The Public Benefit Corporation Guidebook
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THE PUBLIC BENEFIT CORPORATION GUIDEBOOK UNDERSTANDING AND OPTIMIZING DELAWARE’S BENEFIT CORPORATION GOVERNANCE MODEL FREDERICK H. ALEXANDER Click to view TABLE OF CONTENTS PREFACE The benefit corporation model has emerged in the last decade, having been adopted in a majority of U.S. states, and by over 3,000 corporations. This new governance model broadens the perspective of traditional corporate law by incorporating concepts of purpose, accountability and transparency with respect to all corporate stakeholders, not just stockholders. Delaware, the corporate domicile of most U.S. public companies, adopted legislation authorizing the creation of Delaware public benefit corporations in 2013, and since then, hundreds of PBCs have been formed in Delaware. PBCs have a critical role to play in the twenty-first century economy. The PBC Guidebook is the first comprehensive treatment of Delaware’s new provisions. Author Frederick Alexander, Head of Legal Policy at B Lab, draws upon decades of practice as a Delaware corporate transactional lawyer to offer an explanation of the operation of the statute and practical advice for those using it. FREDERICK H. ALEXANDER COUNSEL (302) 351-9228 T [email protected] Instructions on How to Navigate an .ePub (Click to View PDF) The Public Benefit Corporation Guidebook Understanding and Optimizing Delaware’s Benefit Corporation Governance Model Frederick H. Alexander Morris, Nichols, Arsht & Tunnell LLP 1201 North Market Street, 16th Floor P.O. Box 1347 Wilmington, DE 19899-1347 mnat.com | Twitter | LinkedIn | Facebook Copyright © 2016, Frederick H. Alexander and Morris, Nichols, Arsht & Tunnell LLP. CONTENTS PREFACE INTRODUCTION CHAPTER ONE: Fiduciary Duties for Traditional Delaware Corporations: Enforcing Stockholder Primacy I. For whom is the corporation managed? A. The Ownership Model B. The Enterprise Model C. Delaware Follows the Ownership Model D. The Status of Non-Investor Constituencies in the Traditional Corporation E. Multiple Investor Constituencies II. Director Duties and Standards of Review A. The Business Judgment Rule B. The Entire Fairness Standard C. Intermediate Standards of Review D. Standards Specifically Applicable to the Exercise of the Stockholder Franchise CHAPTER TWO: The PBC Statute I. Prelude: The Benefit Corporation Movement II. Delaware PBC Statute A. Responsible and Sustainable Management: The Balancing Obligation B. Requiring a Specific Public Benefit C. Corporate Name; Providing Notice to Investors D. Duties of Directors E. Reports F. Accountability: Derivative Suits G. Supermajority Stockholder Votes H. Appraisal Rights III. Could a Traditional Corporation Adopt Stakeholder Values Without Becoming a PBC? A. The Statutory Framework B. Statute Does Not Authorize Private Ordering of Fiduciary Duties CHAPTER THREE: Standards of Review Applicable to PBCs I. Business Judgment Rule II. Entire Fairness A. The Definition of “Interest” is Not Altered B. Application of Entire Fairness to a PBC III. Intermediate Standards: Revlon and Unocal A. Revlon B. Unocal IV. Franchise Rights CHAPTER FOUR: Guidance for PBCs I. Procedures A. Establish Committee B. Management Role C. Periodic Activity D. Non-Periodic Activity E. Process Issues II. Mergers and Acquisitions A. Supermajority Vote B. Documentation III. Board Composition CHAPTER FIVE: Constituency Statutes: A Viable Alternative For Stakeholder Governance? I. Background II. Adoption of Constituency Statutes III. Operation of Constituency Statutes A. Other Constituency Provisions Permit, But Do Not Require, Consideration of Stakeholder Interests B. Uniform, Opt-In and Opt-Out Constituency Provisions IV. Reaction to Constituency Statutes A. The MBCA and Delaware Reject Constituency Provisions B. Criticisms of Constituency Statutes C. Benefit Corporation Laws May Be A Better Answer To Stockholder Primacy Than Constituency Statutes V. Constituency Statute Litigation A. Expanded Interests for Directors to Consider B. Application to Voting Rights C. Impact on Enhanced Scrutiny D. Standing for Non-Stockholders E. Conclusions VI. Financial Impact of Constituency Statutes CHAPTER SIX: Alternative Entities APPENDICES APPENDIX 1 - Quick Guide to Becoming a PBC APPENDIX 2 - PBC Charter Provisions APPENDIX 3 - Quick Guide to Appraisal for Public Benefit Corporations APPENDIX 4 - Rubric for Decision Making APPENDIX 5 - Delaware Public Benefit Corporation Statute Compared to Model Benefit Corporation Legislation* APPENDIX 6 - When Appraisal Rights Are Available Under PBC Provisions APPENDIX 7 - When Two-thirds Vote Required Under Section 363 APPENDIX 8 - DGCL Subchapter XV. Public Benefit Corporations § 361 Law applicable to public benefit corporations; how formed. § 362 Public