CHAPTER FIVE

The Model Benefit Corporation Legislation

Part 1 of this book has argued that conventional corporate law makes it difficult for corporations and investors to implement strategies that rely on commitments to stakeholders and that seek to manage critical social, environmental, and economic systems. In chapter 5, we begin to explore how the adoption of benefit corporation statutes addresses this concern. In particular, chapter 5 describes the operation of the Model Benefit Corporation Legislation, which was drafted and promoted by B Lab, a nonprofit organization that works to establish paths for business to operate as a force for good. Chapter 6 describes a second model, adopted in Delaware and several other states.

The Model Benefit Corporation Legislation eliminates shareholder primacy by requiring directors to consider a broad group of stakeholders when making decisions and by imposing a corporate purpose of creating a “general public benefit,” which must be measured against a third-party standard that addresses the interests of all relevant stakeholders. The statute makes benefit corporations accountable by (1) requiring them to report annually against that third-party standard and (2) allowing shareholders to bring lawsuits challenging whether that purpose is being met.

Prelude: The Benefit Corporation Movement

A NEED IS RECOGNIZED

A growing number of investors and entrepreneurs have become uncomfortable with the shareholder primacy model.¹ One response could be to follow the “constituency statute” model, which allows, but does not require, directors to consider the interests of stakeholders. These provisions are discussed in detail in chapter 9. However, constituency statutes do not fully address the concerns created by shareholder primacy because they only permit, but do not require, corporations to alter shareholder primacy behavior. By contrast, benefit corporation legislation requires a change in corporate purpose and creates accountability and transparency with respect to stakeholder concerns.

Beginning in 2010, U.S. jurisdictions began to adopt legislation authorizing benefit corporations. A majority of the legislation adopted has generally followed the Model Benefit Corporation Legislation. Since 2013, several states have adopted an alternative model originating in Delaware, which is the subject of chapter 6. Like constituency statutes, benefit corporation laws allow directors to consider the interests of all stakeholders, but unlike constituency statutes, they mandate such consideration, and provide mechanisms to create accountability for these interests.

The benefit corporation movement focuses on broad corporate purposes and on expanding the obligations of corporate managers to include the interests of all stakeholders. However, benefit corporation governance can also be conceptualized as a way to recognize that shareholders have interests beyond financial return.² Clearly, the models of benefit corporation statutes adopted to date encompass this concept to some degree, because while expanding purpose and obligation, they do not empower any constituency beyond the shareholders to enforce those expansions, either through litigation or through corporate governance rights. Alternatively, the benefit corporation legislation may be viewed through the lens of concession theory, in which the state’s interest in the public good must be satisfied by corporations in exchange for the privileges of limited liability, free transferability, and perpetual existence.³

Throughout this chapter and the rest of part 2, it is important to remember that all benefit corporation law is optional. None of the statutes discussed impose stakeholder governance. Instead, they provide an option, so that entrepreneurs and investors who believe that shareholder primacy is harmful, either to their business or to their portfolio, can choose another option. Thus, benefit corporation legislation does not impose stakeholder values on the corporate or investor community. Instead, by providing a viable option to shareholder primacy, the legislation allows entrepreneurs, investors, workers, suppliers, customers, and others to express a preference for accountable stakeholder governance, an option that was not available in the United States prior to 2010.

THE BIRTH OF THE BENEFIT CORPORATION AND THE DRAFTING OF THE MBCL

The MBCL was originally drafted on behalf of B Lab, a nonprofit corporation that promotes business as a force for creating positive social value.⁴ B Lab provides tools that assist businesses seeking to have positive impacts on all of their stakeholders. Among other programs, B Lab awards the trademarked designation Certified B Corp to companies that achieve high scores on its proprietary impact assessment tool. However, B Lab believes that even businesses with positive social and environmental performance should adopt a corporate governance structure that will ensure that impact performance is maintained, even through changes in management or ownership, control changes, or significant events such as initial public offerings. This belief arose from the understanding that shareholder primacy plays a dominant role in the current legal systems and capital markets, so that good impact performance is always at risk, especially in changed circumstances.⁵ In order to earn B Lab’s certification, businesses must make a legally binding commitment to pursue positive social and environmental impact, as long as it is legal to do so.

