A fundamental tenet of corporate law is that a business
corporation is organized and carried on for the benefit of its stockholders.
In recent times, an increasing number of for-profit organizations have
formed in order to pursue social and environmental goals. There is a growing investor
movement toward the financial support of organizations that have social
benefit purposes at the center of their existence. However, it may be difficult
for directors and officers of these organizations to pursue these social
purposes without running afoul of traditional fiduciary duties requiring
corporate managers to maximize shareholder value.
In order to address these concerns, a group of lawyers
and academics have proposed a new form of enterprise, the benefit corporation. The idea
behind this organizational form is to create an enterprise that can utilize the
tools of business financing and management to address social and environmental
issues. In order to deal with the legal issues involved with organizing a
business enterprise for broader goals, the proponents of this idea have crafted
Model Benefit Corporation Legislation.
Since 2010, the model legislation has been adopted in
whole or in part in seven states, including California, New Jersey and
Virginia, and is under consideration in a number of others. New York's version became
law on February 10, 2012. Although the model legislation's provisions
address a number of issues, the "heart" of the model benefit corporation legislation
is its provisions addressing concerns related to potential director and officer
In this post, I examine the circumstances that have led
to the proposal for the development of the benefit corporation concept; the
specifics of the organizational form described in the Model Benefit Corporation
Legislation; and the aspects of director and officer liability addressed in the
legislation. I conclude with my thoughts about the proposed organizational
form, including the implications from both a liability and insurance
My analysis of these issues relies heavily on the
November 16, 2011 paper entitled "The Need and Rationale for the Benefit
A number of contributors participated in the creation of this document,
but the paper's principal authors are William H. Clark, Jr. of the
Drinker Biddle law firm, and Larry
Vranka of Canonchet Group LLC. I also refer below to the Model Benefit
Corporation Legislation, which can be found here.
Information about benefit corporations generally can be found at the Benefit Corporation Information Center.
The January 7, 2012 article in The Economist magazine the first piqued
my interest in benefit corporations can be found here.
Two recent trends have come together to create the need
for a new form of business enterprise. On the one hand, there is a growing
class of investors joining the socially
responsible investing movement. These investors hope to create a direct
social impact through targeted equity and debt investments. (A November 2010
J.P. Morgan study on impact investing can be found here.)
On the other hand, for-profit social entrepreneurs, who are interested in
pursuing mission-driven businesses, are increasingly common.
An earlier initial response to these developments was the
2007 formation of the B Lab, a
non-profit organization whose purpose was to devise and implement a
certification system for companies interested in distinguishing themselves in
order to try to attract the socially focused investors. B Lab promulgated a
number of certification standards for these companies. The difficulty is that
these standards were to be adopted within the existing legal framework.
A critical component of the existing legal framework is
the basic principal that business corporations exist to maximize shareholder
value. This principal constrains the ability of businesses, at least within the
existing framework, to consider the interests of constituencies other than
shareholders. To be sure, a number of states, in response to takeover
battles in the 80's, did implement so-called "constituency"
statues that enable boards and senior company officials to take in account
community interests when considering a takeover bid. Unfortunately, among
the states that have not adopted constituency statues is Delaware, the place of
incorporation for many companies. In addition, even in the states that have
adopted constituency statutes, there is a dearth of case law interpreting the
statutes, and so there is very little guidance on what other interests a board
may consider and to what extent. In addition, constituency statutes are often
merely permissive, not mandatory.
Owing to the absence of clear legal standards in these
areas, directors may be hesitant to consider social goals or the interests of
other constituencies for fear of breaching their fiduciary duties to
shareholders. The legal uncertainties and need for greater clarity have led to
the proposal of a new form of business enterprise to address the needs of
for-profit mission-driven businesses.
The Benefit Corporation
In order to address the legal concerns, reformers have
proposed the benefit
corporation. The three distinct aspects of the benefit corporation are that
it has 1) a corporate purpose to create a material positive impact on society
and the environment; 2) expanded fiduciary duties of directors that require
consideration of nonfinancial interests; and 3) an obligation to report on its
overall social and environmental performance as assessed against third-party
These attributes are embodied in the Model Benefit
Corporation Legislation, which has provided the basis for the benefit
corporation statues that have been enacted in the seven states. (The seven
states are Maryland, Hawaii, Vermont, Virginia, California, New Jersey and New
York. Four other states are currently considering similar legislation.)
