Benefit Corporation Laws -- California vs. Delaware. It's All In the Details

Editor's Note: This is the second post in a two-part series that highlights notable differences in benefit corporation law in two influential states, Delaware and California. In case you missed it, you can read the first post here. 

By Jonathan Storper

Benefit corporation law has been enacted in 19 states, and 10 other states have introduced the legislation.

Delaware is of particular significance because it is the recognized leader in corporate law, and over half of all public companies are domiciled there. California is the largest state and has provided the country with the benefit corporation model legislation.

In the first installment of this series, we explored the three distinct attributes of a benefit corporation and how these differ in the two states. Now, let's get down to the details*. 

*Citations to the CCC refer to the California Corporations Code and DGCL refers to the Delaware General Corporation Law.

Incorporating, merging or converting a benefit corporation

The California articles of incorporation must state that the corporation is a benefit corporation and any optional specific public purposes. CCC 14602. Stock certificates must also identify the corporation as a benefit corporation. CCC 14631.

By contrast, in Delaware, the certificate of incorporation must specify the required specific public benefit purpose(s) and any optional provisions noted above (which are built into the California statute). Provisions may also be included in the certificate of incorporation that disinterested decisions by directors will not constitute an act or omission not in good faith or breach of the duty of loyalty for monetary damages or provide an indemnification right to directors.

In Delaware, stock certificates and notices to stockholders must note that the company is a benefit corporation. Conversion or merger into or out of a California benefit corporation requires at least a two-thirds vote of the outstanding shares. CCC 14603 and 14604. Dissenters' rights are available for those not voting in favor of the California conversion or merger. CCC 14604(d).

In Delaware, a 90-percent vote is required to convert or merge into a benefit corporation. DGCL 363(a). Those not voting to convert or merge into, or merge out of, a benefit corporation are entitled to appraisal rights, that is, the right to have their shares purchased for fair market value. A two-thirds vote is required to convert from, or merge out of, a benefit corporation. There are no appraisal rights converting from a benefit corporation. DGCL 363(b) and (c).

Enforcement

In California, if the corporation fails to pursue its public benefit purpose(s), assess its performance or issue the benefit report, the shareholders may bring an action in court to force the corporation to do so. No monetary damages are available in a derivative action, though the court may order reimbursement of attorneys' fees. CCC 14623.

DGCL 367 authorizes stockholders to sue derivatively to enforce the duties of directors, but only by stockholders individually or collectively who own at least 2 percent of the corporation's outstanding shares or the lesser of 2 percent of the outstanding shares with a market value of at least $2 million where the corporation is listed on a national securities exchange. DGCL 367.

Director's duties

In California, the directors of benefit corporations must perform their duties in good faith in a manner the director believes to be in the best interests of the corporation and with that care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances. CCC 14620(a).

Directors must consider the impacts of any action on not only the shareholders but also on employees, customers, the community, the environment, short- or long-term interests of the corporation, and the ability of the corporation to accomplish its public benefit purpose. CCC 14620(b).

In discharging those duties, directors are not required to give priority to any particular factor or person unless the corporation so stated in its articles. CCC 14620(d). Directors of foreign corporations subject to CCC 2115 are not be subject to CCC 309 (director's fiduciary duties) and instead are subject to the duties under the laws of its jurisdiction of incorporation if those duties are "similar to" those prescribed by the California Benefit Corporation law. CCC 14620(j). The model legislation upon which most states premise their benefit corporation law would likely qualify under this definition, but with Delaware, this is less clear, though still arguably so.

DGCL 365(a) provides that the board of directors must manage the corporation in a manner that balances the "pecuniary interests of the stockholders, the best interests of those materially affected by the corporation's conduct, and the specific public benefit or public benefits" identified by the corporation.

Directors satisfy these modified duties "if such director's decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve." DGCL 365(a). In both states, directors owe their duty to shareholders and not other stakeholders. CCC 14620(i); DGCL 365(b).

Tax and contract bid preferences

Benefit corporations, wherever their jurisdiction of incorporation, may elect to be a subchapter "C" or an "S" corporation for tax purposes. The city of San Francisco offers a city contract bidding preference to benefit corporations of 4 percent.

The press release by the ordinance's sponsor announcing the bid preference states that San Francisco has enacted the ordinance as a way to demonstrate the city's "commitment to sustainability, economic innovation, and social entrepreneurialism." Philadelphia offers a tax benefit to these corporations as well. It remains to be seen if other jurisdictions will offer incentives to the benefit corporation.

Conclusion

The Delaware and California benefit corporation models embrace the principles of purpose, accountability and transparency in similar but different ways. Legal counsel should understand these different and nuanced approaches in order to assist new and ongoing enterprises with the best approach for their business. Each form provides a corporate structure that paves the way for a more sustainable economy where there is no long-term tradeoff between purpose and profit.

Image credit: Flickr/Tax Credits

Jonathan Storper is a partner in Hanson Bridgett LLP's San Francisco office.

*The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.