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INTRODUCTION TO US BENEFIT CORPORATIONS: US Subsidiaries of Foreign Parents Doing Good by Bridging Profitability and Responsible Business – PART II

Posted on February 15th, 2017 | Author: Michael J. Locke

Part II: Legal Structure and Requirements

As discussed in Part I of this series, business owners are increasingly choosing to pursue the B-corporation form to combine their companies’ for-profit and public benefit purposes.  B Lab, the independent non-profit that certifies B-corporations’ social and environmental benefits, recently reported increased instances of B-corporations forming outside the United States, and the B-corporation form may also help attract investors from around the world.  Here, we focus on the legal structures and requirements of B-corporations authorized by New Jersey law, an early adopter of the B-corporation form.

Some may argue that the business-judgment rule already permits companies to pursue socially conscious and environmentally friendly goals when deemed to be in the best interest of the company.  For some business owners, however, it may not be enough that they are permitted to do good when it may benefit the company.  New Jersey’s B-corporation statute requires officers and directors to consider various social concerns when making business decisions because, in addition to the company’s for-profit purpose, every B-corporation must also have the purpose of creating a general public benefit.  It can even identify one or more specific benefits to pursue in its certificate of incorporation.

Like a traditional corporation, B-corporation directors and officers are also required to act in the best interest of the company.  However, unlike a traditional corporation where the “best interest of the company” is defined by maximizing shareholder profit, decision-making for the B-corporation must also include consideration of impacts to employees and suppliers, effects on the community and society, and effects on the local and global environment.  Of course, there is no requirement that the ultimate decision always benefit a non-business concern.  And there is certainly no requirement that the company act contrary to its best interest.

Also like a traditional corporation, the B-corporation provides insulation from personal liability.  Therefore, the major benefit of B-corporation status is that it allows a company to pursue its business, social, and environmental goals in tandem with greater flexibility than a traditional corporation and without fear of a shareholder lawsuit when the company pursues its declared public benefit.  A good example of this concept is the “1% for the Planet” collective.  1% for the Planet is an organization that connects for-profit businesses with grassroots environmental causes.  The group’s members commit to contribute 1% of gross sales to environmental advocacy groups.  In the case of a traditional corporation, a shareholder may argue that this commitment violates the directors’ or officers’ responsibility to maximize shareholder profits.  The traditional company would then have to argue that, under the business judgment rule, the 1% commitment will benefit shareholders in the long run.  For a B-corporation, such a lawsuit would be significantly more difficult, if not impossible, for the shareholder, and the B-corporation would probably avoid lengthy litigation on the matter.

Perhaps the largest structural difference between traditional and B-corporations is the requirement that one independent director be designated the “benefit director.” He or she must make an annual statement to shareholders whether, in his or her opinion, the company acted in accordance with its public benefit purpose.  This statement is included in the B-corporation’s “annual benefit report,” which includes a description of the ways the company pursued and created general or specific public benefits and an assessment of the company’s social and environmental performance.  The B-corporation may also designate a “benefit officer” to perform managerial duties in pursuit of the B-corporation’s general or specific public benefits and to prepare the annual benefit report.

Ultimately, B-corporation status gives socially and environmentally conscious business owners greater flexibility, and the marketing benefits of this status can be enormous.  Many consumers specifically seek out companies that make it their mission to help the community and the environment.  B-corporation status formalizes those efforts and reassures customers that part of their purchase provides a public benefit.

If you have any questions about this post, please contact me at mjlocke@nmmlaw.com.