Sheppard Mullin’s Corporate & Securities Law Blog has put up a post about California’s new “Benefit Corporation” (here). A benefit corporation:
[H]as the purpose of creating “general public benefit.” The term is defined as “a material positive impact on society and the environment ….”
Two things struck me about these new entities. First:
The directors of a benefit corporation are required by law, in connection with every action or proposed action, to consider the impacts of the action on shareholders, employees, customers, the local and global environment, community and societal considerations and various other factors.
The directors of benefit corporations have the freedom to pursue the creation of general public benefit and any identified specific public benefits without concern that they will be accused of straying from the exclusive goal of creating economic benefits for the shareholders.
It strikes me that in order for these provisions to be effective, the Articles (or bylaws) will need to include some mechanism to deal with conflicts between the various constituents. Perhaps some sort of express hierarchy of preferences, or a “maximum benefit” formula, or an arbitration provision could do the trick.
The new law authorizes “benefit enforcement proceedings” by which benefit corporations, either directly or through derivative actions brought by shareholders, may enforce the obligations of the corporation to seek to pursue the general and any identified specific public benefit purpose. The Articles of Incorporation may entitle other specifically named persons to bring these proceedings.”
This seems to be a significant positive addition to previous stakeholder statutes that empowered boards to consider the interests of groups other than shareholders but failed to give those groups any enforcement powers. My sense is that for these provisions to be effective, the right to sue should be specifically granted to relevant stakeholders in the Articles as permitted.
I’m not saying that I’m convinced that these types of entities will be successful. There are indeed good reasons to be skeptical of the effectiveness of these types of attempts to free business from the “shackles” of shareholder primacy.
For more related links you can check out Usha Rodrigues’s post on benefit corporations over at The Glom from back in January (here).