Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 11 MIN READ

The public benefit corporation, a 2021 field report

Delaware's HB 341 cut the conversion threshold to a majority vote, and three Delaware PBCs priced IPOs inside eight months

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 6 sections
  1. What HB 341 changed in the statute
  2. Three listed PBCs in eight months
  3. The operational mechanics post-HB 341
  4. What the comparable states look like in 2021
  5. What to tell a founder this quarter
  6. Sources

wenty months after we last walked through Subchapter XV, the Delaware public benefit corporation is a different animal. Governor Carney signed House Bill 341 on July 16, 2020, the conversion threshold dropped from two-thirds to a simple majority, the director disinterestedness overhang cleared, and by the end of February 2021 three Delaware PBCs had priced on U.S. exchanges. The form stopped being a curiosity.

This is the 2021 field report. What HB 341 actually did, which issuers tested it, and what a founder forming this month should do with the result.

What HB 341 changed in the statute

The 2020 amendment package rewrote three of the most load-bearing sections of Subchapter XV. The Corporation Law Council had left the statute alone in 2018 and 2019 (we covered that twenty-month stretch here) and then used the 2020 cycle to clear three specific frictions that practitioners had flagged as blocking listed-company conversions.

The first change is the vote threshold. Prior law at 8 Del. C. § 363(a) and (c) required a two-thirds vote of the outstanding shares to amend a conventional certificate of incorporation to become a PBC, and the same two-thirds vote to convert out. HB 341 repealed those subsections. Conversions in either direction now run under the default majority rule of § 242(b) for charter amendments and § 251 for mergers. A public company with widely dispersed ownership no longer has to clear a supermajority hurdle that it probably could not clear on any controversial vote. The change is retrospectively obvious, and it was the one statutory barrier that kept boardroom conversations about converting a listed C-corp to a PBC from finishing.

The second change is the appraisal right. The old § 363(b) gave dissenting stockholders statutory appraisal rights in a PBC conversion even when the transaction would not otherwise have triggered appraisal. HB 341 eliminated § 363(b). Appraisal in a PBC conversion now follows the ordinary § 262 rules, meaning it attaches in a merger for cash but not in a charter amendment or a stock-for- stock deal. The deal lawyers drafting around PBC conversions lose a variable and gain predictability.

The third change is the director-disinterestedness gloss on § 365. The bill amended § 365(c) to clarify that a director is not "interested" in a balancing decision by virtue of stock ownership in the PBC, except to the extent the ownership would create a conflict in an ordinary corporation. The amendment also added a default rule that a director's failure to balance the § 365(a) interests does not itself constitute an act or omission in bad faith for purposes of exculpation under § 102(b)(7) or indemnification under § 145, unless the certificate says otherwise. Both pieces are cleanups of a worry that had floated in practitioner commentary since 2013: that any director holding the company's stock might be deemed conflicted in every balancing decision, or that a good-faith balancing error might pierce the usual protection against monetary liability. The statute now says no to both.

Read against the 2013 enactment in SB 47 and the 2015 tune-up in HB 80, the HB 341 package is the third wave of the same drafting project. The 2013 bill put the form on the books. The 2015 bill dropped the mandatory "PBC" name suffix and adjusted the vote and reporting thresholds. The 2020 bill took the remaining teeth out of the conversion mechanism and closed two fiduciary-duty rabbit holes that had not produced a case but had produced a lot of nervous memoranda.

Three listed PBCs in eight months

The bar chart the founders wanted has finally drawn itself. Between July 2020 and February 2021 three Delaware PBCs priced on U.S. exchanges. We now have data points, not just Laureate Education trading sideways.

Lemonade, Inc. (NYSE: LMND) priced its IPO at $29 per share on July 2, 2020, raising roughly $319 million, and opened trading at more than double its IPO price. The company's restated certificate, filed as Exhibit 3.1 to its July 10, 2020 Form 8-K, identifies Lemonade as a public benefit corporation under Subchapter XV and specifies the public benefits it commits to promote. Lemonade's charter predated the HB 341 amendments by a few weeks, but its S-1 cover page disclosed the PBC structure in full and the underwriters priced the book without a PBC discount.

Vital Farms, Inc. (NASDAQ: VITL) followed four weeks later. The company priced 9,303,977 shares at $22.00 on July 30, 2020, began trading July 31, and opened around $35, finishing the day up about 60% from the IPO price. Vital Farms had elected PBC status in October 2017, per its 10-K for the fiscal year ended December 26, 2020, and had also held a B Lab certification throughout. The charter identifies the public benefits as bringing ethically produced food to the table and related mission commitments. Gross proceeds from the offering were approximately $205 million on a market capitalization near $991 million at the IPO price.

AppHarvest, Inc. (NASDAQ: APPH) reached the tape by the SPAC route. Novus Capital Corp. (NOVS) shareholders approved the business combination on January 29, 2021, and AppHarvest began trading as APPH on February 1, 2021. The combined company is a Delaware PBC and a Certified B Corporation, with a mission tied to controlled- environment agriculture in central Appalachia. The deal delivered approximately $475 million of gross proceeds.

Three issuers, three sectors (insurance, packaged food, agriculture technology), three different listing mechanics (traditional IPO on NYSE, traditional IPO on NASDAQ, SPAC merger on NASDAQ). The pattern that emerges is that institutional capital did not penalize the PBC designation in the pricing. The Lemonade book was oversubscribed. Vital Farms traded above its IPO price through the rest of 2020. AppHarvest opened above its trust value. None of the three issuers priced at a discount attributable to Subchapter XV.

