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Can Being a 'Public Benefit Corporation' Pay Off for Your Company?

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By Mark Wilson, Esq. on September 08, 2014 9:00 AM

The concept of ultra vires has generally protected corporate directors from shareholder lawsuits on the ground that the corporation acted outside the scope of its authority. But what if a corporation wants to spend extra money ensuring that, for example, its supply chain is conflict-free? It's probably cheaper to employ slave labor in other countries than it is to contract with manufacturers that are engaging in humane business practices. Arguably, failing to cut costs to the bone impedes shareholder profits and might be grounds for a lawsuit.

Enter the "public benefit corporation," a relatively new type of corporate form that allows corporations to consider motives other than profit when making business decisions.

What Is This Thing?

Many states, including corporate go-to Delaware, have statutes allowing a business to incorporate as a "public benefit corporation." Such a rearrangement allows a corporation's purpose to explicitly include operating responsibly and sustainably and benefitting society in addition to maximizing profit for shareholders. Until now, corporations that incurred greater costs by operating responsibly were vulnerable to shareholder lawsuits on the ground that such responsible operation, while laudable, diminished profits.

There are over 1,000 public benefit corporations in 34 countries, according to B Corp, a nonprofit that advocates for such corporations and provides limited technical assistance to corporations seeking to become benefit corporations. Until now, a corporation that wanted to engage in social responsibility was generally limited to the nonprofit form, which carries its own set of limitations and problems.

Why Should You Care?

It's much easier to begin a new business as a benefit corporation than it is to change an existing business. According to Forbes, 90 percent of shareholders have to approve a change to public benefit status from for-profit status. But Forbes also points out that the form is advantageous in takeover situations. For example, the Revlon rule alters the business judgment rule when a takeover is imminent: Directors can decide only whether the asking price is good for the shareholders, not whether the takeover is good for the company in the long-term. Becoming a benefit corporation could allow a board to decline takeover offers that aren't in the company's long-term interest. This would have benefitted Ben & Jerry's, which didn't want to sell to Unilever in 2000, but felt that it had no choice.

If you're the GC of an established company, it's not likely that you'll be shifting to becoming a benefit corporation. But startups? They definitely could consider this new form when deciding how to incorporate.

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