Benefit Corporations are Necessary
Traditional Corporate Law Requires that Directors Place Profit Above All Else. In the United States, directors of for-profit companies are required to act solely for the ultimate purpose of maximizing the financial returns to shareholders. While corporations generally have the ability to engage in any legal activities, including those that are socially responsible, corporate decision-making must be justified in terms of creating shareholder value. This concept of “shareholder primacy” was recently reaffirmed in which the Delaware Chancery Court, which stated that a non-financial mission that “seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders” is inconsistent with directors’ fiduciary duties. As the Chief Justice of Delaware has written: “American corporate law makes corporate managers accountable to only one constituency—the stockholders.”1
Mission driven and other socially conscious businesses, impact investors and social entrepreneurs are constrained by this inflexible legal framework that does not accommodate for-profit entities whose mission and impact is central to their business model.
The Business Judgment Rule Does Not Provide an Exception to the Rule of Shareholder Primacy. In the ordinary course of business, decisions made by a corporation’s directors are generally protected by the business judgment rule, under which courts are reluctant to second-guess operating decisions made by directors. This deference however, only operates if directors are making decisions for the purpose of maximizing shareholder value. No deference is given if the directors’ purpose is to promote any other interest. Moreover, in a r change of control situation, courts do not give business judgment deference , but instead require directors to show that they acted reasonably to obtain the highest price in order to maximize shareholder. Thus, regardless of its mission, a corporation may not consider social and environmental factors in a change of control: the Delaware Supreme Court stated, in its pivotal Revlon ruling, that “concern for non-stockholder interests is inappropriate” in the sale context.2
Constituency Statutes Do Not Commit Corporations to Sustainability. Some states have passed, “constituency” statutes, which permit directors of traditional corporations to consider the same type of non-financial interests that directors of benefit corporations can consider, However, constituency statutes do not commit directors to considering these other interests, and thus do not create the accountability created by benefit corporation statutes. For a discussion of accountability under benefit corporation law, see here
1 Strine, Making It Easier For Directors to Do the Right Thing, Harv Bus. Kaw Rev. 235, 241 (2014).
2 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 506 A.2d 173.