INTRODUCTION
Model Benefit Corporation Legislation
The model benefit corporation legislation is what many states look at to draft their own statutes for benefit corporations. The model benefit corporation legislation provides a baseline for states to use for corporate purposes, accountability and transparency. However, there are issues in the way it is currently drafted. The largest issues I see in the legislation are: the option to choose shareholders over stakeholders; the lack of accountability for officers and directors; and the lack of a monetary incentive to sue the benefit corporation. Although the model benefit corporation legislation has some flaws, it is entering new territory in the business corporate law realm. Through time, the kinks should be worked out to provide a better crafted body of law. Below is a summary and discussion of the model benefit corporation legislation. (model benefit corporation link
SECTION 1 PRELIMINARY PROVISIONS
Section 101 Application and Effect
Section 101 (a)limits the applicability of the benefit corporation legislation to benefit corporations. Section 101 (b) further states that this legislation will not affect a statute or rule that does not apply to benefit corporations. Section 101(c) makes clear that the enacting state’s business corporate law will generally be applicable to all benefit corporations but the specific provisions of benefit corporation legislation will control over general provisions of the state’s business corporate law. Section 101(c) also states that a benefit corporation may be subject to this legislation and a state’s business corporate law at the same time. Section 101(d) states that a benefit corporation’s articles of incorporation or bylaws can’t limit, be inconsistent with, or supersede a provision of the benefit corporation legislation.
The drafters did recognize that the model benefit corporation legislation is not a complete overhaul of a state’s business corporate law. The drafters acknowledged that benefit corporations may still be subject to provisions of a state’s business corporate law. However, I see an issue with Section 101 (c), but I am not sure if it can be addressed in drafting. Because a benefit corporation can be subject to a states’ business corporate law and benefit corporation legislation at the same time, what if the provisions of each set of laws are both specific and conflicting? The model benefit corporation legislation does not answer this question. The model benefit corporation legislation only addresses a conflict if the general provision of state business corporate law is general. However, because the model benefit corporation legislation is silent, states may be free to assume that state business corporate law would trump model benefit corporation legislation.
Section 103 Incorporation of benefit corporation (see Appendix A)
This section is straightforward, it simply states that a benefit corporation must follow the guidelines provided by its state’s business corporate law and must place in its articles of incorporation that it is a benefit corporation when it becomes incorporated. This section applies to corporations that are being newly formed, not pre-existing entities that want to become benefit corporations.
Section 104 Election of benefit corporation status (see appendix A)
This section addresses the procedures for an existing business corporation or an existing entity that is not a corporation that wants to become a benefit corporation. Section 104(a) states that an existing corporation can become a benefit corporation by amending its articles of incorporation to include a statement that it is a benefit corporation. The section further states that the amendment must be approved by at least the “minimum status vote”. Section 102 states that a “minimum status vote” is satisfied when 2/3 of all the shareholders of every class have approved the amendment. If a limited liability company is merging into a benefit corporation than 2/3 vote of approval is needed by the members of the limited liability company.
Section 101(d) states that the benefit corporation legislation trumps the corporation’s articles of incorporation. Section 102 “minimum status vote” gives every shareholder the power to vote regardless of what the articles of incorporation or bylaws say. For example, If a corporation had written in its articles of incorporation that only a 50% vote was needed to amend them, and the amendment got a 50% approval vote then the corporation would not qualify as a benefit corporation under this legislation.2/3 vote is the minimum threshold that the model benefit corporation legislation proposes. For example, if the state business corporate law requires an 80% vote to amend articles of incorporation or for fundamental changes (such as a merger) then the corporation must abide by that state business corporate provision. Another conflict arises when a corporation’s articles of incorporation require more than 2/3 vote for fundamental changes. For example if the articles of incorporation require an 80% vote for a merger, then 2/3 vote would not be enough for the actual merger but would be enough to satisfy Section 104. So basically, the articles of incorporation would trump the modern benefit corporation legislation. This is the conundrum-Section 101(d) states that the benefit corporation legislation trumps a corporation’s articles of incorporation, however there is a loophole when it comes to mergers.
Section 105 Termination of benefit corporation status (See Appendix A)
This section states what will be considered a termination of benefit corporation status.Section 105(a) states that a corporation can terminate their benefit corporation status by deleting the statement that the corporation is a benefit corporation in the articles of incorporation. This can only be achieved through an amendment and at least a 2/3 vote is required. Section105(b) states that if a merger will terminate the benefit corporation status then the merger must be approved by at least a 2/3 vote. Similarly, a sale, lease, exchange or disposition of all or substantially all the assets (unless in the regular course of business as determined by the state’s business corporate law) of a benefit corporation will not terminate the benefit corporation status unless approved by 2/3 vote. Although there may be tax benefits and other incentives to not go through with a “formal merger”, an indirect merger will not result in the termination of benefit corporation status. Section 105(b) still leaves such a corporation open to liability.
