WHAT IS A PBC?

There exists a longstanding notion, often cited by corporate executives and directors, that a corporation’s primary purpose is to maximize stockholder value.[1] In 2013, Delaware adopted a new subchapter of the Delaware General Corporation Law (“DGCL”) that allowed corporations to form as, or convert into, a public benefit corporation (“PBC”), a corporation that is expressly mandated to act not only in the best interests of its stockholders, but also to act for the benefit of an identified social good.

Unlike a non-PBC corporation, a PBC is required to state in its certificate of incorporation at least one specific public benefit that will constitute part of its overall corporate purpose. With this expansion of the corporate mandate, directors of a PBC thus are allowed, or even required, to consider a broader range of factors (other than stockholder value) and stakeholders (other than the stockholders) when making corporate decisions. Alongside the growth of PBCs, the following question has arisen: are PBC boards uniquely permitted to pursue social benefits within their corporate mandate, or are the fiduciary duties of non-PBC corporations adequately flexible to allow their boards to do the same?

Under Title 8, Subchapter XV of the DGCL (the “PBC Code”), a PBC is “a for-profit corporation organized under and subject to the requirements of this chapter that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”[2] A PBC must state within its certificate of incorporation the specific public benefit to be promoted by the corporation.[3]

The causes that qualify as a “public benefit” under the PBC Code are broad, with only the following guidance provided:

a positive effect (or reduction of negative effects) on [one] or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders), including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.[4]

As a result, the stated public benefits of PBCs vary widely. For instance, Vital Farms, a PBC, states that its “public benefit” includes “bringing ethically produced food to the table,” and “being stewards of our animals, land, air and water, and being supportive of our community,”[5] and Laureate Education, a PBC, states its “public benefit” is “to produce a positive effect for society and students by offering diverse education programs both online and at campuses around the globe.”[6]

While it is difficult to determine precisely how many PBCs exist because certain states do not distinguish a PBC from the non-PBC corporation,[7] there are estimated to be thousands of PBCs in Delaware and nationwide.[8] Initially, corporations in Delaware that elected to incorporate as a PBC tend to be small, closely held corporations, but larger and publicly traded firms are now opting for the PBC form with increasing frequency.[9] Warby Parker, for example, elected to become a PBC simultaneously with its initial public offering (“IPO”) last year, and Lemonade, Inc. also successfully completed its IPO in 2020 as a PBC.[10] From 2013 to July 2020, there were only three publicly traded PBCs in Delaware. Today, there are 19 publicly traded PBCs. Some large and well-known public companies have also found it beneficial to acquire PBCs (or their state- specific equivalent) to operate these entities as subsidiaries. For example, Campbell Soup Company acquired Plum Organics,[11] which is a PBC with a mission to “deliver nourishing, organic food to our nation’s little ones and to raise awareness and advance solutions for childhood hunger and malnutrition in the United States.”[12] After Danone acquired WhiteWave Foods Co. in a take- private transaction in 2017, it incorporated the combined entity as a PBC, and today the plant-based, organic and health foods brand is the largest PBC in operation.

THE 2020 AMENDMENTS TO THE PBC CODE

The PBC Code adopted in 2013 required the approval of 90% of a corporation’s outstanding stock, whether voting or non-voting, to adopt, or reverse, the PBC form.[13] For a large, publicly traded corporation, this high voting requirement meant that any attempt to convert into a PBC faced relatively significant uncertainty. In 2015, to respond to the challenges imposed by the high vote threshold, the PBC Code was amended to require only a two-thirds majority vote of outstanding voting stock to adopt, or reverse, the PBC form.[14] While the 2015 amendment loosened the PBC Code’s voting requirements, it did little to impact the rate at which corporations adopted (or reversed) their PBC status. Thus, in 2020, the PBC Code was further amended to require only a simple majority of stockholder approval to convert to or from a PBC, making it more practical for publicly traded corporations to embrace the PBC form.[15]

The 2020 Amendments also eliminated the statutory appraisal rights of stockholders in connection with the conversion to or from PBC form, which decreased the risk of becoming a PBC because corporations have less worry about costly litigation over appraisal rights and appraisal payouts to dissenting stockholders.[16]

