On July 17th, Delaware Governor Jack Markell signed legislation allowing the creation of public benefit corporations under Delaware law. Under the new Delaware law, the purpose of a public benefit corporation is to operate in a “responsible and sustainable manner.” Delaware’s law requires corporations to demonstrate that they are fulfilling their social mission by issuing reports to shareholders at least every two years to document compliance with the mandate. Unlike some other states, Delaware will not require independent third party auditing of such reports (nor require annual reports). Under the Delaware law, newly formed corporations may elect public benefit status at the outset while existing corporations must receive the approval of 90% of their shareholders to shift to benefit status. Corporations will be able to form, convert or merge into a public benefit corporation beginning Aug. 1.
When signing the legislation Gov. Markell noted "We've all heard about corporations wanting to 'do well' while also 'doing good.' With this new law, Delaware corporations will now have the ability to build those dual purposes into their governing documents.”
What impact will this new legislation have? It is unlikely that many of the large Fortune 500 corporations incorporated in Delaware will adopt public benefit status given the 90% shareholder approval requirement. The real import probably will not be known for some time as the most likely sphere in which the new entity form may make some real difference is the hostile take-over arena. It may be possible for the directors of a public benefit corporation to argue that they are not subject to Revlon duties when confronted with a hostile bid. To review, at heart Revlon says that when the sale of a corporation is inevitable the duties of the directors is to promote the value of the sale and yield the most benefit for the company's shareholders. In other words, get the best deal they can for the shareholders. According to William Clark, a leading proponent of benefit corporations ““It’s very clear you can turn down more cash to protect the mission,” meaning that some standard other than Revlon would have to be created to judge the adequacy of directorial action when facing a hostile bid for a benefit corporation.
Just what that standard will look like is hard to imagine. Arguably, the expansive language of Delaware’s law which as noted simply requires that a public benefit corporation act in a “responsible and sustainable” manner could lend cover to both directors resisting a sale and potential purchasers who could argue that they too are fully capable of continuing such an unspecific mission. It may be that if public benefit corporations in Delaware (and comparable socially conscious corporations allowed in eighteen other states) gain traction, we will see a return to more specific purposes clauses than are now common. The more specific the designation of the “benefits” a corporation is intended to pursue the better positioned directors may be both in terms of satisfying shareholders in their required reports and in fending off future un-wanted suitors.