New Amendment to Delaware’s General Corporations Act Strengthens Delaware’s Status as a Home for Charitable Corporations | Goodwin

[co-author: Eliza Chute, Law Clerk]

Since the adoption in 2013 of a new subchapter of the Delaware General Companies Act, which gave legal persons the option of being incorporated or converting to a public benefit corporation, Delaware has been a attractive jurisdiction to constitute a PBC.[1] Delaware defines a PBC as a company “that aims to produce public benefit (s) and to operate in a responsible and sustainable manner”.[2] In particular, the directors of the PBC are responsible for balancing the profits with the fulfillment by the PBC of its stated public interest.[3] and the interests of those materially affected by the conduct of the PBC.

Unlike many other states that have passed company benefit legislation with more stringent requirements, such as mandatory third party evaluations, a benefit manager and / or officers, and annual employee reports. public benefits available to the public, the DGCL law passed by the Delaware legislature contained provisions. For example, under the DGCL PBC law, third party reviews and manager / benefits manager positions are optional and public interest reports only need to be written twice a year and provided to shareholders of a company. PBC.

The latest amendment to the DGCL, House Bill 341, was enacted on July 16, 2020. In addition to addressing other issues, such as a corporation’s emergency powers, it amended four key provisions of the Delaware law PBC. The end result of these changes is that Delaware has further consolidated itself as the friendliest jurisdiction for those looking to form or convert to a PBC. Regarding PBCs, the new amendment took the following actions:

  • Elimination of specific valuation rights for existing entities converting to PBC: Prior to the adoption of the new amendment, a company that wished to convert into (or proceed with a merger that resulted in a conversion into) a PBC was required to provide its shareholders with valuation rights. These valuation rights have often deterred companies from converting to PBC, especially where the conversion may have triggered a requirement to make difficult cash payments to shareholders. In response to these concerns, the new amendment removed these assessment rights (noting that assessment rights otherwise required under the DGCL regardless of the provisions of the PBC remain in place).
  • Elimination of the super-majority voting threshold: Like almost all states that have enacted charitable corporation legislation, the DGCL previously provided that certain PBC shares required a two-thirds qualified majority vote of the outstanding PBC voting shares, including: (i) merger or consolidation with an entity that is not a PBC and (ii) amend the charter of the PBC to remove or modify the provision relating to the object of the benefit or the provision relating to the requirements of declaration. This qualified majority requirement previously prevented some companies from becoming PBCs due to fear of limiting investors who might be concerned about the limitations of certain exit scenarios. Under the new amendment, these matters now only require the statutory lack of majority approval (unless otherwise specified in a company’s charter).
  • Clarification of conflicts of interest: In addition to the more substantial changes described above, the new amendment also clarified that a director’s interest in the shares of a PBC should not result in a conflict of interest in balancing value for the shareholder of that director with the stated public interest of the PBC and the best interests of those materially affected by the activities of the PBC, except to the extent that such ownership would create a conflict of interest if the company does not was not a PBC. In addition, any failure by a director to comply with the weighting requirement will not constitute an act or omission committed in bad faith for the purposes of limiting liability or indemnifying such director, except in case of conflict of interest or if the charter of the PBC provides otherwise. Delaware law also allows PBCs, like other non-PBC corporations, to include a language in their certificate of incorporation by eliminating monetary remedies as a source of damages in favor of an injunction as a redress for such violations of directors.[4]
  • Clarification of the threshold for derived combinations: Finally, the new amendment clarified that the only shareholders who can bring a derivative legal action or any other type of action to enforce the fiduciary obligations of the directors of the PBC are the shareholders holding at least 2% of the outstanding shares. of the PBC (or, if it is less, that number of shares with a value of at least $ 2,000,000). The new amendment clarified that the provisions of this section do not exempt claimants from complying with other DGCL requirements to bring derivative proceedings.

[1] DGCL Title 8, Chapter 1, Subchapter XV.

[2] DGCL § 362

[3] The DGCL defines a “public interest” in the broad sense as any activity which has a positive effect or reduces the negative effects on persons, entities, communities or interests such as the effects of an artistic, charitable or cultural activity, economic, educational, environmental, literary, medical. , religious, scientific or technological.

[4] Subject to certain limitations in accordance with DGCL § 102 (b) (7).

Luisa D. Fuller