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Delaware Overcomes its Qualms and Advances B Corps Law

Home to half of U.S. public companies and two-thirds of the Fortune 500, Delaware is planning to introduce B-Corp legislation.

Before Richard Geisenberger, Delaware’s chief deputy secretary of state, could conceive of seeing his state’s law tweaked to allow for a new kind of corporation — one legally permitted to consider its impact on people and planet to be equally important as its impact on shareholders’ wallets — he needed an answer to a nagging question in his mind: “Why would an investor want this?”

The conversation around whether to create a legal designation in Delaware for so-called public-benefit corporations (B Corps) started about four years ago, at the beginning of Governor Jack Markell’s administration, Geisenberger says. Since then, 14 states and Washington, D.C. have passed B-Corp legislation, and another dozen have introduced it. Between 250 and 300 companies have incorporated as B Corps within those states. But Geisenberger says he and his colleagues long remained unconvinced that their state — a corporate-law kingpin, with half of U.S. public companies and two-thirds of the Fortune 500 registered there — was ready to embrace the B Corp. The new legal form requires company executives to specify a quantifiable social or environmental benefit in their corporate charter (and holds them to it), and frees the company from the myopic mandate to maximize shareholder value at all costs.

Delaware introduced benefit-corporation legislation to bipartisan support in April; it has passed the State Senate and, if it passes the House (Governor Markell has said he believes that is likely), it will become effective on August 1.

But the qualms that Geisenberger and others had about the new corporate form made its acceptance in Delaware anything but automatic. Frederick Alexander, past chair of the Delaware Bar’s Corporations Law Council and one of the primary drafters of the state’s proposed legislation, says the same question that Geisenberger cites niggled at him too.

“Before I could feel comfortable with this, I wanted to understand why you’d want to raise funds from investors [for a company] that does not consider serving them to be its primary purpose,” Alexander says.

In an effort to address such concerns, Andrew Kassoy — co-founder of Berwyn, Pennsylvania–based B Lab, the nonprofit that drafted the model B-Corp legislation and continues to advocate for its adoption — organized a meeting in September in which the dozen attorneys in the Delaware Bar’s Corporations Law Council, Secretary of State Jeffrey Bullock, Geisenberger and the chancellor of the Court of Chancery Leo Strine, Jr., could speak with about twelve benefit-corporation executives and a few of their investors. Geisenberger says it was speaking with the B-Corp affiliates at this meeting that cleared the doubts he harbored on behalf of investors.

“The investors told us this is what they want,” Geisenberger explains. “They said, ‘We think that makes us more successful than any other approach to the market, and we want to be able to enforce it.’ The underlying philosophy of Delaware law is to enable managers and investors to order their internal financial affairs in ways that make sense to them. If this is what they want, why wouldn’t we let them do it?”

Perhaps the best-known proponent of the mission-before-stock-price philosophy is Facebook CEO Mark Zuckerberg, who illustrates how this particular prioritization can exist outside of the narrow niche of self-proclaimed “green” or “responsible” investors and entrepreneurs. Facebook is not a benefit corporation and has not announced plans to become one, but in a letter he wrote to prospective shareholders before Facebook’s initial public offering last year, Zuckerberg echoed the thinking behind the benefit-corporation model: “We’ve always cared primarily about our social mission, the services we’re building and the people who use them,” he wrote. “This is a different approach for a public company to take ... These days, I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.”

That line of thinking is making more and more sense to Alexander, the Delaware lawyer. He says his concerns about B Corps lightened when he revisited the work of corporate theory academic Lynn Stout, author of The Shareholder Value Myth.

“Current corporate law holds that your sole purpose is to make money for your stockholders,” Alexander says. “But to get that last penny, you might, as a corporation, do all sorts of things that are unethical but not illegal. What Lynn Stout says is that people don’t operate their real lives that way; they do things like give to charity. There’s no reason to say that investors shouldn’t feel the same way.”

One investor who indeed feels the way Stout describes is Albert Wenger, a partner at Union Square Ventures, a New York–based early-stage venture capital firm whose portfolio companies include Twitter, Tumblr, Foursquare, Etsy and Kickstarter. Though USV has no explicit social mission, making investments with an eye toward their societal impact simply makes sense to Wenger — and so does the benefit-corporation concept.

Wenger says USV seeks to invest in companies that oversee online networks whose economics get more valuable, for everyone in the network, the bigger they get. (For example, Kickstarter, a donation-based funding platform for creative projects, improves both as a means of crowdfunding for projects and of offering varied donation options as it grows.)

“We are very interested in companies that can make a credible commitment to be good stewards of their networks,” Wenger says. “That’s why we think a lot of these companies make good candidates to be benefit corporations.”

What tends to happen under traditional corporate law, he says, is that the founders of socially-minded companies try to maintain their companies’ roots by demanding super-voting shares, board control or other dictatorial tactics. “That’s historically not a good idea,” Wenger says. A benefit corporation has its social mission written into its very DNA — rather than asking investors to trust that the mission is written into the DNA of the people leading it — and Wenger says that could be a significant risk-mitigator for investors like himself.

Of course, benefit corporations don’t appeal to all investors, or even most of them. Geisenberger and Alexander say that in drafting the legislation, they labored to ensure that no shareholder would suddenly find him or herself among the investors of a B Corp without recourse: The statute requires a 90 percent shareholder vote to convert to a benefit corporation — much steeper than the two-thirds vote in B Lab’s model legislation — and offers the minority voters the right to sell back their stock in the company at the full appraised value of the regular corporation. What’s more, Geisenberger says that he was driven to draft the B-Corp legislation partly out of a motivation to protect investors — not only enable them; he feared that with growing numbers of states adopting the new corporate form, Delaware companies could merge with B Corps in other states, forcing investors to go with them.

But Wenger says these divergent investor desires is one complication the benefit-corporation entity helps to address, by making clear which companies have explicit social missions that can’t be overruled and which do not — and letting investors make decisions accordingly.

“It makes it a lot less likely that people are going to try to amass concentrated shareholding solely for the purpose of changing the economics of the company,” Wenger says. “A benefit corporation will have it baked into the corporate charter that, even if somebody holds a lot of shares, they can’t simply say, ‘You’ve got to raise your rates.’ Making that commitment right up front will allow these companies to maintain a healthier and more distributed ownership base.”

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