I. The Basic Difference Between a Traditional Corporation and a Benefit Corporation
The corporate form is a legal entity with a well-established primary purpose: to generate profit for the corporation’s shareholders.1 Although the advisability and impact of the so-called “shareholder primacy norm” has often been debated,2 the norm has endured and still commands the respect of modern American courts.3
Despite the enduring emphasis on shareholder primacy, a relatively new business entity has emerged that challenges the norm. Benefit corporations are a variation on the traditional corporate form that combine the attractive features of traditional corporations (limited liability, for-profit status, etc.) with the ability to pursue goals beyond the maximization of its shareholders’ wealth. Although the statutory definition of a benefit corporation varies from state to state, it is sufficient to describe these new entities as “for-profit organizations that are required by law to create a material positive impact on society and the environment in addition to generating a profit . . . Directors and shareholders define what it means to be good for society and the environment.”4 Benefit corporations were statutorily authorized in Delaware in 2013.5
II. Shareholder Primacy and Benefit Corporations Work Together to Incentivize Traditional Corporate Directors to Focus Only on Wealth Maximization
Theoretically, traditional corporations are free to pursue certain humanitarian, philanthropic, or environmental—or socially responsible—interests, and need not focus solely on maximizing shareholder wealth. However, the advent of a corporate form that allows investors to choose a non-wealth focus actually works to undermine the freedoms enjoyed by traditional corporate entities.
The American Law Institute (“ALI”), a dominant voice in the area of corporate governance,6 acknowledges shareholder primacy as the driving force in corporate decision-making.7 Nevertheless, ALI would also give traditional corporations (and, thus, their directors and officers) the ability to overlook shareholder primacy in three broadly-defined situations.8 The first situation is mandatory: shareholder primacy is always secondary to a corporation’s obligation to act lawfully.9 The next two situations grant traditional corporations discretion to consider factors other than the generation of shareholder wealth: (1) a corporation may take ethical concerns into account in conducting its business, and (2) corporations may “devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes.”10 Prior to the existence of benefit corporations, the notion that traditional corporate entities could pursue a range of socially responsible activities was far from contentious; in fact, several alternative legal theories supported the ability of corporate directors to pursue behavior that benefitted the public.11
However, benefit corporations give shareholders a choice. Now, investors may choose to devote their funds either to corporations formed with a primary purpose of social responsibility, or traditional corporations following the norm of shareholder primacy. This new situation seems to create a dichotomy between two dueling corporate forms. This is problematic because the American legal system places a premium on “freedom of contract.” In such a system, it is difficult to see why the directors and shareholders of a traditional corporation shouldn’t be completely beholden to the goal of shareholder wealth maximization, given that those same individuals now have the choice to participate in a corporation with an alternative goal. Perversely, benefit corporations could plausibly be seen as incentivizing the directors of traditional corporations to ignore public benefit concerns out of fear of being summoned into court by shareholders who – by their very nature as shareholders of a traditional corporation – signal their desire for wealth maximization. If nothing else, the legal protection for traditional corporate directors who desire to consider non-shareholder interests is made much murkier as a result of the concept of benefit corporations.
The most recent Delaware case with a serious focus on shareholder primacy confirms the real risk posed by the new corporate entity dichotomy. In an opinion issued before benefit corporations became widespread, a Delaware court – taking a narrower view of corporate freedom than the ALI – boldly stated, “Promoting, protecting, or pursuing nonstockholder [sic] considerations must lead at some point to value for stockholders.”12 The court immediately proceeded to offer the familiar reassurance of the business judgment rule,13 but, if a shareholder is free to choose a benefit corporation instead of a traditional corporation, would emphasizing philanthropic concerns fall within a traditional corporation’s valid business judgment? Even if benefit corporations fail to herald the end of traditional corporate freedom, it seems plausible that a traditional director might experience some shrinkage within the margins of his decision-making.
Worse still, the liability risk posed by the advent of benefit corporations need not be apparently imminent in order to chill traditional corporate social responsibility. The subjective perception of traditional corporate directors (and, to some extent, the perceptions of corporate lawyers) drives risk assessment, so the existence of benefit corporations need only give the appearance of an increased litigation risk. Some have already realized that this new risk exists. Joshua Fershee (Associate Dean for Faculty Research & Development at West Virginia University College of Law) pointedly observed, “Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed . . . as pure profit vehicles.”14 Fershee then concluded that this actually narrows the freedom directors have to consider the public benefit in making decisions.15 If a significant portion of traditional corporate directors reach the same conclusion, it seems inevitable that corporate social responsibility will plummet.
Taken in conjunction with the eBay court’s warning not to overly focus on the benefit of non-shareholders, this possible impact of benefit corporations might force actors working on behalf of traditional corporations to be cautious until further litigation defines the new boundaries of their liability. Inadvertently, the creation of benefit corporations may have incentivized traditional corporate entities to focus even more narrowly on the bottom line.