The 2020 Amendments importantly clarified certain aspects of directors’ fiduciary duties, providing some assurance to boards of directors contemplating adopting the PBC form.[17] Before the 2020 Amendments, the PBC code provided “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.”[18] The 2020 Amendments added Section 365(c) to clarify that a director’s failure to satisfy the balancing requirement does not constitute an act or omission not in good faith or a breach of the duty of loyalty for purposes of the exculpation or indemnification of directors unless the PBC’s certificate of incorporation provides otherwise.[19] Section 365(c) also clarified that a director’s ownership or other interest in the PBC’s stock will not constitute a conflict of interest that would call into question the director’s decision made after balancing the interests of all parties, so long as the ownership interest would not constitute a conflict of interest if the corporation were a non-PBC corporation.[20]

THE AIMS OF THE PBC CODE

Delaware developed the PBC Code to give corporations more flexibility and freedom to balance “conduct[ing] business for the benefit of stockholders”[21] with the interests of other stakeholders and the public benefit identified in the certificate of incorporation.[22] Legislators intended to give corporations the opportunity to do well while doing good[23] and codify such purpose into their governing documents. As Governor Markell signed the legislation into law, he remarked that the PBC code would achieve two related purposes: 1) to allow corporations to pursue a social purpose; and 2) to fill the demand by the market for a business organization that allows directors and officers to pursue those social goals.[24]

However, nine years after the passage of the PBC Code, questions remain: does Delaware law permit a non-PBC corporation to pursue socially beneficial goals in the same manner — and without heightened litigation risk — as a PBC? Are the pursuit of social benefit and the best interests of the corporation mutually exclusive? While the PBC Code is intended to give PBCs and their directors greater flexibility in pursuing social purposes, it is not clear that directors of non-PBC corporations are exposed to higher degrees of risk than their counterparts at PBCs if they authorize corporate actions that are socially beneficial but still defensible as being in the interests of the corporation. In fact, even if there are alternatives that are less costly to the corporation, in many circumstances directors may still be acting in the best interests of the corporation and its shareholders when electing to pursue socially beneficial goals.

While the PBC Code provides a degree of protection to boards that want to serve other stakeholders and public benefits, Delaware law is likely already sufficiently deferential to corporate boards and their business judgment, including in respect of decisions to pursue socially beneficial goals. So long as directors of non-PBCs have satisfied their fiduciary duties of loyalty and care by being reasonably well-informed and acting on a disinterested, independent and good-faith basis in the interests of the corporation, they can make decisions that benefit a public good. In other words, most corporate actions are subject to the same deference granted by the business judgment standard, regardless of whether they serve a public benefit and actions that benefit a public good are not automatically deemed to be mutually exclusive with the best interests of the corporation.

CAN NON-PBC CORPORATIONS PURSUE SOCIAL GOALS?

When evaluating decisions of boards of directors, courts have typically recognized that actions taken to serve social causes actually may constitute a “proper corporate purpose”[25] because such contributions can create partnerships between organizations, contribute to the brand’s image, or manage an area of business risk that would otherwise end up costing the corporation money. In turn, these benefits can lead to maximizing stockholder value.

For example, after the 2018 shooting at Marjory Stoneman Douglas High School, Dick’s Sporting Goods, Inc. (“Dick’s”) announced that it would no longer sell assault rifles and high-capacity magazines in its stores, and would stop selling guns to customers under 21 years old, despite being one of the largest gun retailers in the U.S.[26] Several weeks later, Dick’s destroyed over $5 million in semiautomatic rifles.[27] Following the decision, same-store sales fell 3.1%, with Dick’s CEO attributing much of the loss on the decision to stop selling assault rifles.[28] The CEO also reported that the decision cost the company $250 million.[29] Despite the significant initial losses, only one Dick’s stockholder spoke out against the decision, and no lawsuit resulted.[30] Several months later, Dick’s reported same-store sales had actually increased by 3.2% and in stores that had stopped selling all types of firearms, Dick’s reported overall higher sales. In the fourth quarter of 2019, Dick’s reported a 4.7% increase in net sales year over year.[31]

Meanwhile, in 2021, Veeva became the first publicly traded corporation to convert to a PBC after its IPO.[32] A medical technology company that also prioritized its social purpose, Veeva disclosed that converting to a PBC would allow the company to solidify its corporate purpose, provide flexibility in responding to conditions in the world, and allow it to better prioritize its employees and customers.[33] However, since its incorporation as a non-PBC in 2007, Veeva always aligned itself with a broader social mission. While Veeva now contributes to missions such as employee wellness/ success and sustainability, Veeva appeared to promote those causes before it converted to a PBC. For example, in 2014, instead of leasing offices to serve as its corporate headquarters, Veeva acquired the property for $24 million, citing that owning the property would allow it to implement sustainability measures at its headquarters that it would not be able to undertake as a tenant at the same location.[34] As illustrated by these two case studies, non-PBC corporations have ample discretion to pursue social benefit, if that’s what they want to do.