That is a different data environment from the one Laureate Education sat in alone from 2017 through 2019. Laureate's flat-to-negative tape had been read by some commentators as a PBC penalty and by others as a for-profit-education-sector problem, with no way to separate the two. Three more issuers with no meaningful sector overlap remove that ambiguity. The PBC label, by itself, does not appear to price.

We reviewed the ten-year adoption picture including the Laureate question in our decade check in January 2020, and the broader benefit-corporation landscape in our 2018 revisit. The story since then has been consistent: slow adoption at the state-law level, faster adoption at the B Lab certification level, and now a cluster of listed issuers that removes the public-market question from the list of reasons to avoid the form.

The operational mechanics post-HB 341

For a Delaware corporation forming or converting in early 2021, the mechanics are cleaner than they were at any prior point in the form's history.

A newly formed Delaware PBC files a certificate of incorporation under 8 Del. C. § 362 that identifies at least one specific public benefit the corporation will promote. The public benefit can be artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological. The certificate may, but is not required to, include the designation "public benefit corporation" in the legal name. The ordinary filing fee, registered-agent requirement, and annual franchise tax apply exactly as they would for any other Delaware corporation. There is no PBC-specific surcharge.

A conventional Delaware corporation converting to a PBC now amends its certificate by majority vote under § 242(b). If the conversion is accomplished by merger, the merger follows § 251 with majority approval. Dissenting stockholders in a cash merger get § 262 appraisal; in a stock-for-stock deal or a charter amendment, they do not. The board may include a PBC conversion in a broader recapitalization without having to pre-negotiate a supermajority.

Once operational, a PBC is bound by § 365(a) to direct the business in a manner that balances three interests: the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation's conduct, and the specific public benefit or benefits in the charter. A PBC must produce, at least biennially under § 366(b), a statement to its stockholders describing its objectives, the standards it uses, and its assessment of success. The charter may tighten any of these default obligations; a publicly traded PBC typically commits to an annual report rather than biennial, delivered either through its proxy materials or as a standalone document. Third-party certification is permitted but not required.

The § 367 derivative-suit threshold remains the lesser of 2% of outstanding shares or, for listed PBCs, 2% of outstanding shares or $2 million in market value. That is a meaningful filter that keeps small-dollar balancing-duty suits out of Chancery. It has also continued to mean that the body of § 365 case law remains thin, because plaintiffs meeting the threshold are rare and the ones who do meet it tend to settle.

What the comparable states look like in 2021

The benefit corporation form remains a patchwork across the rest of the country. The count of adopting jurisdictions sits near 37 states plus the District of Columbia, little changed from the 2020 tally. California runs a parallel regime in two flavors: the benefit corporation under Corp. Code §§ 14600 through 14631, and the social purpose corporation under §§ 2500 through 3503, which authorizes a for-profit corporation to pursue one or more narrower "special purposes" rather than the open-ended general public benefit. Washington's social purpose corporation under RCW 23B.25 is a close cousin to California's SPC. Maryland remains the original benefit corporation jurisdiction under § 5-6C of the Corporations and Associations Article.

The state-of-record question for a mission-committed venture-backed company remains Delaware. The alternative-entity package we walked through in July 2019 (statutory public benefit LLCs at 6 Del. C. §§ 18-1201 through 18-1208 and statutory public benefit LPs at §§ 17-1201 through 17-1208) is unchanged going into 2021. Those subchapters cover the operating-company and fund cases where a PBC corporate wrapper is not the right fit.

There is a federal overlay worth naming, because a formation this quarter will touch it. The Corporate Transparency Act, enacted as Division F of the 2021 National Defense Authorization Act when Congress overrode the presidential veto on January 1, 2021, will require most U.S. corporations and LLCs to file beneficial-ownership information with FinCEN once the implementing rules are final. The statutory text applies to reporting companies generally and does not carve out PBCs. A Delaware PBC forming in 2021 should plan on FinCEN reporting in the same way a conventional C-corp will once the rules become effective.

What to tell a founder this quarter

The honest read in March 2021 is that the statutory case against forming as a Delaware PBC has narrowed to almost nothing, and the public-market case against the form has been partially retired by three successful listings.

For a venture-stage company whose mission is part of its product story, Subchapter XV is now the cleanest wrapper available. The § 365(b) balancing framework sits on a statutory base that has been amended three times, most recently to close the two friction points (conversion vote, director exposure) that used to matter most to VCs. The § 367 derivative-suit threshold filters nuisance claims. The § 366 biennial-report obligation is trivial to meet, and sophisticated issuers exceed it voluntarily.

For a later-stage company considering a conversion, HB 341 is the permission slip that was missing. A majority vote is achievable; a two-thirds vote of dispersed public holders was not. Boards that had tabled the question in 2018 or 2019 because of the vote threshold can put it back on the agenda in 2021 without having to negotiate a special-committee process against an impossible numeric target.

For a consumer brand, the calculation is slightly different. The statutory form and the B Lab certification are separate products, and consumers mostly recognize the B Lab mark. Vital Farms carries both; so do a meaningful number of private CPG companies. A founder who wants customer-facing credit generally needs the B Lab certification regardless of the corporate form, and the statutory PBC by itself will not do that marketing work. The statutory form does the governance work; the certification does the signal work.

One thing the 2021 data does not tell us is how a contested § 365 balancing claim would resolve in Chancery. No such opinion has issued. The first one will make law, and the drafting choices issuers are putting into their charters in 2021 (expanded public benefits, annual reporting, references to third-party frameworks) are being made against an unknown judicial backdrop. A founder picking the form in 2021 is making the same bet the 2016 cohort made, with better statutory protection and a public-market reference set. Progress, not certainty.

Sources

Keep reading

More from the journal.