However, after consultation with a number of corporate lawyers, B Lab concluded that it was difficult for corporations to make legally binding commitments to stakeholders, particularly in states that had not adopted constituency statutes. In states with constituency statutes, they believed that it might be acceptable for corporations to add a provision to their articles of incorporation that turned the permissive consideration of stakeholder interests into a mandate to do so and to pursue a material positive impact on society and the environment.⁶ For limited liability companies (LLCs), a more flexible form of business entity, B Lab determined that binding commitments to stakeholders could be made in the operating agreement, the primary constitutional document of an LLC.

Although many businesses start as LLCs, a business often must migrate to the corporate form as it scales and seeks outside capital—many investors insist on the corporate form as a more reliable protector of investor rights. From B Lab’s perspective, then, there was a need to change the law so that corporations could make authentic, enforceable commitments to all stakeholders. This was especially true in states that did not have constituency statutes, but even where there was a constituency statute, the fix of changing “may” to “must” was imperfect. One concern is that the mandate does not have a statutory imprimatur, and, without a precedent interpreting a private ordering provision, the enforceability of the mandate is uncertain. In addition, without the specific director protections that are included in the benefit corporation statutes (as discussed in this chapter and in chapter 6), there could be an increased risk of liability for directors. Finally, there is the concern that if corporations must individually opt in to mandatory stakeholder obligations, there will be a lack of uniformity and it will be difficult for stakeholders to ascertain the strength of the corporate commitment.

In order to address this gap, B Lab asked William Clark, a corporate law partner at Drinker Biddle & Reath LLP (B Lab’s pro bono legal counsel) with significant experience in drafting entity law statutes, to create the MBCL.⁷ Once the statute was drafted, B Lab and Clark worked together to persuade legislatures around the country to adopt the provisions, and met with fairly rapid success. In 2010, Maryland became the first state to adopt a version of the statute, which was signed into law on April 13, 2010.⁸ B Lab’s white paper on the subject includes the following summary of its pitch to legislatures:

The sustainable business movement, impact investing and social enterprise sectors are developing rapidly but are constrained by an outdated legal framework that is not equipped to accommodate for-profit entities whose social benefit purpose is central to their existence. The benefit corporation is the most comprehensive yet flexible legal entity devised to address the needs of entrepreneurs and investors and, ultimately, the general public. Benefit corporations offer clear market differentiation, broad legal protection to directors and officers, expanded shareholder rights, and greater access to capital than current alternative approaches. As a result, the benefit corporation is also attracting broad support from entrepreneurs, investors, legal experts, citizens, and policy makers interested in new corporate form legislation.⁹

Largely through the efforts of Clark and B Lab, benefit corporation legislation has now been adopted in thirty-three jurisdictions within the United States.¹⁰ Five of those states (Colorado, Delaware, Kansas, Kentucky, and Tennessee)¹¹ have adopted a model with substantial differences from the MBCL (including use of the slightly different term “public benefit corporation”), and a similar model has also been recommended by the American Bar Association’s Corporate Laws Committee.¹² The Delaware model will be discussed in chapter 6.

Entrepreneurs are clearly excited by the opportunity to use this form. According to B Lab’s internal database, states report the formation of more than five thousand benefit entities, although states are likely overreporting the number in some cases.¹³ In Delaware, where very accurate numbers are reported, 927 benefit corporations have been formed as of May 2017.¹⁴ Although many of these are small companies, without outside investment, a number of these entities are large enterprises or have raised outside capital. Companies with well-known brands, including Plum Organics (infant food), Patagonia (outdoor wear), and Eileen Fisher (women’s fashion) are benefit corporations. Alliant International University is a large, for-profit education benefit corporation funded by Bertelsmann, a German media corporation. Haskell Murray reports on seven benefit corporations that have raised between $4.5 and $100 million from venture capitalists and corporations.¹⁵ In 2016, Laureate Education, a benefit corporation, raised almost $400 million in a private fund-raising round, including investment from Apollo Global Management, a leading private equity firm. Then, in early 2017, Laureate raised $490 million in the first initial public offering of a benefit corporation.¹⁶ In all, benefit corporations have raised more than $1 billion from venture and private equity funds, corporations, and the public markets.

