Maryland's New Benefit Corporations Law
In April, Maryland became the first state in the nation to enact legislation permitting the creation of Benefit Corporations. Such business entities are often referred to as "B Corporations," a term that is a trademark of B Lab, a non-profit that has worked to popularize the concept and that certifies such businesses. This category of business entity permits a corporation to identify goals other than profit maximization, generally objectives relating to social and environmental performance.
Traditionally, the duty of corporate directors and officers is to maximize the monetary return on shareholders' investment. Benefit Corporations are for-profit enterprises, but they also identify in their corporate documents social progress objectives. The concept grew out of a concern on the part of socially conscious business owners that tapping capital markets can serve to undermine the social mission of their businesses, as the new investors may grow weary of the social mission and simply seek profit maximization.
Under Maryland's approach, Benefit Corporations must have the purpose of creating a "General Public Benefit", defined as "a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of Specific Public Benefits." The new law defines this "third party standard" by which a General Public Benefit is to be measured as a standard for defining, reporting, and assessing best practices in environmental and social practices, created by a party independent of the Benefit Corporation and transparent in its criteria for assessment. B Lab has one such standard up and running and has certified over 200 businesses.
The term "Specific Public Benefit" includes the following:
(1) Providing individuals or communities with beneficial products or services;
(2) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
(3) Preserving the environment;
(4) Improving human health;
(5) Promoting the arts, sciences, or advancement of knowledge;
(6) Increasing the flow of capital to entities with a public benefit purpose; or
(7) The accomplishment of any other particular benefit for society or the environment.
All Benefit Corporations created under Maryland law must have the purpose of creating a General Public Benefit. A Benefit Corporation has the option of specifying in its charter one or more Specific Public Benefits as among its purposes, in addition to (rather than in place of) its purpose of creating a General Public Benefit.
The Directors of a Benefit Corporation must consider the effects of their actions not only the interests of the shareholders, but also on other stakeholders, specified by statute:
(1) In determining what the director reasonably believes to be in the best interests of the benefit corporation, [the director] shall consider the effects of any action or decision not to act on:
- (i) The stockholders of the benefit corporation;
- (ii) The employees and workforce of the benefit corporation and the subsidiaries and suppliers of the benefit corporation;
- (iii) The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation;
- (iv) Community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or the subsidiaries or suppliers of the benefit corporation are located; and
- (v) The local and global environment; and
(2) May consider any other pertinent factors or the interests of any other group that the director determines are appropriate to consider.
Non-shareholder stakeholders, however, lack the standing to sue directors under the new law. Only shareholders are able to vindicate any failure of the directors to consider the effects of a given action on the other stakeholders.
The bill incorporates Maryland's statutory "business judgment" rule, under which board members and officers are generally not liable for actions they take in the course of their duties in seeking to achieve the goals of the corporation, unless those acts constitute fraud, bad faith, waste of corporate assets, or culpable negligence.
Benefit Corporations, of course, have the twin goals of achieving profits and creating Public Benefits. Completely ignoring one of these goals would in all likelihood constitute a breach of duty on the part of the director. But Maryland courts are unlikely to intrude upon a director's business judgment in choosing one alternative over another where both could arguably lead to the achievement of a Public Benefit.
All Benefit Corporations must make clear reference to the fact that they have elected to be Benefit Corporations at the head of their charter documents and on each outstanding stock certificate. Currently extant corporations that wish to convert to become Benefit Corporations may do so by amending their charters under the general procedure that governs charter amendments for Maryland corporations.
The new legislation requires that Benefit Corporations prepare an annual report that 1) describes the ways in which it pursued a General Public Benefit and, if applicable, the Specific Public Benefits listed as in its purpose, and 2) includes an assessment of its societal and environmental performance under a third party standard. The third party standard should be consistent from year to year, so that a Benefit Corporation's progress can be consistently judged; if the entity changes such standard, it must explain why in its annual report. The annual report must be delivered to all shareholders and posted on the Benefit Corporation's website.