I have a client that is a boutique investment bank that focuses almost exclusively on sustainable industries. From a free market perspective, this may seem like an oxymoron – shouldn’t a financial concern put the pursuit of pure profits before “eco-friendly” objectives? However, this enterprise is representative of a rapidly growing segment of the business world. Companies that brand themselves as “mission-driven,” socially or environmentally conscious, “for-benefit companies,” or, in more clever business parlance, serving the “triple bottom line” of profits, people and [the] planet, are swiftly multiplying. Whether this development is driven by demographic shifts, political swings, or consumer pressures is beyond the scope of this article, but this trend calls for an understanding of the legal landscape and how it is triggering major changes to our laws and jurisprudence. This article offers an overview of two types of business entities that have been instituted over the past few years to accomplish such social gains: the benefit corporation and the low-profit liability company.
In the early 2000s, three entrepreneurs – two of whom were former cofounders of the athletic shoe company AND 1 – believed that there should be an independent standard for certifying companies that attend to social and environmental concerns, similar to Fair Trade USA (which certifies Fair Trade coffee) or the U.S. Green Building Council (which certifies LEED buildings). These entrepreneurs founded “B Lab,” a 501(c)(3)nonprofit, in October 2006, and certified the first B Corporation the next year.
It soon became apparent that long-embedded business law standards hindered socially conscious entrepreneurs from operating companies that sought to achieve significant “non-financial” purposes.
A line of corporate law decisions emphasized that maximizing shareholder returns is the primary, if not exclusive, objective of for-profit corporations. In the seminal case of Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919), the Michigan Supreme Court held that, “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to . . . other purposes.” We must also look to Delaware’s case law, as more than half of all U.S. publicly traded companies and 63 percent of the Fortune 500 are registered there, and its highly respected Court of Chancery and Supreme Court are viewed with great deference by other courts.
Delaware’s General Corporation Law makes no mention of shareholder wealth maximization. However, the state’s courts have made this a guiding principle for boards of directors, especially in connection with change of control transactions. In Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), the Delaware Supreme Court held that a board has a “fundamental duty and obligation to protect the corporate enterprise, which includes stockholders,” but in evaluating the corporation’s interests, directors could consider “the impact on ‘constituencies’ other than shareholders (that is, creditors, customers, employees, and perhaps even the community generally).” Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) involved a corporate break-up that forced shareholders to sell their interests to a private buyer. The Delaware Supreme Court said that “The duty of the board . . . [was] the maximization of the company's value at a sale for the stockholders' benefit.” eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010) was a Chancery Court decision that held that “directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization – at least not consistent with the directors' fiduciary duties under Delaware law.”
As a result of traditional business-entity statutes and decades of case law, socially minded companies were faced with a set of dilemmas: not being able to earn a profit or opening their directors up to possible personal liability for decisions that do not maximize shareholder value. One journalist decried the “straitjacket legal requirements of Delaware Code profit maximization.” In actuality, “Delaware corporate law has taken a middle-of-the-road approach by permitting director consideration of non-shareholder interests until it is clear a corporation will change control or break up. In the takeover context, it remains to be seen how Delaware courts will react to the . . . stakeholder interest provision in B Corporation charters.” B Lab, among others, recognized these challenges and undertook as one of its initiatives the introduction and support of legislation to legitimize the “benefit entity.” Gradually, many state legislators responded to calls for a new framework to allow mission-driven enterprises to accomplish their goals.
On April 13, 2010, Maryland became the first U.S. state to pass benefit corporation legislation. As of the date of this article, California, Hawaii, Illinois, Louisiana, Massachusetts, Maryland, New Jersey, New York, Pennsylvania, South Carolina, Vermont, Virginia and Washington have amended their corporate law to allow for benefit corporations. Note that the Washington statute calls these entities “Special Purpose Corporations” and only requires such corporations to adhere to a third-party corporate social responsibility standard if they write that requirement into their articles of incorporation. Six other states (Alabama, Arizona, Michigan, New Mexico, North Carolina, Oregon) and the District of Columbia have introduced legislation to allow this type of entity. As of the date of this article, no B Corporation bill has been introduced in Delaware.
The key premise of these benefit corporation statutes is that a social mission should guide the directors and officers of the corporation in the discharge of their fiduciary duties. However, becoming a benefit corporation exposes a corporation to obligations that it would not otherwise have, to constituencies to which it would otherwise owe no duties.
