When insurer Lemonade recently completed its IPO, it did so as a “public benefit corporation” – that is, a corporation chartered to allow it to have a public benefit purpose, in addition to the traditional profit maximization model. Lemonade’s IPO has raised the question whether other companies will follow this model, including in particular whether other IPO companies will complete their listings as a public benefit corporations. The possibility that other companies may adopt the public benefit corporation model raises a number of questions, including in particular questions concerning the duties and potential liabilities of public benefit corporation directors, as discussed below.
The public benefit corporation idea has been around for several years, and indeed I have previously written about public benefit corporations (PBC). A PBC is a corporation that is legally permitted to consider its impact on social and environmental issues to be equally important as its impact on shareholders’ pecuniary interests. Proponents of the PBC model have developed a Model Public Benefit Corporation Act. 36 states have adopted some form of public benefit corporation legislation and five others are currently considering implementing legislation. Information about benefit corporations generally can be found at the Benefit Corporation Information Center.
As discussed in a July 31, 2020 post on the Harvard Law School Forum on Corporate Governance (here), legislation was recently signed into law to address a number of perceived procedural shortcomings in the Delaware public benefit corporation statutes. Among other things, the new legislation makes it easier for an existing Delaware corporate to convert to a public benefit corporation (and also to make it easier for a PBC to convert to a traditional corporation). The legislation also eliminates shareholder appraisal rights in connection with the conversion (while preserving traditional appraisal rights in the merger context).
Among the many questions surrounding the PBC model have been concerns having to do with the duties and liabilities of PBC directors as they “balance” their companies’ social benefit objectives with their duties to shareholders. (Indeed, as noted in a recent guest post on this site, these same questions also surround the current movement encouraging companies to consider and pursue corporate social responsibility objectives.)
The Harvard Corporate Governance blog post to which I linked above notes that the new Delaware legislation attempts to address this concern by clarifying that a director would not be considered “interested” in connection with a balancing decision solely because of the director’s interest in the stock of the corporation, except to the extent that the same ownership would create a conflict of interest if the corporation were not a PBC. The legislation also clarifies that in the absence of a conflict of interest no failure to satisfy the balancing requirement would be considered “an act or omission not in good faith, or a breach of the duty of loyalty, unless the certificate of incorporation so provides. The amendments also provide that in order to bring a lawsuit to enforce the PBC balancing requirements, the plaintiffs must own at least 2% of the corporation’s outstanding shares, or, for PBCs listed on a national securities exchange, shares with a market value of at least $2 million, if lower.
It remains to be seen whether the recent Delaware legislative changes will encourage other companies to adopt or change to the PBC form. It is important that the new legislation addresses director liability issues, as since director liability concerns have been an important part of the dialog since the concept of a public benefit corporation first began circulating. Indeed, the key objectives of the model legislation to which I linked above are to ensure that directors and officers of the benefit corporation do not incur liability for considering the interests of constituencies other than shareholders and to ensure that the directors and officers do not incur monetary liability for allegedly failing to fulfill the organization’s general or specific benefit purposes.
It is important to note that although the model legislation provides that the directors and officers cannot be held liable for damages under the benefit corporation provisions, the benefit corporation provisions do not exempt the directors and officers from liability for violating general standards of fiduciary care. The exemption from monetary damages in the model legislation provide only that directors is “not personally liable for monetary damages for (1) any action taken as a director if the directors performed the duties of office in compliance [existing statutory provisions specifying the duties of directors generally]; or (2) failure of the benefit corporation to pursue or create general public benefit or specific public benefit.” Parallel provisions provide similar protections for officers.
The point is that the exemption from monetary damages under the benefit corporation provisions does not exempt the directors and offices from claims for damages for violation of their general fiduciary duties. By the same token, however, the model legislation specifies that the directors and officers of the benefit corporation cannot be held liable for considering the interests of constituencies other than shareholders.
The model legislation does provide for a “benefits enforcement action,” for shareholders to pursue injunctive relief if the organization is not pursuing its benefits objectives or providing required reporting. Even though this action does not allow for damages, it does create a context within which defense costs could be incurred.
In other words, notwithstanding the liability protections in the model legislation, directors and officers of a benefit corporation continue to face possible liability exposures and defense expense exposures.
As a for-profit venture organized to pursue a public good, a benefit corporation does not really fit within the usual D&O insurance framework, which divides the world between non-profit and commercial enterprises. In addition, the benefit corporation regime has unique aspects that could have insurance implications, such as the possibility of a benefit enforcement action.
The problem for everyone (including D&O insurance underwriters) is that there isn’t much of a track record concerning many of these director liability issues in the PBC context. There is little case law discussing PBC director liability in the context of fiduciary liability issues. There is little to show how courts will interpret the legislative divisions drawing distinctions between directors’ general fiduciary duties and their consideration of public benefit concerns. For that matter there is little history concerning benefit enforcement actions.
It may be that recent developments – including the Lemonade IPO and the legislative changes in Delaware – will spark a renewed or heightened interest in the PBC form. It may also be that if in fact more companies do opt to do business in the PBC form that many of the continuing questions will start to get sorted out. The success of the Lemonade IPO may be critical in that regard; if companies doing business in the PBC form are successful in attracting investor interest and in raising capital, the adoption of the corporate form is likely to gain further traction.
To the extent more companies choose to adopt the PBC form, D&O insurance underwriters will have to develop specific guidelines designed to address the issues and uncertainties that currently surround the business model. The distinctiveness of the corporate form arguably could suggest the need for specialization, or at least the concentration of underwriting expertise designed to assess and understand the peculiar characteristics of the business model. In any event, proponents of the business model will certainly hope that the D&O insurance community will accept and support the PBC model and undertake to provide insurance for businesses doing business in that form.