a well-established and respected corporate justice system and business-friendly tax, legal and regulatory policies , Delaware is a great place to incorporate with key incentives including tax benefits, efficiency, and privacy. State laws, such as the Delaware General Corporations Act (“DGCL”), are highly valued for providing shareholders and companies with maximum flexibility and a business-friendly legal environment.

What is a “traditional” society?

A corporation is a separate legal entity from its owners (shareholders) and the people who run the business (the board of directors). Often referred to as a “legal person”, a corporation has many of the same rights and responsibilities as individuals, meaning it can own assets, enter into contracts, sue and be sued, pay taxes, and lend and To borrow money.

What does “incorporate” mean?

Incorporation refers to the legal process of forming a business structure or corporation. This process involves various steps, such as the creation of articles of incorporation, the implementation of the articles of association, the election of officers and the issuance of shares to shareholders. By definition, corporations are completely separate entities from their owners (shareholders). This means that corporations are limited liability entities, so their owners are not personally liable for the company’s debts, but can participate in profits through dividends and stock appreciation. Care should be taken to ensure that “social formalities” are followed to maintain this limitation of liability.

What is a “PCB”?

A public benefit corporationCBP”) is a corporation created to generate a public good (“public benefit”) and operate sustainably and responsibly. A company can be incorporated from the outset as a PBC, or it can be converted to a PBC. Unlike traditional corporations that prioritize maximizing shareholder value, PBCs balance the financial interests of stakeholders, the interests of those involved and affected by the corporation (such as employees, customers, creditors and suppliers) and the advancement of their public interests. Benefit to. In addition, PBCs are required to submit to accountability audits and assessments and report on their progress in delivering their public benefit. Although the terms are sometimes used interchangeably, PBCs are distinct from B corporations (“Body B”). The term B Corp refers to for-profit entities (including corporations and LLCs) that have paid a fee to be reviewed and certified by a national non-profit organization called B Labs.

Do you have a handy chart comparing the two?

Why yes, we do.

society

CBP

Who owns the business?

Shareholders.

Same.

Who runs the business?

Board of Directors, which may appoint officers to manage day-to-day operations. Certain decisions must also be approved by the shareholders.

Same.

Will venture capital funds invest?

Yes.

Same.

Last name

Must include “association”, “company”, “corporation”, “club”, “foundation”, “fund”, “incorporated”, “institute”, “society”, “union”, “union”, “limited” or an abbreviation of it.

Must include the words “public benefit corporation” or the abbreviation “PBC”.

Objective

Any lawful act or activity for which companies may be organized and incorporated under the DGCL.

A PBC is intended to produce one or more public benefits and to operate in a responsible and sustainable manner. Accordingly, a Delaware PBC must identify in its business or purpose statement one or more specific public benefits, i.e. a positive effect or reduction of negative effects on one or more categories of people, d entities, communities or interests (other than shareholders in their capacity as shareholders), to be promoted by the company.

A PBC must balance the financial interests of its shareholders as well as promote its public interest and operate in a responsible and sustainable manner.

Directors’ duties

Manage in the best interest of the company and its shareholders.

Manage in a manner that balances the financial interests of shareholders, the best interests of those materially affected by the conduct of the company, and the specific public benefit(s) identified in its certificate of incorporation (the “Balance Requirement” ).

Directors of a traditional Delaware corporation can generally take actions that they believe are not in the best interest of shareholders in the short term, at least if they believe the action is in the best long-term interest of the society. The balance requirement for directors of a PBC might more easily allow, but does not require, directors to take actions that shareholders consider not to be in their best financial interests, if they support the public interest of the PBC.

Lawsuits to enforce directors’ public interest duties

N / A

Recent DGCL amendments have strengthened director protections so that a director’s failure to comply with the balancing requirement does not constitute an act or omission of bad faith or a breach of duty, unless otherwise specified in the certificate of incorporation of a PBC. A Delaware PBC could be subject to derivative shareholder action for failing to pursue its public benefit(s) established in its certificate of incorporation. However, this risk is mitigated because shareholders filing suit must individually or collectively own at least 2% of the outstanding shares of the company.

PBC Reports

N / A

A PBC must provide at least every two years to its shareholders a statement regarding the corporation’s promotion of its public benefit(s) identified in the certificate of incorporation and the best interests of those materially affected by the conduct of the corporation.

Common law fiduciary duties in transactions for corporate control

In certain transactions involving the sale of control of a corporation, Delaware common law generally imposes an obligation on the directors of a traditional corporation to maximize shareholder value.

In response to all sale transactions, directors of a PBC are required to consider the balancing requirement in addition to maximizing shareholder value. In the context of competing bids to acquire a PBC, however, the board could choose to accept a lower bid with a bidder who aligns with the public interest of the PBC. Conversely, in the same circumstance, the directors of a traditional corporation might be bound by their fiduciary duties to accept the highest bid, even if the bidder was less desirable.

other considerations

Regulators know companies best, and there is a well-developed body of case law and law that governs what companies can do.

PBCs are relatively new forms of business, and there is room for improving service platforms and capital resources to adapt these tools to the needs of PBCs.

Should I make this decision now?

No – Delaware law allows a company to convert to a PBC, but it adds additional costs (filing fees and legal fees) and approval requirements.

OK, so do I have to make this decision now?

If you think you might want to be a PBC, incorporating from the start will save you time and money.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.National Law Review, Volume XII, Number 199

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