The examples of Dick’s and Veeva stand in contrast with eBay Domestic Holdings, Inc. v. Newmark. In this case, the directors of Craigslist, Inc. (“Craigslist”), a non-PBC corporation, sought to prevent the takeover of Craigslist by eBay.[35] Craigslist had only three stockholders, eBay Domestic Holdings, Inc. (“eBay”), holder of 28.4%, and two directors who owned the remaining 71.6% interest.[36] The Craigslist board (controlled by its controlling stockholders) resisted the takeover attempt by eBay on the grounds that it needed to protect its unique “culture” as a free community service, to which eBay did not subscribe. The Delaware Chancery Court ultimately found that the directors did not act in good faith and violated their fiduciary duties by implementing a poison pill to resist the takeover by eBay because protecting a “community service” corporate culture was not a “proper corporate purpose.”[37] The court went on to say “[t]he corporate form in which Craigslist operates … is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.”[38]

While the court expressly rejected Craigslist’s attempt to prioritize community service over stockholder value, the facts in eBay Domestic Holdings are distinguishable from the actions taken by Dick’s and Veeva because (i) the Craigslist board adopted a poison pill, a defensive measure that is subject to enhanced scrutiny rather than the business judgment rule in accordance with Unocal Corp. v. Mesa Petroleum Co., (ii) the Craigslist board was controlled by Craigslist’s controlling stockholders, and the poison pill was adopted specifically to prevent eBay, the minority stockholder, both from taking over the company and selling all of its stock in one complete block to a third party and (iii) in the opinion of the court, the Craigslist directors “did not make any serious attempt to prove that the Craigslist culture, which rejects any attempt to further monetize its services, translates into increased profitability for stockholders.”[39] While the eBay court did not address this, even absent the Unocal enhanced scrutiny standard, given director duties under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. to pursue the best price available in a change of control transaction, the courts would challenge any corporate board in a change of control transaction that eschewed a higher value offer in favor of a lower one in the sole interest of social good.

The eBay opinion also points to the inverse: so long as, in the process of satisfying their fiduciary duties and determining that an action is in the best interest of a corporation, the directors justify a “socially good” action that has a corporate benefit, the decisions of directors will receive deference under the business judgment rule. Ultimately, a corporation pursuing a public benefit may be able to tie the positive impact of this benefit to one or more of the corporation’s stakeholders, and thus to the corporation’s business strategy and its overall profitability or health.

THE PBC FORM AS A MANNER OF BRAND MANAGEMENT

The brand of a corporation is typically one of its most critical assets.[40] With a growing population of investors, customers, and employees placing greater emphasis on corporate social responsibility,[41] corporations may adopt the PBC form because of the positive impact on its brand promoting a social benefit may have on its ability to remain competitive in the markets in which it competes.[42] For example, in its proxy statement sent to its stockholders to approve the conversion to a PBC, Veeva Systems stated that converting to a PBC would give customers “increased confidence to invest in Veeva’s technology,” enhance its reputation, and improve long-term financial results. Converting to a PBC helps enshrine the company’s values into its certificate of incorporation, which in turn sends signals to investors, customers and employees that the corporation is committed to promoting a public benefit.[43] Now that the 2020 Amendments have made it easier to adopt the PBC form, corporations can more easily consider using the PBC model as a means to shape their corporate brand.

Adopting the PBC form could also send a strong signal to customers who prefer to do business with socially conscious corporations[44] by lending credibility to a socially conscious label.[45] In fact, studies have shown that 55% of global online customers would pay more for products and services that are socially responsible.[46] In its proxy statement, Veeva Systems proposed stockholders approve the PBC conversion to “give our customers increased confidence to invest in Veeva’s technology solutions, which has the potential to make our revenue base more durable and enhance our ability to invest in innovation for our customers.”[47] Gaining a competitive edge in the market was considered a significant benefit to Veeva in converting to the PBC form.

