Benefit Corporation Laws: Delaware vs. California

Editor's Note: This is the first post in a two-part series that highlights notable differences in benefit corporation law in two influential states, Delaware and California. This post originally appeared on Law360.

By Jonathan Storper

Benefit corporation law has been enacted in 19 states, including Delaware, California, New York, New Jersey, Vermont, Maryland, Virginia, Louisiana, South Carolina, Arizona, Arkansas, Colorado, Massachusetts, Nevada, Oregon, Hawaii, Illinois, Rhode Island, Vermont and the District of Columbia. Ten other states have introduced the legislation.

For the first time, this new corporate form provides a legal basis for companies to have a positive social and environmental purpose in addition to creating shareholder value. Without it, the company's responsibility is to maximize value to shareholders.

Entrepreneurs find the form attractive because it provides a simple and consistent platform to protect a corporate mission and balance it with shareholder value instead of creating complex and expensive corporate class structures, which are of limited value to protect the mission in certain circumstances.

To be successful, however, founders and investors must be aligned on core values, revenue objectives and exit strategies, perhaps to a greater degree than with general-purpose corporations. This is the first new corporate form with a national scope to be introduced into American law since the limited liability company in 1977. Delaware is of particular significance because it is the recognized leader in corporate law, and over half of all public companies are domiciled there.

California is the largest state and has provided the country with the benefit corporation model legislation. Delaware differs from the model legislation in notable ways. This article compares the two states.*

*Citations to the CCC refer to the California Corporations Code and DGCL refers to the Delaware General Corporation Law.

What is a Benefit Corporation?

Benefit corporations fundamentally change how a company is permitted to act. A benefit corporation is a for-profit corporation, but in addition to creating value for its shareholders, it has three additional attributes: social purpose, accountability and transparency.

Social purpose: A difference in specifics

In addition to creating shareholder value like other for-profit companies, a benefit corporation must provide general public benefit. In California, this is defined as "a material positive impact on society and the environment taken as a whole." CCC 14601(c). The articles may (but are not required to) state a specific public benefit. Specific examples include providing low-income individuals or communities with beneficial products or services, preserving the environment, promoting economic opportunity, improving health, and promoting arts, science and knowledge. CCC 14601(e). The California General Corporation Law applies to benefit corporations except when in specific conflict. CCC 14600.

In Delaware, a benefit corporation must produce a general and specific public benefit and operate in a "responsible and sustainable manner." DGCL 362. “Public benefit” means 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): of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.

A two-thirds vote is required to change the specific purpose in both states. CCC 14610(d); DGCL 363(c).

Accountability: Performance assessments vary

In California, the corporation must assess its overall social and environmental performance on a yearly basis using an independent third-party standard, many of which are free to the public. The assessment does not need to be audited or certified by a third party, however. CCC 14630.

The standard must be developed by an entity that has no material financial relationship with the corporation, and the criteria and standard development process must be publicly available. In addition, the amount and sources of financial support for the entity developing the standard must be publicly disclosed, along with any relationships that could reasonably be considered to present a potential conflict of interest. CCC 14601(g). The purpose of these requirements is to prevent the corporation from using an assessment tool that is self-serving.

The Delaware corporation must consider the impact of its actions upon not only the shareholders but also the promotion of the company's public benefit purpose and the best interests of those materially affected by the corporation's conduct. DGCL 365.

Unlike the model legislation promulgated in other states (including California), Delaware benefit corporations do not have to assess such impacts using an independent third-party assessment standard, unless so specified in the corporation's certificate of incorporation. Otherwise, the board is empowered to make such assessment on its own. This is one of the major differences from the model legislation.

Still, the Delaware law gives a nod to best practices by making the third-party standard optional.

Transparency: Different options

The California benefit corporation must report its overall social and environmental performance to its shareholders and the public in an annual benefit report. The report must include the third-party standard selection process, the ways in which the benefit corporation pursued any general or specific public benefit during the year, and any circumstances that hindered the creation of the public benefit. CCC 14630(a). The statement must be sent to shareholders and posted on the company's website annually within 120 days following the end of the fiscal year. CCC 14630(b) and (c).

The Delaware corporation must, by contrast, affirmatively identify itself as a public benefit corporation by including those words, or the abbreviation "P.B.C." or the designation "PBC," in its name. DGCL362(c). California has no such requirement.

The Delaware benefit corporation must also, no less than biennially (annually in California), provide its stockholders with a statement as to the corporation’s promotion of the public benefit identified in the certificate of incorporation and the best interests of those materially affected by the corporation’s conduct. DGCL 366(b).

The statement required by Delaware is similar to California but notably different: It must include the objectives the board of directors has established to promote such public benefit(s) and interests; the standards the board of directors adopted to measure the corporation’s progress in promoting such public benefit(s) and interests; objective factual information based on those standards regarding the corporation’s success in meeting the objectives for promoting such public benefit(s) and interests; and an assessment of the corporation’s success in meeting the objectives and promoting such public benefit(s) and interests.

The charter documents, however, may require that the corporation provide the statement more frequently than biennially, make it available to the public, use an independent third-party standard in connection or attain a periodic third-party certification addressing the corporation’s promotion of the public benefit(s) identified in the certificate of incorporation and/or the best interests of those materially affected by the corporation’s conduct. DGCL 366(c).

Once an optional provision is adopted, a two-thirds vote of shareholders is required to terminate it. DGCL 363(c). These options appear to be intended to allow a Delaware benefit corporation to structure itself according to the model legislation if it wishes.

Check back tomorrow for practical differences between benefit corporation laws in Delaware and California -- from incorporating to director's duties. 

Image credit: Flickr/notionscapital

Jonathan Storper is a partner in Hanson Bridgett LLP's San Francisco office.

*The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.