Delaware Public Benefit Corporations 90 Days Out: Who’s Opting In?

On August 1, 2013, amendments to the Delaware General Corporation Law (DGCL) became effective, allowing entities to incorporate as a public benefit corporation, a new corporate form that requires managers to produce a public benefit and balance shareholders’ financial interests with the best interests of stakeholders materially affected by the corporation’s conduct.

In my paper, Delaware Public Benefit Corporations 90 Days Out: Who’s Opting in?, I present empirical research on the companies that adopted the Delaware public benefit corporation form within the first three months of the effective date of the amended DGCL.

My research shows that 55 public benefit corporations incorporated or converted from other entity types within the first three months of the effective date of the amendments to the DGCL. Based on publicly available information and documents such as corporate charters, I analyze these first 55 public benefit corporations with respect to the following characteristics: (1) year of incorporation as a proxy for corporate age, (2) industry, (3) charitable activities, (4) identified specific public benefit, and (5) adoption of model legislation options not required by the Delaware statute.

First, I find that 74.5% of public benefit corporations incorporated in Delaware in 2013. Although not a perfect proxy, I use incorporation in Delaware as a proxy for length of corporate existence. Barring subsidiary or other relationships with existing companies, these results imply that 74% of public benefit corporations are new small businesses. The corporate age of most public benefit corporations raises questions about the likelihood of their long-term performance and success. Many new small businesses fail. Public benefit corporations may find success even more illusive given the statutory intent that they “operate in a responsible and sustainable manner” and requirement that they employ stakeholder governance management. Sustainable and responsible operations may siphon funds that these new small businesses do not have.

Second, my results show that 31% of public benefit corporations provide professional services (e.g., consulting, legal, financial, architectural design); the technology and education sectors each represent 11% of public benefit corporations; and 9% are engaged in the healthcare sector. 11% of public benefit corporations within the cohort analyzed produce or sell non-perishable consumer products. Notably, two of the most profitable and perhaps most well-known public benefit corporations fall into the consumer retail product category: Method Products, PBC and Plum, PBC.

At face value, companies in the technology, healthcare, and education sectors satisfy the minimal requirements of the public benefit corporation form, because positive “educational,” “medical,” and “technological” effects are each considered a “public benefit” by the DGCL. The “public benefit” that companies in other industries provide is open to debate.

Third, I find that 35% of public benefit corporations could have alternatively incorporated as a charitable nonprofit exempt from federal income tax. This result begs that question as to why a firm that could become a nonprofit organization with 501(c)(3) tax-exempt recognition would choose to become a public benefit corporation. The public benefit corporation is often discussed as an alternative to a traditional for-profit corporation and couched in terms of improving the for-profit sector through combating short-termism and encouraging social and environmental sustainability. It is less often described as an alternative to a charitable nonprofit. Further research is needed to determine the factors that lead these founders to select a for-profit public benefit corporation over a nonprofit corporation.

Fourth, many of the filed charters of the 55 public benefit corporations fail to state a specific public benefit, despite a statutory requirement to do so. These charters instead simply recite statutory language regarding stakeholder governance management—i.e., a statement promising to balance various stakeholders’ interests—or state language from the model benefit corporation statute regarding some general public benefit—i.e., that the specific public benefit is to “create a material positive impact on society and the environment.” Proponents of the public benefit corporation and the legislature intended that the statement of a specific public benefit would focus directors in carrying out a specified mission and also give stockholders notice (and control over) the specified public benefit. Omissions of a specific public benefit seemingly thwarts such goals.

Finally, in my article I also present a legal analysis of the statutory requirements of a Delaware public benefit corporation and compare them to the model statutory requirements for benefit corporations. I highlight two features of public benefit corporations—adoption of stakeholder governance management and pursuit of a public benefit. These two distinct features are often discussed as if they are one and the same; however, they have separate legal significance and consequences with respect to director liability.

Overall, my article presents early, yet important research that fills an informational gap about how the public benefit corporation has been employed initially.

The full paper is available for download here.