SECTION 2 CORPORATE PURPOSE
Section 201 Corporate Purposes
Section 201 (a) states that the purpose of a benefit corporation must be to create a general public benefit in addition to its purpose under state business corporate law. Section 102 defines a “general public benefit” as a material positive impact on society and the environment taken as a whole, assessed against a third party standard from the business and operations of a benefit corporation. This section shows that the drafters did not want to eliminate the purposes of the corporation that have already been established through corporate law but simply want to expand the purpose to include things other than profit. Section 201(b) states that a benefit corporation can include specific public benefits in its articles of incorporation but those specific benefits will not limit the general public benefit purpose.
Section 102 states that a specific public benefit includes: giving beneficial services or products to low income or underserved individuals or communities; promoting economic opportunities for individuals beyond creating jobs in normal course of business; protecting/restoring the environment; improving human health; promoting arts, sciences, or advancement of knowledge; increasing flow of capital to entities with purpose to benefit society or the environment and conferring any other particular benefit on society or the environment. Section 201(c) states that the general public benefit and specific public benefit should still be in the best interests of the corporation. Section 201 (d) reiterates that amendments to the articles of incorporation must be approved by at least 2/3 vote. Section 201(e) relieves a professional corporation, such as a law firm, from violating a law that restricts the business in which a professional corporation can engage by having a general public benefit or specific public benefit.
The general public benefit definition is ambiguous. What counts as having a material positive impact? Is it enough that a corporation recycles and thus reduces waste? Is it enough that a corporation implements more diversity in its workplace? Who is the third party’s standard from which the assessment will be made? Perhaps the drafters thought it would be more beneficial to write a more inclusive definition of public benefit than exclusive. Even more troubling is the specific public benefit definition that the model benefit corporation legislation provides. The last example under section 102 of what includes a public benefit is “anything that confers a particular benefit on society”. The issue with this inclusive definition is that it is subjective. For example, what if the corporation Westboro Corp., believes that “giving people Jesus” is a benefit to society. Westboro Corp. wants to force its religious views on others. Westboro Corp. believes that homosexuals are an abomination, abortion is immoral, and everyone that does not believe in Jesus Christ is going to hell. What if their specific purpose is to “save souls”. What if Westboro Corp. lobbies against same sex marriage in order to protect the sanctity of marriage? What if the Westboro Corp. does nothing more than hire some preacher to stand on a street corner with a microphone to “bring people to Jesus”. Well according to the model benefit corporation legislation Westboro Corp. is conferring a benefit to society.
SECTION 3 ACCOUNTABILITY
Section 301 standard of conduct for directors
Section 301(a) states that directors of a benefit corporation must consider how their decisions will impact: shareholders; employees; customers as beneficiaries of the general public benefit or specific public benefit; community; society; environment short and long term interests of the corporation; and its ability to accomplish its general public benefit and specific public benefit. The directors may consider the interests that are listed in a state’s business corporate law and other important factors or interests of other groups. This section further states that the corporation does not have to give priority to certain groups over others unless it is written in the corporation’s articles of incorporation.
The model business corporation legislation gives corporations the power to still give deference to shareholders over stakeholders. This seems to be counterintuitive. If all corporationshave to do is place what groups get priority in the articles of incorporation, then what would be the incentive to not rank shareholders above stakeholders and basically perpetuate the same system of shareholder wealth maximization. What good does it do to have to take into consideration stakeholders when the consideration is unfairly weighted. For example, if a corporation gives ten times as much deference to shareholders than it does its stakeholders, what is the likelihood that the corporation will do the bare minimum to satisfy the general public benefit requirement. This legislation essentially allows a corporation to gain all the benefits of being a benefit corporation without any of the sacrifice and good will.
Section 301(b) states that section 301(a) will not be a violation of the state’s existing business corporate law and makes directors liable for additional interests other than what is already stated in the state’s business corporate law. Section 301(c) states that a director will not be held liable for monetary damages if the corporation failed to create a general public benefit or specific public benefit or if the director performed in compliance with the model business corporation legislation and duties assigned by state business corporate law. Section 301(d) states that a director does not have a duty to those that are beneficiaries of the general public benefit purpose or specific public benefit purpose. In other words, a corporation has no duty to any of its stakeholders. Section 301(e) focuses on the business judgment rule and states that a director is protected by the business judgment rule if they make a decision in good faith, isn’t interested, is reasonably informed and rationally believes that the decision is in the best interest of the corporation.
