Delaware Public Benefit Corporation: Everything You Need to Know
PBC’s are readily identifiable, because the words “public benefit corporation, “PBC” or “P.B.C.” must be included in the company title. 10 min read
What Is a Delaware Public Benefit Corporation?
A Delaware Public Benefit Corporation (PBC), also known as a social purpose corporation, is a corporation designed to consider social purposes and moral and ethical considerations in determining the path of the business. The greater good pursued by a PBC might be related to the environment, society, or the world at large. Contrast this with other corporations, which consider the bottom line and maximizing stockholder value in making business decision.
Typically, PBCs publish their pursuits benefiting the public in an annual report. This report provides information and data on the PBC’s progress toward meeting their goals. In Delaware, the General Corporation Law permits corporations to convert to a public benefit corporation or start their business as a public benefit corporation.
PBC’s are readily identifiable, because the words “public benefit corporation, “PBC” or “P.B.C.” must be included in the company title. Additionally, PBC’s that issue stockholder notices or stock certificates are also required to identify the entity’s status as a PBC.
What Are the Benefits of Adopting Benefit Corporation Status?
There are both legal and other benefits to public benefit corporation status. Legally, PBCs balance both financial interests and non-financial interests when making decisions about the company. Additionally, if the company decides to sell, they are not subject to the Revlon Rulings. These rulings require other companies to make financial interests the top priority at the time of sale. PBCs are not held to the same requirements.
Shareholders of PBCs select public benefit purposes they are interested in. In addition to choosing the focus, shareholders of a PBC are legally entitled to enforce the pursuit of those goals. These higher standards and specific goals can only be changed or removed by a 2/3 vote of the shareholders.
There are also benefits beyond the legal benefits. Currently, millennials represent 50 percent of the global workforce. Millennials have a strong desire to work at a job that has meaning to them. PBCs attract millennials, and other talent, due to their noble purpose. Additionally, almost 70 million U.S. consumers have stated they prefer to purchase from company’s who share their views on environmental and social responsibility. PBCs are also considered an investment opportunity beyond the public equity markets.
Frequently Asked Questions About PBCs
- Are There Tax Implications of Electing Benefit Corporation Status?
Corporations that start as PBCs, as well as corporations that switch to PBC status, have no tax implications that distinguish them from corporations solely for profit. Just like other corporations, PBCs may operate as C Corps, where earnings are taxed at the corporate level, or as S Corps, where the taxes are imposed at the individual level.
- Does Benefit Corporation Status Make It More Difficult to Raise Money?
Quite the contrary. Benefit corporation status may help a company appear more attractive to investors. JP Morgan reports over $1 trillion in investment opportunities in “impact investing” over the next 10 years. The U.S. Social Investment Forum reports currently 11 percent of U. S. managed assets are currently invested in some form of socially responsible investments. The number of investors interested in socially responsible and impact investments is growing each year.
Recently, leading investors across commercial banking, private equity, and venture capital penned an open letter to fellow investors, in support of benefit corporations. They note benefit corporations provide the following benefits:
- Combat short-termism
- Reduce transaction costs
- Build trust
- Reduce risk
- Attract both customers and talent
- Can Benefit Corporations Go Public?
Public benefit corporations can, and have, gone public. For example, Rally Software successfully completed their IPO in April 2013 at $14 per share.
- How Are Shareholders’ Financial Interests Protected?
PBCs aren’t just about doing good. PBCs are legally obligated to consider the interests of the shareholders when making business decisions. Companies are expected to balance the financial interests with the interest in public good. Shareholders may bring legal action against a company or the company’s board of directors if they believe the company has not struck the correct balance.
PBCs must provide shareholders with a report on the overall environmental and social performance of the company. Included in the report must be detailed information about the success or failure to achieve the specifically designated public benefit purpose.
When a PBC seeks to terminate their status as a PBC, shareholders have “dissenter's rights.” These rights entitle shareholders who don’t agree with the dissolution receive fair market value for their shares.
- Is There Risk of Lawsuits by Third Parties Like Environmental or Labor Groups?