It has been suggested that fiduciaries subject to strict rules, including institutional investors covered by the Employee Retirement Income Security Act, cannot invest in benefit corporations because such fiduciaries are required to seek the highest return possible for their beneficiaries.¹⁷ The concern is that the rules prohibit trustees from pursuing an investment for any reason other than maximizing returns; that is, such trustees should never be concessionary investors, as described in chapter 4. This concern is misguided. As we have seen, there are numerous non-concessionary reasons for using the benefit corporation form. Most importantly, even if a corporation is making a concession with respect to shareholder return by balancing stakeholder interests, it is a category error to attribute that concessionary view to investors. From the investor perspective, any internal corporate concession is simply an expense to be factored in, just like the expense of taxes in a high-tax jurisdiction or a charitable giving program engaged in by a conventional corporation. Indeed, a similar issue arose in the 1980s and 1990s, when a number of states adopted “constituency statutes” that permitted, but did not require, directors to consider the interests of all stakeholders (which we will discuss further in chapter 9). Researchers have found that the Employee Retirement Income Security Act and similarly situated fiduciaries did not alter their behavior with respect to investments in entities subject to these changed laws in any statistically significant way.¹⁸ This research strongly suggests that the fiduciary obligations of institutional investors do not require that they invest only in entities governed by shareholder primacy.

Provisions of the MBCL

A current version of the MBCL is maintained on B Lab’s website and is included here as appendix A. This draft has evolved since 2010, when the first statute was adopted, so some of this discussion may reflect the language that was in place when a majority of the statutes were adopted but that no longer appears in the MBCL. More importantly, each state has made changes from the MBCL in their statutes, so it is important to review the specific text of the relevant statute when advising a benefit corporation. The discussion here does not move sequentially through the statute but rather begins with the critical distinction that makes a benefit corporation different—the requirement that directors consider all stakeholders—and then discusses how that requirement is enforced and reported.

SECTION 301(A): THE HEART OF THE MBCL EXPANDS THE DUTIES OF DIRECTORS

Section 301(a) establishes a standard of conduct for directors that places all stakeholders at the center of governance. Most importantly, it mandates that directors consider the interests of a specific list of stakeholders as well as the ability of the corporation to accomplish its general benefit purpose (and its specific benefit purpose, if there is one). The definition of general benefit purpose is set out in Section 102 and is defined as “a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”¹⁹ Here is the text of Section 301(a):

(a) Consideration of interests.—In discharging the duties of their respective positions and in considering the best interests of the benefit corporation, the board of directors, committees of the board, and individual directors of a benefit corporation:

(1) shall consider the effects of any action or inaction upon:

(i) the shareholders of the benefit corporation;

(ii) the employees and work force of the benefit corporation, its subsidiaries, and its suppliers;

(iii) the interests of customers as beneficiaries of the general public benefit or a specific public benefit purpose of the benefit corporation;

(iv) community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or its suppliers are located;

(v) the local and global environment;

(vi) the short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation; and

(vii) the ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose.

Under Section 301(a), directors of a benefit corporation must consider the effect the corporation has on shareholders, employees, customers, the community where the corporation operates, the local and global environment, and its ability to create a material positive impact on society and the environment.²⁰ To the extent that officers of a benefit corporation have discretion, they are charged with taking the same interests into consideration.

Paragraph 2 of Section 301 goes on to provide that the board may consider other interests set out in the constituency provisions of the corporate statute (in states that have such a provision), or any other “factors or interests” the board deems “appropriate.” Finally, paragraph 3 establishes that the board is not required to prioritize among these interests, unless the corporation’s articles of incorporation provide for such prioritization: “[Directors] need not give priority to a particular interest or factor referred to in paragraph (1) or (2) over any other interest or factor unless the benefit corporation has stated in its articles of incorporation its intention to give priority to certain interests or factors related to the accomplishment of its general public benefit purpose or of a specific public benefit purpose identified in its articles.”

This language accomplishes two critical goals. First, it eliminates any argument that a benefit corporation is subject to shareholder primacy. Nevertheless, the white paper makes it very clear that the structure created is not intended to subvert the interests of shareholders but rather to place all interests, including those of shareholders, on equal footing:

It is important to note that shareholders are among the stakeholders whose interests the directors of a benefit corporation are required to consider; in fact they are listed first, and remain the only stakeholder entitled to bring a legal action against the corporation or its directors. Therefore, directors of benefit corporations may not simply disregard financial stakeholders in pursuing their stated purpose; rather they must balance the interests of shareholders as financial stakeholders with the enumerated other interests.²¹

Second, the language establishes that no particular stakeholder interest has primacy. This reinforces the general nature of a corporation’s public benefit purpose. In addition to eliminating shareholder primacy, it was important to the drafters that no other constituency be able to achieve primacy. For example, a governance model that subverted environmental interests to worker interests could create the same systemic risks as a regime that subverted environmental interests to shareholder interests. The white paper provides additional examples:

