Colorado has adopted, effective April 1, 2014, the public benefit corporation act of Colorado (the “PBCA”) that is similar to legislation being considered in Delaware, but completely different from the model benefit corporation act sponsored by B Lab Company (www.bcorporation.net) and adopted in a number of states. The previous entries have described the background of the Colorado Bar Association’s efforts (led by a group of attorneys supported by the Business Law Section of the CBA, the “Drafting Group”) that led to the adoption of H.B. 13-1138 and discussed the nature of a public benefit corporation (a “PBC”) as well as material provisions of the PBCA. This post will point out some differences between the B Lab model act and the PBCA.
Provisions In The B Lab Model Act Not Included In The PBCA.
Under Section 102 of the B Lab model act and the legislation previously introduced in Colorado, every benefit corporation had the obligation to create "the general public benefit," defined to be "a material positive impact on society and the environment, taken as a whole, assessed against" a third party standard. The Drafting Group noted that, among other issues, things good for society (such as increased employment, availability of petroleum products and nuclear energy providing energy for houses, transportation, and factories) may not be good for the environment. Matters that may be good for the environment (creating large roadless areas, closing down factories, and reducing the availability of energy from petroleum and nuclear sources) may not be good for society.
Under Section 301 of the B Lab model act and the legislation previously introduced in Colorado defined the standard of conduct for directors by requiring the directors, in making any decision for the benefit corporation, to consider the interests of the shareholders, the employees and workforce of the benefit corporation and its suppliers, the interests of the benefit corporation's customers, the community in which the benefit corporation operated and societal factors, the short- and long-term interests of the benefit corporation, and other relevant factors. This raised a significant concern to the Drafting Group because these considerations were required for each decision made by the board, not merely decisions related to the benefit corporation's general or specific benefit purpose. Furthermore, unless the directors carefully documented their consideration of each of the factors mandated by the B Lab model act in connection with each decision, the decisions could be questioned.
Section 102 of the B Lab model act as it existed at the time and the legislation previously introduced in Colorado mandated a third party assessment performed on an annual basis against a standard that was defined in the 2011 and 2012 bills introduced in Colorado with almost two full pages of text. The definitions were in such strict terms that the Drafting Group was convinced that the standard did not yet exist and perhaps could not exist. (Perhaps in recognition of this, the current version of the B Lab model act has a simpler definition of “third party standard.”)
The B Lab model act and the legislation as initially introduced in Colorado in 2011 did not provide a right for shareholders objecting to the conversion to a benefit corporation to dissent from the transaction.
Section 302 of the B Lab model act requires that benefit corporations that are publicly traded must, and other benefit corporations may, appoint a benefit director who has certain obligations that differ from the other directors. In addition to being a member of the board, the benefit director must prepare an “annual compliance statement” that offers the benefit director’s opinion whether the benefit corporation “acted in accordance with its general public benefit purpose and any specific public benefit purpose in all material respects during the period covered by the report.” The B Lab model act exonerates the benefit director from any personal liability unless the liability derives from self-dealing, willful misconduct, or a knowing violation of law. The Drafting Group believed that including a director with a special constituency different from the other directors was inadvisable under and inconsistent with Colorado law.
Sections 303 and 304 of the B Lab model act contemplates the possibility that benefit corporations may appoint a “benefit officer” and establishes standards of conduct for officers generally. The Drafting Group believed that the standards of conduct for officers with discretionary authority found in C.R.S. § 7-108-401(1) was sufficient and there did not need to be a special provision for officers of a PBC.
Section 305 of the B Lab model act provides that a “benefit enforcement action” may be brought against the board by the benefit corporation itself. The Drafting Group did not see the value in this provision because it is the board of directors who would make the determination for the benefit corporation to bring the action.
Section 305 of the B Lab model act also contemplated that persons other than the shareholders of the benefit corporation could bring a derivative action, notwithstanding clear guidance in both the federal and Colorado Rules of Civil Procedure, Rule 23.1 to the contrary. It is clear in s 7-107-402 of the CBCA and in Rule 23.1 that only equity owners can bring a derivative action, and the right to do so does not extend to directors, owners of an affiliated entity, and “other persons.”
Under § 301 of the B Lab model act and under the original H.B. 13-1138 as introduced in the House there was a clear exoneration of the corporation and its officers and directors of liability for monetary damages if they met the applicable standard of care. There is no similar provision under the PBCA. There is merely the provision discussed above that the PBC’s articles of incorporation may provide that a failure by any disinterested director to satisfy the requirements of C.R.S. § 7-101-506 “does not, for the purposes of section 7-108-401 or article 109 [of the Colorado Business Corporation Act] constitute an act or omission not in good faith or a breach [of the director's] duty of loyalty.” The term “disinterested” is not defined and this leaves room for interpretation. This, again, is a provision that may be looked at for further amendment.
One provision in the PBCA that is not included in either the Delaware legislation from which the PBCA was adapted or the B Lab model act is that the PBCA includes the right for certain cooperatives organized under Articles 55 or 56 of Title 7, C.R.S., to elect PBC status.
Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.