New Jersey Creates A New Corporate Structure, The Benefit Corporation, Enabling Companies To Pursue Public Benefits As Well As Profits

On March 1, 2011, New Jersey became the third state to enact legislation authorizing the creation of “benefit corporations”.  A benefit corporation is a corporation designed to generate profits while promoting public benefits.  The legislation is designed to promote performance, accountability and transparency with respect to achieving public benefits, while providing legal protection to directors and officers for considering the interests of its employees and customers, the communities in which the company operates and the environment, as well as the interests of its shareholders, in making corporate decisions.  Maryland, Vermont and Virginia have enacted similar legislation, and a number of states are considering similar bills.

A benefit corporation is formed in the same manner as any other for-profit corporation, except that the certificate of incorporation of a benefit corporation must include a statement that the corporation is a benefit corporation.  N.J.S.A. 14A:18-2.  An existing corporation can become a benefit corporation by amending its certificate of incorporation to include such a statement.  N.J.S.A. 14A:18-3.

A benefit corporation must have as its purpose the creation of a general public benefit, which purpose may be in addition to any other purpose or specific public benefit set forth in its certificate of incorporation.  N.J.S.A. 14A:18-5.  A “general public benefit” is defined as “a material positive impact on society and the environment by the operations of a benefit corporation through activities that promote some combination of specific public benefits.”  N.J.S.A. 14A:18-1.  “Specific public benefits” include “(1) providing low-income individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; and (7) the accomplishment of any other particular benefit for society or the environment.”  Id.

By statute, the achievement of general and specific public benefits are deemed to be in the best interest of a benefit corporation and directors of a benefit corporation are required to consider the effects of any action on various stakeholders when considering the best interests of a benefit corporation.  N.J.S.A. 14A:18-5; 14A:18-6.  Specifically, directors of a benefit corporation are required to consider the effects of a corporate action upon its shareholders, as well as upon the employees of the benefit corporation, its subsidiaries and suppliers; its customers, as beneficiaries of the public benefit purpose of the corporation; the community, including communities in which the benefit corporation or its suppliers are located; the environment; and the short-term and long-term interests of the benefit corporation, including benefits that may accrue from the company’s short term and long-term plans.  Moreover, directors are not required to give priority to the interests of any one group of stakeholders, including shareholders.  N.J.S.A. 14A:18-6.  Officers of benefit corporations are also required to consider these factors in connection with any action within the officer’s discretion that reasonably appears to potentially have a material effect on the creation of a general or specific public benefit or the above-referenced factors.  N.J.S.A. 14A:18-8.

In addition, a benefit corporation is required to elect an independent director, designated as the “benefit director”, who shall prepare an annual statement as to whether, in the opinion of the benefit director, the benefit corporation acted, in all material respects, in accordance with its stated general and specific public benefit purposes and whether the directors and officers of the corporation complied with their obligations to consider the impact of corporate actions upon its various stakeholders, including its shareholders.  N.J.S.A. 14A:18-7.  A benefit corporation may designate a “benefit officer”, whose management duties shall relate to the creation of general or specific public benefits.  N.J.S.A. 14A:18-9.

The public benefit purpose of a benefit corporation and the duties of directors and officers of a benefit corporation are enforceable in a “benefit enforcement proceeding”, in which a claim is brought against an officer or director for failing to pursue the general or specific public benefit purpose of the company or for violating a duty or standard of conduct of an officer or director of a benefit corporation.  N.J.S.A. 14A:18-1; 14A:18-10.  Benefit enforcement proceedings may be commenced directly by the benefit corporation or derivatively by a shareholder, director, the holders of ten percent or more of the equity of the benefit corporation’s parent entity or any other person specified in the company’s certificate of incorporation.  N.J.S.A. 14A:18-10.  Benefit directors are protected from personal liability for their actions or omissions in that capacity, unless a benefit director engaged in self-dealing or his actions or omissions constituted willful misconduct or a knowing violation of law.  N.J.S.A. 14A:18-7.  In addition, officers or directors of benefit corporations are not personally liable for money damages if a benefit corporation fails to create general or specific public benefits.  N.J.S.A. 14A:18-6; 14A:18-8.

Finally, a benefit corporation is required to deliver an annual benefit report to its shareholders containing a narrative describing the ways in which the benefit corporation pursued general or specific public benefits, the extent to which such public benefits were created, and any circumstances hindering the creation of such public benefits.  In addition, the annual benefit report is to contain an “assessment of the social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard . . . .”, as well as the statement of the benefit director as to whether the company acted in accordance with its general and specific public benefit purposes.  N.J.S.A. 14A:18-11.  A “third-party standard” is defined as a “recognized standard for defining, reporting and assessing corporate social and environmental performance” which is prepared by an independent person and is “transparent” because the factors considered in applying the standard, the weighting of those factors and the identity of the person who developed and controls any changes made to the standard is publically available.  N.J.S.A. 14A:18-1.  Finally, a benefit corporation is required to list in its annual benefit report the names and contact address for the company’s benefit director and benefit officer (if any), the compensation paid to each of its directors and the names of each person owning, beneficially or of record, five percent or more of the outstanding shares of the benefit corporation.  N.J.S.A. 14A:18-11.  The annual benefit report must be posted on the company’s website and be filed with the Department of Treasury, provided that the benefit corporation may omit references to compensation of its directors, as well as financial and proprietary information, from the publically posted and filed version of the annual benefit report.  Id.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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