Corporate transactions need not be zero-sum
This past weekend, the new Massachusetts Benefit Corporation statute went into effect, making us the 11th state to enact such a law.
Benefit corporations are structured like traditional C-corporations. They have Articles of Organization (what we in the Bay State call your Certificate of Incorporation). They have by-laws. They’ll likely need all the usual business formation documents: incorporator consents and initial board of director votes. They should probably start off with the usual employment agreements and intellectual property assignments that their C-Corp siblings favor.
But there’s one big exception: where the directors and officers of a C-Corp carry a fiduciary duty to—within the limits of the law and subject to their good faith business judgment—maximize investor returns, Benefit corporations are permitted to emphasize the social and environmental impacts of their activities.
Both entities can arrive at the same noble place. A C-corporation may decide to use all-organic ingredients or 100% recycled packaging, but it’s supposed to do so because it believes that decision gives it some market advantage. Maybe it thinks that it can extract a price premium from socially conscious customers. Maybe it wants to distiguish itself from less circumspect competitors. Maybe it just wants to avoid bad PR. But at its core, the C-corporation has to believe a decision is good for its investors.
Benefit corporations have more latitude. Instead of just considering what is best for investors, these directors and officers can—and in some areas are actually required to—consider how their actions and decisions will impact employees, clients, the communities where the company works, near-and-global environments, both the short and the long term interests of the corporation, and specifically identified items of public good (helping low-income persons, environmental conservation, promoting arts and sciences, etc.).
So when is consideration of public benefit a “can consider” and when is it a “must consider” for an officer or director of a Benefit Corporation? According to the new Massachusetts G.L. ch. 156E, these officers and directors SHALL consider:
- shareholders
- employees
- the interests of customers or clients…or of the general public
- community and societal factors
- local, regional and global environments
- both short-term and long-term interests of the company
- the company’s stated beneficial purpose or the specific items of public good I identified above
They MAY also consider
- the interests of the economy
- other pertinent factors or relevant group interests
Maybe your first thought it reading this list was, “Whoa. That’s a lot of divergent interests that director has to keep happy. It’s tough enough just navigating between the needs of majority and minority shareholders. Now they have to worry about these other constituencies?
That’s probably why 156E insulates decision makers from monetary damages and gives them wide discretion in choosing how much relative emphasis to place on each benefit. If they’re actively working to keep the environment clean and make enough money to stay in business long term, you probably can’t successfully challenge their decision to lay off half of the Worcester office and replace them with cheap temp labor.
So what’s to stop a company from using Benefit Corporation status as a PR shell while they soullessly pillage the environs like their black-hearted C-Corp brethren?
As with shareholder derivative suits, Ch. 156E creates a mechanism (called a benefit enforcement proceeding) by which the corporation itself directly, or a shareholder or director or other named person acting derivatively, can bring an action to force compliance with the entity’s beneficial objectives.
Supposedly, ten companies were queued up this weekend to become the first Benefit Corporations in the Commonwealth.
[NOTE: Statutory Benefit Corporations are not the same thing as B-Corps. B-Corps are entities that have been certified by Philadelphia-based B Labs as being sufficiently beneficial to the greater good. They do not have to comply with any particular statute or regulation, other than the usual ones prohibiting businesses from misrepresenting themselves. Also, it’s be a bit confusing to have C-Corps be entities organized under Mass. G.L. 156C and B-Corps be entities organized under Mass. G.L. 156E.
And Benefit Corporations not the same as a non-profit corporations organized for the furtherance of some public or charitable benefit (and therefore eligible for tax-exempt status). Benefit corporations can be for-profit; they can use their excess cash for corporate gain instead of public benefit. They just have to make the public benefit calculus before they do so.