New Amendments to Delaware’s General Corporations Act will make it easier for corporations to become public benefit corporations | Faegre Drinker Biddle & Reath LLP
On July 16, 2020, Delaware passed new amendments to its public benefit corporation statute, continuing a trend to make this relatively new form of corporation more accessible. The amendments, among other things, (i) reduce barriers to using the public benefit company form by eliminating supermajority voting requirements and valuation rights in connection with conversion or merger with a public benefit corporation, (ii) clarify the conflict of interest rules and provide default statutory protection to directors as part of their duty to balance interests and (iii) clarify the requirements for shareholders to take legal action to enforce the balance requirements required of public benefit corporations.
Public Benefit Corporations (PBCs) are for-profit corporations that aim to produce one or more public benefits and operate in a responsible and sustainable manner. A key distinction between a public benefit corporation and a conventional corporation is that a board must manage a PBC in a manner that balances (1) the pecuniary interests of shareholders, (2) the best interests of those who are materially affected by the conduct of the company (e.g., employees, customers, suppliers, local communities, etc.), and (3) the public purpose or public benefits identified in the company’s certificate of incorporation. public utility company. The amendments to Sections 363, 365, and 367 of the Delaware General Corporate Law (DGCL) are described in more detail below:
- Elimination of super-majority voting rights. Amendments to Section 363 of the DGCL reduce from two-thirds to a simple majority the shareholder vote required for (1) amendments to a certificate of incorporation to effect the conversion from a conventional corporation to a corporation of public benefit (and vice versa) and (2) mergers that result in the conversion of shares of a conventional corporation into shares of a public benefit corporation (and vice versa).
- Elimination of appraisal fees. DGCL Section 363(b)(2) Amendments Eliminate Assessment Fees for (1) Amendments to a Certificate of Incorporation to Effect the Conversion from a Conventional Corporation to a Public Benefit Corporation (and vice versa) and (2) mergers that result in the conversion of shares of a conventional corporation into shares of a public benefit corporation (and vice versa).
- Clarification of provisions relating to interested directors. Changes to Section 365(c) clarify that a director will not be considered “interested” in a balancing decision required by Section 365(a) based solely on ownership or his interest in actions of public interest. corporation, except to the extent that such ownership would create a conflict if the corporation were not a public benefit corporation. The amendments also provide that in the absence of a conflict of interest, failure to comply with the balance requirement will not constitute an act or omission of bad faith for the purposes of section 102(b)(7). ) (the statutory section allowing corporations to include provisions in their certificates of incorporation eliminating pecuniary damages for a director for breach of fiduciary duty) or section 145 (dealing with indemnification of officers and directors ), unless the certificate of incorporation expressly provides otherwise. The change eliminates the need to include a separate provision in the certificate of incorporation to protect directors from violations under section 365(c) by instead making it the statutory default.
- Representation for enforcement measures. The amendments to section 367 specify that any legal action to enforce the balancing requirement must be brought by plaintiffs holding at least 2% of the outstanding shares of the utility company or, in the case of some listed companies, shares worth at least $2,000,000 if that number is lower.
The Amendments (other than those to Section 363(b)(2)) became effective upon proclamation. The amendments to repeal section 363(b)(2) will apply to a merger or amalgamation effected pursuant to an agreement entered into (or, with respect to a merger effected pursuant to section 253, to resolutions of the Board of Directors passed ) on or after July 16, 2020.
To date, most companies that have adopted the for-profit model are closely held private companies. The 2020 amendments, however, significantly reduce statutory barriers for public and widely held companies to become public benefit corporations and could open the door for more companies to consider this option.
The vast economic and social disparities increasingly brought to light by the COVID-19 pandemic and widespread social and political unrest have highlighted for many the potential benefits of a stakeholder-based model. As investors and other stakeholders increasingly focus on corporate social responsibility, environmental, social and governance (ESG) considerations and impact investing, the for-profit company model is growing in popularity and attracting the national attention of lawyers, major institutional investors and the business community. In 2019, the business round table issued a statement on the one company goal signed by more than 180 CEOs – although it does not explicitly mention benefit companies, the statement endorsed a stakeholder-driven approach. In his annual letter to CEOs, Larry Fink, head of BlackRock, the world’s largest institutional investor, called on companies to be “deliberate and committed to achieving their purpose and serving all stakeholders.” Some companies have already taken the leap: Innovative insurance company Lemonade, Inc., which some have called an insurtech unicorn, just went public as a for-profit company this month. It joins Laureate Education as one of the few companies to do so. Legal heavyweight Leo Strine, the former chief justice of the Supreme Court of Delaware, has praised the for-profit company model and called on the Business Roundtable and major institutional investors to come on board. While it remains to be seen how well the profit-making model will be adopted, particularly among public companies, with the recent amendments in Delaware it will be much easier for existing companies to meet the challenge.