While anyone can file a lawsuit, third parties such as environmental groups do not have “standing” to sue PBCs for any of the following:
- Failure to act in a responsible manner
- Failure to act in a sustainable manner
- Failure to balance the interests of stakeholders
- Failure to produce a public benefit consistent with their mission
- Do Directors Have Increased Liability?
The answer to this question, as is often the case, is “It depends.” Delaware law permits PBCs to limit the liability of the director and officers. However, PBCs are not required to do so. When companies do opt to limit liability of the director and officers, this eliminates the concern those parties might have personal liability for corporate wrongdoing. In this case, the court is limited to awarding injunctive relief where corporations deviate from their mission.
- Will It Be More Difficult for Benefit Corporations to Get Director & Officer (D&O) Insurance?
There is no data to suggest PBCs are required to pay higher premiums for D&O insurance. Additionally, there is no evidence PBCs have difficulty obtaining D&O insurance. Some in the know believe PBCs may eventually experience reduced rates for D&O insurance, attributable in part to shareholder engagement.
- What Are the New Director Duties Under Delaware Public Benefit Corporation Status?
PBC directors have several duties. First and foremost, directors are obligated to manage their business in a manner that is both responsible and sustainable. They must balance the specific public benefit or benefits detailed in the
- If There Is No Third Party Certification/Verification, Then How Do We Know a Benefit Corporation Does What It Says?
Even though a PBC is not required to have a third party verify the reports, stockholders of Delaware PBCs may request the verification of the report. When a verification is requested, the verification must be transparent and available to the public.
Difference Between Nonprofit Corporation vs. Public Benefit Corporation
While nonprofits and PBCs can have similar goals, there are differences. One of the largest differences is that in a nonprofit, there are no owners or shareholders. PBCs, on the other hand, have shareholders. The shareholders own the company.
Nonprofits specifically aim to run their company in a fashion that does not result in profits at the end of the year. PBCs, on the other hand, strive to make a profit. This profit is distributed to the stockholders.
If a nonprofit dissolves, they are required to distribute the assets of the company among other nonprofit agencies. When a PBC dissolves, the assets are distributed to the stockholders.
General Corporation Differences
A PBC is owned by shareholders. Shareholders expect the company to turn a profit. This profit is then passed along to the shareholders. In a nonprofit, there are no shareholders, and the corporation is not expected to make a profit.
With the PBC the company files a certificate of incorporation. Included in that certificate is a commitment from the PBC to spend some of their profits, their time, and/or their resources to support a specifically identified public benefit. Nonprofits, on the other hand, form a Delaware and non-stock company. In their mission statement, nonprofits create a statement indicating the altruistic purpose of the nonprofit organization.
In Delaware, PBCs can raise money by selling stock privately or selling stock on a public exchange. Nonprofit corporations, on the other hand, raise money through fundraising activities and individual donations.
Nonprofit corporations are not required to provide information to their members in the form of annual reports. However, nonprofit organizations frequently do provide many reports, with an eye toward raising money from donations. PBCs in Delaware, on the other hand, are required by law to complete a biennial report to shareholders. This report outlines the progress toward their previously stated intended public benefit purposes. While this report must go to shareholders, PBCs are not required to share the report.
Federal Taxation Difference
Nonprofit companies are tax-exempt under the law. Because nonprofit organizations make no profit, they pay no taxes. Instead, nonprofits are required to file tax forms each year (IRS form 990). This form is considered public record. It includes information regarding the company's Board of Directors as well as the company's finances.
PBCs, in contrast, are taxed on their profits just like any other United States Corporation. A PBC files and pays taxes to the IRS each year using a form intended for that purpose, form 1120. A PBC's tax returns are not public information, rather are protected by the privacy laws of the states.
Delaware Franchise Tax Differences
In Delaware, nonprofit companies pay $25 annually. Nonprofits file an annual report, including information regarding the names and addresses of the members of the Board of Directors. The report also includes the names and addresses of the officers.
PBCs, as Delaware corporations, are required to pay an annual franchise tax. Delaware assesses this tax based on the number of shares the PBC's previously issued.
