Benefit Corporations

What if you hate corporate greed but also kind of want a yacht?

Public benefit corporations provide a middle ground. They are for-profit corporations that expressly allow the managers to balance the pursuit of profits with some benefit to the public. For example, Patagonia sells backpacks at an estimated 50% margin but gives millions each year to protect the environment.

Public benefit corporation laws vary by state, and incorporation isn't concentrated in Delaware. But because Delaware is a good model, we'll focus on its law here.

Formation

To form a public benefit corporation, you draft a charter that states any public benefits you plan to pursue. DGCL § 362(a). For example, Patagonia has six public benefits that include funding environmental protection, supporting their employees and reducing waste in the product life cycle.

What constitutes a "public beneift" is broadly defined, and covers anything artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological. DGCL § 362(b).

Governance and Reporting

Directors of a public benefit corporation are required to balance profits, the corporation's public benefit and the effect of the corporation's actions on its stakeholders.

But it is a bit toothless. Absent some conflict of interest, the directors can be exculpated from liability for mismanging this balance. DGCL § 365(c). To the extent it is not exculpated, shareholder can sue, but they are likely to run against the business judgment rule. DGCL § 367. And the law does not give standing to folks that are supposed to benefit from the public purpose. DGCL § 365(b). So if my public benefit corporation pledges to help orphans, but instead buys me a corporate yacht, the orphans can't sue.

The primary driver of accountability is transparency. Every two years the public benefit corporation reports on how it is creating a public benefit and affecting its stakeholders. DGCL § 366. This report includes the corporations objectives, standards for measuring success, objective facts showing its progress and an assessment of its success in promoting its public benefit.

These reports are fashionable even among strictly for-profit corporations, which makes one wonder what place these entities have other than marketing.