Finally, adopting the PBC model could help retain and attract employees who are seeking to contribute to society through their work.[48] Several companies have found it easier to retain talent when the corporation has a strong social purpose.[49] In turn, this can lead to less spending on recruiting and training.

TO CONCLUDE

Delaware corporate law’s general deference to the business judgment of corporate directors grants ample flexibility to pursue corporate actions for the benefit of the corporation, including when the corporation’s interests align with that of its customers, employees or community at large. Notwithstanding the common perception that corporations are prohibited from taking any action except to the extent such actions are intended to directly maximize shareholder value, the DGCL actually requires directors to act in the best interests of the corporation, writ large. While the best interests of the corporation may be synonymous with maximizing stockholder value in many cases, particularly in change of control transactions, non-PBC corporations, including several in the Fortune 500,[50] have reminded the public on various occasions, that corporations do and must take into account all their stakeholders, and not just their stockholders, to develop and maintain a thriving and successful business. So while there may be a public benefit, as the PBC Code asserts, to taking corporate action in the interests of non-stockholder stakeholders, the inverse can also be said, which is that corporate actions that serve a social good are in the best interests of one or more corporate stakeholders, and therefore, in the best interests of the corporation itself.

Endnotes

1For example, the 1997 Business Roundtable statement noted that, “The principal objective of a business enterprise is to generate economic returns to its owners.” See http://www.ralphgomory.com/wp-content/ uploads/2018/05/Business-Roundtable-1997.pdf (September 1997).(go back)

2See Del. Code Ann. Tit. 8, § 362 (West 2015).(go back)

3See Del. Code Ann. Tit. 8, § 362(a)(1) (West 2015).(go back)

4See Del. Code. Ann. Tit. 8, § 362(b) (West 2015).(go back)

5See Vital Farms, “Investor FAQs,” https://investors.vitalfarms.com/investor- resources/investor-faqs.(go back)

6See Laureate Education, Press Release “Laureate Education Becomes a Public Benefit Corporation,” https://www.laureate.net/laureate-education- becomes-a-public-benefit-corporation/ (October 2, 2015).(go back)

7See Michael B. Dorff, Why Public Benefit Corporations? 42 Del. J. Corp. L. 77, 79 (2017).(go back)

8See Simmerman, et al. infra note 9.(go back)

9See Amy L. Simmerman, Ryan J. Greecher, & Brian Currie, “Converting to a Delaware Public Benefit Corporation: Lessons from Experience,” Harvard Law School Forum on Corporate Governance, https://corpgov.law.harvard. edu/2022/02/18/converting-to-a-delaware-public-benefit-corporation- lessons-from-experience (February 18, 2022).(go back)

10See Twelfth Amended and Restated Certificate of Incorporation of Warby Parker Inc. https://www.sec.gov/Archives/edgar/ data/1504776/000162828021018962/exhibit42-resalesx8.htm.(go back)

11See McKenzie Holden Granum, “With the Emergence of Public Benefit Corporations, Directors of Traditional For-Profit Companies Should Tread Cautiously, but Welcome the Opportunity to Invest in Social Enterprise,” 38 Seattle U. L. Rev. 765, 766 https://digitalcommons.law.seattleu.edu/sulr/ vol38/iss2/21 (January 2015).(go back)

12See Plum Organics, “Plum, PBC? What’s a Public Benefit Corporation?,” https://www.plumorganics.com/benefit-corp.(go back)

13See Michael R. Littenberg, Emily J. Oldshue, & Brittany N. Pifer, “Delaware Public Benefit Corporations — Recent Developments,” Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard. edu/2020/08/31/delaware-public-benefit-corporations-recent- developments; Richards Layton & Finger, “Delaware Governor Jack Markell Signs Legislation Amending the Delaware General Corporation Law,” Richard Layton & Finger, https://www.rlf.com/delaware-governor-jack- markell-signs-legislation-amending-the-delaware-general-corporation-law (June 24, 2015).(go back)

14See Littenberg, supra note 14.(go back)

15Id. Del. Code Ann. Tit. 8, § 242(b), 251, Sections 363(a) and (c) were removed from the PBC Code (West 2020).(go back)

16Id.(go back)

