June 9, 2014
Experts Corner

Assessing the legal rights, rewards of benefit corporations

James W. McLaughlin

In May, Connecticut joined the majority of its fellow states when it adopted legislation to introduce a new type of corporate legal entity — the benefit corporation. Benefit corporations are designed to meet the needs of the rapidly-developing sustainable business movement in the state. They offer impact investors and social enterprise entrepreneurs a comprehensive yet flexible legal entity that is specifically equipped to accommodate for-profit entities that have a social benefit purpose central to their existence.

Historically, a business corporation's focus has been limited to maximizing shareholder value to the exclusion of other considerations. Deviating from this narrow focus could subject directors to legal risk for breach of their fiduciary duty to the corporation. Benefit corporations broaden the scope of director discretion by removing any ambiguity as to whether directors can consider interests of stakeholders other than shareholders in fulfilling their fiduciary duties. In fact, the new legislation makes such considerations mandatory for benefit corporations.

The law requires a benefit corporation to have the stated purpose of creating a general public benefit. It also offers the option to adopt one or more specific public purposes including improving human health, promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, or promoting the arts, sciences or advancement of knowledge.

Because a corporation's officers and directors, as fiduciaries, owe a duty of care and loyalty to the corporation, they must consider the effect each corporate action will have in advancing the company's purpose. For a traditional business corporation, these duties are properly exercised when its directors' decisions are aimed at enhancing shareholder value. Benefit corporations expand the fiduciary duties scope by requiring directors and officers to consider how their actions also impact employees and customers, the community, local and global environment, short-term and long-term interest of the corporation, and its ability to accomplish its public benefit purpose.

In addition to expanding director and officer discretion, benefit corporations allow specific liability protections to their directors, officers and the corporation itself. Only directors and shareholders of a benefit corporation have the exclusive right to bring a "benefit enforcement proceeding" action against the corporation, its directors or its officers for failing to pursue or create a public benefit. No third party or government entity can initiate such a legal action. Additionally, while a benefit enforcement proceeding is designed to hold the corporation and its directors and officers to a higher standard of conduct, it can't result in liability for monetary damages.

Such protections are balanced by stringent transparency requirements. Benefit corporations are obligated to annually assess their overall social and environmental performance, as measured against a third-party standard. This assessment must be included in a published annual report that also details the benefit corporation's activities and progress in creating a general public benefit. This report must be sent to all shareholders and made available to the public.

Connecticut benefit corporations also provide shareholders an opportunity to ensure continuity of the corporate mission to create a benefit. By unanimous vote, benefit corporation shareholders may elect to make the corporation's status irreversible. This so-called "legacy preservation provision" is an option that is currently available only in Connecticut.

Connecticut now has an entity choice designed for social entrepreneurs and business owners whose mission both extends beyond solely enhancing shareholder value and purposefully includes considerations of society as a whole.

The option to become a Connecticut Benefit corporation starts Oct. 1, and several Connecticut companies are already preparing to opt in.

James W. McLaughlin is an attorney with Murtha Cullina LLP in Hartford and is a member of the firm's business and finance department.

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