Benefit Corporation - Benefit Corporations and Corporations Contrasted in Law

Benefit Corporations and Corporations Contrasted in Law

Historically, United States corporate law has not been structured or tailored to address the situation of for-profit companies who wish to pursue a social or environmental mission. While corporations generally have the ability to pursue a broad range of activities, corporate decision-making is usually justified in terms of creating long-term shareholder value. A commitment to pursuing a goal other than profit as an end unto itself may be viewed in many states as inconsistent with the traditional perspective that a corporation’s purpose is to maximize profits for the benefit of its shareholders.

The idea that a corporation has as its purpose the maximization of financial gain for its shareholders was first articulated in Dodge v. Ford Motor Co. in 1919. Over time, through both law and custom, the concept of “shareholder primacy” has come to be widely accepted. This point was recently reaffirmed by the case eBay Domestic Holdings, Inc. v. Newmark, in which the Delaware Chancery Court stated that a non-financial mission that “seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders” is inconsistent with directors’ fiduciary duties.

In the ordinary course of business, decisions made by a corporation’s directors are generally protected by the business judgment rule, under which courts are reluctant to second-guess operating decisions made by directors. In a takeover or change of control situation, however, courts give less deference to directors’ decisions and require that directors obtain the highest price in order to maximize shareholder value in the transaction. Thus a corporation may be unable to maintain its focus on social and environmental factors in a change of control situation because of the pressure to maximize shareholder value.

Mission driven businesses, impact investors and social entrepreneurs are constrained by this outdated legal framework that is not equipped to accommodate for-profit entities whose mission is central to their existence.

Even in states that have passed, “constituency” statutes, which permit directors and officers of ordinary corporations to consider non-financial interests when making decisions, legal uncertainties make it difficult for mission driven businesses to know when they are allowed to consider additional interests. Without clear case law, directors may still fear civil claims if they stray from their fiduciary duties to the owners of the business to maximize profit.

By contrast, benefit corporations expand the fiduciary duty of a director to require him to consider non-financial stakeholders as well as the financial interests of shareholders. This gives directors and officers of mission driven businesses the legal protection to pursue an additional mission and consider additional stakeholders besides profit. The enacting state's benefit corporation statutes are placed within existing state corporation codes so that it applies to benefit corporations in every respect except those explicit provisions unique in the benefit corporation form.