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.