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Balancing Profit and Purpose: The Rise of Public Benefit Corporations and Their D&O Risks
Priya Cherian Huskins, Esq.
Nov 20, 2024
What do Amalgamated Financial, a bank holding company, and United Therapeutics, a pharmaceutical company, have in common?
They are both part of a movement in the business world known as public benefit corporations (PBCs). PBCs explicitly aim to make a profit and benefit a specific social or environmental cause simultaneously.
This path is not for everyone, and indeed some may hesitate to pursue becoming a benefit corporation lest they get hit by ESG backlash. Having said that, the PBC movement pre-dates the ESG backlash and is likely to persist.
In this article, I’ll provide a high-level overview of benefit corporations today and the risks that directors and officers of these types of companies may face.
Public Benefit Corporations vs. B Corporations
PBCs are not to be confused with B Corporations.
The organization known as B Lab certifies B Corporations. To obtain this certification, companies have to meet strict social and environmental standards, including annual reporting.
This certification signals to consumers (and sometimes stockholders) a commitment to make a positive impact on social and environmental issues.
B Corp certification is akin to the LEED certification for green building or Fair Trade certification for coffee. However, the certification for B Corporations does not confer any legal status upon the company.
By contrast, PBCs are legally structured entities with a dual mandate to pursue profits and public benefit.
| For instance, in Delaware, a public benefit corporation is defined as the following: |
| “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. |
PBCs must adhere to specific state laws, including reporting on their impact. This structure offers some legal protections, allowing directors to balance financial returns with a public benefit without risking liability for prioritizing non-financial goals.
| Going back to what Delaware says: |
| The board of directors shall manage or direct the business and affairs of the public benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation. |
Not all PBCs are Delaware corporations, of course. Delaware’s approach to public benefit corporations differs from that of many other states, some of which follow the Model Benefit Corporation Act.
Key differences include Delaware's requirement for a specific public benefit purpose, fewer mandates on third-party performance standards, and less prescriptive roles for benefit directors. Delaware also offers more flexible reporting requirements.
A Growing Movement
Since the PBC structure is relatively new, it’s unsurprising that only about a dozen are currently publicly traded. Publicly traded PBCs include Allbirds, Coursera, Lemonade, Planet Labs, Veeva, Vital Farms, and Warby Parker, to name a few.
In 2020, Delaware made it simpler for corporations to become benefit corporations by updating the Delaware General Corporation Law regarding public benefit corporations.
The update eliminated the two-thirds supermajority stockholder approval required to convert to or from a public benefit corporation.
Now, if a Delaware corporation wants to become a public benefit corporation, it just requires board and shareholder consent to amend the certificate of incorporation.
| As Pam Marcogliese and Sarah Solum from law firm Freshfields pointed out in this Forbes interview, the change has ushered in an uptick in public benefit corporations: |
| [Before] . . . July 2020, there were concerns among boards and their advisers about some of the costs of going the PBC route, including the onerous requirements for conversion and some lingering risks for directors. The recent amendments have resolved many of those concerns . . . by further insulating directors from liability if they are not conflicted when conducting the “tripartite balancing” whereby PBCs have a duty to engage in a good faith balancing of the interests of (a) the stockholders, (b) those constituencies materially affected by the corporation’s conduct, and (c) the public benefit(s) identified in the company’s charter. On its face, this duty to engage in a tripartite balancing of these three sets of interests gives directors greater flexibility. |
Director and Officer Risk in Public Benefit Corporations
Benefit corporations provide a bold opportunity for some corporations to go in an innovative direction. And with innovation comes some degree of risk.
For example, it is theoretically problematic for a corporation to have more than one “master.” Shareholder primacy is the name of the game for regular corporations, meaning that director fiduciary duties run first and foremost to the corporation’s owners.
By contrast, benefit corporations have stakeholders beyond just the shareholder owners, and their interests must be balanced with the benefit corporation’s mandate for social good.
This Sherman and Sterling article does a good job of providing examples of PBCs pursuing social good that might otherwise be characterized as corporate waste if “stockholders’ pecuniary interests” were the only relevant measure and no regard could be given to a public benefit.
In theory, the idea is that the PBC structure should provide directors and officers more flexibility to pursue social goals than they otherwise would in a normal corporate structure.
The good news is there has not been a rash of litigation on this topic. When Woodruff Sawyer recently conducted a study of publicly traded PBCs, we found that only 17 PBCs have ever been publicly traded. Of these, only four have been sued by their shareholders. None of this litigation, however, was focused on the topic of balancing owner and public benefit interests. Instead, it was the type of shareholder litigation typically filed against public companies related to stock drops.
The litigation risk for Delaware PBCs is perhaps somewhat muted. Under Delaware law, only individuals or groups holding at least a 2% ownership stake in the company can bring lawsuits to enforce the PBC balancing of interests. Or, in the case of a publicly traded benefit corporation, it's the lesser of 2% or $2 million in market value.
Next Steps for PBC Directors and Officers
Directors and officers of benefit corporations will want to work with trusted advisors on ways to calibrate and mitigate risk.
Given the relative freshness of the benefit corporations, there’s not as much predictability around personal liability issues compared to more traditional corporate forms.
Having said that, here are three steps that will be helpful:
- Keep good minutes when balancing stakeholder interests. Many times, there will not be much of a conflict between shareholders and other stakeholders. However, if there are conflicts—or potential conflicts—the board will be well-served by having a robust record of the care it took in executing its fiduciary duties.
- Update your personal indemnification agreement. Even the best directors and officers can end up in litigation. If that day comes, everyone will be happy that they have a strong indemnification agreement that quickly advances the cost of defense.
- Ensure that you have a state-of-the-art D&O insurance program. A good D&O insurance program can reimburse the corporation for the cost of defense as well as pay settlements. Not all D&O policies are the same—even when issued by the same insurance carriers. You will want to work with a D&O insurance expert, not an insurance generalist.
Time will tell if PBCs will ultimately be subject to unfortunate litigation. These three steps, however, will go a long way to ensuring that litigation does not need to become financially uncomfortable for directors and officers of PBCs.
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