The entrepreneurs, investors, consumers and policy makers interested in new corporate form legislation are not interested in, for example, reducing waste while increasing carbon emissions, or reducing both while remaining indifferent to the creation of economic opportunity for low-income individuals or underserved communities. They are interested in creating a new corporate form that gives entrepreneurs and investors the flexibility and protection to pursue all of these public benefit purposes. The best way to give them what they need is to create a corporate form with a general public benefit purpose.²²

Despite the mandatory nature of the provision, it is important to emphasize that the mandate in Section 301 is procedural in nature. The director provision only mandates that the board consider a wide range of constituencies; it does not mandate any particular outcome.²³ In this respect, the MBCL follows the contours of conventional corporate law: courts protect shareholders not by second-guessing the substance of decisions but rather by ensuring that directors are acting consistently with their fiduciary obligations.²⁴ This is a critical point, and we will return to it in our discussion of other provisions of the MBCL that take a different approach, as well as the Delaware model.

SECTION 201: CORPORATE PURPOSE BEYOND VALUE MAXIMIZATION

Expanding corporate purpose to include achieving public benefits

Under conventional corporate law, corporations have power to take actions to the extent provided by statute. By the twentieth century, most corporations were incorporated with the power to engage in any lawful activity.²⁵ This avoided cumbersome “ultra vires” litigation, in which corporations, shareholders, or third parties might dispute whether certain activities were legally permissible for a certain corporation.²⁶ It is important to note that purpose clauses, including the modern broad purpose clause—define only the type of activities that corporations can undertake, not what their goal might be in undertaking those activities. This means that shareholders cannot bring lawsuits to enforce shareholder primacy as a matter of corporate purpose, because primacy is a matter of why a corporation undertakes activity, not what activity it undertakes. Instead, shareholder primacy is enforced through application of the fiduciary duty concepts, and not as a matter of corporate power (discussed in chapter 3).

Section 301 thus parallels conventional corporate law by focusing on fiduciary duties and board procedures to enforce the stakeholder mandate. There is, however, a deviation from this correspondence in Section 201 of the MBCL, which specifies that “a benefit corporation shall have a purpose of creating general public benefit.”²⁷ In addition, a benefit corporation may, in its articles, add a specific benefit purpose. Section 201 suggests that there is possibly a goal-oriented element to corporate purpose under the MBCL, which is quite different from conventional corporate law.

This suggestion is confirmed by the remedy provisions of the MBCL, which do call for substantive court review of the question whether a benefit corporation is satisfying its benefit purpose—even if the directors have satisfied their fiduciary duties. In this respect, the MBCL uses the concept of “purpose” very differently from conventional corporate law. This difference allows corporate action to be challenged as not adequately addressing stakeholder interests, even if the directors have satisfied their obligations with respect to all stakeholders. This aspect of the legislation is discussed further in the section on remedies.

General public benefit: Environmental and social concerns

Every corporation created under the MBCL has the purpose of creating “general public benefit,” defined as “a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit.”²⁸

The critical starting point for understanding the general benefit is the definition of “third-party standard.”²⁹ Although the board of a benefit corporation is entitled to select the standard, the statutory definition is rigorous. The most important aspect of the third-party standard requirement for this purpose is its comprehensiveness: the standard must address all of the interests that directors must consider under Section 301. The additional requirements of independence, credibility, and transparency (all of which are subject to judicial review) are intended to ensure that public benefit status will not be abused. Returning to the definition of general public benefit, the board (or court) is to look for a positive impact “on society and the environment, taken as a whole” assessed against that standard. The “as a whole” language, paired with the use of an assessment that includes the aspects that a board must consider under Section 301, conveys that all interests with which directors must concern themselves are to be considered in the creation of positive impact.³⁰

The term “as a whole” might be read to suggest netting all the positive and negative effects enumerated in the chosen third-party standard (which, by definition, would incorporate the stakeholder considerations required by Section 301). The white paper, however, initially indicates that it is only the positive effects that are to be included in the calculation:

Some observers have expressed concern that “material positive impact” takes no account of potential “negative impacts” of the business or operations of a benefit corporation. This is true and intentional. A “net positive impact” would imply that one could add and subtract impacts from diverse activities (e.g., add 2 units for reducing energy usage per unit of production, subtract 1 unit for a discrimination lawsuit, etc.) based upon some common unit of measure. Such a unit of measure does not exist and is unlikely to exist at least for a considerable period of time.³¹

