Vermont’s newest business entity: The “B Corporation”

Effective July 1, 2011, entrepreneurs in Vermont have a new business entity to consider when determining how to set up shop.  The “Vermont Benefit Corporation Act” creates a new corporate model that encourages “for profit” businesses to focus on solving social and environmental problems.

Ordinary corporations have a legal duty to protect their shareholder’s interests above all else. Indeed, corporate law in every state creates a legal cause of action against directors and corporate officers who breach their duty to the shareholders. This duty (often interpreted as a duty to maximize profit) typically results in a narrow focusing of the business mission and operating methods.  Corporate directors and officers are encouraged to minimize or otherwise overlook the potential social and/or environmental impacts of a particular decision if they adversely affect the bottom line.

At the same time, many corporations recognize that being known as a “green” company greatly increases their market potential. (For purposes of this article I am using the term “green” to include both environmental and social considerations.)  Unfortunately, holding a company out as “green” is frequently nothing more than good marketing.  Standards for operating as a “green” company vary from state to state, and from industry to industry.  In many cases there are no standards by which to measure a company’s social and/or environmental impact.  Individuals inclined to invest “green” companies have few tools available to help them determine just how green the company really is.

The Vermont Benefit Corporation Act seeks to address the barriers to corporate involvement in social and environmental issues in a couple of important ways. The first is that a Benefit Corporation’s (also known as a “B Corp.”) legal structure expands corporate accountability to include an obligation to consider social and environmental consequences in decision making.  While maximizing shareholder interests is still a part of the equation, B Corp. directors and officers are not required to make shareholder interest the only consideration. Under the law B Corporations are legally required to consider the broader impacts of a particular course of action.

The Vermont Benefit Corporation Act also addresses the issue of “transparency” in determining just how “green” a business is on a day to day basis.  Benefit Corporations legally obligate themselves to operate in accordance with independent, third party standards. The B Corp. is required to issue an annual “Benefit Report” which sets out (among other information) the corporations public benefit goals, steps taken during the year to meet those goals and an assessment of social and environmental performance that is prepared in accordance with the third party standards.   The law also requires transparency as to the annual compensation paid to each director. Shareholders then have the authority to approve or reject the Benefit Report.

Forming a Vermont Benefit Corporation is similar to forming a traditional Vermont Business (“for profit”) Corporation.  Articles of Incorporation are drafted and filed with the Secretary of State.  To qualify as a “B Corporation,” however, the Articles of Incorporation must specifically include the statement “This Corporation is a benefit corporation.” As with a traditional corporation, incorporators of a B Corporation must still decide whether the business will be a close or general corporation, and further decide the company’s tax status (“S corp.” vs. “C corp.”).   The Secretary of State must approve the corporate name.  A registered agent based in Vermont must be designated for the acceptance of service of legal documents on behalf of the corporation. A fiscal year and the number and class of shares must be designated.  A Board of Directors must be established.

Under the new law an operating Business Corporation can choose to become a Benefit Corporation by amending its Articles of Incorporation to add the statement “this corporation is a benefit corporation.”  A current Business Corporation can also merge with a Benefits Corporation and the “surviving” corporation designated as a Benefits Corporation.  In both cases the law requires certain procedures be used to provide notice to the shareholders.

One of the most obvious distinctions between a Business Corporation and a Benefit Corporation is the statement of “corporate purpose.” Under Vermont law, a Business Corporation is free to engage in any lawful business unless the Articles of Incorporation specifically limits permissible business activity. Benefit Corporations are also permitted to engage in any lawful business activity.  Under the new law, however, B Corporations “shall have the purpose of creating a general public benefit.” This benefit is in addition to- and may be a limitation on- other purposes of the corporation.

A “general public benefit” is statutorily defined as “a material positive impact on society and the environment, as measured by a third-party standard, through activities that promote some combination of specific public benefits.”  In other words, the stated purpose of a B Corp. is to engage in certain activities with the goal of promoting a larger social or environmental goal.

“Specific public benefit” is defined to include providing low income or underserved individuals or communities with beneficial products or services; promoting individual or community economic opportunities beyond the creation of jobs in the normal course of business; preserving or improving the environment; improving human health; promoting the arts ort sciences or the advancement of knowledge; increasing capital flow to other public benefit entities; and the accomplishment of any other identifiable benefit for society or the environment.

Perhaps the most important distinction between a Business Corporation (traditional corporations) and a Benefit Corporation is the fact that the creation of a general and specific public benefit is deemed, by law, to be “in the best interests of the benefit corporation.” As mentioned earlier, the overriding purpose of a traditional corporation is to protect and maximize the shareholder’s interests and directors and officers of Business Corporations have a fiduciary duty to make such considerations the highest priority when engaged in corporate activities. Decisions that do not maximize shareholder interests may result in directors and officers being liable for damages caused by breach of that duty, and as a result a narrow focusing of the business mission and operating methods usually occurs.