III. Organization as a Benefit Corporation Offers Entities No Advantage in Pursuing the Public Benefit
Arguably, benefit corporations limit the social responsibility of traditional corporations while offering no substantial advantage over the traditional corporate form. B Lab, the group credited with the creation of the benefit corporation concept,16 reports that benefit corporations are primarily intended to address two perceived problems inherent in the organization of traditional corporations motivated by shareholder primacy: (1) the difficulty shareholder primacy presents “for corporations to [consider non-shareholder stakeholders’ and environmental concerns] when making decisions,” and (2) an “absence of transparency” that disables consumers from telling the good corporations from corporations with “good marketing.”17
It is difficult to see how a benefit corporation is a significant improvement from the traditional corporate form. Any claim that benefit corporations create new legal protections for directors to pursue the public benefit must be contrasted with the degree of freedom ALI suggests traditional corporations enjoy.18 Even the eBay opinion, with its seemingly stringent emphasis on shareholder primacy, left traditional directors insulated by the business judgment rule and only required that a corporation’s philanthropic pursuits provide shareholders with value at some point.19 In many regards, benefit corporations fail to offer their directors anything that the directors of traditional corporations (pre-benefit corporations) did not already enjoy under the business judgment rule.20
ALI itself offers guidance that applies to benefit corporations, and also suggests that any changes to the norm of shareholder primacy should have come about through case law, rather than legislation. In its commentary, ALI notes:
Many states now have statutes concerning some of the issues covered by this Section, but few of these statutes achieve a result that could not be achieved by the courts, and in general the statutes need to be read against the case law background. Because attitudes toward the matters covered by § 2.01 are likely to continue to evolve, the principles embodied in this section would seem to be better implemented by case law than by legislative codification.21
Moreover, the directors of benefit corporations are on new territory, meaning their litigation risk is new and unknown. Benefit corporations – being a comparatively young variety of business entity – have yet to spawn much litigation, meaning that directors of these entities have little insight into the liability they might amass.22 Other litigation risks that are alien to traditional corporate directors have been identified, such as the potential liability of a director that is beholden to multiple constituencies.23
The impetus behind the creation of benefit corporations is commendable. However, the existence of an alternative corporate form may have a troubling impact on the social responsibility of traditional corporations, and benefit corporations may not offer much in return. Shareholder primacy, though often criticized and imperfect, allowed enough room for traditional corporations to pursue socially responsible activities, if so desired.
In claiming the socially responsible corporate form for themselves, benefit corporations may have deprived traditional corporations of their liberty to consider the public good, and actually exposed directors to a new set of legal risks. With the large amount of traditional corporations that remain, the existence of benefit corporations and their monopoly on corporate “goodness” may have unfortunate consequences.
See Dodge v. Ford Motor Co., 204 Mich. 459, 507 (1919). ↩
See, e.g., Robert Sprague & Aaron J. Lyttle, Shareholder Primacy and the Business Judgement Rule: Arguments for Expanded Corporate Democracy, 16 Stan. J. L., Bus. & Fin., Fall 2010, at 1 (2010). ↩
See eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (Del. Ch. 2010). ↩
CT Corp. Staff, Understanding Benefit Corporations, Wolters Kluwer (Sept. 28, 2016), https://ct.wolterskluwer.com/resource-center/articles/understanding-benefit-corporations. ↩
Del. Code Ann. tit. 8, §§ 361, 362 (2013). ↩
See, e.g., Jonathan R. Macey, A Close Read of an Excellent Commentary on Dodge v. Ford, 3 Va. L. & Bus. Rev. 177, 178 (2008) (“[ALI’s] Principles of Corporate Governance . . . [is] considered a significant, if not controlling, source of doctrinal authority . . . ”). ↩
Principles of Corp. Governance: Analysis and Recommendations § 2.01 (Am. Law Inst. 1994). ↩
See Joshua Fershee & Elaine Waterhouse Wilson, March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III), Bus. L. Prof Blog (Sept. 23, 2014), http://lawprofessors.typepad.com/business_law/2014/09/march-of-the-benefit-corporation-so-why-bother-isnt-the-business-judgment-rule-alive-and-well-part-i.html. But see eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (Del. Ch. 2010) (suggesting all corporate activity must generate shareholder wealth). ↩
eBay, 16 A.3d at 33 (emphasis added). ↩
Joshua Fershee, Long Live Director Primacy: Social Benefit Entities and the Downfall of Social Responsibility, Bus. L. Prof Blog (July 18, 2017), http://lawprofessors.typepad.com/business_law/2017/07/long-live-director-primacy-social-benefit-entities-and-the-downfall-of-social-responsibility.html. ↩
Kyle Westaway & Dirk Sampselle, The Benefit Corporation: An Economic Analysis with Recommendations to Courts, Boards, and Legislatures, 62 Emory L. Rev. 999, 1010-1011 (2013). ↩
Id. at 1011. ↩
See Principles of Corp. Governance: Analysis and Recommendations, supra, note 7. ↩
eBay, 16 A.3d at 33. ↩
See Fershee & Wilson, supra note 11 (“The idea that a [traditional] corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts . . . .”); see also Kickstarter Went B Corp –Why Your Company Should Not, Corridor Legal (Sept. 21, 2015), http://corridorlegal.net/index.php/2015/09/21/kickstarter-b-corp-why-your-company-should-not/ (“[Corporations] can achieve all the same goals without making a decision to organize as a B corporation.”). ↩
Principles of Corp. Governance: Analysis and Recommendations, supra note 7, § 2.01, at cmt. b. ↩
See Priya Cherian Huskins, Benefit Corporations: New Risk for Directors and Officers?, Woodruff, Sawyer & Co. (Oct. 8, 2014), https://wsandco.com/do-notebook/b-corp/ (suggesting the same, but also discussing the alternative position: benefit corporations may create more legal protection for their directors). ↩