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Editorial 9 MIN READ

Benefit corporation, revisited: eighteen months of receipts

Laureate's stock chart, Kickstarter's third benefit report, Wisconsin as the 34th state, and a Chancery docket still empty of § 365 cases

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 7 sections
  1. What Laureate's year on the tape has shown
  2. Kickstarter, three years in, is the B-corp everyone keeps citing
  3. The state count has moved to 34, and the map still matters
  4. The Chancery docket that isn't
  5. Who this form now makes sense for, post-Laureate
  6. What to watch in the next twelve months
  7. Sources

he benefit corporation story has moved in the eighteen months since we last looked at it straight on. Laureate Education has a full year of stock-chart data as a public Delaware PBC, Kickstarter has filed a third annual report against a set of commitments its charter now locks in, and Wisconsin became the 34th state to adopt a benefit corporation statute on February 26, 2018.

What has not happened is the other thing we were watching for. The Delaware Court of Chancery still has not issued a written opinion in a § 365 balancing case. The form is out in the world, capitalized at real dollars, and no one has tested it in litigation yet.

What Laureate's year on the tape has shown

Laureate Education priced its IPO at $14 on January 31, 2017, and shares began trading on the Nasdaq Global Select Market on February 1, 2017, raising roughly $490 million as the first listed Delaware PBC. The $14 price came in south of the $17 to $20 range the underwriters had marketed, and the stock closed its first trading day at $13.25. Through 2017 and into spring 2018 the stock traded mostly below its IPO price, in a band the street has described as sideways with a slight downward lean.

For purposes of this piece the stock chart is evidence for one proposition and against another. In favor: the market cleared the deal. Institutions that in diligence called the § 365 balancing duty a risk factor wrote checks anyway, and the price discovery that followed has been about for-profit education policy, not about the charter. Against: the signal that the PBC form can price at a premium is not in the numbers. A founder who forms as a PBC in May 2018 and plans to IPO is still making a bet that an additional governance clause will not cost the deal multiple. Laureate's tape is consistent with that bet, barely.

The relevant disclosures are in the S-1 and the 2017 10-K. Laureate lists the PBC balancing obligation as a risk factor, along with the § 366 biennial reporting requirement and the § 367 derivative suit mechanism. The filings are the first worked example of how an underwriter and counsel handle Subchapter XV for a public issuer. They do not break new statutory ground; they simply disclose the statute as written, which is what the statute invites. We walked through the mechanics in last fall's piece on Delaware's public benefit corporation, four years in, and the Laureate filings are the corporate-finance complement to that statutory reading.

Kickstarter, three years in, is the B-corp everyone keeps citing

Kickstarter converted to a Delaware PBC on September 21, 2015, roughly seven weeks after the HB 80 amendments took effect. The conversion was timed to coincide with the lower two-thirds threshold and with appraisal rights as the concession to dissenters. Kickstarter's charter commits the company to a set of operational promises, the most cited of which is the pledge to donate 5% of after-tax profits to arts education and to organizations fighting systemic inequality.

Three benefit statements have now published. The 2016 report was the shake-down cruise; the 2017 report, released in March 2018, reads like a mature disclosure document, covering creator support, platform-integrity work, community safety, and the 5% pledge's mechanics. The reports are posted to Kickstarter's site and referenced in its annual correspondence with stockholders, which satisfies § 366 with room to spare. Delaware only requires a biennial statement; Kickstarter has chosen to publish annually, because publication itself is part of the product.

What the Kickstarter example settles is a narrow but useful question. A company that takes the § 366 report seriously can build a durable artifact out of it without losing speed. What it does not settle is the counterfactual. We still do not know what happens when a PBC board wants to sell to a buyer whose plans undercut the specific public benefit, and a minority of stockholders objects. Kickstarter has not been sold. Laureate has not been sold. AltSchool has not been sold. The hardest case under Subchapter XV remains hypothetical.

The state count has moved to 34, and the map still matters

Wisconsin's 2017 Act 77 took effect February 26, 2018, making Wisconsin the 34th state with a benefit corporation statute (plus Washington, D.C., which enacted in 2013). The arithmetic matters less than the cohort. The 34 states include most of the large economies: California, New York, Illinois, Pennsylvania, Florida, Massachusetts, and Texas; and it includes most of the states where a founder might default-form at home: Oregon, Colorado, Virginia, the Carolinas. A social entrepreneur with a home-state preference has the option almost everywhere now.

The distinction that matters is not whether a state has a statute, but which statute it has. Two things worth keeping straight.

Roughly thirty states, including all of the Model Act adopters, have enacted some version of William H. Clark Jr.'s Model Benefit Corporation Legislation. Maryland was first in April 2010, and the Model became the template for subsequent enactments through 2015 and 2016. The Model Act requires the corporation to pursue a "general public benefit" (defined as a material positive impact on society and the environment), permits but does not require a "specific" benefit in the charter, requires an annual report, and requires the corporation to measure its performance against an independent third party standard. Several Model Act states also allow or require the appointment of a benefit director, a benefit officer, or both.