Because nonprofit corporations are not stock corporations there are no shareholders with the nonprofit. However, there may be different classes of members belonging to a nonprofit corporation. This can include voting members and nonvoting members. The bylaws of the nonprofit corporation dictate requirements for membership, including the qualifications for membership and the types of members in the nonprofit corporation.
With PBCs, there are three separate and distinct categories: shareholders, the officers, and the director or directors. Members and directors are not shareholders. Consequently, they don't have an interest in the company's income or assets. The shareholders own the company and have the interest in the assets and income of the PBC. Shareholders elect members to serve on the Board of Directors at the annual meeting. The directors are responsible for creating the policies of the direction of the company, hiring the officers, and pursuing the stated intent of the PBC. Officers, including the president, vice president, treasurer, and secretary, oversee handling day-to-day business operations of the corporation. Once there is a contract to the contrary, the officers serve at the pleasure of the Board of Directors.
As previously indicated, nonprofit corporations cannot issue stock certificates. PBC corporations, on the other hand, do issue stock certificates. The certificates must be clearly marked with the words "benefit corporation."
Candidates for PBC Status
Corporations that have a desire to pursue social good, but also would like to earn profit for their stockholders, may find PBC status attractive.
Corporations solely focused on private interests and corporations not interested in pursuing clearly defined social benefit may not be interested in PBCs status. In Delaware, publicly traded entities must have 90 percent stockholder approval to meet the threshold of becoming a PBC corporation. Private corporations are not similarly limited.
How Do You Direct and Manage the Company?
As previously stated, public benefit corporations must clearly identify and promote at least one specific public benefit. A public benefit is defined as either a positive public benefit, or reduction of negative effects to the public. This could include the following:
- Artistic benefit
- Charitable benefit
- Economic benefit
- Cultural benefit
- Environmental benefits
- Educational benefits
- Religious benefits
- Literary benefits
- Scientific benefits
- Technological benefits
- Medical benefits
- Religious benefits
What Does Operating in a Responsible or System and Sustainable Manner Mean?
PBC management is expected to consider the companies decisions and how those decisions impact their workforce, their environment, and their community. PBCs are expected to operate in a manner that minimizes negative externalities.
The directors of the PBC have an obligation to balance the public benefit along with the stockholder’s interests, and the interests of others who may be impacted by the company's decisions.
In Delaware, directors are expected to use board meetings to discuss and consider various interests. These interest which the directors must balance, include the following:
- Provide a competitive return to stockholders.
- Create a net positive impact associated with the benefits identified in the corporate charter.
- Have a net positive impact on the environment and society at large.
Under Delaware law, directors are protected from potential liability as long as they make decisions that are informed, disinterested, and serve a rational purpose.
PBCs are required to file reports, either every year or every other year. This is an opportunity for the PBC to publicize their public benefits purpose and the impact their actions had. Many PBCs publish their reports on their website. However, this is not required. Companies file reports tracking and identifying their public benefit purpose, and tracking their social responsibility outcomes using data to establish adequate performance.
When issuing stock PBCs must make sure purchasers are informed this is a public benefit corporation. This is a protection for the purchaser, so they are aware that in addition to the goal of making money, a PBC pursues a public benefit, sometimes at the expense of profit.
If the stockholders believe the PBC is failing to balance stockholder and public benefit interests appropriately, the stockholders can maintain a derivative lawsuit. Only stockholders, either collectively or individually who own at least 2 percent of the outstanding shares of the company, are entitled to bring a lawsuit for failure to pursue the company's stated public benefit goals. Typically, the board of director includes language that balances the required interest and considers the public companies specific benefit when making major decisions.
Super Majority Consent
Certain corporate events can only occur with a PBC super majority of two-thirds of the votes of the stockholders. Examples would include a charter amendment, which deletes or alters the companies public benefit goals. Mergers or consolidations with another entity that is not a PBC also require super majority vote. Finally, if a charter amendment is proffered converting the company from a PBC to traditional corporation, a super majority vote is also required. Changes to the bylaws do not require the super majority stockholder vote.
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