The nuts and bolts of establishing a B Corporation
A way to generate profit and do some good at the same time
Shareholders’ meetings are generally tame, scripted affairs, but Apple's 2014 meeting was memorable for CEO Tim Cook's well-publicized chastising of a shareholder who questioned whether the company's environmental efforts came at the expense of investor profits. The incident resonated with many who have become disillusioned by modern corporate culture. Surely, companies can “do good” beyond solely generating profits.
Apple has no legal obligation to do environmental or social good. In fact, many law professors would argue that its only obligation is to create profit for its shareholders. Many consumers and investors are frustrated by this narrow view of corporate obligations, and in response, 27 states have passed legislation creating a new corporate form — the Benefit corporation, or B Corp.
While it's unlikely that Apple would convert to a B Corp, many household names have taken advantage of the new business form, such as Patagonia, Seventh Generation and Warby Parker. Social responsibility is already a big part of the brand identity of each company, so B Corp status seems a natural fit.
The social missions of these companies do not appear to have hindered their profitability; all three are consumer favorites and enormously successful.
New Hampshire’s B Corp law took effect Jan. 1, and if you own (or are starting) a socially minded company, the B Corp form may help you achieve your goals. New companies may form as B Corps, and existing companies may convert.
From a legal perspective, a B Corp must have a corporate purpose of creating a “general public benefit” integrated into its governing documents. The law defines this benefit as "a material positive effect on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
B Corps may also elect to pursue "specific public benefits," such as serving low-income populations or improving the environment. These public benefit purposes are memorialized in the company's controlling agreements and included in the required state filings.
The company’s interests
Redefining the corporate purpose broadens the fiduciary duties of corporate directors. B Corp directors must consider the effects that company actions will have on corporate profits, the company's employees, the interests of customers, the community (including communities where the company's offices, subsidiaries and suppliers are located), the local and global environment and the short- and long-term interests of the company.
Directors have considerable discretion in weighing these interests, and the law protects them from personal liability for monetary damages if the company fails to pursue public benefits. The law does not create any fiduciary duty of directors to the general public for general or specific public benefits — in other words, a member of the public cannot sue the directors for the company’s failure to achieve its intended public benefits.
The law sets out a special cause of action, called a benefit enforcement proceeding (BEP), to enforce the public benefit purposes.
A BEP may be brought by the company itself or by its shareholders against the company, its directors or its officers. A BEP serves to enforce the company's public benefit obligations, or to enforce the obligations of officers and directors under the B Corp law. If a company has failed to serve its public benefit purposes, the secretary of state may revoke its status as a B Corp.
B Corps must foster transparency by publishing an annual benefit report. This report must set out the ways in which the B Corp has pursued its public benefit goals, the results of those efforts, and any circumstances that hindered those efforts.
The report must also measure public benefit against some third-party standard, which the company may choose. The report must be filed with the secretary of state, distributed to shareholders and posted to the company's public website.
Publicly traded B Corps must also designate a benefit director, who is responsible for preparing the annual report.
New Hampshire’s B Corp statute creates an additional layer of accountability for a company and provides a mechanism to enforce that accountability. Those interested primarily in social benefit may be best served by creating a nonprofit, but for the new breed of socially conscious entrepreneurs out there, the B Corp may be the ideal vehicle to generate profit and do some good at the same time.
To learn more, visit bcorporation.net.
Andrew Grosvenor, an associate with the law firm of Orr & Reno, can be reached at 603-223-9179 or AGrosvenor@orr-reno.com.