by Stuart R. Cohn and Stuart D. Ames
Effective July 1, 2014, Florida joined the growing number of states that permit special types of for-profit corporations to pursue substantial public interest goals at the possible expense or deferral of profit maximization, the traditional corporate goal objective. What has been the exclusive realm of not-for-profit corporations is now open to for-profit corporations that want to devote some part of their business resources to substantial nonprofit or socially beneficial activities. The legislation created two new forms of for-profit corporations: 1) the benefit corporation and 2) the social purpose corporation.1 These new entities differ from traditional corporations in three principal respects: 1) a statutory purpose to engage in public benefit activities, in addition to whatever specific public benefit goals may be adopted in the articles of incorporation; 2) a statutory mandate to directors and officers to consider the effect of any corporate action or inaction upon the corporation’s public benefit goals; and 3) a mandatory annual report to shareholders describing the efforts of the corporation to achieve the statutory and any specifically adopted public benefit goals. The new entities may be thought of as “green” corporations, the difference between the benefit and social purpose corporations being one of degree of commitment to broad public benefit goals. The intent of the new legislation is to accommodate entrepreneurs and investors who want a for-profit corporation that may engage in substantial socially beneficial activities to an extent beyond what may be allowed for traditional corporations.
Although Florida joins approximately 25 other states that have adopted analogous legislation, Florida’s approach differs from other states, with the exception of California and Minnesota, by allowing entrepreneurs a choice to form either a benefit corporation with broadly stated general public goals or a social purpose corporation that may have a single or more limited public benefit agenda. Most states have adopted only the benefit corporation model, which mandates that directors and officers consider an entire range of societal and environmental factors with regard to any corporate action or inaction. The drafters of the Florida legislation believed that it is preferable to give entrepreneurs and investors a choice between a broad, general public-oriented type of corporation and a corporation that may be more limited in its range of public benefit goals.
Why the New Corporate Entities?
Although corporations have long engaged in charitable and other public service projects, there is a sense that an undefinable legal limit exists to nonprofit making activities. In part, the limitation is tied to the fiduciary responsibilities of directors and officers to the corporate shareholders. In part, it is also due to the traditional concept of a corporation as a profit-making entity. In recent years, however, there has been a growing movement among socially minded entrepreneurs and investors who seek to move away from the traditional profit maximization model for corporations and exploit private interests to serve the public interest. Such dual-purpose corporations were initially seen as an oddity. Ben & Jerry’s was often cited as such an entity, and the company gained considerable respect for its clear pursuit of public benefit goals. Today, Ben & Jerry’s is not an oddity.2 B Labs, which operates a leading Internet site for benefit corporation information, engages in a state-by-state check of benefit corporation formations and its most recent figure is 955 filings.3 As noted in one major study:
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.4
Benefit and Social Purpose Corporations’ Principal Characteristics
• Purpose — The benefit corporation (B corporation) and social purpose corporation (SP corporation) are formed with the stated statutory purpose of creating or pursuing public benefit activities. These new entities are intended to make profit but at the same time engage in substantial public interest pursuits that may significantly affect the corporation’s bottom line and shareholder distributions. They are distinguished from not-for-profit entities because both the B corporation and SP corporation are for-profit entities and may distribute dividends to their shareholders.
The distinction between the B corporation and the SP corporation is that the B corporation has a broad purpose to benefit the public generally, while the SP corporation can choose to limit the benefit goal or goals it pursues. The difference is reflected in the respective definition sections. The B corporation’s stated statutory purpose is to pursue a “general public benefit,” defined as “a material, positive effect on society and the environment, taken as a whole....”5 The stated purpose of an SP corporation is to create a “public benefit,” the word “general” being deliberately omitted. Public benefit for the SP corporation is defined as “a positive effect, or the minimization of a negative effects, taken as a whole on the environment or on one or more” listed categories of potential beneficiaries.6 In addition to their statutory mandate, both the B Corporation and the SP corporation may choose to adopt in its articles of incorporation a “specific benefit purpose.”7 The difference being that any specifically adopted benefit purpose in a B corporation does not absolve the directors and officers from the mandate to consider broad societal concerns,8 while for an SP corporation, the specific public benefit can be the sole goal considered by management.