This is a fair point as to level of difficulty, but it is somewhat difficult to reconcile with the entire program of introducing broad stakeholder responsibility as a fundamental aspect of corporate governance. Considering only the positive effects could lead a company to champion a few good practices—for example, paying employees well, reducing solid waste, and making contributions to charity—while ignoring other concerns—such as human rights issues in its supply chain, large outputs of greenhouse gases, and discriminatory hiring practices—and yet still claim to produce a “material positive impact.” The white paper suggests that use of third-party standards will ameliorate this concern and “moves the market closer to a desired net impact assessment.”³² Though the white paper is not explicit, this ameliorative effect presumably arises from the fact that negative impacts—such as those that arise from poor environmental or workplace practices—are likely to make it difficult to score well on a comprehensive third-party standard.

The best reading of the MBCL, the comments, and the white paper appears to be that the drafters did not contemplate any sort of rigorous mathematical netting process to arrive at a numerical benefit measurement but rather believed that the rigor of the definition of third-party standard, along with mandatory reporting, would force benefit corporations to do an analysis that did, in fact, account for negative effects on stakeholders, even if that accounting came in the form of failing to “score points” on an assessment of positive impacts.³³

Specific public benefit: Tightening the focus

MBCL Section 201(b) also gives corporations the option to add a specific public benefit to the corporation’s articles. “Specific public benefit” has a broad meaning, including a catchall: “conferring any other particular benefit on society or the environment.”³⁴ Each of the items listed in the definition, as well as any matter encompassed within the catchall, clearly come within the definition of general public benefit, so the efficacy of adding a specific benefit is not immediately clear. The MBCL is very clear that this additional purpose should not dilute the corporation’s general public benefit purpose.³⁵ However, this provision does allow a business to take on an obligation to achieve a particular goal that would not be mandated under the general public benefit obligation.

As with general public benefit, creation of the specific public benefit is deemed to be in the best interests of the corporation.³⁶ The term is then used throughout the statute, in parallel with general public benefit. Thus, the mandate under Section 301(a) that directors consider the ability of the corporation to accomplish its general benefit purpose is accompanied by an admonition to consider any specific benefit purpose in like manner. Similarly, Section 305(a) provides a substantive claim for failure of a benefit corporation to pursue or create its specific public benefit.

The option of choosing a specific public benefit might not be technically necessary, since anything that might be a specific public benefit would already seem to be included within the general definition that will be applicable to any benefit corporation that were to adopt a specific purpose. As we have seen, the white paper explains why it was important to mandate a general purpose, so that all stakeholders would be protected. It does not explain why, having determined that benefit corporations must pursue broad purposes, there was a need to also allow them to call out more specific purposes. The option of adopting specific purposes does provide an affirmative ability to supplement the broad aperture of general public benefit. If the creators of the corporation want to ensure that a particular interest—whether it is workers, stakeholders affected by climate change, or the local veterans population—are protected, there is no way to ensure that such a particular interest will play an important role in the general public benefit calculation. Thus, specifying a specific benefit is a way of making sure a fundamental interest does not get lost.³⁷

There may be a second, somewhat subtler reason for including a specific purpose: to create stronger accountability where desired. Because the pursuit of “general public benefit” is so broad, there may be concern that corporations could take on the benefit label, measure against a standard, but still effectively obfuscate the benefit creation question by setting one stakeholder against another. Thus, a company might do just enough to scrape by in its pursuit of benefit, or at least to make a court hesitant to second-guess the board’s conclusions. This is harder if the creators of the corporation include some specifics—such as greenhouse gas reduction or service to a particular underserved population. Interestingly, this is what appears to be behind the Delaware model’s requirement that PBCs elect a specific purpose to go alongside their general stakeholder obligations (as we will discuss in chapter 6).

THE IMPORTANCE OF REMEDIES UNDER THE MBCL

Two types of claim

One of the most important innovations under the MBCL is the creation of the “benefit enforcement proceeding,” a singular remedy for breaches of the stakeholder governance mandate. Section 102 defines such a proceeding as one to establish either that the benefit corporation failed in pursuing its benefit purpose or that the directors failed to adequately consider the interests of its stakeholders. Section 305 adds to this definition by limiting standing to bring such claims and by limiting corporate liability. Such a proceeding may allege:

(1) failure of a benefit corporation to pursue or create general public benefit or a specific public benefit purpose set forth in its articles; or

(2) violation of any obligation, duty, or standard of conduct under this [chapter].³⁸