benefit corporation defined; contents of certificate of incorporation. § 363 Certain amendments and mergers; votes required; appraisal rights § 364 Stock certificates; notices regarding uncertificated stock. § 365 Duties of directors. § 366 Periodic statements and third-party certification. § 367 Derivative suits. § 368 No effect on other corporations. APPENDIX 9 - Specific Public Benefits Examples* APPENDIX 10 - B Lab Recommended Provision for Mission-Aligned LLCs ENDNOTES 1-20 21-40 41-60 61-80 81-100 101-120 121-140 141-160 161-180 181-200 201-220 221-240 241-260 261-280 281-300 301-320 321-340 341-360 361-384 Morris Nichols’ Delaware Corporate Counseling Group Click to view TABLE OF CONTENTS INTRODUCTION How This Book Came to Be Many readers of this book will be familiar with traditional corporations and the law that governs them, and may wonder why Delaware, the center of US corporate law for the last century, would introduce a new corporate governance model. They may be reading this book to discover the “why” of Delaware public benefit corporation law as much as the “how.” In light of that, I thought it might be helpful to tell a bit of my own history with the changes to the Delaware statute. I have spent 26 years in private practice, advising clients on Delaware corporate law issues. As a partner in the transaction group of a leading Delaware law firm, I have worked on preferred stock financings, IPOs, mergers, hostile takeovers, proxy contests, corporate governance and fiduciary issues. My practice addressed anything in the lifecycle of a corporation that involved the relationship between stockholders, directors, officers and corporations. There was a great deal of complexity, but that complexity, for the most part, arose not from a profusion of laws and regulation, but rather from the multiplicity of situations in which some fairly simple rules and principles were to be applied: directors are elected by stockholders, and, once elected, have the full authority to manage the corporation. That authority is subject to the board’s fiduciary duties of care and loyalty: the directors must prudently and unselfishly manage the corporation to create a financial return for stockholders. Of course, there are a few other rules (how the director elections work, and what charters and bylaws can include, etc.), but that basic structure−stockholder-elected directors manage the corporation, but must do so carefully and loyally for the financial benefit of the stockholders-underlies nearly every question that comes up in corporate law disputes. This paradigm is often called the “stockholder primacy” model, and it drove much of the advice I gave. Thus, in my practice it was critical to help directors understand the primacy of stockholder value, particularly in M&A situations. While corporations could certainly be good employers and valuable resources to the community, that was not their raison d’etre-corporate law was about creating value for the stockholders, who owned the corporation, and who elected its managers to oversee their investment. For corporate lawyers, these were simple, non-ideological facts. The corporate form was a brilliant legal technology that allowed entities to raise large sums of money from disaggregated investors, who could diversify their investments across many such entities, allowing many corporations to take risks and create value. The underlying ethos was that investors were willing to risk their capital with these complete strangers because they knew that there was a system in place to protect them: elected directors who were obligated to be loyal to stockholders. A few years ago, when I was chairing the bar committee (the Council”) that recommends changes to the Delaware General Corporation Law (the “DGCL”), we were approached by B Lab, a non-profit organization that wants to provide corporations with a broader remit, so that they have a purpose of creating value for all of their stakeholders, not just stockholders. B Lab certifies companies as being good corporate citizens (like a Fair Trade mark for corporations). B Lab has requirements for certification: first, the company must meet a strict standard of social and environmental performance; second, the company must have a corporate governance model that mandates good corporate citizenship. For corporations, however, that second aspect violates the stockholder primacy model central to traditional corporate law, and B Lab was lobbying state legislatures to adopt a statute they had drafted called the Model Benefit Corporation Law (the “MBCL”). The MBCL contains a number of provisions that require corporations to follow a broader fiduciary model. When a state adopts the MBCL or similar statutory provisions, corporations created under that state’s general corporation law can opt into the new