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E-MailMichael Dorff is the Michael & Jessica Downer Endowed Chair, Southwestern Law School; James Hicks is an Academic Fellow at the University of California, Berkeley, School of Law; and Steven Davidoff Solomon is Professor of Law at University of California, Berkeley, School of Law. This post is based on their recent paper.
The public benefit corporation (“PBC”) is one of the hottest developments in corporate law. The sine qua non of this new form is that directors are permitted under their fiduciary duties to consider purposes other than profit in decision-making. The PBC has thus been described as different from the traditional corporation, which in some measure must be devoted solely to a for-profit motive. The PBC has been hailed as the “new corporate form”: one that permits a corporation to both earn money and serve a social purpose.
While there has been significant hype and theoretical consideration of this new form, to date there has been little empirical study. Critics of the PBC argue that it will be used for “purpose washing,” merely advocating a public purpose for public relations purposes while still maintaining a purely for-profit motive. Critics also argue that the current corporate form has enough latitude to serve multiple purposes. Advocates counter that the PBC will do nothing less than transform the U.S. capital markets, arguing that the profit maximization norm has contributed to a litany of preventable social ills, from global warming to income inequality, and from declining job stability to political corruption. By incorporating values other than profit-seeking into a company’s “DNA,” proponents assert, the law can tame capitalism’s worst excesses while retaining its many virtues.
But these are theories, and not only is there no empirical study of either of these arguments, there is a lack of data on more simple metrics such as PBC foundation and formation. We aim to close this gap by conducting an empirical study of early-stage investment in PBCs. Our strategy is to examine the universe of PBC formations and the types of investment they receive. We do so through early-stage investment, which consists of the usual range of angel investors, accelerators and incubators, venture capital funds, and private equity. Together, these present an interesting test case for PBC funding, because the investors themselves often have profit-maximizing incentives and fiduciary duties. By examining early-stage investment we can discern whether for-profit investment is occurring in PBCs, and if so, whether it is different in kind from traditional VC investment. This allows us to assess the development of PBCs, and the potential for future large-scale investment and utilization of the forms by mainstream companies. This study of early-stage investment also provides some evidence on how PBCs are being used: are they serving wider purposes, or are simply purpose-washing devices?
We collect by hand a database of all Delaware-registered PBCs that received investment between 2013 and 2018. This amounts to a small but not insignificant number of companies (n = 97). We then examine the type and scope of early stage investment in these companies. We find that early stage investment in PBCs is significant (over $1 billion), and includes well-known companies such as Allbirds, Lemonade, and Numi Tea. Moreover, we find that PBCs are being funded over a wide range of mostly consumer-focused industries (banking, food, education, technology, and more), by traditional, for-profit venture capital investment firms. Our evidence suggests that PBC round sizes are slightly smaller than their purely profit-seeking peers, but that on average investment occurs at similar stages to traditional start-ups.
Our results confirm that PBCs are being utilized as for-profit investment vehicles at a low but steady rate. PBCs are attracting investment—they are not an utter failure. We find that significant investments in PBCs tend to be in consumer-focused companies. At first blush this supports the purpose-washing hypothesis, but we also consider alternative possible explanations.
We conclude by drawing some new theories on the future of investment in PBCs. We theorize that PBCs still have significant hurdles to widespread adoption or usage. One of the primary drawbacks to widespread use of PBCs is the lack of case law on the scope of fiduciary duties and certainty of board action under the new statute. The investment patterns and flows that we find show that this has not deterred investment, but also that the PBC has not garnered unmitigated support from the VC community.
We theorize that, based on our results, PBC status is a secondary driver of early-stage investment and, by proxy, more widespread for-profit investment. VCs and other investors appear willing to tolerate the PBC’s wider purpose, but want to ensure some for-profit motive, and they focus on consumer-facing companies where PBC status is more likely to buttress a profit purpose. We believe the consequence is that the widespread use of the PBC remains some way off, but that there is groundwork being laid for more significant adoption. This will only come once there is a greater network of companies and lawyers familiar with the form and willing to have their companies opt-in to the PBC framework. Until then, PBCs are likely to be the purview of small and start-up businesses and, when utilized by for-profit companies, we suspect the social purpose will remain secondary to their for-profit motive.
Part I examines the use and scope of PBCs and provides background on the different theories of investors’ willingness to participate with these relatively new forms. Part II provides our empirical analysis. Part III builds on our empirical analysis to offer a theory for the future development and growth of PBCs. Ultimately, we draw a mixed view of PBCs, one that sees them neither as the form of the future nor as a mere fancy. Instead, this is an emerging corporate form that is very early in its lifecycle, awaiting more significant networks to develop to support its growth. If these networks develop, PBCs may attract much wider usage than is currently the case.
The complete paper is available here.