In keeping with the distinction between substantive and procedural remedies discussed above, clause 2 is focused on whether a standard of conduct was met, rather than on actual outcomes. Clause 1, however, is focused on substance: Has the corporation itself failed to achieve (or to pursue) its benefit purposes? This is a critical departure from conventional corporate law—in some ways, as important as expanding the stakeholders who may be considered, because it changes the paradigm at the heart of corporate law.³⁹ Under that paradigm, a properly functioning board has the last word on business decisions. Allowing for substantive court review of independent board action represents a shift from the principles underlying the business judgment rule and gives courts a much stronger hand in corporate decision making. Despite the arguably radical conceptual change, the practical effect of clause 1 may be limited, due to its interaction with other provisions within the MBCL, as we shall discuss.

Exclusivity

The MBCL makes clear that the benefit enforcement proceeding is intended to be exclusive—it is the only remedy available with respect to general and specific public benefits, or with respect to the obligation to consider stakeholder interests (or certain other obligations we will discuss, such as reporting obligations).⁴⁰ Second, such a proceeding may be brought only directly by the benefit corporation itself, or derivatively by shareholders (or directors) of the corporation, or by an entity of which the benefit corporation is a subsidiary (unless the bylaws or articles of incorporation grant such a right to others). Corporate shareholders must own at least 2 percent of a class or series of stock in order to bring a claim; for parent shareholders, the ownership requirement increases to 5 percent of outstanding equity interests of the parent. Thus, other stakeholders cannot bring claims, and this limitation is consistent with the statement in Section 301 that directors do not have duties to beneficiaries of general or specific public benefits.⁴¹

The availability of the business judgment rule for fiduciary claims

The MBCL preserves the business judgment rule with respect to fiduciary claims:

A director who makes a business judgment in good faith fulfills the duty under this section if the director:

(1) is not interested in the subject of the business judgment;

(2) is informed with respect to the subject of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and

(3) rationally believes that the business judgment is in the best interests of the benefit corporation.⁴²

This statutory imposition of the business judgment rule suggests that to the extent that stakeholder interests are to be protected by reference to fiduciary duties (i.e., claims brought under clause 2 of Section 305[a]), litigation under the MBCL will focus in the first instance on the procedure at the board level and not on the substance of the board’s decision. As discussed in “The Business Judgment Rule” section of chapter 3, the business judgment rule strictly limits the ability of courts to second-guess business decisions made by disinterested directors. Unless a plaintiff can show that directors were conflicted, grossly negligent, or acting in bad faith, courts will not find a breach of duty, even if they disagree with the challenged decision and even if the results of the decision were disastrous.

Importantly, there is always room for some substantive showing under the business judgment rule, if the showing is made in order to demonstrate that the directors could not have met the procedural standard—that no rational, adequately informed person would have made the decision in question.⁴³ Moreover, if directors do have conflicts, a court may review the substance of a decision. Thus, a decision to support a charitable organization would likely be protected by the business judgment rule, but if it turned out that a controlling shareholder’s spouse was the executive director of the charity and that a majority of the directors were not independent of the controlling shareholder, a court might apply the entire fairness test and review the substance of the decision.

In light of the limitations on standing, the imposition of the business judgment rule, and the exclusive nature of Section 303, it appears that the statute is intended to focus actions against unconflicted directors on challenges to board process, thus paralleling the rules in conventional corporation law. The difference, however, is that a benefit corporation board is required to consider many more interests than a traditional corporate board. These additional considerations were discussed above, and they include workers, customers, community, the environment, and the corporation’s ability to accomplish its general benefit purpose.

Clause 1: The substantive claim—power to the courts?

Clause 1 of Section 305 provides that a claim may be brought for failure to pursue or create general public benefit. In such a proceeding, the business judgment rule will not apply, so that the court will not only be looking at whether the board was independent and followed all the right procedures. In such a substantive benefit proceeding, a court will instead determine whether the corporation is in fact pursuing or achieving a general public benefit, that is, a material positive impact on society and the environment as assessed against a third-party standard, as well as any specific public benefit set forth in its articles. This is potentially a radical change from conventional corporate law, giving courts greater reach into corporate decision making. Such a proceeding could examine several issues.

