Should Your Startup Become a Public Benefit Corporation?
With the increased attention paid to companies that feature public benefits or social impact as part of their mission or business plan and with the rise of social impact investors, more and more states are enacting public benefit corporation statutes (five will go effective this year). Delaware revised its statute to include the public benefit corporation in 2013.
Public benefit corporations are similar to traditional corporations, but they allow for an expanded corporate purpose where the corporation (and its directors) may balance financial and non-financial interests when making decisions. Specifically, the public benefit corporations are not required to maximize stockholder value and can also consider their non-financial public benefit purpose when making decisions, even in the context of a sale transaction. Traditionally, corporations and boards of directors were required to take actions in the financial best interest of their stockholders almost exclusively, especially in the context of a sale transaction.
With the increased ability to consider non-financial interests when making decisions, public benefit corporation do face additional accountability for their public benefit purpose. Specifically, stockholders of a public benefit corporation are given additional rights to enforce the public benefit duties of the corporation though derivative suits. Also, public benefit corporations are required to make biennial reports to its stockholders to report on the corporation’s overall public benefit impact.
To become a public benefit corporation existing corporations must amend their charter and/or bylaws to include the new purpose, change their name (to one including the public benefit designation) and provide for other related provisions required by statute. At least two-thirds of the corporation’s outstanding stock must approve the transition to a public benefit corporation. New corporations can incorporate with the required provisions already included. A corporation can reverse course and go back to being a more traditional corporation with a two-third stockholder vote and amendment the charter and bylaw.
Make sure your company fully understands the public benefit corporation statutes if social impact is part of your startup business plan.