Section 301(c) baffles me the most. Directors are exonerated from personal liability if they do not make decisions that have the corporation pursue a general public benefit or specific public benefit. What incentive does a director have to do pursue a general public benefit or specific public benefit if his heart is not in the right place? What prevents a director from focusing on shareholder wealth maximization? The exoneration of directors makes this legislation a watchdog without teeth-all it does is bark but it is completely harmless. Closer reading shows that directors are not liable for monetary damages, however it seems a director can be sued for injunctive relief. So basically this legislation allows for a director to focus on shareholder wealth maximization and if he ignores creating a general public benefit or specific public benefit then the only recourse is injunctive relief. What a sham! Section 301(d) further adds insult to injury by limiting standing. Section 301(d) removes any standing from stakeholders. This essentially limits standing to shareholders of the corporation. I can see why the drafters have limited standing, the floodgates of the courthouse would open because essentially the entire world would have standing to sue a corporation. Seeing how litigious Americans are, there would be a significant waste of judicial resources. However, because directors can only be sued for injunctive relief it seems that most people would not be interested in taking such a route because they can not sue for monetary gain.
Section 302 Benefit Director
Section 302(a) states that the board of directors of a publicly traded benefit corporation must designate a Benefit Director that will have all the powers, duties, rights, and immunities of the other directors and the additional powers duties rights and immunities provided in this section. However, other benefit corporations may designate a Benefit Director that will have all the powers, duties, rights, and immunities of the other directors and the additional powers duties rights and immunities provided in this section. Section 302(b) states that a Benefit Director must be elected but may be removed by the provisions the state’s business corporate law. The Benefit Director must be independent but may also serve as the Benefit Officer at the same time. The articles of incorporation or bylaws may give additional qualifications to the Benefit Director as long as they are not inconsistent with this section.
Quickly notice that public corporations must elect a Benefit Director while non public corporations have the option to. What was the drafters’ intent behind having a more stringent standard for public corporations than private? Section 302(b) seems to contradict itself-first it states that a Benefit Director should be independent but then it states that the Benefit Director can also be a Benefit Officer. But upon closer reading, Section 102 carves out an exception. Section 102 states that independent means having no material relationship with a benefit corporation or subsidy of the benefit corporation. Section 102 further states that serving as a Benefit Director or benefit officer does not mean that the individual is not independent. This seems to go against logic. How can an individual that is an employee of a corporation be considered to not have a material relationship with the benefit corporation? I think that the definition of “independent” is sloppy and that the exception should be stated differently. I think better wording would be “Although Benefit Directors and Benefit Officers do have a material relationship with the benefit corporation, they shall be deemed independent for the purposes of this legislation when the only material relationship is serving as Benefit Director and Benefit Officer within 3 years of each other”, or something along those lines.
Section 302(c) states that a Benefit Director must prepare an annual benefit report to shareholders. Section 302(d) states that an act or inaction by a Benefit Director will be an act or inaction of that individual in capacity of Benefit Director. Section 302(e) states that a Benefit Director will not be personally liable for an act or omission in the capacity of a Benefit Director unless the act or omission constitutes self-dealing, willful misconduct, or knowing violation of the law regardless of what a corporations articles of incorporation or bylaws state. Benefit Directors are further insulated from liability by 302(e). Mere carelessness, or gross negligence is not enough to make a Benefit Director personally liable for the decisions he makes. This makes the burden of proof much higher. Basically, in order to make a Benefit Director liable, one must have not only the smoking gun, but also the dead body and a witness to the shooting.
Section 303 Standard of conduct for officers
Section 303(a) states that officers of the benefit corporation must consider the interests and factors listed in section 301(a) if they have the discretion to act and if it reasonably appears that the matter may have a material effect on the creation of the general public benefit or specific public benefit. Section 301(b) states that considering the interests in section 301(a) will not be a violation of state business corporate law officer duties.Section 303(c) mirrors section 301(c)-it exonerates an officer from monetary damages, unless stated in articles of incorporation or bylaws, if the officer was performing in the course of his duties in compliance with this section or if there has been a failure to pursue or create a general public benefit or specific public benefit. Section 303(d) mirrors section 301(d) by limiting standing and not providing it to those that are beneficiaries to the general public benefit purpose or specific public benefit purpose. Section 303(e) mirrors 301(e) and provides the business judgment rule, which further insulates an officer from liability. Sections 303(c)-(e) provide the same limiting liability to officers as Sections 301(c)-(e) provide to directors. The same issues I discussed earlier with limiting director liability also apply when limiting officer liability. See section 301 of this paper for discussion of those issues.