Did the corporation use a proper third-party standard? If shareholders bring a substantive benefit enforcement proceeding with respect to general public benefit under Section 305, the initial issue is likely to be whether the corporation is using a qualifying third-party standard. If the court were to find that the third-party standard chosen by the corporation did not satisfy the statutory standard, then it would appear that the shareholders would be entitled to relief. However, the only relief to which the shareholder would be entitled would be injunctive, as the statute exculpates benefit corporations from monetary liability in benefit enforcement proceedings.⁴⁴ Thus, a benefit corporation that was found not to have used a qualifying third-party standard to measure public benefit could be ordered to do so.

Must the corporation both pursue and create public benefit? What could be litigated if a court found that a corporation were using a qualifying third-party standard? The statutory test is creation of or pursuit of a general public benefit, as assessed against the standard (or a specific benefit listed in the articles). One initial inquiry is whether the test is disjunctive or conjunctive; in other words, what happens if a corporation pursues but does not create general public benefit? It seems unlikely that the drafters would have included the word “create” if there were not going to be an independent right to sue for failure to do so, even in the face of legitimate pursuit, since it seems extremely unlikely that there would be cases where a corporation achieved general public benefit without pursuing it. In other words, if the statutory standard could always be satisfied by adequate pursuit, there would be no need to include the term “create.” This is consistent with the white paper, which emphasizes that directors do not need to be concerned about monetary liability for failure to create general public benefit, because of the limitations on monetary liability (thus indicating that they did anticipate that shareholders could win some sort of relief where corporations failed to create public benefit).⁴⁵

Who sets the standard? The next question, then, is how a court would determine whether there has been “material positive impact” assessed against the qualifying standard. In order to analyze this question, it is necessary to return to the third-party standard definition discussed earlier. In particular, it must be a “recognized standard for defining, reporting, and assessing corporate social and environmental performance.” This language could be interpreted in three ways. First, it might be that the “assessment” aspect falls entirely on the corporation. That is, the standard need not include an assessment or a “score” but merely elicit enough information to allow the board (and, in a substantive proceeding, the court) to perform an assessment. Second, it might be that the standard should include a scoring mechanism but the board (or court) may determine whether any particular score signals achievement of general public benefit. Finally, the strictest interpretation would be one that contemplated that there must be a score and that the board (or court) must accept the standard setter’s interpretation of whether the score represents a passing grade.

Two commentators suggested the latter, strict interpretation under a prior version of the MBCL. The initial version of the MBCL included the word “as” in the general public benefit definition, so that a corporation needed to have “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.” The commentators’ article, published in 2013, claimed that the word “as” created an ambiguity, suggesting that if a benefit corporation did not meet the requirements of its third-party standard, it would not have created general public benefit, as defined. In order to address this ambiguity and clarify that corporations and courts had greater flexibility, the authors proposed that the MBCL be changed to drop the word “as.”⁴⁶

The offending word has indeed been dropped from the MBCL. This still leaves the question whether there needs to be a system of assessment built into the standard, even if there is no concept of ranking or passing. Although the words of the MBCL might be read to suggest such a requirement, the better reading appears to be that no such system is required, and this is consistent with the white paper. The white paper names several standards that will meet the requirements of the MBCL, including the Global Reporting Initiative, Underwriters Laboratories ISO 26000, and B Lab’s B Impact Assessment. Although the B Impact Assessment made available by B Lab does provide for scoring, the other two do not.⁴⁷

Putting all of this together, it appears that a challenge under clause 1 of the benefit enforcement proceeding provision would examine the following issues:

1. Did the third-party standard meet the statutory definition?

2. Has the corporate process for satisfying its purpose of creating general public benefit taken into account all relevant factors from the standard?

3. Does the corporate goal for performance, if satisfied, create an actual positive impact, and has the company in fact pursued that goal?

4. Has the corporation met its goal, or otherwise created material positive impact?

Items 3 and 4 would both need to be satisfied if the “pursue or create” language were read to create a conjunctive test, while satisfying either would satisfy a disjunctive test. There are policy arguments that favor both interpretations. The strongest argument for a conjunctive test is that simply “trying” is not enough, and, moreover, is especially hard to measure. In order to prevent greenwashing, the argument runs, courts must be able to determine whether a company is in fact meeting its purpose. This argument draws some support from the fact that the only relief the statute contemplates is injunctive, so that the only result of a finding of liability for failure to create adequate benefit would be an order to do so, and, where the court found it appropriate, a mandatory injunction prescribing specific steps. For example, a particularly poor environmental performer might be enjoined to take specific actions with regard to reducing use of, reusing, and recycling nonrenewable resources.