• Mandate — In contrast to traditional corporations, each B and SP corporation is subject to a statutory mandate to management to consider the corporation’s statutory and any specifically adopted benefit purpose. Directors and officers of a B corporation are mandated to consider the effects of any corporate action or inaction upon 1) the corporation’s ability to accomplish its general public benefit purpose and any specifically adopted benefit purposes; 2) shareholders; 3) employees; 4) suppliers; 5) customers; 6) communities where the business is located; 7) the local and global environment; and 8) the short- and long-term interests of the corporation.9 In contrast, directors and officers of an SP corporation are mandated only to consider the effects of any action or inaction upon the shareholders and the ability of the corporation to accomplish its public benefit purpose, however limited that benefit may be, and may, but are not required, to consider any of the other societal interests mandated for consideration in a B corporation.
An example illustrates the mandate difference between a B corporation and an SP corporation. Suppose that a for-profit corporation plans to manufacture and sell an anti-malarial drug and, as part of its business plan, will distribute that drug at low or no cost in African countries. If distribution in Africa is the corporation’s sole benefit purpose, the corporation could appropriately be a SP corporation. However, if the corporation is a B corporation, directors and officers would be mandated to consider as well employee programs, environmental concerns, community issues, and similar societal factors, and cannot concentrate on a single benefit program to the detriment of other general benefit concerns.10 Because of the broader mandate imposed on management of B corporations, the drafters of the Florida legislation initially believed that most entrepreneurs would prefer the more limited mandate applicable to SP corporations. However, experience shows that the “fully green” B corporation has an appeal. In the first seven months after California adopted its legislation allowing for both the B corporation and the more limited corporation known in California as the flexible purpose corporation, 60 of the 75 corporations incorporated under the new provisions were B corporations.11 Indeed, the first corporation formed in Florida under the new legislation was a B corporation. Time will tell which of the two varieties will be more numerous.
• Limitation on Liability — Both the B and SP corporations have a statutory declaration that the creation of a public benefit or a specific public benefit is “deemed to be in the best interest of the” corporation.12 The combination of a clear statutory purpose, mandate to management, and the “deemed best interest” of the corporation allows such corporations to engage in much more substantial public benefit programs at the expense of bottom lines and shareholder distributions than traditional corporate law might otherwise allow, subject to the ever-present fiduciary duty of care owed to the corporation to assure that the corporation remains economically viable.13 In addition to creating greater protection from shareholder claims, both the B corporation and SP corporation provisions eliminate liability for monetary claims against the corporation and its directors and officers by the corporation, a shareholder, or any potential beneficiary of a public benefit for failure to create or pursue a general or specific public benefit. This is an important safeguard for management who must at all times weigh the costs of creating public benefits against the economic well-being of the corporation.
• Formation and Appraisal Rights — A benefit or a social purpose corporation can be formed in one of three ways: 1) incorporation as such; 2) amendment of the articles of incorporation changing an existing corporation to a B or SP corporation; 3) an existing corporation’s merger or share exchange with or into an existing B or SP corporation; or 4) conversion of a noncorporate entity (such as a limited liability company or limited partnership), foreign corporation, or other foreign for-profit business entity into a Florida B or SP corporation.14 Article amendments, mergers, conversions, and share exchanges by corporations require a minimum two-third shareholder approval.15 Because of the significant change in corporate purpose effected by such action, dissenting shareholders are entitled to appraisal rights. The same voting requirement and appraisal rights apply when a corporation terminates its status as a B or SP corporation (other than by dissolution).16 Concurrent with adoption of the benefit corporation legislation, Ch. 607 was amended to provide for appraisal rights in such situations.17
• Accountability — Although directors and officers are mandated to consider a B or SP corporation’s benefit goals, they are not required to take any corporate action to create or pursue such goals. The mandate is simply to consider, not implement. This raises two accountability issues. One is a so-called “green-washing” concern that a corporation will cloak itself in the guise of a socially conscious benefit corporation to gain goodwill or a market advantage but nevertheless ignore or only minimally pursue benefit goals. A second accountability concern is management’s obligation to shareholders who have invested with the expectation that the corporation will create or pursue benefit goals. Accountability concerns are addressed by two provisions: annual reports and benefit enforcement proceedings.
Each B or SP corporation is required to prepare and distribute to shareholders, and post on its corporate website, an annual benefit report assessing the extent to which the corporation pursued and achieved benefit goals during the past year.18 The disclosure includes a narrative description of the ways the corporation pursued benefit goals and any circumstances that hindered the pursuit of such goals. The report must contain an assessment of the overall societal and environmental performance of the corporation using a third-party standard. A third-party standard is defined as “a recognized standard for defining, reporting and assessing the societal and environmental performance of a business.”19 The annual report for an SP corporation need not be assessed by a third-party standard unless the corporation chooses to do so. The annual benefit report requirement is intended to create a level of transparency that will dissuade formation of B and SP corporations to engage in green-washing.
