Benefit corporation law could spur socially responsible business boom

Posted: 12:32 pm Thu, July 29, 2010
By Penny J. Minna and Namha B. Corbin

Maryland is the first state to enact innovative legislation creating a new type of corporation, the benefit corporation. The new law blends a traditional for-profit corporation with a nonprofit’s mission to benefit the public, requiring directors to consider the societal ramifications of their decisions as well as the stockholders’ interests.

House Bill 1009/SB 690, signed into law as Chapter 98 of the Laws of Maryland of 2010, will take effect on Oct. 1. Under the new legislation, a corporation can elect to be a benefit corporation by identifying itself as such in its charter. The charter must also say that the corporation’s purpose is to create a general public benefit. That purpose may expand or limit any other corporate purpose permitted under Maryland law.

Generally, the Maryland General Corporation Law’s provisions apply to benefit corporations unless otherwise required by the benefit corporation subtitle, another law, or the context of the MGCL provision. Thus, transactions such as mergers or asset sales that are not specifically addressed in the benefit corporation subtitle will be governed by the MGCL.

‘Material, positive impact on society’
The legislation was promoted by B Lab, a nonprofit organization that certifies, rates and promotes the interests of benefit (or “b”) corporations. B Lab developed its own “b corporation” certification standard, which includes performance standards and requires the corporation to amend its governing documents to require directors to consider the interests of various stakeholders and its mission when making corporate decisions.

Drawing upon those requirements, the new law provides that a benefit corporation must pursue a “general public benefit,” defined as “a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits.”

A “third-party standard” is one that defines, reports and assesses best practices in corporate, social and environmental performance. It must be developed by an entity independent of the corporation. It must be transparent, so that information about the standard is publicly accessible. Accordingly, each benefit corporation will need to align its general public benefit purpose with one or more third-party standard-setting organizations, such as Cradle to Cradle.

While there is no readily apparent reason for distinguishing between general and specific public benefits, the new statute defines “specific public benefits” as any particular benefit for society or the environment. These include, among other things, promoting economic opportunity for individuals or communities (beyond job-creation in the normal course of business), preserving the environment, improving health, and promoting the arts, sciences, or advancement of knowledge.

Examples include having a carbon-neutral footprint or sourcing a substantial portion of the benefit corporation’s supplies through local, women- or minority-owned businesses.

A step further
Each director of a Maryland benefit corporation is subject to both the standard of conduct set forth in Section 2-405.1 of the Maryland General Corporate Law and in the benefit corporation subsection.

Under existing law, a regular corporation’s charter expressly can allow directors to consider, in evaluating a potential acquisition of control of the corporation, the effect of the acquisition on employees, suppliers, customers, and creditors of the corporation.

The new benefit corporation law takes that a step further. It is part of a director’s duty to the benefit corporation to consider a decision’s impact not just on the corporation and its stockholders but also on a wide range of beneficiaries of its public benefit purposes.

The expanded list of considerations includes (i) the interests of employees and workforce of the corporation and its subsidiaries or suppliers; (ii) the interests of its customers, as beneficiaries of the general or specific public benefit purposes of the benefit corporation; (iii) community and societal considerations, including those of any community in which offices or facilities of the benefit corporation, its subsidiaries or suppliers are located; and (iv) the local and global environment.  Directors may consider other pertinent factors or the interests of any other group they determine appropriate.

However, the new legislation is explicit that benefit corporation directors owe no duty to the “beneficiaries” of the corporation’s purposes.  Accordingly, such beneficiaries do not have standing to assert any cause of action against its directors. Also, benefit corporation directors who “reasonably” perform their duties (under the standard in the benefit corporation subtitle) have the same immunity from liability afforded directors of Maryland corporations under Section 5-417 of the Maryland Courts and Judicial Proceedings Article.

While this seems to provide protection, it remains to be seen how the potentially broader responsibility of the directors articulated in the new statute might be enforced, and whether they might be exposed to new or additional liabilities.

Imposing broader responsibility
In order to make its activities more transparent, each benefit corporation must provide an annual benefit report to all stockholders and post it on its website, if any exists. The report must describe the ways in which the corporation pursued a general public benefit and any specific public benefits identified in its charter during the year, and the extent to which benefits were, in fact, created. The report also must discuss any circumstances that hindered the corporation in creating a public benefit.

Maryland’s new benefit corporation law creates an entity that is designed to allow socially responsible entrepreneurs to operate their businesses without having to compromise the public benefit for the interests of their stockholders.

A key factor of the new law is that the directors of a benefit corporation expressly have a duty to consider the impact of their decisions on not just the stockholder’s interests, but on a broad range of beneficiaries of the corporation’s public benefit purposes. While this may clarify a director’s right and duty to consider other interests, it also imposes broader responsibility.

It will be interesting to see how potential investors and directors react to this structure and whether the protections and provisions of the new statute open up growth opportunities for socially responsible businesses.

Penny J. Minna is a partner and Namha B. Corbin is an associate in the corporate practice of law firm DLA Piper, practicing in the Baltimore office. They have extensive experience representing both public and private companies in connection with various securities, business and finance transactions. The authors can be reached at penny.minna@dlapiper.com and namha.corbin@dlapiper.com, respectively. Jay Smith, David Clarke and Kelly Hardy of DLA Piper also contributed to this article.