John Gentile
In 2013, Delaware adopted legislation permitting the formation of “public benefit corporations.” Delaware joined the growing number of states addressing the growing demands of business leaders, investors, social activists and others looking for an alternative to the business corporation solely operated to make money for shareholders. Under Delaware law, a public benefit corporation is “a for-profit corporation . . . that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”
The Delaware legislature will soon be considering several amendments to the public benefits corporation statute, 8 Del. C. § 362. The first proposed amendment would eliminate the requirement of a public benefit corporation identifier in the name of a public benefit corporation. Instead, only notification to purchasers of shares in the corporation would be required under certain circumstances. The second proposed amendment would provide a market out to the provisions that require appraisal in certain transactions involving public benefit corporations. The third—and most important—proposed amendment would reduce from 90 percent to two-thirds the approval of all outstanding shares required for mergers or changes to the charters of corporations looking to convert to public benefit corporation status.
These amendments would affect all public benefit corporations but especially those looking to go public. Delaware-incorporated Etsy Inc. has now become the first benefit corporation to go public. Etsy, the online handmade crafts marketplace, raised $267 million in their initial public offering. Etsy has certified B corporation certification from the nonprofit organization B Lab. This means that Etsy has met a high standard of overall societal and environmental performance. The company outlined in its prospectus that it intends to focus on the long-term sustainability of its business and the ecosystem at large. But Etsy is not registered as public benefit corporation under Delaware law and that is where the conflict lies.
Etsy faces the challenge of striking a balance between maximizing profits for shareholders and making decisions in the interest of the public good. On one hand, going public means acknowledging the fact that the corporation’s duty is to maximize profits for shareholders. But, on the other hand, Etsy will have to make decisions to uphold its social mission, which could affect maximizing profits for shareholders. Becoming a registered public benefit corporation would ensure that Etsy would have to stay true to its social mission without violating its duty to pursue shareholder interests. But, it would need to change its corporate charter, and to do so presently requires 90 percent stockholder approval. The proposed legislative amendment would lower this shareholder requirement to two-thirds, making the approval more achievable.
Etsy’s public offering and subsequent foray into the market will be watched closely. If Etsy decides to become a public benefit corporation, its directors will become subject to broader fiduciary duties. Shareholders who do not vote in favor of the conversion to public benefit status get appraisal rights. Shareholders who can sue for traditional breaches of fiduciary duties can also sue to enforce the company’s public benefit goal. That could prove to be subjective when there are shareholders with different opinions as to the company’s social mission. True to form, Delaware law offers significant protections to directors of public benefit corporations; they can only be forced to improve the company’s public benefit effort if sued on those grounds and monetary damages cannot be awarded.
Ultimately, a public benefit corporation will face challenges in upholding duties to both shareholders and the public good. However, it may be just the type of entity that allows corporate directors to pursue not only shareholder value but also theoretically “doing the right thing.” That is what makes Etsy a compelling case study. The amendments of the public benefit corporation to be presented to the Delaware legislature show that there is a movement to make it easier for these types of entities to function in Delaware. If Etsy becomes a public benefit corporation and operates successfully in the best interests of its shareholders, consumers, employees and society as a whole, the idea of a public benefit corporation could gain some real momentum and gain wider acceptance in today’s economy.
John Gentile is a Volume 40 Articles Editor of the Delaware Journal of Corporate Law. John serves as a Judicial Extern to the Honorable Karen L. Valihura of the Supreme Court of Delaware, and he is currently in the process of completing the Business Organizations Law Certificate Program.
Suggested Citation: John Gentile, Amendments to Delaware’s Public Benefit Corporation Statute, Del. J. Corp. L (April 23, 2015), www.djcl.org/blog.