Renewed Interest in IPOs of Public Benefit Corporations

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

I can think of only one public company that is currently a Delaware Public Benefit Corporation. That’s Laureate Education, which initially filed with the SEC in 2015 and went effective in 2017. (See this PubCo post.) Now, finally, we have a second company that has filed for its IPO as a PBC—Lemonade, Inc., which declares on the cover page of its prospectus that it is incorporated in Delaware as a PBC as a demonstration of its “long-term commitment to make insurance a public good.” It’s been quite a long dry spell since the PBC legislation was signed into law in 2013. In the last few years, however, we have witnessed intensifying investor focus on sustainability as a strategy (see, for example, this PubCo post), as well as swelling numbers of companies declaring their commitments to all stakeholders, as reflected, for example, in the Business Roundtable’s adoption of a new Statement on the Purpose of a Corporation (see this PubCo post) and the World Economic Forum’s Stakeholder Principles in the COVID Era (see this PubCo post). What’s more, new legislation just passed by the House in Delaware will, if ultimately signed into law, make it easier to slip in and out of PBC status. [Update: This bill was signed into law on July 16.] Will these trends toward sustainability and stakeholder capitalism, together with the Delaware legislation, fuel a renewed interest in the PBC for public companies and expecting-to-become public companies? Will Lemonade open the floodgates?

A “public benefit corporation,” according to the Delaware General Corporation Law, “is a for-profit corporation…that is intended to produce a public benefit…and to operate in a responsible and sustainable manner. To that end, a public benefit corporation shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.” To put it another way, as described in this article in the Institutional Investor, a PBC is a corporation that is “legally permitted to consider its impact on people and planet to be equally important as its impact on shareholders’ wallets….”

SideBar

As discussed in this PubCo post, former Delaware Chief Justice Leo Strine has been a big proponent of the PBC. In the debate regarding the extent to which, in making decisions, boards of traditional corporations may take into account other constituencies, such as employees and the larger community, or must consider only the impact on stockholder value, Strine has come out firmly in the camp of stockholders. In a 2015 paper, The Dangers of Denial, he explained that corporate law is resolutely focused on stockholder welfare. “Within the limits of their discretion, directors must make stockholder welfare their sole end,” Strine wrote. The other view is misguided and ineffective, he believed, because the concept does little to change the incentives of directors to take the interests of these other constituencies into consideration. In this article In the Harvard Business Law Review, Strine argued forcefully that current corporate accountability structures make it difficult for directors to “do the right thing”; in shifting the power balance to create incentives for good corporate citizenship, he contended, the benefit corporation model may just offer a real-world solution. By articulating new corporate purposes and mandates, in Strine’s view, the PBC tweaks the normal corporate accountability structure that makes corporate managers accountable to only one constituency—stockholders:

“That is what is refreshing about the benefit corporation movement. Rather than ignore the importance of the accountability structure within which corporate managers operate, the benefit corporation movement set out to change it. In the liberal tradition of incremental, achievable reform rather than radical renovation, the benefit corporation is a modest evolution that builds on the American tradition of corporate law. But that evolution is potentially important because, if it gains broader market acceptance, the benefit corporation model puts some actual power behind the idea that corporations should be governed not simply for the best interests of stockholders, but also for the best interests of the corporation’s employees, consumers, and communities, and society generally.”

However, Strine observed, PBCs must, in effect, help investors to overcome that high hurdle regarding profitability by proving the principle underlying the concept of PBCs. They must

“generate results for equity investors that inspire confidence that companies doing it the right way will generate long-run returns consistent with prudent portfolio growth. One of the reasons why entrepreneurs of all generations find the benefit corporation model appealing is because of its supposedly better alignment with the time horizons required to make a business most sustainably profitable. Many hard-headed executives find the public markets’ and institutional investor community’s obsessive focus on quarterly earnings and rapid portfolio turnover to be inconsistent with the need for the managers of actual productive enterprises to develop new products and services, bring them to market, and deliver value to consumers that leads them to become committed customers. The benefit corporation model supposedly addresses that concern by providing breathing room to corporate executives from short-term pressures. Not only that, advocates for the benefit corporation argue that doing things the right way is the profitable way in the long run, because regulatory shortcuts, product quality compromises, and the like tend to get discovered and result in corporate failures and underperformance.”