The New York legislative approval memorandum for its “B Corporation” law stated, in part, the justification for the change to the state’s business law as follows:
Tens of thousands of companies are using sustainability and social innovation as a competitive advantage in the marketplace. Corporate leaders need to be able to shape business models that enable them to satisfy the demands of investors, employees and customers who increasingly demand that corporations serve both shareholders and society, considering the impact of their decisions on multiple stakeholders rather than maintaining a singular focus on short-term maximization of financial profits. Benefit Corporations have the potential to be the corporate entity that can offer entrepreneurs and investors the option to build and invest in businesses that meet higher standards of corporate purpose, accountability and transparency.
Under New York’s law, for example, a benefit corporation must have a "general public benefit" purpose, 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 latter are defined as providing individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; preserving the environment; improving human health; promoting the arts, sciences, or advancement of knowledge; increasing the flow of capital to entities with a public benefit purpose; or the accomplishment of any other particular benefit for society or the environment.
A standard corporation may elect to be a benefit corporation by amending its charter to include a statement that the corporation is a benefit corporation. Both an amendment electing benefit corporation status and the termination of benefit corporation status must be approved by the stockholders. A benefit corporation is permitted to identify and include one or more specific public benefits in its charter with the approval of its stockholders.
The benefit corporation law in each state resolves the limitations discussed above that Delaware case law has imposed on its corporations. Benefit corporations are permitted to promote the interests of multiple constituents, as opposed to primarily (if not exclusively) maximizing stockholders’ returns. In determining what a benefit corporation director reasonably believes is in the best interests of the enterprise, he or she must consider the effects of any act or omission on the following: stockholders; employees and workforce, including the employees and workforce of subsidiaries and suppliers; customers as beneficiaries of the general or specific public benefit purposes of the corporation; community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or its subsidiaries or suppliers are located; and the local and global environment. The director may also take into account any other relevant factors or the interests of any other group, as appropriate. Benefit corporation directors retain standard personal immunity for their actions in the reasonable performance of their duties.
Generally, benefit corporation laws require the preparation and filing of an annual benefit report, offering a narrative description of, among other things, the process and rationale for selection of the third-party standard, assessment of performance, compensation paid to directors, and the persons who own five percent or more of the company's outstanding shares. The reports must also generally be posted on the company’s website and delivered to an appropriate state agency.
It is expected that lawmakers in more states will seek to enact benefit corporation laws, likely based on B Lab's "Model Benefit Corporation Legislation," to remove legal impediments that prevent management and boards of directors from applying a “triple bottom line” objective, and to maintain their competitive status by providing legal recognition for businesses that adopt higher standards of corporate purpose, accountability and transparency.
Another benefit-driven legal entity is the Low-Profit Limited Liability Company (“L3C”). The L3C was first conceived by Robert M. Lang, Jr., CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation. It has been described as combining the financial advantages of the limited liability company (“LLC”) with the social advantages of a nonprofit – a cross between a nonprofit organization and a for-profit corporation. The entity is designated as targeting low-profits (not “no-profits”) with charitable or educational goals. If an entity is seeking to qualify for 501(c)(3) tax status, it should be formed as a nonprofit corporation.
On April 30, 2008, Vermont was the first state to adopt the L3C. Rhode Island, Maine, Michigan, Illinois, North Carolina, Utah, Louisiana and Wyoming also amended their laws to recognize the L3C. According to InterSector Partners, L3C – a consultant to L3Cs – as of March 8, 2013, there are over 775 “active” L3Cs in the foregoing states.
The Vermont Corporations Division’s website states that “The basic purpose of the L3C is to signal to foundations and donor-directed funds that entities formed under this provision intend to conduct their activities in a way that would qualify as program-related investments.” Program-Related Investments (PRI) are equity or debt investments from a foundation that align with its charitable purpose. In contrast to tax-exempt charities, L3Cs can distribute post-tax profits to their owners.
