With the Emergence of Public Benefit Corporations, Directors of Traditional For-profit Companies Should Tread Cautiously, but Welcome the Opportunity to Invest in Social Enterprise

• Publication year: 2014

SEATTLE UNIVERSITY LAW REVIEW Volume 38, No. 2, WINTER 2015

With the Emergence of Public Benefit Corporations, Directors of Traditional For-Profit Companies Should Tread Cautiously, but Welcome the Opportunity to Invest in Social Enterprise

McKenzie Holden Granum(fn*)

I. INTRODUCTION

With an increase in social entrepreneurship taking place over the past decade, state legislatures have felt a growing demand to adopt new corporate governance structures that align with the various objectives of U.S. companies. Social entrepreneurship, or social enterprise, has become the popular term used to describe business forms that aim to produce profits while also seeking to significantly advance one or more social or environmental goals.(fn1) Today, "[t]he idea of using business to create social and environmental value alongside profits has reached nearly every sector of the economy . . . ."(fn2) Social entrepreneurs can be found not only in progressive industries like organic farming and renewable energy, but also in more conservative industries such as insurance and banking.(fn3) Leading proponents of this new business form have successfully lobbied state legislatures across the country to recognize the entrepreneurs' desire for new corporate governance structures.(fn4) Ben & Jerry's, Patagonia, and Seventh Generation are just a few of the well-known companies that pushed their respective states to adopt what is being called "benefit corporation" legislation.(fn5) Their efforts are particular examples from a movement that has resulted in nineteen states adopting some form of "benefit corporation"(fn6) governance status within existing corporate codes.(fn7)

In the spring of 2010, Maryland and Vermont became the first states to enact benefit corporation legislation,(fn8) with California, Hawaii, New Jersey, Virginia, and New York following suit in 2011.(fn9) New legislation has allowed incorporating businesses to choose an off-the-shelf formation type that better aligns with the ideals of its own goals and embeds a social mission into its legal structure. It has also provided a path for existing incorporated businesses to amend their corporate charters to become benefit corporations.(fn10)

The bulk of the newly implemented statutory forms provide not only a new framework for social entrepreneurs to work within, but also an indication to socially conscious investors, consumers, and business partners that these businesses are obligated and dedicated to operating in a responsible and sustainable manner-in addition to their duty to generate shareholder profits. Public Benefit Corporations (PBCs) are generally formed in the same manner as traditional for-profit companies;(fn11) however, a PBC entity is usually required to identify in its certificate of incorporation a statement of purpose identifying one or more specific public benefits to be promoted by the corporation, and the entity must have a name that clearly identifies its status as a PBC.(fn12)

The compulsory notice requirement in a company's certificate of incorporation announces to the world, and particularly to interested investors, that the PBC's purpose may not align with the profit-driven business form shareholders have come to expect.(fn13) As the number of PBCs continues to increase across the country(fn14)-indicating that this form is gaining traction and becoming somewhat popular among new business founders and even consumers-many unknowns exist regarding how individual and institutional investors will respond.(fn15) In traditional for-profit corporate governance structures, directors arguably have a general duty to maximize shareholder value, and, at a minimum, have a duty to advance the long-term interest of stockholders.(fn16) In drafting PBC statutes, advocates of social enterprise and supportive legislators intended to avoid the presupposed mandate for corporations to solely maximize shareholder wealth as a matter of corporate purpose.(fn17) PBCs are supposed to operate not just for the benefit of the shareholders, but directors of these entities must aim to make decisions that are in the best interest of society as a whole, as well as the bottom line.(fn18)

Currently, hundreds of private companies throughout the United States have formed or converted into PBCs, but no publicly traded company has embraced the PBC form.(fn19) With Delaware enacting new legislation enabling the formation of PBCs in August 2013,(fn20) Campbell Soup Company (Campbell) became the only publicly traded corporation in the United States with a wholly owned subsidiary that is a PBC.(fn21) Plum Or-ganics, PBC (Plum Organics) was acquired by Campbell in May 2013, and while Campbell has stated that it embraces Plum Organics' mission and efforts under the PBC form, questions remain about how Campbell will be able to align the PBC principles of the subsidiary while responding to its own shareholders' concerns regarding the pressures of quarterly and annual balance sheets.(fn22)