Under the model legislation, the benefit corporation is required
to have a purpose of "general public benefit" and allowed to identify
one or more "specific public benefit" purposes. The model legislation lists
seven non-exhaustive possibilities for specific public benefit goals, which
include: providing products or services to low income individuals; providing
economic opportunities for individuals or communities; preserving the
environment; improving human health; promoting the arts or sciences; increasing
the flow of capital to public benefit enterprises; or the accomplishment of any
other particular benefit to society or the environment.
The model legislation further provides that in
considering the best interests of the corporation, the directors of the
corporation "shall consider the effects of any action or inaction" on the shareholders;
the employees of the corporation; the customers; community or societal factors;
the local and global environment; the short-term and long-term interests of the
benefit corporation; and the ability of the benefit corporation to accomplish
its general and specific benefit purposes.
In addition to providing this broad array of factors
directors must consider, the model legislation provides certain protections for
the benefit corporation directors (and officers). First, the model legislation
provides that consideration of the interests of all stakeholders shall not
constitute a violation of the general fiduciary duty standards for directors.
Second, the model legislation expressly exonerate the directors and officers
from monetary damages for any action taken in compliance with the preexisting
standards for director duties; and for the failure of the benefit
corporation to pursue or create its stated general or specific public benefit.
These provisions are intended to eliminate directors' concerns that they could
face damages liability for the enterprise's failure to fulfill its purposes or
for considering the interest of constituencies other than shareholders.
The model legislation does provide for a form of
injunctive relief action, to require the benefit corporation to live up to its
commitments. Under these provisions, shareholders have the right to bring a
legal action in the form of a "benefit enforcement proceeding" on the grounds
that a director or officer has failed to pursue the stated general or specific
purpose or failed to consider the interest of the various stakeholders
identified in the statute. However, only shareholders or directors can bring a
benefits enforcement proceeding; beneficiaries of the corporation's public
purpose have no right of action. The exclusion of any right of action by third
parties protects the benefit corporation from unknown, expanded liability that
might create disincentives to becoming a benefit corporation
The purpose of the benefit corporation is to provide an
appropriate enterprise vehicle for for-profit mission-driven businesses. Among
the objectives in structuring the benefit corporation form is the need to
address critical issues regarding the duties and potential liabilities of
directors and officers. The key objectives of the model legislation are to
ensure that directors and officers of the benefit corporation do not incur
liability for considering the interests of constituencies other than
shareholders and to ensure that the directors and officers do not incur
monetary liability for allegedly failing to fulfill the organization's general
or specific benefit purposes.
It is important to note that although the model
legislation provides that the directors and officers cannot be held liable for
damages under the benefit corporation provisions, the benefit corporation
provisions do not exempt the directors and officers from liability for
violating general standards of fiduciary care. The exemption from monetary
damages in the model legislation provide only that directors is "not personally
liable for monetary damages for (1) any action taken as a director if the
directors performed the duties of office in compliance [existing statutory
provisions specifying the duties of directors generally]; or (2) failure of the
benefit corporation to pursue or create general public benefit or specific
public benefit." Parallel provisions provide similar protections for
The point is that the exemption from monetary damages
under the benefit corporation provisions does not exempt the directors and
offices from claims for damages for violation of their general fiduciary
duties. By the same token, however, the model legislation specifies that the
directors and officers of the benefit corporation cannot be held liable for
considering the interests of constituencies other than shareholders.
The model legislation does provide for a "benefits
enforcement action," for shareholders to pursue injunctive relief if the
organization is not pursuing its benefits objectives or providing required
reporting. Even though this action does not allow for damages, it does create a
context within which defense costs could be incurred.
In other words, not withstanding the liability
protections in the model legislation, directors and officers of a benefit
corporation continue to face the possible liability exposures and defense
As a for-profit venture organized to pursue a public
good, a benefit corporation does not really fit within the usual D&O
insurance framework, which divides the world between non-profit and commercial
enterprises. In addition, the benefit corporation regime has unique aspects
that could have insurance implications, such as the possibility of a benefit
In just over two years, seven states have enacted
legislative provisions allowing for benefit corporations. Implementing
legislation is under consideration in several more states. It seems likely that
adoption of benefit corporation legislation will become more generalized in the
months and years ahead. It also seems likely that as the benefit corporation
form become more widespread that insurers will be called upon to address the
insurance needs of this new type of enterprise. The unique features of these
organizations raises the possibility that new insurance solutions, targeted to
the unique needs of these kinds of companies, will be required.
In any event, benefit corporations represent an
interesting innovation on the corporate enterprise landscape. If, as seems
likely, more states adopt benefit corporation enabling legislation, the issues
involved in addressing these companies' insurance requirements will become an
increasingly common concern.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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