A benefit enforcement proceeding may be brought by shareholders against the corporation or against a director or officer derivatively for failure to pursue or create a public benefit.20 However, no monetary penalty can be assessed against either the corporation or against a director or officer for failure to pursue or create any public benefit.21 Consequently, the most that can be achieved through such litigation is a mandatory injunction to a director or officer to adhere to the statutory duty to consider the corporation’s benefit goals. Although the benefit enforcement proceeding may create some leverage for unhappy shareholders, a more effective route for shareholders dissatisfied with the commitment of directors may be through the director election or removal processes, both of which are governed by Part I of Ch. 607.
Are Such New Entities Really Necessary?
When the benefit corporation concept was initially raised in the Business Law Section of The Florida Bar, quite a few lawyers wondered whether such a new form of enterprise was necessary. Several questions were raised: If corporations already have the power to engage in socially useful activities, why is there a need for the benefit corporation concept? Doesn’t the business judgment rule already give sufficient protection to directors who cause their corporations to expend assets for public benefit purposes? Don’t the stakeholder provisions in our corporate statute protect directors and officers who promote public welfare interests at the possible expense of corporate profits? Are there actually investors who would put their money into corporations that have avowed, nonprofit maximizing social purposes?
• Corporate Powers — It is well accepted that corporations can utilize assets for charitable or other public welfare purposes. Florida allows corporations “to make donations for the public welfare or for charitable, scientific, or educational purposes.”22 This statutory provision was a response to concerns regarding the judicial attitude to corporate charitable contributions or other public benefit programs.23 The new legislation does not affect this existing power. However, the concern is a matter of degree. Both case law and fiduciary duty obligations point to the fundamental responsibility of directors and officers to serve the economic interests of the corporation and its shareholders. Bright-line tests do not exist, but there is an implicit sense that corporate expenditures for nonrevenue-producing activities cannot exceed bounds that would significantly impact corporate profits and shareholder distributions.24 In contrast, both the B and the SP corporation are formed for the express purpose of engaging in public benefit activities, thus, creating an explicit goal and acceptance that substantial corporate assets may be used for those purposes. Therefore, directors and officers of such corporations will not have or perceive the same constraints on the use of corporate assets that exist with traditional corporations.25
• Business Judgment Rule — The judicially created business judgment rule substantially protects directors in their decisions to employ corporate assets. However, director decisions must be consistent with fundamental fiduciary obligations, which, therefore, brings into play the extent of expenditures for nonprofit maximizing activities. The business judgment rule is therefore not a shield against shareholder claims of corporate waste or otherwise inappropriate non-profit maximizing expenditures. However, B and SP corporations mandate directors and officers to consider public interest goals and shield management from claims that may arise as a result of the use of corporate assets for such purposes, subject only to the duty of care requirement that management must at all times consider the financial welfare of the corporation.
• Stakeholder Provisions — Florida’s duty of care statute includes a so-called “stakeholder” or “other constituencies” provision that allows a director to “consider such factors as the director deems relevant,” including community and societal interests.26 On its face, the provision appears to allow for the kind of corporate conduct for which benefit corporations have now been created. However, stakeholder provisions were adopted in Florida and many other states in order to justify defensive efforts by directors to fight hostile takeovers, defenses that were clearly contrary to shareholder interests in receiving takeover premiums. With the decline of the hostile takeover phenomenon, stakeholder provisions have been given little attention. Given this background, it is unlikely that such a provision would permit the broad scope of public interest conduct that may be undertaken by directors of benefit corporations.27
• Investor Interest — When the idea of a benefit corporation was first raised in Florida, there were relatively few states that had adopted such legislation. Today there are approximately 25 states, and the number is growing. The response of entrepreneurs and investors has been positive in states that have adopted benefit corporation legislation.28 The total number of such corporations is not likely to rival traditional corporations or LLCs, but it is clear from the market response that these forms of social responsible corporations are an idea whose time has come.
