No Good Deed

It is becoming easier than ever to form a benefit corporation.  Clerky has a simple incorporation package for a reasonable price and Cooley Go has a DIY set of forms that anyone can use.

Some Lawyers Are Still Uncertain

But some lawyers- even some who are at the forefront of social enterprise law and benefit corporation governance- continue to sound a note of caution when it comes to using the benefit corporation form when companies are contemplating a financing or considering an IPO. The concern they express is that while benefit corporation directors must balance the interests of stakeholders with those of shareholders, there is no case law interpreting that obligation. Thus, they worry that benefit corporations will face uncertainty in litigation.

Delaware Law Addresses the Uncertainty

But the Delaware statute is carefully drafted to preserve the business judgment rule so that directors of Delaware benefit corporations who inform themselves about relevant environmental and social concerns, and who act rationally (a particularly low bar), will generally not be second-guessed by courts. (The story is a little more complicated in states that do not use the Delaware model.)  Moreover, even if the business judgment rule is not effective in a particular transaction, the Delaware statute allows benefit corporations to eliminate monetary liability for disinterested balancing decisions, so that the only relief would be injunctive. (In addition, there is plenty of case law decided under constituency statutes, which gives some pretty good indications as to how courts will treat benefit corporations; this law review article does a great job of summarizing these cases.)


The Risk of Not Being a Benefit Corporation

But more importantly, the equation is not simply about added risk for benefit corporations. Remember that the primary aspect of benefit corporation law is to unambiguously eliminate a risk: namely, that shareholders will challenge a board decision as being made for the benefit of stakeholders, rather than shareholders.  Indeed, that is exactly what happened in the eBay case, where the Delaware Chancery Court voided board action because it found that the directors of craigslist were trying to protect their community of users, rather than maximizing shareholder value.

This case should be unnerving for public companies directors who want to take a moral stance, whether against human trafficking, climate risk or political opportunism, or who simply want to assert that their customers come first. While directors may be able to argue that their position ultimately benefits shareholders for reputational or other reasons, some shareholders (especially those who disagree with the politics of the corporate position) may claim that the company is just “doing the right thing,” and seek to punish the directors for the good deed.

A Call For Lawsuits That Challenge Ethical Behavior

Indeed, last month, when CEOs left the White House Council on Manufacturing, two writers in the Wall Street Journal {subscription required} called for shareholders to sue them for breach of fiduciary duty. The writers similarly called for shareholder suits against the management of Target for adopting an inclusive bathroom policy.

Would such suits be successful?  It is certainly possible in a conventional corporation.  At a minimum, there could be discovery to look into the directors’ motives, and a risk of monetary liability for directors acting in “bad faith” by putting public interest over profit.

But there is no such risk in a Delaware benefit corporation. That’s because in a benefit corporation, directors are required to consider the interests of customers and the community as ends unto themselves, and not merely as ways to make more money.

Are there risks to being a benefit corporation?  Perhaps, but lawyers must remember that there are real risks to not being a benefit corporation, and those risks will only become greater as companies try to negotiate a landscape in which there is increasing pressure on corporations to act as good citizens, and not simply as engines of profit. It is benefit corporations, and not conventional corporations, that are designed to survive litigation attacks as expectations for corporate social responsibility mature.

Leave a Reply