Last week, Veeva Systems — a NYSE-traded company with a $40B market cap — announced that it had formed a board committee to explore becoming a public benefit corporation, along with shedding its main anti-takeover provisions. That’s a pretty unique move for a company that’s not even consumer-facing, and if Veeva proceeds, they would join only three publicly traded companies incorporated under Delaware’s “public benefit corporation” statute — Laureate Education, Lemonade and Vital Farms.
Some are predicting that more might convert — or that we will see more public company subs going that route, as Danone North America and Procter & Gamble’s “New Chapter” have done. A MoFo memo analyzes the three current public company PBCs, extracts some lessons and explains the possible benefit:
An obligation to report on ESG considerations and risks is not the same as an obligation to pursue a public benefit potentially to the detriment of short-term stockholder value. Adopting a PBC form allows boards of directors and management to balance these considerations and make the choices they think are right, while having a defense from activist stockholders that may be off-put by a quarter or year of lower-than-hoped results. Because of this, PBCs have been touted as a potential solution both to the problem of short-termism in issuer and investor behaviors and to companies seeking to maximize profits for stockholders and passing associated negative externalities to the public at large.
Meanwhile, a Seyfarth memo notes some of the hurdles for public company PBCs — compared to the over 3,000 privately held companies that have now gone through the B-Lab process to become Certified B-Corps. Here’s an excerpt:
Because of the need for, and cost associated with, a shareholder vote to reincorporate an entity, among other reasons, this can be a practical barrier to B Corp certification for public companies. Notwithstanding, B Corps are slowly making their way into the public company space – with Danone North America leading as the world’s largest B Corp. At this juncture, the few other public B Corps were certified before becoming public.
Demand for B-corps, although limited, may be helped along by Delaware’s recent amendments to its “public benefit corporation” statute, which make it easier to convert to that structure and afford more protections to PBC directors. As John recently blogged on The Mentor Blog, a Ropes & Gray memo takes a deep dive into the amendments. Here’s a summary:
– Voting Thresholds for Opting In and Opting Out Lowered. The 2020 PBC amendments eliminated Section 363(a) and (c) – which had originally required 90% approval to convert in or out of PBC status. The result is that the voting thresholds for conversions, mergers and consolidations involving PBCs are now governed by Sections 242(b) and 251 of the DGCL, which provide for majority voting unless the certificate of incorporation provides otherwise.
– Elimination of Statutory Appraisal Rights in Connection with PBC Conversions. The 2020 PBC amendments eliminated Section 363(b) – which had provided appraisal rights to stockholders who didn’t approve of a conversion to the PBC entity form. As a result, there no longer is a specific statutory appraisal right if a conventional corporation converts to a PBC. Appraisal rights in connection with PBC mergers and consolidations are now governed by Section 262 of the DGCL, which addresses appraisal rights in connection with mergers and consolidations more generally.
– Director Protections Strengthened. As discussed above, under Section 365(a) of the DGCL, directors of a PBC must balance the pecuniary interest of stockholders, the interests of other stakeholders and the specific public benefit identified in the certificate of incorporation. Section 365(c) has been amended to clarify that a director’s ownership of stock or other interests in the PBC does not inherently create a conflict of interest, unless the ownership of the interests would create a conflict of interest in a conventional corporation.
In addition, the 2020 PBC amendments revised Section 365(c) to provide that any failure on a director’s part to satisfy Section 365(a)’s balancing requirement does not constitute an act or omission not in good faith or a breach of the duty of loyalty for purposes of Section 102(b)(7) (exculpation of directors) or Section 145 (indemnification) of the DGCL, unless the certificate of incorporation provides otherwise. Previously, this was framed as an opt-in in Section 365(c), rather than as an opt-out.
– Ability to Bring Derivative Suit Brought into Alignment with Conventional Corporations. Amendments to Section 367 align the thresholds for PBC derivative actions with those applicable to conventional corporations.
-Liz Dunshee, TheCorporateCounsel.net September 21, 2020