An Additional Concern: Disclosure to Potential Investors
The new legislation does not address the type or scope of disclosure that should be given to potential investors in these newly created entities. The shift in emphasis from profit-maximization to public benefit goals is an important distinction from traditional corporations. Potential investors should, therefore, be made aware of the benefit goals of the corporation, including, if appropriate, the open-ended nature of such goals: the fact that management may be expending substantial corporate assets in nonprofit maximizing activities; that distributions to shareholders may be significantly affected by such corporate expenditures; and that directors and officers authorizing such expenditures may be shielded from personal monetary liability. Failure to make adequate disclosure might result in state or federal securities law violations if investors are misled by misstatements or omissions of material facts regarding corporate goals, policies, and shareholder rights and limitations.29
It must be emphasized that adoption of the benefit and social purpose entities in no way modifies or affects the capacity of traditional corporations to engage in charitable or other public benefit activities. The new entities are intended for entrepreneurs and investors who want their corporations to create or pursue benefit goals to a degree beyond what might otherwise be considered permissible for traditional corporations. Florida’s adoption of B and SP corporation alternatives offers to public-minded entrepreneurs a choice of options not available in most states where only B corporations have been authorized. The new legislation has opened the door to entrepreneurs who desire to pursue substantial public benefit goals in the context of for-profit corporations. B and SP corporations may well become the entity of choice for organizers who desire to “do well by doing good.”30
1 Florida’s corporate statute, Ch. 607, has been divided into three parts. Part I contains general provisions and governs the traditional corporate model, Part II governs social purpose corporations, and Part III governs benefit corporations. Parts II and III are not entirely stand-alone provisions, as they incorporate all Part I provisions to the extent not specifically addressed in Part II or Part III.
2 Forum for Sustainable and Responsible Investment, 2010 Report on Socially Responsible Investing (2010), available at http://ussif.org/. One study found that as of 2010, for-profit companies that have been, on some basis, identified as socially responsible represented roughly 10 percent of all domestic assets under management, approximately $2.3 trillion, much of it in mutual funds.
3 Benefit corporation, http://www.benefitcorp.net (registration numbers).
4 William H. Clark, Jr. & Larry Vranka, The Need and Rationale for the Benefit Corporation 1, 28 (unpublished manuscript dated January 26, 2012, available in authors’ materials.) William Clark, a Philadelphia attorney, is among the most prominent attorney proponents of benefit corporations and informally consulted with the drafters of the Florida legislation.
5 Fla. Stat. §607.602(5).
6 Fla. Stat. §607.507(6) (emphasis added). The listed categories include artistic, charitable, economic, educational, cultural, literary, religious, social, ecological, and scientific benefit activities. Fla. Stat. §607.507(2).
7 “Specific public benefit” is defined in the B corporation statute by a nonexclusive list that includes such items as providing low-income or undeserved individuals or communities with beneficial products or services, improving human health, and increasing the flow of capital to entities whose purpose is to provide a benefit to society. Fla. Stat. § 607.602(8). For SP corporations, the definition of a specific public benefit is general, but the listing contained in the B corporation statute is repeated among the possible public benefits that an SP corporation may choose to pursue. Fla. Stat. §607.502(6).
8 Fla. Stat. §607.606(2) (“The identification of a specific public benefit...does not limit the obligation of a benefit corporation” to create a general public benefit.).
9 Fla. Stat. §607.607(1).
10 Presumably if the corporation distributing drugs in Africa was, at the same time, not considering ways to improve employee welfare, or was engaged in less than ecologically sound manufacturing processes, the corporation would not be considered a true B corporation. The result may be a failure to meet third-party assessment standards mandated for B corporations.
11 Eric I. Talley, Corporate Form and Social Entrepreneurship: A Status Report from California and Beyond (Sept. 2012) (Draft version 1.2, prepared for the Association for Corporation Counsel 2012 annual meeting).
12 Fla. Stat. §607.506(3) (SP corporations); Fla. Stat. §607.606(3) (B corporations).
13 The directors’ duty of care mandated in Fla. Stat. §607.0830 is specifically noted for each of the B and SP corporations.
14 In addition to the creation of new companies with substantial public benefit goals, it may be anticipated that some existing traditional and nonprofit corporations may find it preferable to transform into either a B or SP corporation.
15 Fla. Stat. §607.502(5) (SP corporation); Fla. Stat. §607.602(7) (B corporation). This requirement applies to each class or series of shares whether or not entitled to vote, voting as a separate voting group.
16 Fla. Stat. §607.505(3) (SP corporation); Fla. Stat. §607.605(2) (B corporation). This requirement applies to each class or series of shares whether or not entitled to vote, voting as a separate voting group.
