The public benefit corporation is a new class of corporations for companies seeking to blend both profit and purpose. These companies believe that business can serve both shareholders and society. They balance the impact of their decisions on the environment, community, employees, customers, suppliers and investors (collectively known as stakeholders), rather than maintaining an exclusive focus on short-term maximization profits.
In most ways, yes, a public benefit corporation operates exactly like a traditional corporation. However, there are a few distinctive features.
From a tax perspective, a public benefit corporation acts just like a traditional Delaware corporation. The company management may elect to be taxed as a C-Corp or an SCorp. Assuming the public benefit corporation meets all the other requirements, shares in the company qualify for Qualified Small Business Stock (QSBS) tax treatment. There is no tax benefit for public benefit corporations.
Companies that choose the public benefit corporation believe that capitalism can be a tool for good. They choose the structure to ensure that as they grow financially, they benefit all stakeholders. This is known as stakeholder capitalism. The motivation for each public benefit corporation is different, but there are three main motivators:
Yes. Whereas a public benefit corporation is a new legal structure set forth in the Delaware corporate statute, B Corp is a voluntary certification that any company may choose to pursue. The B Corp certification is primarily a consumer-facing seal of approval that indicates that a company is operating in a socially and environmentally responsible manner. In order to become B Corp certified, a company must meet a minimum standard of social and environmental impact as measured against an objective standard.
To make things a little more confusing, many public benefit corporations choose to become B Corp certified as a public and objective commitment to their purpose.
In order for a Delaware corporation to convert to a Delaware public benefit corporation, the company must have:
The board of directors of a public benefit corporation is required to manage the company in a manner that balances the financial interests of the stockholders, the best interests for the company’s stakeholders and the specific public benefit identified in its certificate of incorporation. This balance should be reflected in board meeting minutes and consents.
Additionally, a public benefit corporation must draft a benefit report detailing the company’s promotion of the public benefit identified in the certificate of incorporation and of the impact on its stakeholders. In Delaware, this report must be delivered to all shareholders every two years. However, many public benefit corporations choose to go above and beyond the minimum threshold by making the report public on an annual basis.
The benefit report must include:
Note that the benefit report does not include any financial reporting.
There isn’t enough data to draw any clear conclusions. The value of the shares of any company is driven by so many factors that may or may not be related to the company’s legal structure. Some argue that if company management is not doing everything to maximize the financial value of the company, then the stock price will suffer. Others argue that a stakeholder management approach to growing the business creates better long-term value for the company because by doing so, management is creating a more resilient company. One study of a publicly traded companies found that companies with a high environmental social and governance (ESG) score were more resilient, and their stock price outperformed their peers during the 2020 crash.
The first way the debt might convert to equity in a convertible note is when a Qualified Financing occurs.
Once a traditional Delaware corporation starts to consider acquisition offers, the directors of the company are required to sell to the highest bidder regardless of any other factors under the Revlon Rules. In contrast, the public benefit corporation was designed specifically to empower directors to take other factors into account when deciding whether and to whom to sell the company. The board may, for instance, consider the impact of the sale on the company’s employees, community, suppliers, customers or the environment, as well as the financial impact on the shareholders. Directors in a public benefit corporation have broader decision-making power than directors of a traditional corporation. This discretion allows them to make decisions based on long-term value rather than the short-term interests of its shareholders.
Here is a comprehensive list of the publicly-traded public benefit corporations:
The legal process for a public benefit corporation to go public is the same as a traditional Delaware corporation. However, the business risks and the disclosures in the S-1 are different. These disclosures are often added in the Risks section of the S-1. Some examples are:
Of course, a company should keep in mind that when any company goes public, it must answer to a more diverse and likely fickler group of investors than its venture capital investors. Public shareholders tend to be focused on the short-term performance of the stock rather than the long-term value, so they may not be as interested in, or forgiving of, a company that makes business decisions that are not exclusively focused on boosting short-term stock price.
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