By identifying a general and specific benefit as “in the best interests of the corporation” the directors and officers are required to consider more than just shareholder benefit when exercising business decisions. Indeed, the new law requires that directors consider the impact of any board decision not just on shareholders, but also potential impacts on the employees and workforce of the benefit corporation, its subsidiaries and its suppliers, the interests of customers to the extent they are beneficiaries of the general and specific public benefit, the community as a whole, the local and global environment, and long and short term interests of the B Corp. itself  Directors may also consider “any other pertinent factors or the interests of any other group that the director determines are appropriate to consider.” A director is not required to give any one particular interest a priority.  Rather, the law recognizes that to be a truly “green” corporation factors other than shareholder interests must be considered when business decisions must be made.

The new Vermont Benefit Corporation law also creates a new corporate directorship and officer.  Each board of directors is required to designate at least one person to be the “benefit director.” In addition to traditional responsibilities, the benefit director is responsible for preparing the “annual benefit report.”  The “benefit officer” is the individual given the authority and responsibility of performing management duties related “to the purpose of the corporation to create public benefit.”

Corporations typically prepare an annual report for shareholders.  The new law requires that the annual corporate report for a B Corp. contain specific information.  The annual report must include: a) a statement of the specific goals or outcomes identified by the corporation for creating general public benefit and specific public benefit during the reporting period; b) a description of the actions taken by the B Corp. to attain the identified goals or outcomes and the extent to which they were accomplished; c) a description of barriers experienced by the B Corp in attaining its stated goals or outcomes; d) specific actions that can be taken to improve corporate performance in attaining identified general and specific public benefit; and e) an assessment of the B Corp.’s social and environmental performance prepared in accordance with third-party standards that has been applied consistently with prior benefit reports (this  requirement is discussed further below); and f) a statement of general and specific public benefit goals and outcomes, approved by the shareholders, for the next reporting period.

Also required in the benefit report is a statement from the benefit director whether, in the opinion of that director, the corporation acted in accordance with stated goals and outcomes in all material respects during the reporting period, and whether the corporate board and directors conformed with the duty of considering more than just shareholder interests when engaging in corporate business during the reporting period.  If the benefit director’s opinion is that the corporation did not act in accordance with stated general and specific public benefit goals/outcomes, or that the board or officers did not satisfy their duties, the benefit director shall include a description of the respective shortcomings.

In addition to information about corporate activity during the reporting period, the annual benefit report must also provide the name and contact information for each director, including benefit directors, the compensation paid by the corporation to each director during the reporting period.  The report must also identify each shareholder owning 5% or more of the shares of the benefit corporation.

In addition to providing each shareholder a copy of the annual benefit report, the law requires the B Corporation to post its most recent report on its website (although information about director compensation must be included in the annual report itself it can be excluded, along with any proprietary information, from the website posting) or otherwise make the report available, free of charge, to any person requesting a copy.

Marketing a business as “green” is big business.  The problem for consumers and investors, however, is that there are few-if any- applicable standards by which to measure a company’s social and/or environmental impact. The standards that do exist may vary from region to region. Vermont’s Benefit Corporation Act seeks to address this concern by requiring Benefit Corporations to assess- and publish- its performance in attaining general and specific public benefit goals by using third party standards.  The statute defines such standards as “a recognized standard for defining, reporting and assessing corporate social and environmental performance.”

The third-party standard must be developed by a person independent of the corporation (no material relationship with the corporation or any of its subsidiaries) and “shall be transparent” by making available to the public the factors considered when measuring the performance of a business, the relative weight given to each factor and the identity of the person who developed and controls changes to the standards and the process by which those changes are made.

The development of “third-party standards” is itself a rapidly developing industry. The present leader in third-party validation is “B Lab,” a Philadelphia based alliance of B Corporations that have promulgated uniform standards in four general categories: governance (how the business is managed), community relations and impact, environmental impact and beneficial business models (how the business is structured.) B Lab provides a thorough assessment of a B Corporation’s operations and those that meet the rigorous standards are given a “B Corp. certification.”  (Vermont’s law does not require “certification,” but only that third- party standards be used to regularly assess the company’s performance. B Corporations are free to choose among available third-party standards, so long as the standards used meet the transparency requirements.)

 Right of Action

The new law provides that the duties of directors and officers and the general and specific public purpose of B. Corps. are enforceable only through a “benefit enforcement proceeding.” This newly created right of action can be commenced or maintained only by shareholders, a director of the corporation, a person or group of persons owning 10% or more of the equity interest in any entity of which the benefit corporation is a subsidiary or any such person as may be specified as having a right of action in the B Corp.’s Articles of Incorporation. The general public does not have a right of action against a benefit corporation that fails to live up to its mission.

According to the “Certified B Corporation” website there are presently 439 B Corporations in 11 states (plus the City of Philadelphia) across 54 industries generating 2.18 billon dollars in revenues. Given Vermont’s reputation of having a socially and environmentally consumer base, is reasonable to assume that we will see a blossoming of Vermont B Corporations over the next few years.