By Sharon C. Lincoln & Adrienne M. Ellman, Foley Hoag LLP
On August 7, 2012, Governor Deval Patrick signed H. 4352 into law, An Act relative to infrastructure investment, enhanced competitiveness and economic growth in the Commonwealth, thereby adding Chapter 156E to the General Laws of Massachusetts. This new statute governs the establishment and operation of benefit corporations, a hybrid entity that incorporates characteristics of traditional for-profit and non-profit corporations.
With the introduction of Chapter 156E, otherwise known as the “Massachusetts Benefit Corporation Act”, Massachusetts became the eleventh state to permit this socially minded form of corporate entity. Well-known benefit corporations in other states include Patagonia, Inc. in California and King Arthur Flour Company, Inc. in Vermont.
The effective date of Chapter 156E is December 1, 2012, although in practice, the first effective date for electing benefit corporation status is Monday December 3, 2012.
Distinguishing Characteristics of Benefit Corporations
Benefit corporations are for-profit corporations, incorporated under Chapter 156A or Chapter 156D of the Massachusetts General Laws, which elect to be benefit corporations under the Massachusetts Benefit Corporation Act (as described below).
Benefit corporations are similar to traditional for-profit corporations but they differ in a few important respects: (i) broadened fiduciary discretion for directors and officers; (ii) formal oversight of public benefit mission; and (iii) increased accountability.
Broadened Fiduciary Discretion. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors or risk shareholder lawsuits, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.
In fact, under the newly-adopted legislation, the directors of a benefit corporation are required to consider the effects of their corporate decision-making on the following:
- The shareholders of the benefit corporation;
- The employees and workforce of the benefit corporation;
- The interest of clients;
- Community and societal factors, including those of each community in which offices or facilities of the benefit corporation are located;
- The local, regional and global environment;
- The short-term and long-term interests of the benefit corporation; and
- The ability of the benefit corporation to accomplish its general and specific public benefit purposes.
In practice, this expanded fiduciary discretion means that the directors of a benefit corporation faced with financial hard times could, for example, prioritize retaining the corporation’s workforce through the lean period, and opt to dip into cash reserves to do so, in order to continue to fully pursue the corporation’s public benefit goals. In contrast, the directors of a traditional corporation faced with similar economic circumstances may be more likely to decide to build up cash reserves by laying off employees, in order to fulfill their fiduciary duty to prioritize the financial returns to investors.
At the same time, the new Massachusetts law provides protection for a benefit corporation’s directors and officers by providing that they are not personally liable for monetary damages for any “failure of the benefit corporation to pursue or create general public benefit or a specific public benefit.”
Formal oversight. Benefit corporations are required to designate one director as the “benefit director” whose primary responsibility is to oversee and report on the corporation’s public benefit aims. At least annually, the benefit director is charged with preparing an annual report for the shareholders indicating, among other things, whether such benefit director believes that the corporation, directors, and officers are acting in accordance with the corporation’s general and/or specific public benefit mission and what impact the corporation’s status as a benefit corporation is having on its business.
Benefit corporations may also elect to have a “benefit officer” who is primarily responsible for preparing and submitting the annual benefit report (described below).
Increased accountability. Chapter 156E requires benefit corporations to issue an annual “benefit report” to shareholders that includes, among other things, all of the following:
- A narrative description of the ways in which the benefit corporation pursued a general and/or specific public benefit during the year and any circumstances that may have hindered the creation by the benefit corporation of general and/or specific public benefit;
- An assessment of the overall social and environmental performance of the benefit corporation against a third-party standard (discussed below);
- The name of all directors and officers of the benefit corporation;
- Compensation paid by the benefit corporation during the year to each director; and
- The name of each person who owns 5% or more of the outstanding shares of the benefit corporation.
The annual benefit report must be provided to shareholders at the same time that the benefit corporation delivers any other annual report to its shareholders, or within 120 days following the end of the benefit corporation’s fiscal year. In addition, a benefit corporation must post its most recent annual benefit report on its website (with compensation and other confidential or proprietary information redacted) and it must provide a similarly redacted copy to the Secretary of the Commonwealth of Massachusetts when it files its annual report.
The Massachusetts Benefit Corporation Act does not require that a benefit corporation measure its social and environmental performance against any particular third party standard, only that the third party standard selected by the corporation is comprehensive and independent. A partial listing of such third party standards can be found here.
As noted above, directors and officers of a benefit corporation are not personally liable for a failure of the corporation to pursue or create public benefit. In addition, the corporation itself is not liable for monetary damages under Chapter 156E for any failure to pursue or create a general or specific public benefit. However, the new statute provides for additional accountability by including procedures by which directors or shareholders may initiate so-called “benefit enforcement proceedings” against a benefit corporation or its directors or officers with respect to a failure to pursue or create general or specific public benefits or a violation of a duty or standard under Chapter 156E. Such proceedings appear to be geared toward encouraging the benefit corporation to more fully pursue and create its general or specific public benefits.
