Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 9 MIN READ

The benefit corporation at ten

Maryland's April 2010 statute is a decade old, 36 states and DC now have the form, and the only listed Delaware PBC still trades below its IPO

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 7 sections
  1. What Maryland did in April 2010
  2. The adoption scorecard at ten years
  3. B Lab certification is the other scoreboard
  4. The Chancery docket is still empty
  5. Laureate Education and the single public data point
  6. The ten-year verdict
  7. Sources

en years ago this April, Maryland enacted the first benefit corporation statute. Thirty-six states and the District of Columbia now have some version of the form on the books, the Delaware Public Benefit Corporation subchapter has been live since August 2013, and the single Delaware PBC that has traded on a U.S. exchange for a full cycle has spent most of that cycle below its IPO price.

This is the ten-year view. The form exists, the statutes work, and the scale remains small.

What Maryland did in April 2010

Governor Martin O'Malley signed Senate Bill 690 on April 13, 2010, adding Subtitle 6C to Title 5 of the Corporations and Associations Article of the Maryland Code and making Maryland the first U.S. jurisdiction to authorize a benefit corporation. The statute took effect October 1, 2010. Its architecture was straightforward: a benefit corporation is a for-profit corporation whose charter commits the board to pursue a "general public benefit," defined as a material positive impact on society and the environment taken as a whole, assessed against a third-party standard. Directors are shielded from monetary liability for considering non-shareholder interests and are required to consider them. The form also requires an annual benefit report delivered to shareholders and posted publicly.

That structure, drafted by the attorney William H. Clark, Jr. of Drinker Biddle & Reath and circulated by B Lab, became the template for what eventually got called the model benefit corporation legislation. States that followed Maryland's lead (Vermont in May 2010, New Jersey in March 2011, Virginia in March 2011, California in October 2011) mostly adopted the model with light edits. The model has gone through several iterations since, most recently a refresh that circulated through state bar committees in 2016 and 2017.

Delaware did not follow the model. When Governor Jack Markell signed Senate Bill 47 on July 17, 2013, creating Subchapter XV of the Delaware General Corporation Law at 8 Del. C. §§ 361 through 368, the drafting committee chose a narrower and more corporate-lawyerly architecture. A Delaware PBC has to identify a specific public benefit in its certificate of incorporation. Directors owe a balancing duty to shareholders, to the specified public benefit, and to those materially affected by the corporation's conduct. The form requires a biennial statement to shareholders and does not require public disclosure or a third-party standard. That quieter approach is what most venture-backed and publicly traded PBCs have organized under.

We walked through the original Maryland-versus-Delaware design choice in our 2016 piece on the form and came back to the question at eighteen months and again at the 2019 Delaware amendment cycle. What has happened between those check-ins and today is a steady, unspectacular accretion of adoptions and a striking lack of litigation.

The adoption scorecard at ten years

Thirty-six states plus the District of Columbia have enacted a benefit corporation statute as of early 2020, per B Lab's state-by- state tracker. The adoption wave broke in two phases. The first, from 2010 through about 2014, added most of the coastal and industrial states plus a cluster of early-signal jurisdictions (Hawaii, Oregon, Louisiana). The second, slower phase has brought the Mountain West and the upper Midwest into the count: Idaho in 2015, Tennessee in 2015, Kansas in 2017, Wisconsin in February 2018, Kentucky in 2017, Alaska in 2015. Texas added a limited variant, the social purpose corporation, in 2013 and did not adopt the model benefit statute proper. A handful of states sit outside the count with related but distinct forms: California's Social Purpose Corporation under Corp. Code §§ 2500 through 3503, Washington's Social Purpose Corporation under RCW 23B.25, and Florida's Social Purpose Corporation under Fla. Stat. § 607.501 through § 607.513. Our 2016 state-level scorecard stepped through that distinction; it still reads cleanly.

Fourteen states have not enacted a benefit corporation statute, most of them Southern or Plains states. The holdouts include Alabama, Mississippi, North Dakota, South Dakota, Wyoming, New Mexico, Oklahoma, Georgia, Iowa, North Carolina, Ohio, Michigan, and Maine. The regional pattern is what it has been since 2012: the form gets adopted where there is a cluster of mission-driven employers asking for it, and it sits on the shelf where there isn't.

Within the states that have adopted, active benefit corporation filings remain a small fraction of total annual corporate formations. Maryland's Department of Assessments and Taxation, which publishes entity counts, has benefit corporation filings in the low four digits cumulatively against an annual total corporate formation pace in the low six digits. Delaware does not break out PBC filings in its annual report, but the Division of Corporations' cumulative PBC count sits in the low four digits against the state's 1.5 million active entity population. Pennsylvania, which has been an early and enthusiastic adopter, has benefit corporation filings in the hundreds per year against LLC formations in the mid-five-figures. The ratio is the same everywhere: the benefit corporation is available and used, but it is not chosen by default.