17 The legislation added Fla. Stat. §§607.1302(g), (h), (i), and (j), providing for such appraisal rights.
18 Fla. Stat. §607.512 (SP corporations); Fla. Stat. §607.612 (B corporations).
19 Fla. Stat. §607.602(10). The annual report must identify the provider of the third-party standard but does not require that the provider audit or certify the annual report. There are several independent companies that have developed such standards. The leading company in the field of benefit corporation creation and reporting is B Labs, http://www.bcorporation.net.
20 Fla. Stat. §607.511 (SP corporations); Fla. Stat. §607.611 (B corporations). No potential or actual intended beneficiary of a benefit goal has standing to bring such a suit for failure to pursue or create the benefit. Fla. Stat. §§607.509 (3)-(4) (SP corporations); Fla. Stat. §§607.609 (3)-(4) (B corporations). Other states have imposed a minimum share ownership requirement to bring the action, but Florida opted not to do so.
21 Directors and officers are protected from monetary penalties in Fla. Stat. §607.507(3) and 509(3) (SP corporations); Fla. Stat. §607.607(2) and 609(3) (B corporations). The corporation is protected from monetary penalties in Fla. Stat. §607.511(1)(b) (SP corporations); Fla. Stat. §607.611(1)(b) (B corporations).
22 Fla. Stat. §607.0302(12).
23 See, e.g., Dodge v. Ford Motor Co., 170 N.W. 688 (Mich. 1919), in which Henry Ford’s decision to reduce dividends in order to reduce the price of cars to the general public was held improper. The court stated: “A business corporation is organized and carried on primarily for the benefit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors...does not extend to a change in the end itself, to the reduction of profits or to the non-distribution of profits among stockholders in order to devote them to other purposes.”
24 In the oft-cited case A.P. Smith Mfg. v. Barlow, 98 A.2d 581 (NJ 1953), the New Jersey Supreme Court had no trouble upholding the corporation’s power to make a donation to Princeton University, but did note that the contribution “was modest in amount.”
25 From a purely technical perspective, there is nothing in Florida’s corporate statute or case law that expressly or implicitly prevents a corporation from engaging in substantial public benefit programs. The concern that principally motivates the adoption of the B and SP corporations is the sense of restraint imposed upon directors and officers as a result of traditional corporate law concepts of profit-maximization and fiduciary duties to shareholders, and the concern that courts may be receptive to arguments of breach of duty when large public benefit expenditures have been made.
26 Fla. Stat. §607.0830(3). Among the listed factors a director may consider are “the social, economic, legal, or other effects of any action on the employees, suppliers, customers of the corporation or its subsidiaries, the community and society in which the corporation or its subsidiaries operate, and the economy of the state and the union.”
27 Delaware does not have a statutory stakeholder provision but has judicially recognized the directors’ authority to consider “other constituencies,” including the community generally, in hostile takeover defensive actions. Unocal Corporation. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). However, in a later case, the Delaware Supreme Court noted that “while concern for various corporate constituencies is proper when addressing a takeover threat, that principle is limited by the requirement that there be some rationally related benefit accruing to the stockholders.” Revlon, Inc. v. MacAndrews & Forbes Holding, Inc., 506 A.2d 173, 176 (Del. 1985).
28 Within the first three months after Delaware’s adoption of its benefit corporation statute, 55 corporations were formed under those provisions. Alicia E. Plerhoples, Delaware Public Benefit Corporations 90 Days Out: Who’s Opting In?, http://scholarship.law.georgetown.edu/facpub/1307.
29 The concerns regarding investor understanding may also apply to creditors who may not be aware that the corporation’s goals include significant nonprofit maximizing activities. Drafters of Florida’s legislation considered, but rejected, the notion of requiring benefit corporations to have an express notation in their corporate name, such as “BC” or “SPC,” as some states have done.
30 It should be pointed out that Florida did not extend B or SP status to limited liability companies as at least one other state has done.
Stuart D. Ames is a shareholder in the corporate department of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. He focuses his practice primarily on for-profit and not-for-profit corporate law, alternative entity law, and commercial finance law.
Stuart R. Cohn is the Sam T. Dell professor of law at the Levin College of Law, University of Florida. He and Stuart Ames are the authors of Florida Business Laws Annotated (Westlaw) and, on behalf of the Business Law Section of The Florida Bar, were the principal drafters of the benefit corporation legislation.
This column is submitted on behalf of the Business Law Section, Judge William Alva VanNortwick, Jr., chair, and Mark Nichols, editor.