August 10, 2020

New Amendment to Delaware General Corporation Law Solidifies Delaware’s Status as Welcoming of Benefit Corporations

Since the 2013 adoption of a new subchapter to the Delaware General Corporation Law, which provided corporate entities the ability to be formed as, or convert into, a public benefit corporation, Delaware has been an attractive jurisdiction for incorporating as a PBC.[1] Delaware defines a PBC as a corporation “that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”[2] Notably, PBC directors are responsible for balancing profits with the PBC’s achievement of its stated public benefit[3] and the interests of those materially affected by the PBC’s conduct.

Unlike many other states that adopted benefit corporation legislation with more stringent requirements, such as mandatory third party evaluations, benefit director and/or officer(s), and publicly available annual public benefit reports, the DGCL statute adopted by the Delaware legislature contained less onerous provisions. For example, under the DGCL PBC statute, third-party evaluations and benefit officer/director positions are optional and public benefit reports are only required to be made biannually and provided to a PBC’s stockholders.

The latest amendment to the DGCL, House Bill 341, was signed into law on July 16, 2020. In addition to addressing other matters, such as a corporation’s emergency powers, it amended four key provisions of the Delaware PBC statute. The ultimate result of these amendments is that Delaware has further solidified itself as the most friendly jurisdiction for those seeking to form or convert into a PBC. With respect to PBCs, the new amendment took the following actions:

  • Elimination of Specific Appraisal Rights for Existing Entities Converting into a PBC: Prior to the adoption of the new amendment, a company that wished to convert to (or enact a merger that resulted in conversion into) a PBC was required to provide its stockholders appraisal rights. These appraisal rights frequently deterred corporations from converting into a PBC, particularly where conversion may have triggered an obligation to make cash payments to challenging stockholders. In response to these concerns, the new amendment eliminated these appraisal rights (noting, appraisal rights otherwise required pursuant to the DGCL irrespective of the PBC provisions remain in place).
  • Elimination of Super-Majority Voting Threshold: Like almost all states that have enacted benefit corporation legislation, the DGCL previously provided that certain actions of PBCs required a super-majority vote of two-thirds of the PBC’s outstanding voting stock, including: (i) merging or consolidating with an entity that is not a PBC and (ii) amending the PBC’s charter to delete or change the benefit purpose provision or the reporting requirements provision. This super-majority requirement previously served as an impediment to certain corporations becoming PBCs due to a fear of limiting investors that may express concern over limitations to certain exit scenarios. Pursuant to the new amendment, these matters now only require the statutory default of a majority approval (unless otherwise stated in a corporation’s charter).
  • Clarification of Conflicts of Interest: In addition to the more substantive amendments described above, the new amendment also clarified that a director’s interest in stock of a PBC shall not result in a conflict of interest in such director’s balancing of stockholder value alongside the PBC’s stated public benefit and the best interests of those materially affected by the PBC’s activities, except to the extent that such ownership would create a conflict of interest if the corporation were not a PBC. Moreover, any failure on the part of a director to satisfy the balancing requirement will not constitute an act or omission not in good faith for the purposes of limitation of liability or indemnification with respect to such director, other than in the case of a conflict of interest or if the PBC’s charter provides otherwise. Delaware law also allows PBCs, like other non-PBC corporations, to include language in their certificate of incorporation eliminating monetary relief as a source of damages in favor of injunctive relief as a remedy for such director violations.[4]
  • Clarification of Threshold for Derivative Suits: Finally, the new amendment clarified that the only stockholders who may bring a derivative lawsuit or any other type of action to enforce the fiduciary duties of the PBC directors are those stockholders owning at least 2% of the outstanding shares of the PBC (or, if less, that number of shares with a value of at least $2,000,000). The new amendment further clarified that provisions in this section did not relieve plaintiffs from complying with other DGCL requirements for bringing derivative suits.

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[1] DGCL Title 8, Chapter 1, Subchapter XV.

[2] DGCL § 362

[3] The DGCL defines a “public benefit” broadly as any activity which has a positive effect or reduces the negative effects on persons, entities, communities or interests such as effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.

[4] Subject to certain limitations pursuant to DGCL § 102(b)(7).