It is important to note that benefit corporations should not be confused with “B Corps” which are for-profit corporations, limited liability companies, partnerships and other business entities (including benefit corporations) that have been certified as B (for Beneficial) Corps by B Lab, an independent non-profit. B Corp status is conferred by B Lab on business entities that meet certain criteria. The B Corp designation is a branding tool and has no legal significance.
Electing Benefit Corporation Status
Newly-formed corporations electing to be benefit corporations must make a statement in Article II of their Articles of Organization that the entity is to be a “benefit corporation” or that “the corporation shall have the purpose of creating a general public benefit.” The corporation may also identify specific public benefits that it aims to create.
A general public benefit is broadly defined in Chapter 156E as “a material, positive impact on society and the environment, taken as a whole, as measured by a third party standard, from the business and operations of a benefit corporation.”
Specific public benefits as defined in the new law may include any of the following:
- Providing low-income or underserved individuals or communities with beneficial products or services;
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
- Promoting the preservation and conservation of the environment;
- Improving human health;
- Promoting the arts, sciences, access to and advancement of knowledge;
- Increasing or facilitating the flow of capital and assets to entities with a general public benefit purpose; or
- Conferring any other particular benefit on society or the environment.
With the approval of two-thirds of each outstanding class of securities (i.e., the “minimum status vote”), existing corporations may elect benefit corporation status and amend their articles of organization accordingly. In addition, an existing entity may become a benefit corporation if it is a party to a merger, conversion or share exchange with a benefit corporation and the benefit corporation is the surviving entity. In this case as well, at least two-thirds of each outstanding class of securities must approve the merger.
An existing benefit corporation may elect out of benefit corporation status by amending its articles of organization to delete the required statement that the corporation is a benefit corporation. This amendment must be adopted by at least two-thirds of each outstanding class of securities.
The Secretary of the Commonwealth recently released guidance regarding these rules, as well as other matters related to the administration of benefit corporation.
Aside from the distinguishing factors identified above, benefit corporations are generally governed by Chapters 156A and/or Chapter 156D unless Chapter 156E provides otherwise.
Comparison to Non-Profit Corporations
Although benefit corporations may have similar public benefit purposes as non-profit corporations organized under Chapter 180 of the Massachusetts General Laws, the fact that benefit corporations are taxable, for-profit entities significantly distinguishes them from non-profit corporations. Unlike non-profit corporations, benefit corporations have owners and can issue stock, options, warrants and other forms of equity and debt. They may distribute earnings to shareholders and otherwise operate for the benefit of their investors. Benefit corporations can also elect to be S corporations and may be part of a holding company structure.
In contrast, a non-profit corporation may not be owned by any individuals or entities and its assets may not be used for the benefit of private interests. Instead, the assets and earnings of non-profit organizations must primarily be used for the benefit of the public. Non-profit corporations are generally exempt from tax and are regulated by the Non-Profit Organizations/Public Charities Division of the Attorney General’s office.
Risks and Opportunities of Benefit Corporations
Benefit corporations are relatively new corporate entities and it may take time for the distinguishing features of benefit corporations to become widely known. In the meantime, investors and consumers may not fully understand or appreciate what sets benefit corporations apart from traditional corporations. Fees associated with producing the annual benefit report, including the third-party standards, may add an extra burden to startup businesses. Also, the legal issues facing benefit corporations are generally unknown and certain investors and directors may be unwilling to take on undefined risks.
On the other hand, benefit corporations provide several opportunities for business owners. The fiduciary flexibility of a benefit corporation’s board of directors enables it genuinely to consider a broad array of factors when making decisions and focus on long term priorities over short term gains, without automatic deference to maximizing shareholder profit in the short term. A benefit corporation may have an advantage in attracting investment from socially conscious investors and funds that put a priority on supporting ventures that aim to increase the common good as well as provide a return for their owners. Benefit corporation status may also help to distinguish a benefit corporation’s products and inspire brand loyalty in a crowded marketplace.
Overall, the Massachusetts Benefit Corporation Act provides an alternative corporate form for socially minded entrepreneurs and businesses in the Commonwealth to consider. Time will tell what the full impact of benefit corporations will be.
 The ten other states to pass legislation establishing benefit corporations are California, Hawaii, Illinois, Louisiana, Maryland, New Jersey, New York, South Carolina, Vermont and Virginia. Maryland and Vermont were the first states to do so, in 2010.