Promising or Pointless? - An Analysis of Benefit Corporations

-- By AndrewIwanicki - 28 Mar 2020

Introduction

Ten years after the introduction of benefit corporations (BCs), their effects largely remain unclear. In this short time, the nascent development has yet to produce incontrovertible results that break through the static of intertwined economic and social dynamics. Uncertainty is compounded by vague legislative language, diverse benefit goals, varied shareholder objectives, and contested assessment methods. Furthermore, courts have yet to address the legal enforceability of public-benefit commitments.

Nonetheless, BCs are meaningful as a clear break from the century-long norm of shareholder-profit maximization. The explicit permissiveness of BC legislation to pursue social benefits to the detriment of shareholder profits is a substantive change. The decade-long absence of short-termist shareholder activism within BCs stands in contrast to recent trends of increased activism within general corporations and extensive case history regarding shareholder-profit protection.

Critics claim that general corporations may establish equivalent public-benefit goals, but noteworthy authorities reject this assertion and a lineage of case law casts doubt; BC legislation eliminates any doubt. Critics argue that BC legislation is prohibitively cumbersome, but regardless of inconveniences, BC formation is growing substantially.

Laying the Foundation

Shareholder primacy traces back to Dodge v. Ford (Mich. 1919). Ford withheld stock dividends with the stated intention to “employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes." The court found in favor of plaintiff shareholders, determining that “a business corporation is organized and carried on primarily for the profit of the shareholders. The powers of the directors are to be employed for that end.”

Some argue that shareholder primacy is greatly limited by the Business Judgment Rule: courts grant deference to directors’ decision-making, which may include consideration of other contingencies. However, in Revlon v. MacAndrews? (Del. 1986), the court ruled that Revlon may not privilege other interests to the detriment of shareholders, explaining “a board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.”

Sealing the Seams

Even if a company’s public interests are firmly established and clearly signaled, shareholders may invoke their profit interests at any time. In eBay v. Newmark (Del. Ch. 2010), despite Chancellor Chandler’s admiration for Craigslist’s altruism, he declared that Craigslist’s corporate form “is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.”

The removal of Etsy’s CEO in 2017 and subsequent actions (layoffs, introduction of manufactured goods, renunciation of B-Corp status) suggests that Certified B Corps, which lack legal status, are also vulnerable to shareholder-profit-focused activism.

The Honorable Leo Strine, Chief Justice of the Delaware Supreme Court, professed the universal obligation of Delaware corporations to shareholder primacy in The Dangers of Denial (2015):

“Even if § 101(b) of the DGCL, which allows a corporation to pursue ‘any lawful purpose,’ represented an expression of Delaware’s commitment to a constituency-based approach, the provision does not exist in a vacuum, and the contention that it proves directors are free to promote interests other than those of stockholders ignores the many ways in which the DGCL focuses corporate managers on stockholder welfare by allocating power only to a single constituency, the stockholders.”

Strine methodically addresses various theories of shareholder-primacy circumvention and fervently rejects them all. However, he acknowledges one exception: “nothing has happened in Delaware outside of the enactment of the benefit corporation statute to provide practical power to any constituency other than stockholders.”

A Way Out

The BC form eliminates any uncertainty regarding the ability to pursue public-benefit ends. BC legislation unequivocally distinguishes BCs from shareholder-profit-maximization precedent and establishes some protection against its invocation.

To be clear, BCs are still governed by shareholder primacy. Shareholders remain the only constituency that may contest directors’ decisions; therein, BCs are still vulnerable to shareholder activism. However, BCs create a unique power for minority shareholders to protect benefit objectives. BC shareholders may initiate benefit enforcement proceedings to contest actions that conflict with stated non-profit commitments. Consequently, BCs tend to attract shareholders that support their impact objectives, further reducing profit-focused activism.

To date, only one benefit enforcement proceeding has been initiated: Pirron v. Impact Makers (Richmond Cir. Ct. 2019). After Impact Makers’ board removed founder Pirron and sold voting shares, presumably to subvert non-profit commitments, Pirron filed suit. The parties settled, reversing the sale, restoring Pirron’s position, and therein preserving Impact Makers’ commitments.

Towards Building a Proper Exit

As Strine stated, “the benefit corporation is a modest, but genuine . . . step forward.”

Direct regulation of harmful externalities would likely be a more effective method of reform. However, in its absence, permissive BC legislation offers a path to expand corporate accountability.

Support for this mission is gaining momentum. Impact investment is growing 10%+ annually, investing ~$500 billion in projects with public-benefit goals in 2019 (GIIN); according to GIIN’s 2019 Impact Investor Survey, 34% of respondents (investing $27+ billion) intentionally pursued below-market-rate returns to that end. Thousands of companies have formed as BCs despite inconveniences including reporting requirements. Many consumers willingly pay more for ethically produced goods; impact reporting empowers informed consumers and encourages impact-related competition.

Presumably, BCs will be insufficient to thwart imminent existential risks or end widespread extractive business practices. The direct effects may prove trivial.

Nonetheless, BCs represent a positive development with minimal risk of additional harm. BCs’ explicit rejection of shareholder-profit primacy marks resistance to a dangerous trend. BCs expand commitment to public benefits, protect against profit-driven opposition, and coincide with broader changes in norms: “Fortune 500 companies with concrete, ambitious carbon targets quadrupled in . . . four years, to 23%,” (NPR); Larry Fink declared that corporations must “shift the tide of short-termism afflicting our society,” (BlackRock Annual Letter); BCs are pressing BlackRock? to establish associated concrete objectives and accountability measures.

Hopefully, BCs foreshadow greater reforms to come and will serve as a catalyst thereof.