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.

Wednesday, January 11, 2012

Legal Considerations for Mobile Apps Developers

Instead of this week's post, I would like to refer you to my article that was recently published on the children's apps developer forum Moms With Apps.

Thursday, January 5, 2012

Lower Taxes in New York State

December 2011 brought good news to many New Yorkers: the Middle Class Tax Cut and Job Creation Plan. Among other things, this Plan reduces income taxes to their lowest levels in over 50 years. In addition, the MTA payroll tax is eliminated.

The Plan was passed in the hope of fostering private sector job creation, increasing spending and investment in New York State. Overall, 4.4 million New Yorkers will pay less income tax in 2012. Because of the MTA payroll tax elimination, approximately 704,000 businesses that currently pay it will no longer have to do so. This includes 290,000 small businesses with payrolls of less than $1.25 million, 415,000 self-employed individuals, and all public and non-public schools. According to the Plan, manufacturers outside of the MTA region will see their corporate tax rates cut in half, providing $25 million in tax savings. The Plan also aims to adjust the personal income tax standard deductions and income brackets for inflation, which will provide about $440 million in tax savings over the next two years for all New York State residents. Additionally, the Plan eliminates the personal income tax PIT surcharge, which will impact 91% of all taxpayers.

The effectiveness of this Plan in rebuilding the New York State economy remains to be seen, but it is definitely a major step in the right direction.