This Note addresses the prospective risk that traditional shareholder expectations could dissuade directors of publicly traded for-profit companies from investing in and acquiring PBCs as wholly owned subsidiaries; specifically, because inconsistent corporate purposes between a parent company and its subsidiary could result in an unprecedented new type of director liability. Part II of this Note begins by presenting background information on the Delaware PBC statute. It also provides a brief overview of the differing duties between directors of traditional for-profit corporations and those of PBCs in fulfilling corporate purposes. Part III analyzes the potential for shareholders of a parent company to enjoin directors from investing in or acquiring a PBC as a wholly owned subsidiary. Part IV explores the ability of shareholders to select investments in a publicly traded parent company for the sole purpose of bringing a double derivative lawsuit on behalf of the parent company to enforce certain social expectations on behalf of a PBC subsidiary. Part V acknowledges several steps that directors of publicly traded companies should consider before approving plans to embrace a PBC entity within its web of subsidiary businesses. Finally, Part VI provides a brief conclusion.

II. DELAWARE AND ITS PBC LAW

Part II discusses how Delaware introduced and adopted PBC legislation, and notes the impact that Delaware's leadership in corporate law may have on future issues related to PBCs. Additionally, it discusses facial differences in Delaware's new PBC law that are of importance when discussing corporate purpose and the governing duties of directors.

A. Delaware's Adoption of PBC Law

PBC legislation was introduced under Senate Bill 47 on April 18, 2013, in the 147th Delaware General Assembly.(fn23) Senate Bill 47, entitled An Act to Amend Title 8 of the Delaware Code Relating to the General Corporation Law, would enable the formation of PBCs in Delaware.(fn24) The Bill was lauded by Senator David Sokola, who stated that he was proud to sponsor legislation that gave "corporations a way to rebuild public trust in business by ensuring that the benefits of their work extend[ed] beyond their stockholders and managers."(fn25) The bill received bipartisan support upon its introduction, and unanimous approval in both the State House and Senate followed.(fn26) Upon signing the bill, Delaware's Governor also issued the following statement of support: "With the addition of Public Benefit Corporations, Delaware will continue to be a leader and support a new movement of social entrepreneurs and investors who are stepping forward to meet high standards of corporate purpose, accountability and transparency."(fn27)

On August 1, 2013, Delaware's PBC legislation went into effect, and businesses began to file the necessary paperwork to form PBCs in accordance with the new law.(fn28) In total, seventeen businesses filed to incorporate as PBCs on the first day of enactment.(fn29) More than 110 businesses incorporated as PBCs in the State of Delaware between August 1, 2013 and December 31, 2013.(fn30)

B. Delaware's Leadership in Corporate Law

Delaware is the home of more than one million legal entities and many of the nation's largest businesses.(fn31) And because Delaware is also home "to most venture-backed businesses, 50% of all publicly-traded companies, and 64% of the Fortune 500, it is the most important state for businesses that seek access to venture capital, private equity, and public capital markets."(fn32)

But beyond the numbers, Delaware's leadership in corporate law derives from its "well-established body of precedent, its highly regarded judiciary, . . . its supposed tilt (or lack thereof, depending on one's viewpoint) toward management or investors. Delaware's bench also has the advantage of having so many opportunities to address critical corporate law issues."(fn33) Accordingly, Delaware has arguably the most developed body of corporate common law jurisprudence dictating the appropriate application of fiduciary principles.(fn34) Furthermore, recent rulings from Delaware's Court of Chancery regarding the matter of corporate purpose will likely influence how shareholders today view their position within the concept of the firm.(fn35)

As a result of Delaware's dominance over these matters, it is natural for business lawyers, scholars, and the rest of the country to look to its courts for guidance in the...