Public Benefit Corporations Have Arrived in Texas
Public benefit corporations, which are recognized in over 30 states, have now been adopted in Texas. The Texas public benefit corporation laws became effective on September 1, 2017. Now, businesses can incorporate in the State of Texas as a public benefit corporation.
Public benefit corporations create legal protection for companies to consider and balance a positive social purpose with the financial interests of shareholders. The public benefit can include effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. This corporate structure creates significant advantages for attracting and retaining (1) employees who find the company’s purpose a primary reason they choose to work there, (2) consumers who identify with and purchase from more trustworthy social-conscious companies, and (3) impact investors that are able to hold companies more accountable to their missions.
Founders and investors must be aligned on the corporation’s social values, revenue and profitability objectives, and exit strategies. Because public benefit corporations must delicately balance multiple interests, this alignment will be critical to the growth and success of the business, even more so than a traditional for-profit corporation.
Under the Texas Business Organizations Code, public benefit corporations are treated as ordinary for-profit corporations except as discussed below.
The public benefit corporation must be intended to produce a public benefit and to operate in a responsible and sustainable manner. A “public benefit” is a positive effect (or a reduction of a negative effect) on one or more categories of persons, entities, communities or interests (other than shareholders in their capacities as shareholders), including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. The corporation’s certificate of formation must specify one or more specific public benefits.
To accomplish the purposes of the corporation, a public benefit corporation must be managed in a manner that balances:
- the shareholders’ financial interests;
- the best interests of those persons materially affected by the corporation’s conduct, such as employees, consumers, etc.; and
- the public benefit(s) specified in its certificate of formation.
Transparency and Accountability
The Texas public benefit corporation laws provide for significant transparency and accountability requirements that are unique to benefits corporations (versus ordinary for-profit corporations):
- Name or notice. The name of the public benefit corporation must contain the words “public benefit corporation” or the abbreviation/designation “P.B.C.” or “PBC”. If the name does not contain any of these, the corporation must provide notice that it is a public benefit corporation to each person to whom it issues shares (unless the corporation is a public company filer with the Securities and Exchange Commission or the corporation is selling shares in a public offering registered with the SEC, in which case this notice is not required).
- Stock certificates. Stock certificates issued by a public benefit corporation (or notice regarding uncertificated stock) must note conspicuously that the corporation is a public benefit corporation.
- Shareholder meeting notices. Each shareholder meeting notice must include a statement to the effect that the corporation is a public benefit corporation.
- Shareholder reports. At least biennially, a public benefit corporation must provide its shareholders a statement addressing the corporation’s efforts in promoting its specified public benefit and the best interests of those materially affected by the corporation’s conduct. The statement must include:
- the objectives the board of directors has adopted to promote the public benefit(s);
- the standards the board of directors has adopted to measure the corporation’s progress in achieving those objectives;
- factual information regarding the corporation’s results in meeting the objectives; and
- an assessment of the corporation’s success in meeting the objectives and promoting the public benefit(s).
- Other. The corporation’s certificate of formation or bylaws may require that the shareholder report be provided more frequently than biennially or be made available to the public generally.
The board of directors of a public benefit corporation must manage the business and affairs of the corporation in a manner that balances:
- the financial interests of the shareholders;
- the best interests of those persons materially affected by the corporation’s conduct; and
- the public benefit(s) specified in the certificate of formation.
A shareholder may bring a derivative action on behalf of the corporation to enforce compliance with this requirement. In determining whether a director has met this requirement, a director is considered to have satisfied the director’s duties to shareholders and the corporation if the director’s decision (i) is both informed and disinterested and (ii) is not a decision that no person of ordinary, sound judgment would approve.
However, a director does not owe any duty to any person because of:
- any interest the person has in the specified public benefits(s); or
- any interest materially affected by the corporation’s conduct.
In other words, the directors essentially owe duties only to the corporation’s shareholders.
Merging or Converting a Public Benefit Corporation
Because the decision to become a public benefit corporation, or to no longer be a public benefit corporation, is so fundamental to the interests of the corporation and its shareholders, Texas law gives shareholders significant voting and economic rights related to this decision.
- Elect in. If a for-profit corporation wishes to become a public benefit corporation (whether by merger, conversion, or amendment to its certificate of formation), shareholders holding at least two-thirds of outstanding shares entitled to vote on the matter must approve.
- Elect out. If a public benefit corporation wishes to no longer be a public benefit corporation and instead become an ordinary for-profit corporation (whether by merger, conversion or amendment to its certificate of formation), shareholders holding at least two-thirds of outstanding shares entitled to vote on the matter must approve.
- Dissenters rights. A shareholder is entitled to dissenters rights in either an elect-in or elect-out decision (unless, in the case of an amendment to the certificate of formation, the shareholder holds shares that are part of a class of shares listed on a national securities exchange or held of record by at least 2,000 owners).
Founders and impact investors in businesses that have interests in both profitability and social causes are welcoming these new laws. These businesses now have a legal basis to balance the interests of their social purposes along with shareholders’ financial interests when making decisions. When the business has alignment with its investors on these varying interests, the corporation can become more powerful and successful in pursuing these interests.
But these companies must also consider the risks associated with this corporate structure:
- Prospective investors. Generally, investors are profit motivated. Their primary interests are value creation and return on investment. For public benefit corporations to raise capital, they must locate potential investors that embrace the social purposes of the corporation, which will necessarily be a more limited pool of potential investors. Ordinary for-profit investors will likely be hesitant to invest in a public benefit corporation, and may outright reject the investment opportunity.
- Less predictability of directors’ duties. There is little caselaw in Texas or other states interpreting directors’ duties in the context of a public benefit corporation. Thus, directors have no road map on how courts will weigh the various company interests in assessing directors’ decisions. This unpredictability will likely cause many worthy board candidates to forego board service, which might also drive away prospective investors that demand board representation as part of their investment.
- Novelty of public benefit corporations. Given how new these corporate structures are, founders may be reluctant to use them over concerns of attracting capital. Likewise, investors may be reluctant to invest capital until these corporate structures generate more market performance data.
We are excited that Texas has finally adopted public benefit corporations and provided both founders and investors an opportunity to pursue important social causes through a for-profit corporation structure. We’ve seen some highly successful public benefit corporations such as Kickstarter, Method and Patagonia. At Jackson Walker, we are ready to advise you on forming or becoming a public benefit corporation or investing in a public benefit corporation.
For questions regarding this topic, please contact any of the following: