Why Does the Delaware Public Benefit Corporation Matter to Silicon Valley?

Ultimately, it’s about money and making more of it.

But before we get to the money, let’s talk about the benefit corporation, which is rapidly gaining market acceptance. 30 states and DC have adopted benefit corporation legislation since Maryland passed the first benefit corporation law in 2010. Similar legislation is pending in 10 other states and there are now more than 2,000 benefit corporations in the US.

Corporate law is rarely the source of disruptive technology but when it is, it tends to change the world.  The last time was 1811 when New York invented free incorporation and limited liability, which made it easy to incorporate and raise capital. These innovations were woven into the corporate law of almost every country, enabled the creation of the corporations that ushered in the prosperity of the Age of Industry and make Silicon Valley possible.

The benefit corporation is another such disruptive technology because it endows the for-profit corporation with a social and environmental conscience that transcends and includes the usual profit-oriented one.  The benefit corporation makes it legally permissible for corporations to do the right thing not only by stockholders but also by society and the environment. Under current Delaware corporate law, for example, corporations must make stockholder welfare their sole end and may only act in the interest of other stakeholders such as society and the environment if doing so is a means of promoting stockholder welfare.

Delaware’s corporate law makes it difficult for its corporations to legally pursue a heroic purpose, become sustainable or become leaders in corporate social responsibility. Unless such goals are an instrument to creating stockholder wealth, directors risk breaching their fiduciary duty pursuing them. If directors aren’t careful, it may be illegal to do the right thing. Delaware law now makes it safe for its public benefit corporations to pursue such goals.

Delaware is busy promoting and legitimizing the new form. Chief Justice Leo Strine has published law review articles establishing the primacy of the Delaware public benefit corporation as the leading vehicle for directors and officers who wish to do the right thing by stockholders, society and the environment. (Google his papers: The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law and Making it Easier for Directors to “Do the Right Thing.”) These papers were written for lawyers and the director class to make it clear that this is a legitimate approach for mainstream business that has liability safe harbors and other strategic advantages such as a clear opt-out of Revlon duties in an auction context to sell to the most aligned buyer.

Delaware just amended its public benefit corporation law recently, effective August 1, to make it easier for public companies to become benefit corporations. The super majority vote required to convert an existing corporation into a benefit corporation was reduced from 90% of each class of shares to 66 2/3 % of all shares voting as a single class, and dissenters rights have been eliminated in public companies wishing to convert to benefit corporations.

So, why does the benefit corporation matter to Silicon Valley where the corporation exists to maximize profits for venture capital firms and their limited partners?

Again, in this community it’s about money and making more of it.

It turns out that doing business this way is more profitable. The preliminary economic data indicates that corporations built with principles of sustainability, such as those embodied by the benefit corporation, out perform their conventional peers and provide a better rate of return to investors. (See, for example: The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, Eccles et al, Harvard Business School Working Paper, November 2011).  In the ultimate analysis, it’s easy to understand why: most of us would rather do business with a corporation that is legally committed to doing the right thing by us and the environment than one that is committed to business as usual.

It’s just a matter of time before Silicon Valley discovers this new corporate form and embraces the more profitable way of doing business it engenders. Which venture capital firm will take this disruptive technology and run with it? Which iconic Silicon Valley CEO will seize the opportunity to become the global thought leader in responsible and sustainable business by converting their corporation into a benefit corporation?  And what will the corporate world look like once this disruptive technology has taken hold?

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