Georgia is the latest southeastern state to enact benefit corporation legislation, effective January 2021. We’ve reviewed the new statute and compared it to the Model Benefit Corporation Legislation developed by B Lab. We’ve previously surveyed benefit corporation legislation in the mid-atlantic and southeastern states. You can find our downloadable 2020 survey of southeastern states here. Generally, the southeastern states are adopting an ugly duckling version of the B Lab model. Effectively, the southeastern model now proliferated by Georgia waters down key elements of the framework that have been adopted in Delaware, New York, and other jurisdictions with robust corporate law centers. Social enterprises and mission-oriented companies operating in the southeast should carefully consider the limited protections offered by these domestic benefit corporation models in choosing how and where to incorporate or restructure.
What is a Benefit Corporation?
A Benefit Corporation is a formal type of business entity structure, like an LLC, C-Corp, or S-Corp. Essentially, a Benefit Corporation is a C-Corp with certain statutory distinctions that impact how it is operated, as well as the rights and responsibilities of its directors, managers, and shareholders.
Theoretically, a Benefit Corporation may be thought of as a legal framework to best promote corporate social responsibility. Over the past few decades, U.S. corporate law has trended towards something lawyers ominously refer to as the Doctrine of Shareholder Primacy. It basically means that shareholders – often in the form of large institutional hedge funds, pension funds, or venture capitalists – can pressure companies’ managers into maximizing monetary return to shareholders over competing considerations like environmental and social impact. For example, a company could be prevented from rolling out a novel paternity leave program for its employees, or prioritizing sustainability in its supply chain, if by doing so the company were to minimize shareholder dividends. By organizing and operating as a Benefit Corporation, a company can shield its management activities from shareholder pressures; effectively, Benefit Corporation status puts the force of law behind the idea that a company can and will consider people and planet as worthy metrics of success alongside profit.
Practically, a company might choose to launch or restructure as a Benefit Corporation if:
- its founders are mission-oriented and don’t wish to risk this motivation for doing business (e.g. selling one unit of product, giving one unit to a population in need);
- its management sees an audience specific advantage to being recognized as embodying corporate social responsibility principles (e.g. a company competing with nonprofits in selling goods or services to Government); or,
- its management wishes to justify certain atypical expenditures that are tied more towards its mission than its industry (e.g. a law firm buying kayaks to steward a local river the firm has adopted J).
Since corporate law is governed by state law, all of this begins with the adoption of Benefit Corporation legislation at the state level.
Are all Benefit Corporation Statutes the Same?
No. I like to think of Benefit Corporation statutes along a gradient, ranging from B Lab’s Model Benefit Corporation Legislation to many southeastern states’ Ugly Duckling Social Purpose Legislation. (Some states even go above and beyond the B Lab standard to what may be considered Supermodel status).
Here’s a snapshot of a few select attributes to show how these statutes might differ:
|Definition of Public Benefit||General public benefit inclusive of environmental and social impact accounting + optional specific benefit such as providing low-income or underserved communities with beneficial products or services
|Positive effect or reduction of negative effects on any category of person or interest other than stockholders, e.g. charitable, religious, technological (Georgia, Kentucky, Tennessee)|
|Standards of Conduct
|Directors are obligated to weigh the impact their actions or inactions upon all specifically named stakeholders (employees, shareholders, community, environment, long-term corporate interests)
|Directors are vaguely required to balance stated benefits with interests of shareholders and can’t give “regular, presumptive, or permanent priority” to shareholders (Tennessee)
Directors must vaguely balance the interests of shareholders, stakeholders, and the stated benefit (Kentucky)
Directors must only consider the stated public benefit in decision making (Georgia)
|How is Demonstration Met?||Annual, publicly posted benefit report measuring general and specific benefits validated by independent third party and supported by financial statements
|No statutory requirement for audit or validation (Tennessee)
No statutory requirement for audit, validation, or online posting (Georgia)
Directors must vaguely adopt a standard by which to measure performance in pursuit of the stated benefit (Georgia)
|Rights Available to Stakeholders Wishing to Challenge Satisfaction of Public Benefit
|Benefit enforcement proceeding requiring public posting of its third-party audit
Derivative suit available to 2% shareholders
|Derivative suit available to 2% shareholders (Kentucky, Tennessee)|
|Rights Available to Investors to Contest||Shareholders must ratify by 2/3 vote amendment of corporation to become a benefit corporation||Shareholders must ratify by 90% of voting and nonvoting shares of each class of stock to convert from corp to benefit corp, but only 2/3 approval needed to convert or merge from benefit corp to corp (Kentucky)
Shareholders must ratify by 2/3 vote amendment of corporation to become a benefit corporation (Georgia, Tennessee)
Shareholders may dissent from benefit corp conversion and demand fair market purchase (Georgia, Kentucky, Tennessee)
So How Does Georgia Stack Up?
Georgia enacted House Bill 230 / Act 487 on July 29, 2020. Interestingly, while receiving overwhelming support in the House (165:2), the law received less fanfare in the Senate (32:19). This is surprising since, as outlined below, the law is relatively anemic in key areas.
In the most robust form, legislation would require Benefit Corporations to prioritize and demonstrate ongoing commitment to community, employees, environment, and shareholders (i.e. all stakeholders). In lighter forms, legislation might only require commitment to a certain cause or population (e.g. religious group) (§ 14-2-1802(2)). Georgia has adopted the watered-down version of benefit, meaning that a Georgia Benefit Corporation could presumably qualify for recognition by invoking an affinity for high school football (educational and charitable benefits are statutory examples). Lacking constraints around what qualifies as public benefit above all else renders Georgia’s benefit corporation legislation if not meaningless at least disconnected from shareholder primacy and the triple bottom line (people, planet, profit) theme of legislation elsewhere around the country.
Defining Director Conduct
A Georgia Benefit Corporation director must only consider the company’s stated benefit in its decision making (§ 14-2-1806(a)(2)). This is bad news for social entrepreneurs. Let’s say three co-founders of a social enterprise featuring a 1:1 model supporting a stated public benefit (sell one article of goods, give one to a community in need) take on early investors resulting in a board of the three founders, three investors, and one neutral advisor. Depending on board powers, it is possible that the board on majority vote could decide to eliminate the 1:1 model by merely “considering” the stated benefit against its desire to improve shareholder return. Georgia companies cannot rely on the statute to protect their stated benefits, but must further incorporate protective measures into their charters, bylaws, and shareholder agreements permissible under the law.
Ideally, a Georgia Benefit Corporation would choose an auditing standard like B Lab’s B Corp certification and proactively publish annual reviews on its website. However, the statute does not require that, and because the definition of benefit can be so arbitrary and narrowly defined, there is little incentive for a Georgia company to do so. Going back to my earlier example, a Georgia Benefit Corporation invoking a high school football team as its public benefit could internally measure its performance in pursuit of the public benefit according to booster club involvement or games won.
About Kevin Christopher
Kevin is founder and principal of Rockridge®. Kevin’s practice areas include corporate, patent and trademark law. He is an entrepreneur, NIH RADx faculty member and Small Business Innovation Research (SBIR) reviewer. He mentors impactful and innovative founders through First Flight Venture Center, Oak Ridge National Lab Innovation Crossroads, and Tsai Center for Innovative Thinking at Yale. Kevin has been recognized as a SuperLawyer by Thomson Reuters and Top Business Leader by Conscious Company Magazine. Read more about Kevin, connect with him, and Calendly him.
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