Lemonade states that its public benefit, as described in its certificate of incorporation, “is to harness novel business models, technologies and private-nonprofit partnerships to deliver insurance products where charitable giving is a core feature, for the benefit of communities and their common causes.” However, as indicated in the company’s risk factors, while directors of traditional corporations are considered to “have a fiduciary duty to focus exclusively on maximizing stockholder value,” the directors of a PBC “have a fiduciary duty to consider not only the stockholders’ interests, but also the company’s specific public benefit and the interests of other stakeholders affected by [the company’s] actions.” Similarly, in “the event of a conflict between the interests of [the company’s] stockholders and the interests of [its] specific public benefit or [its] other stakeholders, [its] directors must only make informed and disinterested decisions that serve a rational purpose; thus, there is no guarantee such a conflict would be resolved in favor of [the company’s] stockholders.”

These and other similar risks are some of the reasons that, in adopting laws authorizing PBCs, the Delaware legislature made it particularly difficult to convert a traditional corporation to a PBC. For example, currently, the approval of 2/3 of the outstanding stock is required for a traditional corporation to amend its certificate of incorporation to become a PBC or to merge with another entity if the effect of the merger is to convert the shares into shares of a PBC. (Note that, originally, the vote required for conversion was 90%, which made it well nigh impossible for a traditional public company to convert to a PBC.) Appraisal rights are available to stockholders that did not vote in favor of the conversion or merger. And the same vote is required for conversion from a PBC form of entity into a traditional corporation.

The legislation that was just passed by the House in Delaware would, if ultimately signed into law, eliminate the 2/3 voting requirements, making it easier to convert a traditional corporation to a PBC or a PBC to a traditional corporation. Only the standard stockholder vote provisions would be applicable—generally a vote of a majority of the outstanding shares (or any greater or other vote required under the company’s certificate of incorporation) would be required. The amendments would also eliminate the special appraisal rights provisions, with the result that appraisal rights would not be available for conversions resulting from amendments to the certificate, but standard appraisal rights (§262) would be available in the context of mergers.

In addition, as noted above, the current PBC statute mandates that the board of directors manage the business and affairs of the PBC by balancing “the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.” The statute provides that, with respect to a decision implicating the “balance requirement,” directors of PBCs will be deemed to satisfy their fiduciary duties to stockholders and the corporation if their decision “is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.” A PBC is also permitted to include in its certificate, for purposes of its director exculpatory provisions under §102(b)(7) and its indemnification provisions under §145, that any disinterested failure to satisfy the mandate will not be considered to “constitute an act or omission not in good faith, or a breach of the duty of loyalty.”

The new legislation would also amp up the protections for directors of a PBC. The amendments would clarify that a director would not be considered “interested” in connection with a balancing decision solely because of the director’s interest in stock of the corporation, except to the extent that the same ownership would create a conflict of interest if the corporation were not a PBC. The amendments would also provide that, in the absence of a conflict, no failure to satisfy the balancing requirement would, for purposes of §102(b)(7) or §145, be considered “an act or omission not in good faith, or a breach of the duty of loyalty, unless the certificate of incorporation so provides.” That is, the certificate would no longer need to expressly provide for the protection for it to apply. In addition, the amendments would provide that, to bring any lawsuit to enforce the PBC balancing requirement, the plaintiffs must own at least 2% of the corporation’s outstanding shares or, for PBCs listed on a national securities exchange, shares with a market value of at least $2 million, if lower.

Time will tell whether the new Delaware legislation affecting PBCs, if signed into law, or the new PBC IPO, if successful, might lead other PBCs to take the IPO plunge— or perhaps even convince some traditional public companies to convert to PBCs.

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