B Lab certification is the other scoreboard

The statutory form and the B Lab certification are two different things, and keeping them straight matters. A Certified B Corporation is a business that has completed B Lab's B Impact Assessment, scored at least 80 on the 200-point scale, and paid an annual certification fee. Incorporation as a statutory benefit corporation is a separate legal step, taken with a Secretary of State. Some Certified B Corporations are also statutory benefit corporations; some are not; some statutory benefit corporations have never sought certification.

As of early 2020, B Lab reports more than 3,200 Certified B Corporations across over 70 countries, with more than 2,550 in the United States region of its directory. That is up from roughly 2,100 certified companies when we last checked the count in mid-2018, and up from a few hundred a decade ago. The certification has grown at roughly 15 to 20 percent a year, which is neither the exponential curve that B Lab itself projected in its early materials nor the stall that skeptics predicted.

The two numbers that matter at the ten-year mark are these. Statutory formations are small and growing slowly. Certifications are larger and growing faster. The interpretive move is that the market has found B Lab's third-party score more useful as a signal than the state-law form itself. For a consumer brand that wants to say something about its governance, the certification shows up in marketing and on packaging. The statutory form does not, because most customers cannot distinguish it from a plain C-corp.

The Chancery docket is still empty

A decade in, no Delaware Court of Chancery opinion has interpreted the § 365 balancing duty in a contested case. The closest thing to a merits engagement has been occasional citations in footnotes and in treatise chapters, including in the 2018 and 2019 Chancery benchbook updates. The bench has had the statute in front of it and has not been asked to apply it to a fiduciary-duty claim.

That is a conspicuous absence. Over a comparable ten-year stretch Delaware's appraisal statute at 8 Del. C. § 262, its fair-price analysis under Weinberger v. UOP, Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), and its post-merger fiduciary doctrine under Revlon and Unocal accumulated hundreds of opinions. The PBC subchapter has accumulated essentially none. The most common inference is that PBCs have not yet been the subject of control transactions or large-dollar fiduciary litigation at the rate ordinary Delaware corporations have. A second inference is that directors and shareholders in PBCs are settling disputes before they ripen, because the balancing duty is novel enough that no one wants to be the test case. A third inference is simply that there have not been enough large PBCs for long enough.

Without a written opinion the statute's actual operational effect, which is to say how a Chancellor would weigh a shareholder's claim that directors gave too much weight to the specified public benefit at the expense of a share-price-maximizing merger, remains a construct. It is a construct most transactional lawyers can describe but none can point to a ruling on. That is the same place we were at the five-year and seven-year marks.

Laureate Education and the single public data point

The one publicly traded Delaware PBC with a full trading history is Laureate Education, Inc. (NASDAQ: LAUR), which priced its IPO at $14 on January 31, 2017 and began trading February 1, 2017. A decade into the benefit corporation experiment, and three years into Laureate's life as a listed PBC, the stock has traded in a band mostly below its IPO price. Through 2019 LAUR closed most trading days between $15 and $20, with an October 2019 peak in the mid-$20s tied to a strategic review that included divestitures of assets in Chile, Malaysia, India, and other markets. As of the beginning of 2020 the shares are in the high teens. The company has been profit- able on an adjusted basis, has continued to file its biennial PBC statement, and has not faced a § 365 challenge.

The tape does not support the underwriter-friendly thesis that the PBC structure commands a pricing premium, and it does not support the critic-friendly thesis that PBC status penalizes valuation in a way that blocks access to public markets. The signal is flatter than either side was ready for. Laureate's business, a roll-up of for-profit universities on four continents, is a complicated story and the PBC overlay has been a small factor inside it. What the chart mostly shows is that you can run a public PBC for three years without the form itself becoming a problem.

The ten-year verdict

The form works. It is on the books in 36 states plus the District of Columbia, it has a coherent Delaware implementation with three years of public-market data behind it, it has a steady pipeline of certifications at B Lab running ahead of statutory formations, and it has yet to produce the Chancery opinion that would tell practitioners how the balancing duty actually decides a hard case.

Scale is the honest caveat. Ten years into a corporate form that was marketed as a structural alternative to the shareholder-primacy default, the benefit corporation is a rounding error in total entity formations. In the states that have adopted it, the ratio of new benefit corporation filings to new LLC filings is roughly one to several hundred. The form is available to founders who want it, and the founders who want it have been a niche, not a wave.

For a founder in January 2020 deciding whether to organize as a benefit corporation or a Delaware PBC, the ten-year record has clarified two things. The statutes are real law, drafted by real committees, and they do what they say. And the market has not yet found the situation in which choosing the form gives a company an advantage its competitors cannot match by other governance means. The second finding is the one that will either change in the next decade or settle the question.

Sources

Keep reading

More from the journal.