CLIENT ALERT: Delaware Makes it Easier for Corporations to Become Public Benefit Corporations
On July 16, 2020, Governor Carney signed into law amendments to the General Corporation Law of the State of Delaware (“DGCL”), including amendments to the statutes governing public benefit corporations (“PBCs”). Importantly, the amendments eliminate the two-thirds super-majority stockholder vote required for a conversion to or from a PBC through a charter amendment or by merger and statutory appraisal rights that were previously available pursuant to Section 363(b) of the DGCL in connection with a conversion to or from a PBC. The amendments, which became effective upon their enactment into law, reduce certain of the hurdles for public and private Delaware corporations desiring to promote public benefits while remaining a for-profit entity to adopt the PBC corporate form. These amendments coincide with increased focus on the role of corporations in generating positive social impacts and a greater interest in ESG-related issues.
The PBC corporate form was introduced in Delaware on August 1, 2013 with the adoption of subchapter XV of the DGCL authorizing the formation of PBCs. The statute established PBCs as for-profit entities intended to “produce a public benefit or public benefits and to operate in a responsible and sustainable manner.” “Public benefits” are broadly defined to include a positive effect (or reduction in negative effects) on one or more categories of persons, entities, communities or interests, including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. Unlike directors of a conventional Delaware corporation,1 directors of a PBC are required to balance the pecuniary interests of stockholders, the best interests of those materially affected by the PBC’s conduct and the public benefit identified in the PBC’s charter. Given the material differences between the traditional corporate form and PBCs, the PBC statutes enacted in 2013 required corporations electing to opt-in to or opt-out of the PBC form obtain the approval of 90% of the outstanding shares of each class of stock, whether or not voting. The voting standard was subsequently relaxed in 2015, in part over concerns regarding corporations’ ability to secure such a high vote and a desire to more broadly enable use of the PBC corporate form.
Prior to the enactment of the 2020 DGCL amendments, Section 363(a) of the DGCL prohibited conventional corporations from (i) amending its charter to include the relevant provisions necessary to become a PBC or (ii) merging or consolidation with or into another entity if, in such merger or consolidation, the shares of such conventional corporation would be converted into or exchanged for shares of a PBC or similar entity, in each case without the approval of two-thirds of the outstanding stock of the corporation entitled to vote thereon. Former Section 363(c) likewise prohibited a PBC from (i) amending its charter to remove or amend the provision establishing the corporation as a PBC or any other provision authorized by Section 366(c) of the DGCL (pertaining to periodic statements and third-party certifications), or (ii) merging or consolidating with or into another entity if, in such merger or consolidation, the shares of the PBC would be converted into or exchanged for shares of a corporation that is not a PBC or similar entity, without the same two-thirds supermajority stockholder vote. The 2020 amendments eliminate Sections 363(a) and (c). Accordingly, subject to any greater or additional vote required under the corporation’s charter, the stockholder approval necessary to convert to or from a PBC, whether through a charter amendment or by merger, will be the default statutory vote required under Section 242 or the applicable merger statutes — a majority of the outstanding stock of the corporation entitled to vote thereon.
In addition, the 2020 amendments to the DGCL eliminate Section 363(b) of the DGCL. That provision granted appraisal rights to stockholders of a conventional corporation holding shares of the corporation immediately prior to the effective time of (i) a charter amendment to effect the conversion of the corporation to a PBC or (ii) a merger or consolidation resulting in the conversion or exchange of the corporation’s stock into or for shares of a PBC, if such stockholders did not vote in favor of or consent to the amendment or merger or consolidation, except under limited circumstances — namely, where the market out exception applies. As a result of the elimination of Section 363(b), stockholders of conventional corporations will not be entitled to seek an appraisal of the fair value of their shares in connection with a conversion to a PBC effected pursuant to a charter amendment. The availability of appraisal rights in connection with the conversion of a PBC by merger or consolidation will be governed by the DGCL’s appraisal statute, Section 262, with respect to which certain conforming amendments have been enacted as part of the 2020 amendments to the DGCL.
The 2020 amendments include other amendments to the PBC statutes. The amendments to Section 365(c) clarify that, for purposes of Section 365(b), a director will not be interested with respect to a balancing decision based solely on his or her ownership of stock of the PBC, except to the extent that such ownership would create a conflict of interest if the corporation were not a PBC. In addition, Section 365(c) has been amended to provide that, in the absence of a conflict of interest, no failure to satisfy the balancing requirements set forth in Section 365 will constitute an act or omission not in good faith for purposes of Section 102(b)(7) or Section 145, unless the PBC’s charter otherwise provides. Prior to the 2020 amendments, this protection for directors of a PBC was available only if the PBC’s charter included an affirmative provision to that effect. Finally, Section 367 of the DGCL has been amended to clarify that any suit (including any individual, derivative or any other type of action) to enforce the balancing requirements of Section 365(a) must be brought by plaintiffs owning at least 2% of the PBCs outstanding shares or, in the case of certain listed companies, shares with a value of at least $2 million if such number is lower.
1 Delaware case law makes clear that the primary purpose of a conventional corporation is to generate long-term stockholder value, except under certain limited circumstances (e.g., in the context of a sale of the company). As a result, directors of conventional corporations may consider other constituencies but only to the extent the interests of such other constituencies align with the long-term wealth maximization of the corporation’s primary stakeholder – its stockholders. See, e.g., eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (Del. Ch. 2010) (“Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders”).