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December 19, 2011

The New York Benefit Corporation Statute – Finally, a Corporation for the Granola Crowd

A vocal and growing minority has expressed concern about the perceived failure of Corporate America to act in a manner that benefits society. Often cited for this failure is the mandate that business corporations maximize profits for the benefit of shareholders. In response to this concern, Governor Cuomo on December 13, 2011 signed into law a bill authorizing "benefit corporations" in New York. The legislation will become effective in February, 2012. It remains to be seen if this new corporate hybrid will gain traction in New York.

A "benefit corporation" is a business corporation that has among its corporate purposes creating "general public benefit," meaning "a material positive impact on society and the environment, taken as a whole." A benefit corporation can also pursue one or more "specific public benefits." The statute identifies six of these, including preserving the environment and improving human health, but the benefit corporation's certificate of incorporation can identify any other particular benefit for society or the environment.

To be incorporated as a benefit corporation, the certificate of incorporation must identify the corporation as a "benefit corporation" and its stock certificates must contain a special legend on their face stating that the issuer is a benefit corporation.

Existing corporations can elect to become benefit corporations but doing so will require a vote of shareholders holding at least 75% of each class of the corporation's outstanding shares. The same 75% voting requirement will apply to the merger of a corporation that is not a benefit corporation with a benefit corporation and to termination of benefit corporation status, whether directly or through a merger or sale of assets. Thus, the statute seeks to assure that a corporation can neither become a benefit corporation nor terminate that status through any "back door" means that evades the 75% vote requirement.

One of the key provisions of the statute is the requirement that directors and officers of a benefit corporation in discharging their duties must consider the effects of any action on the ability of the benefit corporation to achieve its general public benefit and any specific public benefit for which it was organized, as well as on its shareholders, employees, customers, community, the environment and the short-term and long-term interests of the benefit corporation. In considering these factors, the directors and officers are not required to give priority to one over another.

The statute may impose a new and possibly burdensome decision making paradigm on the managements of benefit corporations, since the obligation to consider the effects of an action on each of these constituencies and factors is imposed not only on the board but on individual officers. Thus, even day-to-day business decisions would need to be considered and documented in a manner that demonstrates compliance with the statute.

The purpose of this provision goes to the raison d'entre of benefit corporations. It counters the general rule that directors and officers must act only in the best interest of the corporation to maximize profits for the benefit of shareholders. In fact, the statute states that creating the general and specific public benefit are in the best interest of the benefit corporation.

But benefit corporations are not all tree hugs and blue birds. The statute imposes special requirements that will cause many to question the benefit of benefit corporations. First, the general public benefit to be achieved by a benefit corporation must be assessed against an independent, third-party standard. A number of organizations, such as BLab and Global Reporting Initiative, have released assessment tools for this purpose.

Within 120 days following the end of its fiscal year, a benefit corporation must deliver to each shareholder an "annual benefit report" that describes and assesses the performance of the benefit corporation relative to its general and any specific public benefit. The annual benefit report must also disclose the compensation paid to each director of the benefit corporation for serving in that capacity and the name of each person who owns 5% or more of the outstanding shares of the benefit corporation, either beneficially or of record.

The annual benefit report must be posted on the benefit corporation's website and filed with the New York State Department of State. While the director compensation information and any proprietary information contained in the annual benefit report can be omitted from the posted and filed versions, the 5% shareholder information must be publicly disclosed. Privately-held New York corporations are not generally required to disclose the identity of their shareholders. It is difficult to understand why this requirement was imposed with respect to benefit corporations.

More ominous is a provision of the statute that creates a cause of action against a director or officer of a benefit corporation for (1) failure to pursue the general or specific public benefit, (2) failure to deliver or post the annual benefit report, or (3) "neglect of, or failure to perform, or any other violation of his or her duties or standard of conduct under [the statute]." The "failure to pursue the "¦ public benefit" provision is vague at best, while "neglect of, or failure to perform or any other violation "¦" language is extremely broad. The statute does not state who would have standing to bring such actions. Therefore, being a director or officer of a benefit corporation could expose a person to risks beyond those faced with a regular business corporation.

In light of these added requirements and risks, is it likely that many benefit corporations will be incorporated or that large numbers of existing corporations will convert to benefit corporations? As stated, the key to a benefit corporation is that it provides management with the ability (and mandate) to focus on the public benefit without fear that doing so will violate their duty to maximize returns for the shareholders. Section 717(b) of the New York Business Corporation Law, however, already permits directors to consider many of the same factors recited in the benefit corporation statute in taking action.

Moreover, a privately-held corporation owned entirely by like-minded shareholders could accomplish the same end without electing benefit corporation status. Even if outside funding was sought, the corporation could pursue socially-responsible funding sources that would support its pursuit of public benefit goals. By the same token, it seems unlikely that traditional funding sources, whose only goal is to maximize the return on their investment, would invest in a benefit corporation.

The 75% shareholder approval requirement would impact the benefit corporation's ability to partake in merger and acquisition activity and thus might dissuade any corporation with a substantial number of shareholders from electing benefit corporation status.

Given the added requirements and risks, it is likely that the benefit corporation will be a niche entity appealing mostly to those who want to make a strong statement regarding their commitment to general or specific public benefit.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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