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Editorial 9 MIN READ

Delaware's public benefit corporation, four years in

Subchapter XV works as advertised when the founders take the charter seriously and as window dressing when they do not

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 7 sections
  1. What Subchapter XV actually requires
  2. The 2015 amendments, and what they changed
  3. How the Delaware form differs from the model benefit corporation
  4. Who has actually used it
  5. Where the form actually bites
  6. When it earns its keep
  7. Sources

Delaware public benefit corporation is a for-profit stock corporation whose charter names a specific public benefit the board must balance against stockholder pecuniary interests. The statute is Subchapter XV of the Delaware General Corporation Law, 8 Del. C. §§ 361 through 368, enacted in August 2013 and amended in a material way in August 2015.

Four years in, the form is neither the revolution its drafters promised nor the liability trap its critics predicted. It is a specific statutory obligation that changes how a board documents its decisions, and in several hundred cases it has changed what a company is willing to put into writing when a founder departs.

What Subchapter XV actually requires

Section 362(a) defines a public benefit corporation as a for-profit corporation intended to produce "a public benefit or public benefits and to operate in a responsible and sustainable manner." The charter must identify one or more "specific public benefits" the corporation will promote, and the entity must describe itself as a public benefit corporation on its stock certificates or uncertificated-share notices. The name requirement was softened in the 2015 amendments: a PBC no longer has to include "PBC" or "public benefit corporation" in its legal name, though the charter disclosure stays mandatory.

Section 362(b) provides that "public benefit" means "a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature." The statute is deliberately broad. Drafters picked "specific" as the modifier that does the work, not the list of categories.

The operative provision is § 365. The board of a PBC must manage the corporation in a manner that balances (1) the stockholders' pecuniary interests, (2) the best interests of those materially affected by the corporation's conduct, and (3) the specific public benefit named in the charter. Section 365(b) provides a safe harbor: a director satisfies fiduciary duties under the section if the decision "is both informed and disinterested and not such that no person of ordinary, sound judgment would approve." That is the business-judgment rule, with an extra factor the director must consider rather than a different standard of review.

Section 366 requires the board to furnish stockholders, at least biennially, a statement describing the objectives the board has established to promote the public benefit and the interests of those materially affected, standards the board has adopted to measure progress, objective factual information based on those standards, and an assessment of success in meeting the objectives. The statute does not require third-party certification, public disclosure, or any particular format. A PBC can satisfy § 366 with an internal memo sent to its six stockholders.

Section 367 creates a derivative-suit mechanism: stockholders owning individually or collectively at least 2% of outstanding shares, or for public PBCs the lesser of 2% or shares worth at least $2 million, may sue to enforce the balancing requirement. Section 368 says only that any ambiguity in the subchapter is to be resolved in favor of the stockholders' interests, which is a tell about who the drafters expected to litigate under it.

The 2015 amendments, and what they changed

House Bill 80, signed by Governor Markell on June 24, 2015 and effective August 1, 2015, did three things that matter.

First, it dropped the supermajority conversion threshold. Under the original 2013 statute, converting an existing Delaware corporation into a PBC required approval from 90% of the outstanding shares of each class, and a stockholder who dissented had appraisal rights. Nine out of ten was a number designed to make the conversion effectively impossible for any corporation with dispersed ownership. HB 80 lowered the threshold to a two-thirds supermajority, the same bar that applies to a charter amendment changing the corporation's purpose. Conversion in the other direction, from PBC back to an ordinary stock corporation, was brought to the same two-thirds standard.

Second, HB 80 preserved appraisal rights for stockholders who dissent from a conversion into or out of PBC status. That concession to investors was the price of the lower voting threshold. It means a venture-backed company that wants to convert mid-life still has to price out the dissenters, but the math of a conversion no longer turns on a single holder's veto.

Third, the amendments dropped the naming requirement described above, which had been a friction point for founders who wanted the statutory obligation without the marketing label.

HB 80's sponsors, including Delaware's Corporation Law Section, framed the amendments as an ordinary tune-up of a new statute whose drafters had set the initial conversion bar too high. The practical effect was to move the PBC from a form that almost only worked for brand-new entities to one that worked for reorganizations as well.

How the Delaware form differs from the model benefit corporation

Maryland was first in 2010, and its statute became the template for William Clark Jr.'s Model Benefit Corporation Legislation, which B Lab pushed through state legislatures one at a time. Most state benefit corporation statutes, including California's, New York's, Illinois's, and the roughly thirty others, track the Model Act with local edits. Delaware is not one of them.

The differences are load-bearing. The Model Act requires the board to consider a fixed list of stakeholders (employees, customers, community, environment, and so on), and most states require an annual benefit report prepared against a third-party standard such as B Lab's B Impact Assessment. Delaware requires biennial reporting, does not mandate a third-party standard, and does not prescribe the list of stakeholders the board must weigh. The balancing test in § 365 is open-textured by design; the board names the public benefit and the affected interests, and the statute asks them to consider those.

