Sunday, January 15, 2012

New York State Welcomes Benefit Corporations

On December 13, 2011, Governor Cuomo signed a new law that will allow New Yorkers to form benefit corporations, also known as B Corps. This act makes New York the seventh state to have benefit corporations, after Maryland, California, Hawaii, Vermont, Virginia and New Jersey. The law goes into effect on February 10, 2012. A new Article 17 has been added to the New York Business Corporation Law that lays out the rules relating specifically to New York benefit corporations.

Before this law, directors and officers of a New York corporation could take into account non-financial values when making decisions on behalf of the corporation, but were not required to do so. The ultimate goal was still to maximize shareholders value. A benefit corporation is able to require its directors and officers to consider non-financial values (not just the interests of the shareholders) when rendering decisions on behalf of the corporation.

There are three main aspects that differentiate a benefit corporation from a regular corporation: (1) a benefit corporation has a corporate purpose to create general public benefit (unlike a regular corporation that can exist for any lawful purpose); (2) its directors and officers have expanded fiduciary duties that require them to consider non-financial values; and (3) a benefit corporation has to publish an annual report measuring its social and environmental performance against an independent standard. “General public benefit” is defined as “a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”

Any existing New York corporation can choose to become a benefit corporation by amending its certificate of incorporation to state that it is a benefit corporation. This can be done only upon a ¾ vote of the shareholders. Likewise, a New York benefit corporation can terminate its status as a benefit corporation at any time by amending its charter to delete the statement that it is a benefit corporation, upon a ¾ vote by the shareholders. Every benefit corporation has a purpose of creating general public benefit. A benefit corporation may also identify a specific public benefit in its charter.

Directors and officers of a benefit corporation must act in the best interests of the stakeholders, a broad group of people that includes, in addition to the shareholders, customers, suppliers and employees of the corporation. Directors and officers also have to consider the community, local and global environment, and the short and long-term interests of the company when making decisions on behalf of the corporation. As a result, the benefit corporation shareholders may see lower financial returns.

The expanded fiduciary duty of directors and officers broadens their potential liability. The new law addresses this concern by limiting the group of people to whom directors and officers owe such expanded fiduciary duty. Section 1707(c) states that directors and officers do not owe fiduciary duties to anyone who could be deemed to be a beneficiary of the general or specific purpose of the benefit corporation, unless the charter or by-laws so provide. This means that directors and officers of a benefit corporation do not owe fiduciary duties to the various stakeholders other than the shareholders, and they cannot bring a lawsuit against directors or officers for breach of the fiduciary duties. This still allows benefit corporations and their directors to be sued by the shareholders for failure to achieve the general public benefit, for failure to consider interests of the various stakeholders when making decisions, or for failure to publish the annual report.

Section 1708 requires benefit corporations to post on their website, file with the Department of State and send to all shareholders an annual benefit report that measures the company’s overall social and environmental performance against a third party standard. There are many third party standards that can be used, and the directors and shareholders are free to choose one. B Lab is one such commonly used standard. Benefit corporations do not have to get certified by B Lab. The certification process is separate from becoming a benefit corporation under New York law.

Overall, the new law reflects the desire by many to add a mandatory social mission to the corporate America. It will not be surprising if in the near future most corporations choose to become benefit corporations. For now, New York, together with six other states, is at the forefront of the national movement to legally enable corporations to have triple bottom lines. Some aspects of how benefit corporations will work still remain unsettled, especially due to the absence of case law relating to fiduciary duties of a benefit corporation’s officers and directors.

The information contained in this article is for general informational purposes only. It is not intended to and does not amount to legal advice. You should not rely on the general statements of law which appear in this post, which may not be applicable to the particular facts of your situation.

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