17Id.(go back)

18See Del. Code Ann. Tit. 8, § 362 (West 2015).(go back)

19Id.(go back)

20See Del. Code Ann. Tit. 8, § 335(c) (West 2020).(go back)

21See Delware.gov, “Governor Markell Signs Public Benefit Corporation Legislation,” https://news.delaware.gov/2013/07/17/governor-markell-signs- public-benefit-corporation-legislation (July 17, 2013).(go back)

22See Del. B. Summ., 2013 Reg. Sess. S.B. 47 (2013).(go back)

23See Delware.gov, “Governor Markell Signs Public Benefit Corporation Legislation,” https://news.delaware.gov/2013/07/17/governor-markell-signs- public-benefit-corporation-legislation/ (July 17, 2013).(go back)

24See Dorff, supra note 7 at 80.(go back)

25See eBay Domestic Holdings, 16 A.3d at 32.(go back)

26See Valentina Caval, “Why Dick’s Sporting Goods Decided to Stop Selling Guns,” Yahoo! Finance, https://finance.yahoo.com/news/why-dicks- sporting-goods-decided-to-stop-selling-guns-ceo-231006766.html (October 8, 2019); Laura M. Holson, “Dick’s Sporting Goods Destroyed $5 Million Worth of Guns,” New York Times, https://www.nytimes. com/2019/10/08/business/dicks-sporting-goods-destroying-guns-rifles.html (October 8, 2019).(go back)

27See Holson, supra note 27.(go back)

28See Caval, supra note 27.(go back)

29See Holson supra note 27.(go back)

30See Megan Henney, “Dick’s Sporting Goods CEO Confronted by Shareholder Over Gun Policies,” Fox Business, https://www.foxbusiness. com/retail/dicks-sporting-goods-ceo-confronted-by-shareholder-over-gun- policies (August 30, 2018).(go back)

31Id.(go back)

32See PracticalESG, “More on PBCs — Publicly Traded Corporation Converts to a Public Benefit Corporation,” https://practicalesg.com/2021/06/publicly- traded-corporation-converts-to-pbc (June 8, 2021).(go back)

33See Veeva, “Veeva: A Public Benefit Corporation,” https://www.veeva.com/pbc.(go back)

34See Veeva, “Corporate Citizenship at Veeva,” https://www.veeva.com/corporate-citizenship.(go back)

35See generally eBay Domestic Holdings, 16 A.3d 1 (Del. Ch. 2010).(go back)

36See Id. at 6.(go back)

37See Id. at 32.(go back)

38See Id. at 34.(go back)

39See Id. at 33.(go back)

40See W.C. Bunting, “Against Corporation Activism: Examining the Use of Corporate Speech to Promote Corporate Social Responsibility,” SSRN, 74 Okla. L. Rev. at 245, 248 https://papers.ssrn.com/sol3/papers. cfm?abstract_id=3893628 (May 9, 2022).(go back)

41See Simmerman, et al. supra note 9.(go back)

42See Veeva Systems Inc, Proxy Statement for Special Meeting 1-3 (2021); see Simmerman, et al. supra note 9.(go back)

43See Jen Barnette, “FAQ: Delaware Public Benefit Corporations,” CooleyGo, https://www.cooleygo.com/faq-delaware-public-benefit-corporations (August 6, 2021).(go back)

44Id., Dorff, supra note 7 at 83.(go back)

45Dorff, supra note 7 at 87, See Christopher Marquis, “Public Benefit Corporations Flourish in the Public Market,” Forbes, https://www.forbes. com/sites/christophermarquis/2021/06/14/public-benefit-corporations- flourish-in-the-public-markets/?sh=72246458233d (June 14, 2021).(go back)

46See Dorff, supra note 7 at 87 (citing the U.S. Digital Consumer Report).(go back)

47See Veeva Systems Inc, Proxy Statement for Special Meeting 1-3, at 1 (2021).(go back)

48See Barnette, supra note at 44, Veeva, supra note at 47, Dorff, supra note 7 at 82, 83.(go back)

49See Marquis, supra note 46.(go back)

50Examples include: Apple, Amazon, Walmart, Inc. See “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’,” https://www.businessroundtable.org/ business-roundtable-redefines-the-purpose-of-a-corporation-to-promote- an-economy-that-serves-all-americans (August 19, 2019).(go back)