The Chan/Zuckerberg Initiative: Why Not a Benefit Corporation? Because We Don’t Need them to do Good
Mark Zuckerberg’s announcement that he would transfer 99 percent of his family’s Facebook stock to a LLC was greeted with both praise for the underlying sentiment and cynicism over the choice of form with critics suggesting he chose the LLC structure to avoid taxes on the $45 billion block of stock. I for one applaud his decision to use his great wealth to further philanthropic goals—and will leave the argument over the tax issue for others.
What interests me and what has gone unmentioned is not why he and his wife choose to use a LLC instead of a traditional non-profit foundation (an topic which many have addressed) but instead, why use a LLC instead of a benefit corporation?
Incorporating as a Public Benefit Corporation (as they are known in Delaware) would enable Chan/Zuckerberg family to take advantage a fairly new legal entity specifically designed to allow directors and executives to further identified social good—however they are defined—without fear of shareholder protest. Champions of benefit corporations stress that traditional corporations place implicit constraints on boards of directors who must always seek to maximize profit.
So the Public Benefit Corporation would seem to be the perfect vehicle for the new initiative right? ( I don’t buy that Zuckerberg and his wife choose the LLC form for “control” purposes as some commentators have alleged—the share structure of Facebook shows that Zuckerberg knows quite well how to maintain control in a corporate form.) But they did not go there –why? Perhaps the newness of the form proved off-putting but that seems doubtful. Zuckerberg is not one to shy away from the new.
Instead I suspect they did not go there because there was no need to and they knew that. My problem with benefit corporations from the get-go has been not with their objectives which I thoroughly support but with the fact that they are simply not necessary. I would rather see every business entity make a commitment to doing good rather than creating one form that supposedly is the only one empowered to do so—which in truth hurts the cause of social responsibility by providing cover for non-public benefit corporations to claim that they are not legally entitled to do so.
While the emotional justification for the creation of benefit corporations is strong, the legal argument that benefit corporations are necessary simply does not hold water.
Consider the primary argument supporting the need for benefit corporations. As noted by one commentator:
- The Fiduciary Duties of Traditional Corporations May Inhibit Directors and Officers Pursuing Publicly Beneficial Activities
- While Delaware courts do not second-guess the substance of director and officer decisions, case analysis of Delaware court decisions illuminates court doctrine that implies that the decision-making process directors and officers implement must seek shareholder value maximization if it is to be considered rational. To do otherwise would be to implement an irrational decision-making process.
- In eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (Del. Ch. 2010), the Delaware Court of Chancery wrote, “When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting nonstockholder interests — be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture — ultimately promote stockholder value.” (emphasis added) While this holding is frequently cited for the proposition that directors can consider non stockholder interests in their decision-making, the language makes clear that such consideration must be rational; a rational decision is one that is attuned to “ultimately promote stockholder value.” eBay does not provide directors with blanket protection for considering stakeholder interests or promoting non stockholder interests in their own right: to be protected, such consideration or promotion must be rationally related to the promotion of stockholder value.
- Public Benefit Activities: “Rational” Decision-Making and Waste of Corporate Assets
- In In re Walt Disney Derivative Litigation, 906 A.2d 27, the Delaware Supreme Court considered the doctrine of waste in analyzing exorbitant executive compensation. The court held that a claim of waste will only arise in the “rare, unconscionable case where directors irrationally squander or give away corporate assets.”16 Indeed, “waste” entails any “exchange of corporate assets for consideration so disproportionately small as to lie beyond range at which any reasonable person might be willing to trade.”17 Often, the claim is associated with “a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received. Such a transfer is in effect a gift.”
To these arguments there are simple rejoinders. First, directors can always articulate a rationale for doing good that serves stockholder interests if they are feel the need—especially in today’s evolving society where social responsibility is becoming increasingly important to investors. Second, by utilizing the LLC format (as the Chan/Zuckerberg initiative will) the default fiduciary duties of managers can be altered and Delaware law makes this abundantly clear:
- “(c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”
Proponents of benefit corporations may bemoan the fact that Zuckerberg did not choose this form. For those who view the existence of the entity as legally superfluous the news is not so bad. Rather than cabin off businesses that want to “do good” in one business structure, let’s recognize that all businesses, regardless of legal structure, can and should be doing that.