What is a public benefit corporation?

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.

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Is a public benefit corporation a C-Corp?

In most ways, yes, a public benefit corporation operates exactly like a traditional corporation. However, there are a few distinctive features.

  • Shift in purpose — The public benefit corporation shifts the mandate of the company from a narrow focus on pure profit maximization to a broader focus of creating a positive impact on people and planet while still making a profit. At the same time, it explicitly removes the legal liability for choosing purpose over profit (the Revlon Duties). In fact, the legal duty flips from a mandate to maximize shareholder value to a mandate to produce a public benefit and to operate in a responsible and sustainable manner. Public benefit corporations are required to identify a specific public benefit in their certificate of incorporation. A specific public benefit is a positive affect (or the reduction of a negative affect) on the company’s stakeholders.
  • Increase in accountability — Public benefit corporations are required to balance financial interests of shareholders with the best interests of those materially affected by the corporation’s conduct, including those identified specific benefits. Shareholders holding more than 2% of the company’s shares have a right of action to enforce the new purpose and commitment to stakeholders.
  • Increase in transparency — Public benefit corporations are required to report biennially to shareholders about the company’s social and environmental performance against an objective measure. Many public benefit corporations choose to go above and beyond this minimum requirement by issuing a report annually to the public. Note that this report is exclusively about the social and environmental performance; public benefit corporations are not required to share any financial information in such reports.
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How are public benefit corporations taxed?

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.

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Why become a public benefit corporation?

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:

  • Building long-term value. Companies are subject to pressures to grow and maximize returns for their shareholders on tight timelines, which may be at odds with the positive impact on stakeholders. Of course, this pressure is amplified once a company goes public. The public benefit election makes it clear that the company will make decisions based on building shared and durable value for all stakeholders rather than just trying to increase the valuation of the company or current share price. This attracts shareholders with a longer-term perspective and provides management with the protection to make decisions that favor the long term over immediate share price. This focus on all stakeholders also reduces risk and increases resilience. Because public benefit corporations measure the impact on all stakeholders, they are able to spot and solve issues before they threaten the viability of the company.

  • Engaging employees. Increasingly, employees expect the companies they work for to align with their values. The more a business is able to develop and articulate a core purpose and engage with Millennials and Gen Z, who equate purpose with business excellence, the greater their chances are for long-term success. Public benefit corporations must articulate and measure their purpose, which helps attract, engage and retain a workforce motivated by purpose.

  • Attracting customers. Brands leading with purpose attract and build loyalty with customers. Consumers are more likely to buy from, trust, champion and defend companies that have an authentic purpose. Electing the public benefit corporation legal structure is a way to communicate to customers that the company is building purpose into its DNA.
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Is there a difference between a public benefit corporation and a B Corp?

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.

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What is the process for converting to a public benefit corporation?

In order for a Delaware corporation to convert to a Delaware public benefit corporation, the company must have:

  • Shareholder approval—The shareholders of the company must approve the conversion to a public benefit corporation. Originally, the threshold for shareholder approval was 90% of shareholders. But in a 2020 amendment to the statute, that threshold was lowered to a simple majority.
  • Board approval—The board of directors must approve the action.
  • Amend certificate of incorporation—The certificate of incorporation must be updated to include the statutory language and the specific public benefit.
  • Update stock certificates—The stock certificates must be updated to put stockholders on notice that the company is a public benefit corporation.
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What are the ongoing governance issues for public benefit corporations?

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:

  • The objectives the board of directors has established to promote their public benefit;
  • The standards the board of directors has adopted to measure the corporation’s progress in promoting a public benefit;
  • Objective factual information based on those standards regarding the corporation’s success in meeting the objectives for promoting a public benefit; and
  • An assessment of the corporation’s success in meeting the objectives and promoting a public benefit.

Note that the benefit report does not include any financial reporting.

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How does conversion to a public benefit corporation impact the value of my stock?

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.

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What venture capital funds have invested in public benefit corporations?

The first way the debt might convert to equity in a convertible note is when a Qualified Financing occurs.

  • Allianz
  • Andreessen Horowitz
  • Baseline Ventures
  • Benchmark
  • Betaworks
  • Brand Foundry
  • Bullet Time Ventures
  • Freshtracks Capital
  • Claremont Creek Ventures
  • Collaborative Fund
  • CommonAngels Ventures
  • DBL Investors
  • Emerson Collective
  • Fidelity
  • First Round Capital
  • Forerunner Ventures
  • Formation|8
  • Founders Fund
  • Foundry Group
  • General Catalyst
  • Generation Equity Investors
  • Goldman Sachs
  • Good Capital
  • Greycroft Partners
  • GV
  • Hallett Capital
  • Harrison Metal
  • Impact America Fund
  • Kapor Capital
  • KKR
  • Kortschak Investments
  • Lerer Hippeau
  • Learn Capital
  • Lighter Capital
  • Matrix Partners
  • New Enterprise Associates
  • New School Ventures
  • Omidyar Network
  • Pacific Community Ventures
  • Peterson Ventures
  • Prelude Ventures
  • Reach: New Schools Capital
  • Red Swan Ventures
  • Renewal Funds
  • Serious Change
  • Sequoia Ventures
  • Sherpa Ventures
  • Softbank
  • Spark Capital
  • T. Rowe Price
  • Tekton Ventures
  • The Westly Group
  • Tiger Global Management
  • Thrive Capital
  • Union Square Ventures
  • Y Combinator
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Are there any special considerations for public benefit corporations at acquisition?

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.

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Which companies are publicly-traded benefit corporations?

Here is a comprehensive list of the publicly-traded public benefit corporations:

  • Laureate Education (February 2017)
  • Lemonade Insurance (July 2020)
  • Vital Farms (July 2020)
  • Grosvenor (August 2020)
  • Veeva Systems (January 2021)
  • Appharvest (February 2021 via SPAC)
  • SDAC (February 2021)
  • Amalgamated (March 2021)
  • Coursera (March 2021)
  • Broadway Financial Corporation (March 2021 via merger)
  • Zymergen (April 2021)
  • Zevia (July 2021)
  • Planet Labs (July 2021 via SPAC)
  • AeroFarms (August 2021 via SPAC)
  • United Therapeutics (September 2021)
  • Warby Parker (September 2021)
  • Allbirds (November 2021)
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What considerations should public benefit corporations take into account for IPO?

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:

  • As a public benefit corporation, our focus on a specific public benefit purpose and producing a positive effect for society may negatively influence our financial performance.
  • Provisions in our certificate of incorporation, Certificate of Designations, bylaws and the Delaware General Corporation Law could make it more difficult for a third party to acquire us, could discourage a takeover and adversely affect the holders of our Class A common stock.
  • Our directors have a fiduciary duty to consider not only our stockholders’ interests, but also our specific public benefit and the interests of other stakeholders affected by our actions. If a conflict between such interests arises, there is no guarantee that such a conflict would be resolved in favor of our stockholders.
  • 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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