Delaware's Subchapter XV, enacted by SB 47 in August 2013 and amended by HB 80 in June 2015, is the outlier. It requires a specific public benefit in the charter, not a general one; its reporting cadence is biennial, not annual; it permits but does not require a third-party standard; and it does not prescribe a benefit director or benefit officer role. Section 365(b) then installs a business-judgment safe harbor on top of the balancing duty, and § 367 imposes a 2% or $2 million standing threshold on any derivative action to enforce it. The result is a leaner, more investor-tolerable form.

The choice between the Delaware PBC and a home-state Model Act benefit corporation therefore tracks two questions. Is the company going to raise institutional equity or otherwise present itself to diligence counsel (Delaware)? Or is the mission a public accountability exercise in which an annual third-party-graded report is part of the promise (the Model Act)? The two regimes are not interchangeable, and founders who swap one for the other because of filing-fee math usually regret it.

The Chancery docket that isn't

Four and a half years after Subchapter XV took effect, the Court of Chancery has yet to produce a signed opinion in a § 365 balancing case. There have been conversion-related disputes that settled, board decisions challenged under ordinary fiduciary theories (sometimes in a PBC, sometimes not, with the PBC status not doing load-bearing work in the opinion), and practitioner notes speculating on how the court might read the statute. What there has not been is an opinion that interprets the § 365 balancing duty, the § 366 report, or the § 367 standing threshold on a contested record.

Two explanations are plausible. One is that the form has not been around long enough or capitalized at a scale that generates litigation; the 2% or $2 million standing threshold screens out nuisance suits, and a single stockholder with the stake to meet it usually has other remedies to try first. The other is that the existing PBCs are mostly run by founders and boards who wanted the form and take the reporting duty seriously, which makes the balancing claim hard to plead with particularity. Both are probably partly true.

The absence of case law cuts both ways. For a founder asking whether Subchapter XV creates new liability risk, the empty docket is reassuring; the business-judgment safe harbor of § 365(b) has not yet been eaten away by a high-profile ruling. For a founder hoping that the form will deter a future acquirer from abandoning the mission, the empty docket is less reassuring; the deterrent effect of § 367 depends on the credible prospect of a stockholder suit, and a credible prospect is different from a never-tested one.

Who this form now makes sense for, post-Laureate

The case for picking a benefit corporation in 2018 is narrower than the early-2015 enthusiasts advertised and broader than the 2014 skeptics allowed.

It makes sense when the company is raising capital from investors who are either mission-aligned or mission-tolerant, and when the commitment is load-bearing to the company's customer or employee promise. Kickstarter is the clean example. The charter promises are part of why creators list on the platform, and they are hard-coded into the corporate document rather than announced in a blog post that a new CEO could take down.

It makes sense for post-acquisition carve-outs where the buyer wants to preserve the target's brand without integrating it. Plum Organics inside Campbell's remained the cleanest small-example of that use, and the model continues to appear in consumer-goods and renewable energy M&A.

It makes sense for any operating company whose board would welcome the biennial § 366 report as the kind of stakeholder accounting they would have done anyway. For those boards the statute is a discipline device more than a constraint.

It does not make sense for a two-person consultancy that wants the marketing benefit without the paperwork; an LLC with a thoughtful operating agreement gets closer to the same outcome. It does not make sense for a bootstrap SaaS company whose customers do not price in mission. And it probably does not make sense for a venture-backed software company that expects to sell to a strategic, if the strategic is from a jurisdiction where the PBC designation is not already understood; the integration friction is real even when the legal conversion is cheap.

The Laureate year has been informative but not definitive. One listed PBC trading below its IPO price for a year is consistent with several stories: that the form is a small discount to the market, that the discount is priced in and not growing, or that the market is not pricing the form at all and is pricing the for-profit education sector poorly. A second listed PBC, when one arrives, will clarify. Until then, the honest way to describe the form's public-market signal is that it did not blow up, which is less than the boosters claimed and more than the critics expected.

What to watch in the next twelve months

Three things are worth tracking. The first is the next listed PBC; a second IPO will let the market distinguish company-specific pricing from form-specific pricing. The second is the first Chancery opinion that actually construes § 365 or § 367 on the merits. The third is whether any state that has not already adopted, most obviously Oklahoma, Georgia, Iowa, or Kansas, picks up Wisconsin's momentum and closes the map further.

For a founder deciding in May 2018, the guidance from September 2016 still holds up and is worth reading alongside this one. The earlier piece on benefit corporation, B-corp, public benefit corporation: not the same thing separates the statutory entity from the B Lab certification, which is the confusion that still costs more founders more money than the form itself does. The machinery has settled. The question is whether the business in front of you is one of the narrow set for which the form is the right tool, and that question has not changed.

Sources

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