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Virginia’s Benefit Corporation Structure Allows for Social Responsibility and Profit

Jan 11, 2013 | gabylinares | Corporate Governance, Law | No Comments

By Stacey L. Worthy, Esq.

On July 1, 2011, the Commonwealth of Virginia joined a handful of states that allow a new corporate structure—the Benefit Corporation. A Benefit Corporation is a Virginia stock corporation with at least one mission of creating a general public benefit.[1] Virginia law defines a general public benefit as one that produces a material, positive impact on society or the environment, as measured by a third-party standard.[2] A third-party standard is one recognized for defining, reporting, and assessing corporate social and environmental performance, is developed by a person independent of the Benefit Corporation, and is transparent.[3]

A Benefit Corporation’s mission may also incorporate additional specific public benefits. A specific public benefit is one that serves public welfare, religious, charitable, scientific, literary, or educational purposes, or other purpose or benefit beyond the strict interest of the shareholders of the Benefit Corporation, as opposed to a general public benefit, which focuses, in wider terms, on society or environment taken as a whole.[4] This can include such benefits, among others, as providing low-income or underserved individuals or communities with beneficial products or services; promoting economic opportunity beyond the creation of jobs in the normal course of business, preserving or improving the environment, and improving human health.[5]

Under the Benefit Corporation structure, the company is still expected to produce a financial return for shareholders, but making a profit does not need to be the exclusive concern. Therefore, this unique structure allows companies to make a difference while still making a profit. It allows the Board of Directors justification for considering the public interest when doing so might impact the bottom line. As one CEO of a Virginia Benefit Corporation stated, “It’s something that both liberals and conservatives can agree on. . . . From the liberal perspective, benefit corporations help with social justice, and from the conservative perspective, they allow the free market to take care of societal problems.”[6]

The growing trend to pass Benefit Corporation laws reflects the interest, growth, and promise of socially-responsible businesses. To date, California, Hawaii, Illinois, Maryland, Massachusetts, Louisiana, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia all passed legislation to allow the Benefit Corporation structure. Additionally, the District of Columbia introduced legislation on December 18, 2012.

Making the Switch to Benefit Corporation Structure

Virginia law allows existing stock corporations to change their structure to become a Benefit Corporation. In order to do so, directors are required to make a determination that such change of structure would be in the company’s best interest.[7] The directors must consider the effects that such a change would have on shareholders, employees, the corporation’s subsidiaries, and customers, the community, and society as beneficiaries of the general or specific public benefit purpose.[8]

After the directors determine that the Benefit Corporation structure is appropriate, the corporation must propose an amendment to the articles of incorporation to add a statement establishing that the corporation is a Benefit Corporation. The directors must then obtain the approval of all shareholders entitled to vote on the amendment, or if the corporation has no shares, the consent of the board of directors.[9]

Additional Responsibilities

 Benefit Corporations must prepare an annual benefit report that includes, among other things a narrative description of the ways in which the benefit corporation pursued the general public benefit during the year and the extent to which the general or specific public benefit was created, and any circumstances that hindered the creation of the general or any specific public benefit.[10] The annual report must be made available to all shareholders and the public free of charge with a copy filed with the Virginia State Corporation Commission.

 New Protection and New Risks of Liability

 Becoming a Benefit Corporation provides added protection from shareholder lawsuits. According to the statute, an officer of a Benefit Corporation has no liability for actions taken when the officer acts, in his good faith business judgment, consistently with (1) the general or specific public benefit of the company and (2) the requirements of any third-party standard then in effect for the company.[11]

 Additionally, due to the fact that directors are required to take into consideration the effects that becoming a Benefit Corporation would have on shareholders before changing the corporate structure, directors are protected from shareholder derivative suits for pursuing social objectives that do not necessarily increase profit. However, the Benefit Corporation structure does not provide an absolute shield from liability. Directors may still be held liable if they make poor and reckless business decisions even if such decisions are made in the name of social or environmental progress.

 Directors are also exposed to a new liability in the form of a “benefit enforcement proceeding” in which certain parties—such as Benefit Corporation itself; a shareholder of the Benefit Corporation; another director of the Benefit Corporation; or any other person as specified in the Benefit Corporation’s Articles of Incorporation or Bylaws—can sue to enforce the obligations of the Benefit Corporation. This proceeding may be brought if directors fail to produce the annual benefit report or completely fail to make even the slightest effort to pursue the general or specific public benefits to which the Benefit Corporation has committed.[12] However, such proceeding cannot be brought simply because the Benefit Corporation attempted but failed to achieve the public benefit.

 Questions and Interests

 If you have questions about the Benefit Corporation structure or are interested in changing your corporation’s structures, please contact DCBA Law & Policy at 202-644-8525 or info@dcbalaw.com.

[1] VA Code § 13.1-782.

[2] VA Code § 13.1-782.

[3] VA Code § 13.1-782.

[4] VA Code § 13.1-782.

[5] VA Code § 13.1-782.

[6] Zak Kozuchowski, New Virginia Law Adds Legal Structure of ‘Benefit Corporations,’  Virginia Business, June 1, 2011, available at http://www.virginiabusiness.com/index.php/news/article/a-new-type-of-company.

[7] VA Code § 13.1-787.

[8] VA Code § 13.1-788.

[9] VA Code § 13.1-785.

[10] VA Code § 13.1-791.

[11] VA Code § 13.1-789.

[12] VA Code § 13.1-788.

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