By amending a state’s general LLC act, rather than attempting to pass a separate law, state legislators may preserve existing LLC statutes, making the L3C more “user-friendly” than a completely new business structure. With regards to its legal and tax structure, the L3C mirrors the LLC by offering pass-through tax treatment, the liability protection of a corporation and the flexibility of a partnership. Its members are allowed to have management responsibilities, hold voting rights, make investments, and receive investment income. Unlike a standard LLC, the L3C is specifically formed to further a charitable purpose, enabling its owners and managers to deem its primary purpose as a charitable mission without violating any fiduciary duties to the company’s investors.
Together, the benefit corporation and the low-profit liability company are reshaping the model for limited liability entities. Although there are no pending bills for either of these entities in Delaware, it will be interesting to monitor how that state’s legislators respond to the mounting pressures of the mission-driven market.
 Jay Coen Gilbert, Bart Houlahan and Andrew Kassoy.
 B Corporations pay an annual fee between $500 and $25,000, based on revenues, for certification. According to B Lab’s Annual Report, B Corporations are required to: have a corporate purpose to create a material positive impact on society and the environment (“Purpose”); expand fiduciary duty to require consideration of the interests of workers, community and the environment (“Accountability”); and publicly report annually on overall social and environmental performance against a comprehensive, credible, independent, and transparent third-party standard (“Transparency”).
 Jamie Raskin, “The Rise of Benefit Corporations.” The Nation, June 27, 2011.
 Steven J. Haymore, “Public(ly Oriented) Companies: B Corporations and the Delaware Stakeholder Provision Dilemma,” Vanderbilt L. Rev., Vol. 64:4:1311, 1311-1346, at 1345, (2011).
 See, CA. Corp. Code § 14600, signed into law on 10/9/2011, effective on 1/1/2012; HI. Rev. Stat. § 420d-1, signed into law on 7/8/2011, effective upon signing; 805 IL. Comp. Stat. 40/1, signed into law on 8/2/2012, effective on 1/1/2013 ; La. Rev. Stat. Ann. § 12:1801, signed into law on 5/31/2012, effective on 8/1/2012; MA Ann. Laws Ch. 156e, § 1, signed into law on 8/7/2012, effective on 12/1/2012; MD Code Ann., Corps. & Assns. § 5-6c-01, signed into law on 4/13/2010, effective on 10/1/2010; NJ Stat. Ann. §14a:18-1, passed on 1/10.2011, effective when signed into law on 3/1/2011; NY Bus. Corp. Law §1701, signed into law on 12/12/2011, effective on 2/10/2012; 15 PA Cons. Stat. §3301, signed into law on 10/24/2012, effective on 1/22/2013; SC Code Ann. §33-38-110, signed into law on 6/14/2012, effective upon signing ; VT Stat. Ann. Tit. 11A, § 21.02, signed into law on 5/19/2010, effective on 7/1/2011; VA Code Ann. §13.1-782, signed into law on 3/26/2011, effective on 7/1/2011. WA RCW 23B.25, “Social Purpose Corporation” Law, signed into law 3/30/2012, effective 6/7/2012.
 Initially, the L3C structure was intended to serve as a catalyst for urban development, by attracting for-profit ventures that could revitalize and preserve disadvantaged communities. The PRI funds from private foundations would then be leveraged to lower the investment risk, making outside investment more appealing and spurring economic growth. See Nancy I. Clement and Robert M. Lang Jr., “Low-profit Limited Liability Company (L3C) - A New Tool for Implementing University Research via Social Entrepreneurs,” Proceedings of the NCIIA 13th Annual Meeting (March 21, 2009); http://nciia.org/conf09/papers/Clement.pdf; see also, Community Wealth Ventures, Inc., The L3C: Low-Profit Limited Liability Company; Research Brief 2 (2008), available at http://www.cof.org/files/Documents/Conferences/LegislativeandRegulatory01.pdf.
 M. DiFonzo, Investing in the Arts: The L3C (Low-Profit Limited Liability Company), November 14, 2012.
 Vermont (177 since April 2008); Michigan (167 since January 2009); Wyoming (35 since February 2009); Utah (46 since March 2009); Illinois (121 since January 2010); North Carolina (78 since August 2010); Louisiana (122 since August 2010); Maine (26 since July 2011); and Rhode Island (4 since July 2012). Note: These are L3Cs that are showing as “active” by the respective secretaries of state and exclude L3Cs that are now inactive, administratively dissolved, expired or no longer recognized by the state in which they were organized.
Lawrence Cohen is a Director in the Corporate Department at Gibbons P.C.