The practical result is that a Delaware PBC is easier to comply with and harder to market. A founder who wants the B Corp badge still has to pass the B Impact Assessment and sign a separate contract with B Lab; the statutory entity and the private certification remain two different things, a distinction we covered in an earlier piece on benefit corporation, B-corp, public benefit corporation: not the same thing.

The Delaware form is also more litigation-resistant, for better and worse. Section 367's 2%/2-million-dollar standing requirement keeps out most nuisance suits. Section 365(b)'s business-judgment safe harbor makes it hard to second-guess a specific balancing decision after the fact. A plaintiff who wants to argue the board ignored the public benefit must show something closer to bad faith than mere bad judgment.

Who has actually used it

Kickstarter converted in September 2015, shortly after HB 80 took effect, and its charter names as its specific public benefit the "positive effects on society" of promoting creative works and a responsible business model. The conversion was deliberately not a prelude to going public, and Kickstarter's founders said so in writing. The charter commits the company to a set of practices ranging from donating 5% of after-tax profits to arts education and inequality programs to capping executive pay.

AltSchool, a network of micro-schools backed by Founders Fund and Andreessen Horowitz, incorporated directly as a PBC in 2014. Its charter identifies personalized education as the public benefit. The form has been useful to the company as a signal to parents and to teachers the company hires away from traditional schools, and has not (so far as outside filings show) been the subject of stockholder litigation.

Laureate Education, an international network of for-profit colleges, converted to PBC status in October 2015 and went public on the Nasdaq in February 2017, raising roughly $490 million in the first IPO of a Delaware PBC. The S-1 disclosed the § 366 reporting obligation and the § 365 balancing duty as risk factors, which is the standard defensive move for a form the market has not priced. The stock traded, the deal closed, and the PBC structure did not become a deal-breaker for institutional buyers who had said in advance it might.

Other adopters include Plum Organics (a Campbell Soup subsidiary that converted after acquisition), Method Products, Rally Software (before its CA Technologies acquisition), and a long tail of venture-backed software and consumer companies. Patagonia, often cited as the exemplar, is incorporated in California as a benefit corporation under that state's statute rather than as a Delaware PBC; the California regime is the Model-Act form with a separate annual-report requirement. The two should not be collapsed.

The Delaware Division of Corporations does not publish a separate count of PBCs, but practitioner estimates put the number in the low thousands by late 2017, heavily concentrated in food, consumer goods, renewable energy, and education. That is not mass adoption. It is a cohort of firms for whom the charter promise is part of the product.

Where the form actually bites

The § 366 report is the lever that matters. A board that is not prepared to articulate its public benefit in measurable terms and report against it every two years should not pick this form. The report does not have to be public, but the stockholders receive it, and in a venture-backed company the stockholders include the investors, the founders, and eventually the acquirer's diligence team. The report becomes the paper trail that a departing founder points to when the acquirer wants to drop the PBC designation.

The § 365 balancing duty changes board minutes more than it changes outcomes. Good PBC boards document the public-benefit factor they considered in any decision of consequence, name it, and state how they weighed it. That documentation is cheap when it happens at the board meeting and expensive when it is reconstructed in discovery. The directors who treat the balancing duty as a checklist item to address in the minutes are the ones who get the business-judgment safe harbor when a § 367 suit arrives.

The conversion arithmetic has gotten easier, but the tax plumbing has not changed. A PBC is still a stock corporation for federal tax purposes, taxed at the corporate rate, and not eligible for any charitable tax treatment simply by virtue of the form. A C-corp that becomes a PBC is still a C-corp. An S-corp that elects PBC status is still an S-corp, subject to the Subchapter S one-class-of-stock and qualified-shareholder rules. A PBC that also wants to take donations and issue deductible receipts still needs a separate 501(c)(3) vehicle.

When it earns its keep

The form is useful in three settings.

The first is the mission-driven startup whose investors have asked, before writing the check, how the company will keep faith with its stated purpose after the next round. The PBC charter is an answer that survives a founder departure and a board reshuffle, because unwinding it requires the same two-thirds vote that building it did. The biennial report is a small tax to pay for that durability.

The second is a post-acquisition carve-out where the acquirer wants to preserve the acquired company's brand promise. Plum Organics inside Campbell's is the cleanest example. The PBC designation is a contract the acquirer signs with the market, enforceable under § 367 by any stockholder who cares to sue.

The third is the reorganization of a family or closely held company whose owners want the legal architecture to outlive them. A PBC can be funded, transferred, and inherited like any other stock corporation, and the charter obligation travels with the shares.

A founder forming a two-person consultancy does not need this. A bootstrap SaaS business whose customers do not price in mission does not need this. An operating company whose board would resent the reporting obligation will produce reports that reflect that resentment, and those reports are the artifact a plaintiff's lawyer will read first.

The PBC is a specific, narrow commitment dressed as a general-purpose corporate form. Picking it is a promise the statute lets you keep. Not picking it is not a failure of civic virtue; it is an accurate read on what the business is for.

Sources

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