Insights

Benefit Corporations: New Risk for Directors and Officers?

October 8, 2014

Management Liability/D&O

What do Etsy, Patagonia and Ben & Jerry’s have in common? They’re all part of a relatively new movement in the business world known as benefit corporations. Benefit corporations explicitly aim to make a profit and benefit a specific social or environmental cause simultaneously.

B Lab – the certifying organization for B Corporations – touts that a “B Corp certification is to sustainable business what LEED certification is to green building or Fair Trade certification is to coffee.” Indeed, with more than 1,000 businesses certified as B Corps, and legislation being passed in several states for B Corporations, it seems that a wave of do-gooder companies are seeking the “public benefit corporation” distinction.

Last September, Governor Jack Markell of Delaware talked about benefit corporations, and his decision to sign into law “a bill enabling the formation of a new type of corporation that is hard wired to compete to be the best in America at being the best for America.” He said that “these new Delaware public benefit corporations will harness the power of private enterprise to create public benefit.”

Here’s what Delaware corporation law says about what a public benefit corporation is:

A “public benefit corporation” is a for-profit corporation organized under and subject to the requirements of this chapter that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner … “Public benefit” means a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. “Public benefit provisions” means the provisions of a certificate of incorporation contemplated by this subchapter.

Currently, only private companies have pursued the B Corp certification, but B Lab says it could also be an option for public companies.

There are no public B Corps yet, but there is nothing in the B Corporation legal framework which prevents a public company from becoming certified or that prevents a B Corporation from going public. In fact, the B Corporation legal framework was created to enable companies to go public and maintain their social mission.

Public or private — do directors and officers of benefit corporations have a special reason for concern?

Brave New World

One concern for directors and officers of a benefit corporation is that this type of corporation concept is still in its infancy. This means we don’t have a lot of litigation history for Ds and Os in a benefit corporation environment; and, when you don’t have data, you don’t have visibility into the full spectrum of risk.

But B Lab has a different take on the topic of risk as it relates to Ds and Os of B Corporations:

It is the opinion of our attorneys that adopting the B Corporation legal framework to expand the definition of the ‘best interests’ of the corporation should reduce the liability for Directors and Officers by creating legal protection (called ‘safe harbor’) for them to take into consideration the interests of multiple stakeholders when making decisions, particularly when considering financing and liquidity scenarios. Adopting the B Corporation legal framework will, however, give shareholders additional rights to hold Directors and Officers accountable for taking into consideration these same interests when making decisions — and that of course is the whole point.

In my opinion, from a pure risk standpoint, a corporation’s having more than one “master” could be problematic. Benefit corporations have stakeholders, and their interests must be balanced with the benefit corporation’s mandate for social good. At this time, we simply don’t know what the optimal balance is.

And remember what Delaware law says about how the business of a benefit corporation is to be run: in a “manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.”

In his article on benefit corporations, attorney Jeremy Chen points out that benefit corporations are “required to measure their overall social and environmental performance against a third-party standard.” There is also a requirement for an annual report that outlines a benefit corporation’s performance in accomplishing its public benefits goals.

What counts as success? Unclear.

However, per Chen, part of the accountability rubric for benefit corporations is the potential for a “Benefit Enforcement Proceeding” to be brought against the directors and officers of a benefit corporation:

A public benefit enforcement proceeding can be brought against the directors or officers for violating their duties regarding the Benefit Corporation’s benefit interests and purposes. This proceeding can be brought by the Benefit Corporation itself, or derivatively by a shareholder, a director, or a person or group owning 5 percent or more in corporate equity. Damages are limited to injunctive relief, and money damages are not available.

The threshold in Deleware is actually 2 percent or, in the case of a publicly traded benefit corporation, the lesser of 2 percent or $2 million in market value. Thus, benefit corporation directors and officers have one more reason they may face derivative suits (compared to the Ds and Os of more traditional corporations).

Should Ds and Os of Benefit Corporations Really Be Concerned?

Benefit corporations are an exciting experiment, and provide a bold opportunity for some corporations to go in an innovative direction. And with innovation comes some degree of risk. Directors and officers of benefit corporations may want to work with a trusted advisor on ways to calibrate and mitigate this risk.

Given the relative freshness of the benefit corporation option, there’s not as much predictability around personal liability issues compared to more traditional corporate forms.

In general, however, the risk profile is likely to be similar to any private company (read more about the basics of private company D&O insurance here) — which is to say much more limited compared to a public company, but still plenty of opportunity for “sticky” lawsuits.

Realize that if a corporation doesn’t make profit the primary driving principle, then there may be the propensity for people to disagree about what the corporation is supposed to do.

Under stress, this type of disagreement can lead to lawsuits. In this regard, directors of more traditional for-profit corporations have an easier job: there’s just one organizing principle — maximizing value for the shareholders. So long as you’re making profit, shareholders of companies tend not to be upset.

With benefit corporations, one can imagine the situation where some shareholders might decide to file suit if they think Ds and Os are making the company too profitable and short-changing the social mandate.

The good news, however, is that directors of benefit corporations (at least in Delaware) can still rely on a version of the business judgment rule. Moreover, both directors and officers of benefit corporations also enjoy rights to indemnification and other protections enjoyed by directors and officers of more traditional corporations.

Finally, a good D&O insurance policy may be warranted (but note: not all D&O insurance carriers may be comfortable writing insurance for benefit corporations).

So while there are still unanswered questions around D&O risk, and benefit corporation litigation in general, this new corporate form may well be the right choice for businesses that want to pursue both profit and social good.

 

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

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Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn