Delaware Public Benefit Corporation — Is It Right For You? A Five-Part Test

If you’re an entrepreneur considering incorporating as or converting into a Delaware Public Benefit Corporation (PBC), the following five-part test may be helpful in determining whether it is the right choice of entity.

1. You have a clear social or environmental public benefit purpose.

Is it easy for a future customer, investor or employee to see what your social impact goals are and how they relate to the business of the company? A Delaware PBC must promote a specific public benefit and operate in a responsible and sustainable manner.  The law takes a broad approach to what a public benefit can be:  a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.

 While there are endless possibilities for a potential public benefit, the company’s public benefit purpose should be specific to its goals.  

2. Your public benefit purpose is central to your business model.

In our experience, the Public Benefit Corporation tends to be the best fit for companies where their core business is driven by adherence to the public benefit purpose; in other words, the more successful the business, the more impact on the public benefit. A simple example would be an organic food business with a public benefit purpose to promote access to healthy food: the more organic food the company sells, the more it accomplishes its public benefit purpose. The company’s public benefit purpose is meaningful and hard-wires the commitment to providing access to healthy food into the company’s core business. It is also measurable, as the company can track its growth in providing organic food.

The company’s public benefit purpose should be meaningful and easily measurable.

3. You believe in transparency and are comfortable tracking the public benefit purpose.

In addition to the standard information rights that shareholders have, every two years a PBC must provide a benefit report to its stockholders. The report must include (1) the company’s public benefit objectives, (2) the standards it uses to measure progress towards those objectives, (3) factual information based on those standards and (4) an assessment of the success of the public benefit objectives. While the benefit report must only be provided to stockholders, many companies use this opportunity to report on the company’s public benefit purpose as a public relations tool and highlight additional sustainability and corporate social responsibility initiatives of the company. The reporting requirement underscores the importance of selecting a public benefit purpose that can be subdivided into concrete measurable objectives.

The company will need to have processes in place to track its public benefit purpose and report on progress using a specific statutory scheme.

4. You’re comfortable with some legal risk and novelty.

Because the PBC was adopted in Delaware in 2013, there is still limited guidance on how to balance the company’s public benefit purpose with its profit purpose.  One of the main differences between a traditional Delaware corporation and the PBC relates to the director’s fiduciary duties. Whereas under Delaware law, directors of traditional corporations must manage the corporation in the best interests of the stockholders, the PBC requires directors to balance the interests of stockholders, the public benefit purpose and the interests of those materially affected by the PBC’s conduct. It’s good news that there have been no lawsuits relating to a PBC’s fiduciary duties but this lack of precedent leaves little guidance on how directors are to balance these potentially competing interests.

The PBC’s relative novelty and unique governance features brings additional legal risk.

5. You’re ready to educate potential investors on the PBC form.

While the DE PBC is becoming more recognized in the mainstream with the increased adoption of the form by major consumer products companies like Kickstarter and Plum Organics, there is still a lot of confusion and lack of understanding of how PBCs differ from traditional corporations. From our experience, even so-called “impact investors” often require education on the particulars relating to the PBC corporate form. As an entrepreneur pitching to investors, the PBC form will be one more item on the diligence list that you will need to get them comfortable with. Your corporate form likely won’t be the sticking point for an investment, but be prepared to explain time and again how the PBC is different and why you think it is right for you.

While the PBC is becoming more mainstream, many investors will still require education and may need to be “pitched” on why it makes sense for the company.