On the other hand, it might be argued that the better policy would be to enforce the provision disjunctively. First, if a court were to find that a corporation had created adequate benefit for stakeholders, it would seem downright churlish to criticize them for not pursuing what they actually achieved. On the flip side, it would seem that if a corporation were in fact pursuing stakeholder benefits but was failing to achieve them, issuing an injunction would seem out of place. However, there may be less to this distinction than meets the eye. “Pursuing” without taking realistic steps to succeed should not be countenanced, but at the same time, failing to create benefit after putting in adequate effort is analogous to a well-functioning board taking calculated risks but failing to make a profit. Consider, for example, a company where a large element of benefit was a product that would allow customers to reduce energy use. If the product ultimately failed, would it make sense to find the company in breach of its benefit duties? This is likely to be an area where case-by-case development leads to the best law. The absence of risk of personal liability should ensure that directors are not discouraged from continuing to take entrepreneurial risks in creating general public benefit, even with this existing uncertainty.

A similar analysis should apply with respect to the “netting” question discussed earlier in relation to MBCL Section 201. Rather than viewing this as a simple binary issue, there is likely to develop a more nuanced case law that recognizes that significant failure to address one or more critical negative impacts arising from a corporation’s conduct, when viewed through the lens of a comprehensive third-party standard, prevents it from claiming to have met the statutory standard.

TRANSPARENCY

The MBCL requires corporations to prepare and make available an annual benefit report.⁴⁸ This transparency requirement is a critical feature of the statute. Without some type of reporting, it would be very difficult for shareholders and other stakeholders to know whether a benefit corporation is in fact pursuing and creating public benefit.⁴⁹ There are three specific elements to the transparency requirement. First, the report must be sent to each shareholder. Second, the report must be posted on the website of the corporation or, if the corporation does not have a website, made available without charge to any person who requests it. Finally, the report must be filed with the corporate filing office. Although most states that have adopted the MBCL follow the first two requirements, more than half have not adopted the state filing requirement.⁵⁰ In addition, several states have added express penalties for failure to file the report.

There are really two critical elements to the transparency standard. The first, discussed earlier, is the third-party definition, which establishes the criteria for selecting a third-party standard against which to measure benefit performance. The second element is the annual benefit report itself.⁵¹ The report has three critical pieces: a narrative, an assessment, and a compliance statement. In addition to these three elements, the annual report must include the name of the benefit officer and director, where applicable, and the compensation paid to directors.

In the narrative section, the report must detail the ways in which the corporation pursued and the extent to which it created general public benefit (as well as specific public benefits, if it has any). The narrative portion must also detail any circumstances that have hindered creation of benefit. The narrative must also explain the reasons for choosing the third-party standard used to assess performance. Next comes the heart of the report: the “assessment of the overall social and environmental performance of the benefit corporation against a third-party standard.”⁵² The compliance statement affirms that the corporation and the directors are properly pursuing benefit purposes.⁵³ For corporations that have a benefit director, the annual compliance statement is to be made by this director.

BENEFIT DIRECTORS AND OFFICERS

The MBCL permits the board of directors to include a benefit director, who must satisfy certain independence requirements.⁵⁴ Some states have adopted a requirement that there be a benefit director, or require such a director if the company is publicly traded. The only extra responsibility of a benefit director is the provision of an annual compliance statement, which must be included in the annual benefit report. The statement must indicate whether the corporation acted in accordance with its benefit purposes and whether the directors and officers acted in accordance with their obligations to consider the interests of stakeholders, and it must describe any failure to so comply. The MBCL also permits the designation of a benefit officer, who has the responsibility to prepare the annual benefit report and undertake any other duties related to public benefit that are delegated in the bylaws or by the board.

OPTING IN AND OUT

The MBCL requires a two-thirds vote of shareholders, by class, to authorize a transaction in which a corporation becomes a benefit corporation. The same vote is required for a transaction in which the benefit corporation ceases to be a benefit corporation or sells substantially all of its assets.⁵⁵ Unlike the Delaware benefit corporation statute, which will be discussed in chapter 6, the statute does expressly require a supermajority vote when a corporation is acquired in a merger and its shareholders receive stock in a benefit corporation. However, a supermajority role is required in a merger of a conventional corporation if the “surviving, [new, or resulting]” entity is to be a benefit corporation; this language could arguably apply to such a transaction. Some states have varied the vote requirement to bare majority, 75 percent, or 100 percent.⁵⁶

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In the next chapter, we will turn to the second important model of benefit corporation law, which was first adopted in Delaware in 2013.