Benefit Corporations Arrive in Colorado

Last night Colorado became the fifteenth state to make the benefit corporation form available to entrepreneurs. Governor Hickenlooper signed the legislation in a bubbly ceremony at New Belgium Brewing Company. It goes into effect April 1, 2014.

The law creates the “public benefit corporation” – a new kind of for-profit corporation, whose directors have a mandate to consider the impact of its actions on all stakeholders, not just the financial interest of its shareholders. Mission-driven companies like New Belgium have been seeking this kind of authority for years. They see it as a way to bake in their high standards of social and environmental responsibility, to publicly put a stake in the ground.

Public benefit corporation status is available only to corporations, not to other forms of entity such as LLCs. A corporation that chooses PBC status is required to:

• state a public benefit purpose in its articles of incorporation;
• manage the company in a manner that balances the shareholders’ financial interests, the best interest of those affected by the corporation’s conduct, and the stated public benefit; and
• report publicly on the social and environmental impact of its operations, as measured against a third party standard.

As long as the directors of a public benefit corporation are making decisions that balance shareholder return against other stakeholder interests, they are protected from shareholder lawsuits claiming breach of fiduciary duty. On the other hand, shareholders may sue if they feel the directors are neglecting their duty to consider the company’s impact on other stakeholders.

Some people say that existing corporation law requires companies to maximize their financial return by externalizing costs onto society and the environment. If so, the public benefit corporation is freed from that obligation, and instead required to take the interests of society and the environment into account.

For existing corporations, converting to public benefit corporation status requires a two-thirds shareholder vote. Shareholders who oppose the conversion may require the company to buy them out under the Colorado dissenters’ rights statute.

The fourteen states (and the District of Columbia) that have passed benefit corporation legislation up to now have all adopted some version of the model legislation created by B Lab, the originator of the benefit corporation concept. The language of the Colorado law instead follows a model proposed by the Delaware Bar Association. Delaware looks likely to pass a similar law this summer.

Only time and case law will tell whether the language differences matter, but B Lab has welcomed the Delaware approach. Both the Colorado law and the Delaware proposal include the three essential pillars of B Lab’s model:

• public benefit purpose,
• refocusing the directors’ business judgment to include all affected stakeholders, and
• transparency, in the form of impact reporting.

The benefit corporation form is designed to help companies preserve their commitment to a social and environmental mission while raising capital for growth. It’s too soon to say how well the form will serve this purpose. But at a minimum it offers an efficient way to build accountability to a triple bottom line into the entity’s charter. This makes it a promising addition to the social business toolbox.