Will B-Corporations Promote the Green Movement?

Date: August 18, 2010

By now you may have already heard about Maryland's new legislation, signed into law this past April, permitting the creation of Benefit Corporations, commonly referred to as "B Corporations". Maryland was the first state in the nation to enact such legislation. Vermont followed up shortly thereafter, signing similar legislation into law this past May.

The impetus for this legislation, at least partially, arose from the sustainability movement. Many business owners and investors believe that business can be a positive force for social change, and many customers want to support such enterprises. Consumers are, more than ever, seeking to support companies that have demonstrated a commitment to social responsibility. The B Corporation business model focuses its impact on multiple stakeholders instead of simply on financial return.

Benefit Corporations are for-profit enterprises, but they also identify in their corporate documents social progress initiatives. 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. Choosing the B Corporation route provides entrepreneurs a tool to ensure that their business will continue in its founding mission.

The statute requires that Benefit Corporations pursue 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 statute provides guidance on what constitutes specific public benefits. The "third-party standard" is also defined in the Benefit Corporation statute and must be created by a party independent of the corporation and must be transparent in its criteria for assessment.

The officers and directors of a Benefit Corporation are afforded permission and protection from liability in the event of a derivative suit by shareholders who take issue with the management's emphasis on social or environmental concerns (as opposed to emphasizing only shareholder returns). Importantly, non-shareholder stakeholders lack standing to sue B-Corp directors. Only shareholders are able to vindicate any failure of the directors to consider the effects of a given action on the other stakeholders. The B Corporation statue incorporates Maryland's statutory "business judgment" rule, an important protection for board members and officers.

What is yet to be fully revealed is who will take advantage of this new legislation, what opportunities it may provide, and of course what risks and disadvantages may arise. Questions are, of course, being asked about the statute's requirements. For example, what will constitute a breach of duty in light of the twin goals involved? Who will determine what standards should be used to measure whether a business is contributing to "a material positive impact"? Time will tell and very likely case law will necessarily more narrowly define the statute's requirements.

On Monday, September 13, 2010, Peter Sheehan from Whiteford, Taylor & Preston, along with several other panel members, will discuss Benefit Corporations, including how to start or convert into B Corporation status, the audit process, and possible tax benefits for B Corporations. We invite you to join us at the Offices of PSA Financial in Hunt Valley, Maryland at 6:00 pm on Monday, September 13th to learn about this exciting development. Please RSVP to Ariel Arcadipane at Tickets are $35.00 a person and drinks and hors d-oeuvres will be served.