January 21, 2019

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Delaware Set To Consider Major New Choice In Corporate Structure

Delaware’s governor introduced legislation for consideration in the statehouse April 18th to give companies the option to structure themselves as benefit corporations.

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By Francesca Rheannon

More than half of all publicly-traded companies and about two-thirds of the Fortune 500 call Delaware their corporate home. The state has always been a business-friendly place – with “business friendly” defined as making it easier for corporations to maximize profits, even when at the expense of social and environmental needs.

But the corporate haven par excellence is preparing to give its companies a major new choice in corporate structure: to incorporate as benefit corporations, with the obligation to “operate in a responsible and sustainable manner” that privileges the Triple Bottom Line over the singular bottom line of profit maximization.

Governor To Propose Benefit Corporation Law

On Thursday April 18, Governor Jack Markell formally proposed benefit corporation legislation for the consideration of the state legislature. Following similar legislation in 12 other states and the District of Columbia, the measure will require higher standards of corporate purpose, accountability and transparency. 

B-Lab co-founder Jay Coen Gilbert underscored the significance of this development in an interview with CSRwire:

"It raises the bar considerably. Delaware is the touchstone of American corporate law and so to have [the state] pass legislation recognizing the need for a new kind of corporation should be a huge accelerator for the sustainable business movement and for the growing community of impact investors."

The Business Case For The Benefit Corporation

Victoria Fiore, spokesperson for certified B-Corporation Plum Organics, called it a “big win” in anticipation of passage of the measure, due to the strong support behind it. The company, which is incorporated in the state, met with the Delaware state bar association to advocate drafting the Plum Organicslegislation. She told CSRwire:

"We've had some crazy growth in the past couple of years, so when we and some of our other partners went in front of the Delaware bar and said this is important to us as companies that are growing and scaling, they listened."

Fiore says the business case for benefit corporations is strong. One reason is that consumers care about how they vote with their dollars for responsible brands. But beyond that Fiore points out that it will help companies that use the structure more easily hew to their mission of balancing social and environmental goals with financial ones: 

“It's really important to have these kinds of structures in place to help drive those decisions and legitimize them within the business. It's a different way of governing.”

The Proposed Delaware Law vs. Model Benefit Corporation Legislation

The Delaware Bar Association chose to formulate the draft benefit corporation law somewhat differently from the model followed by the other states where the legislation has passed.

The purpose of both the model and the Delaware laws is substantially the same: to allow a Triple Bottom Line – people, profit, planet -- to guide the actions of the corporation. However, they differ in several respects.

One concerns the stated purpose of the corporation, another the role of its board of directors and a third is a difference in reporting requirements.

Purpose of the Benefit Corporation, Role of Board

The model legislation is more explicit that the corporate purpose should be to “create a material positive impact on society and environment” -- a specific commitment to do some real good. The benefit corporationDelaware formulation reads only that the company is obligated to operate in a responsible and sustainable manner.

That’s “obviously a pretty big statement compared to existing corporate law, which says that your job is to maximize shareholder value,” Jay Coen Gilbert asserts, but he says it's a little more “do no harm,” whereas the model legislation requires the company to create a positive material impact -- a higher bar.

William Clark of the law firm Drinker, Biddle and Reath helped draft the model legislation. He says that while both the Delaware and model statutes redefine the duties of the board of directors, the model enjoins the directors to “consider the interests of the constituencies of the corporation that are affected by its actions,” with those constituencies to include not only the shareholders but also the employees, the communities where the corporation has its operations and the environment. 

In Delaware, the draft legislation reads that the directors have the duty to “consider the interests of those materially affected by the operation of the corporation, in addition to the pecuniary interests of the stockholders of a Delaware corporation,” without specifying those stakeholder constituencies.

However, both achieve the same result, Clark says.

Reporting and Transparency

As for reporting requirements, the difference lies in to whom the corporation has to disclose, Jay Coen Gilbert told CSRwire:

"I would say the single biggest difference between the two is that while the Delaware legislation requires benefit corporations to report on their overall social and environmental performance, which is a huge incremental commitment these companies are making compared to traditional Delaware corporations, the model benefit corporation legislation goes further by requiring those reports be given to the public -- the general public -- not just the shareholders. And it also requires the report to assess the company's performance against a third party standard, as opposed to being self-reported."

B Lab provides third party certification to companies that choose to incorporate according to the csr reportingB-Corporation standard.

Gilbert thinks the reason for the difference might have to do with the fact that the Delaware legislation predominantly focuses on public corporations, since that makes up so much of the corporate landscape in that state:

"If a company is public, the report to the stockholders is going to be a public report because the stockholders are the public. And so for them that distinction between stockholders and the public was less relevant than it was when we were drafting the model legislation, which we were drafting primarily for private companies."

Frederick Alexander of Morris, Nichols, Arsht & Tunnell LLP, the law firm that drafted the Delaware legislation, explained that the Delaware provisions specify categories of information that must be disclosed in a biennial report. They also permit corporations to opt in to a third party model:

“I think the drafters believed that the specific requirement of a third party standard would not be a good fit for all benefit corporations, and that the transparency requirements that we mandated were sufficiently protective.”

But Alexander points to greater detail in the public benefit language of the Delaware bill. In addition to the general public benefit requirement, the proposed law requires the corporate charter to identify one or more specific public benefits – something he says is optional in other states.

In an email to CSRwire, he wrote:

“I believe the thinking was that an articulated goal or set of goals beyond the general public benefit would ensure that the directors and management were properly pursuing public benefits.”

Expected Impact

Whatever the differences between Delaware and the other states that have adopted benefit corporation laws, Jay Coen Gilbert thinks the move will have a significant impact. He said it will help create a clear path for benefit corporations to scale up via public capital markets, while maintaining a public benefit mission even in the face of those markets’ traditional “short termism.”

And the most important thing according to him will not be whether the law is passed but the extent to which it is used:

"The most important thing for us to be on the lookout for will be, if the law gets passed in June, it'll be looking at that first effective date in August and seeing which leading companies show up to be there with the governor."

Here’s betting that’s a challenge socially responsible companies in Delaware are eager to meet.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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