In 2013, following in the footsteps of California, Delaware introduced a new corporate form that could be chosen by companies organized under its state law – the public benefit corporation (PBC). This type of corporation is described in the Delaware General Corporation Law as “a for-profit corporation . . . that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.” Given the increasing focus on impact investing and responsible consumer practices, the benefits of the public benefit corporation form are gaining wider recognition, and an increasing number of companies are incorporating as Delaware PBCs.
With the increased popularity of Delaware public benefit corporations, many lenders have likely received requests to provide financing to companies that have chosen this corporate form. In making the determination of whether to provide such financing, along with typical underwriting considerations, lenders should be aware of the heightened corporate governance standards to which Delaware PBCs are subject. In particular, unlike a traditional Delaware C corporation, management and the board of directors of a Delaware PBC have a fiduciary duty to manage the company in a manner that balances both the pecuniary interests of the company's stockholders and the public benefit or benefits identified in the company's charter, and must also specifically consider the stakeholders that are impacted by the company and its operations. The company is also required to deliver a public benefit report at least every two years that states (a) the objectives established by the board of directors to promote the public benefit, (b) standards adopted by the board of directors to measure progress in promoting such public benefit, (c) objective, factual information based on those standards regarding success in promoting the public benefit, and (d) an assessment of the company's success in promoting the company's public benefit.
The additional governance requirements described above result in a different risk profile for a lender than would lending to a traditional Delaware C corporation. Among other things, the added fiduciary duties for management could increase the likelihood of activist shareholder lawsuits based on claims that the company is being operated in a manner that does not comport with the heightened standards of the Delaware statute. In addition, questions have arisen as to the impact that a Delaware PBC's duty to protect its public benefit above other interests might have on outcomes for lenders in an insolvency proceeding. Lenders should seek advice of outside counsel with knowledge of the specific statutory PBC requirements in order to both conduct additional diligence to gauge a prospective borrower's compliance with these requirements and to craft terms in the loan documents that mitigate the additional risks to the lender. Additional terms in the loan documents could include, for instance, (a) strengthened litigation-related covenants and defaults to address shareholder suits arising from a borrower's failure to comply with PBC requirements, (b) a requirement that the board of directors consider conversion of the borrower to a traditional C corporation if necessary to protect the lender's interests, and (c) requirements to deliver to the lender copies of all PBC-specific reports and audits.
The Morrison & Foerster team will continue to monitor legislative and case law developments related to Delaware PBCs and the potential impact these may have on lenders. Please reach out to any member of the Morrison & Foerster team if you have questions.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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