The Development of Delaware Public Benefit Corporations and Their Access to Capital

1. Introduction

Traditionally, an entity was required to make a choice to pursue either for-profit or non-profit purposes; it could not do both. In fact, directors of a corporation could be subject to a lawsuit for breach of fiduciary duty for pursuing activities unrelated to maximizing the corporation’s profit.

However, answering increased demand for socially responsible enterprises, on August 1, 2013, Delaware amended its General Corporation Law (the DGCL) to allow entrepreneurs to incorporate a new form of entity known as a public benefit corporation (PBC) under subchapter XV of the DGCL (the Delaware PBC Act) and to pursue both for-profit and non-profit purposes. The number of PBCs grew significantly ever since. Many of these dual-purpose entities have received not only significant investments from private funds but also have successfully gone public. 

2. Formation, Operation, and Termination of Delaware PBCs

The Delaware PBC Act requires a PBC to specify in its certificate of incorporation that it is a public benefit corporation and identify one or more specific public benefits under the purposes’ provision. For example, Warby Parker, was founded in 2010, as a Delaware public benefit corporation, with the goal to provide consumers with affordable eyeglasses.  Warby Parker’s certificate of incorporation provides that the purposes of the corporation are (1) to engage in any lawful for-profit activity; and (2) “to provide access to products and services that promote vision and eye health and to work towards positively impacting the communities in which the corporation operates.”  Warby Parker’s slogan is “Buy a Pair, Give a Pair - For every pair purchased, a pair of glasses is distributed to someone in need. So far, that’s 10 million pairs and counting.”

A Delaware PBC is required to conspicuously specify in its notices to stockholders and on its stock certificates that it is a public benefit company pursuing dual purposes. PBCs often add provisions to their bylaws that further detail their specific public benefits and assessment and reporting methods.

One of the greatest advantages offered by Delaware PBCs is a distinct marketing advantage and a unique customer and investor base who feel aligned with the PBC’s specific impact on society.

A PBC is subject to an ongoing reporting requirement under the Delaware PBC Act. PBCs must provide stockholders, at least every other year, a report assessing the PBC’s success in fulfilling its purposes, standards established by the board, and evidence relating to the attainment of those standards and objectives. A PBC can choose to provide the report more frequently or use a third party to certify or assess the attainment of its goals.

A traditional corporation can change to a Delaware PBC by a simple majority vote of stockholders and board approval unless its existing governing documents provide otherwise. Any amendment to the specific public benefit provided in the certificate of incorporation can also be done by a simple majority vote of stockholders and board approval.  For example, two public companies, Veeva Systems and United Therapeutics, converted to the PBC form. For public companies, this must be done by filing a proxy statement with the SEC and following all related federal securities laws governing takeovers. 

A PBC can terminate its designation as a PBC by amending its articles of incorporation to remove the language that identifies its specific public benefits. Termination of its PBC designation requires an affirmative simple majority vote by stockholders and board approval unless its certificate of incorporation provided for a higher threshold, such as requiring a super majority vote by stockholders. 

3. Access to Private Capital, IPOs, Acquisitions, and Takeover Threats

With the increasing consumer preference to purchase from socially responsible companies and increasing investor appetite for impact investment, PBCs have been very successful in raising capital. Some have gone public in recent years.

For example, Zymergen, a PBC and a biotechnology company specializing in machine learning and artificial intelligence, received at least 5 rounds of funding (including $130 million in 2016, $400 million in 2018, and $300 million in 2020, each from Softbank’s Vision Fund) before conducting an initial public offering in 2021 with a valuation of over $2.9 billion.

Another example is Warby Parker, which raised a total of $535.5 million over nine rounds, and went public in September 2021 with a valuation of around $4.5 billion. With the prevalence of social media, investors and consumers are more aware than ever of the impacts these companies make on society and these companies’ stocks have benefited from social media campaigns.

It is likely that some pre-IPO candidates may choose to convert to a PBC to stand out from the crowd and attract investors. In fact, to attract investors, there have been SPACs who agreed to merge with a target with a provision that post-merger, the board would be permitted to convert the company to a PBC without stockholder approval. CF Finance Acquisition Corp, a SPAC, is an example.  In addition, a growing number of large corporations have formed or acquired PBCs or converted into a PBC. For example, Procter & Gamble has a PBC subsidiary named New Chapter (US); and Danone North America, a subsidiary of Danone S.A., converted to a PBC in 2017, following the combination of the Danone U.S. dairy business and Whitewave Foods.

For startup PBCs, private capital is available. For example, organizations such as the Acumen Fund, Bridges Fund Management, Root Capital, and Social Finance help PBCs gain access to capital markets.

For public PBCs, this author believes that the possibility of a change of control or a takeover transaction might be greater than traditional corporations. A bidder could contend that the board failed to balance for-profit purpose and non-profit purposes and failed to maximize values for the stockholders.  If one accepts the argument that a PBC must forgo some profits to pursue its social or environmental mission, then a PBC is inefficient in the eyes of a profit-maximizing investor and may be acquired by a bidder who then simply converts it to a traditional corporation and removes its social mission entirely. If the bidder makes a cash offer with a price per share much higher than the share price in the public market, it would be difficult for the board to defend this takeover without the risk of a derivative lawsuit. Accordingly, publicly traded PBCs may become prime acquisition targets because of their perceived lack of profit maximization or for having social or environmental goals contrary to a bidder’s own social or environmental goals.

4. Director Liabilities and Risk of Derivative Actions

Pursuant to Section 365(a) of the DGCL, the board of a PBC is required to manage or direct the affairs of the PBC in “a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.” However, under Section 365(b), like in a traditional corporation, a director of a PBC does not owe any fiduciary duty toward any person other than the corporation.

Stockholders of a PBC may bring a derivate action against a director for a failure to either (i) act in the stockholders’ interests, (ii) pursue a public benefit, or (iii) balance the dual purpose.

The Delaware PBC Act provides directors with a certain degree of cushion against liability. Section 365(c) provides that any failure by a director to satisfy the balancing requirement “does not constitute an act or omission not in good faith or a breach of the duty of loyalty for purposes of Section 102(b)(7) (exculpation of directors) or Section 145 (indemnification) of the DGCL, unless the certificate of incorporation so provides.”  This means that a PBC’s certificate of incorporation could opt out of this provision and could hold a director liable for failure to balance the company’s dual purposes.

In addition, pursuant to Section 367 of the DGCL, an action to enforce the balancing requirement may not be brought unless the plaintiffs in such action own individually or collectively, as of the date of instituting such derivative action, at least 2% of the corporation’s outstanding shares or, if the PBC’s shares are publicly traded on a national exchange, the lesser of such percentage of shares or shares with a market value of at least $2 million as of the date the action is initiated. For activist investors, these thresholds could be easily met.

5. Conclusion

Sustainable, publicly traded PBCs are no longer an illusion.  Now, there are at least 10 publicly traded PBCs (such as Vital Farms, Lemonade Insurance, and the examples above).  Because stockholders of a PBC are put on notice that the corporation pursues a dual purpose, directors’ fiduciary duties may be deemed to be relaxed and there is a risk of a derivative action. In addition, publicly traded PBCs may become prime acquisition or take-over targets because of their perceived lack of profit maximization or for having social goals contrary to a bidder’s own social goals. Even so, PBCs have been successful in raising capital and have become attractive targets for venture investments. If we have faith in the market’s pricing ability, we should encourage more PBC incorporations and their IPO.