Katovich Law Group recently became a B Corporation.  We had been intending to do it for years but never got around to tackling what I assumed would be a large amount of paperwork.  Then one day I was contacted by the wonderful staff of B Lab.  They walked me through the process and it was surprisingly straightforward.  Before we knew it, we were part of this great network of like-minded businesses.

Clients often ask us about how to become a B Corp.  There is some confusion as to what it actually means to be a B Corp.  First, it is important to understand that it is not a statutory business form.  In fact, any business form can be a B Corp – this is slightly confusing because the name implies you have to be a corporation.  In fact a sole proprietorship, partnership, LLC, LLP, co-operative, or any other type of business can be a B Corp.

One of the fundamental characteristics of a B Corp is its commitment to take into account the interests of the community, workers, the environment, and other stakeholders when making decisions.  Ideally, this commitment should be reflected in the formation documents of the company.  However, believe it or not, in many states, making such a commitment can expose a corporation’s board to potential liability.

In approximately 30 states, there exists what is known as a constituency statute.  These statutes vary but in essence they allow the board of a corporation to consider the interests of constituents other than the shareholders when making decisions.  A corporation in a state without a constituency statute must do what is in the best interests of the shareholders (investors) – period.  The  board has a great deal of latitude (in most cases) to determine what is actually in the best interest of the shareholders, but the board cannot legally put the interests of the community, the environment, workers, or any other stakeholder group ahead of shareholders’ interests.

For example, the California Corporations Code provides that “A director shall perform [his/her] duties . . .  in a manner such director believes to be in the best interests of the corporation and its shareholders . . . .”  Thus if the board of a California corporation made a decision to protect the environment, for example, at the expense of what was best for the company and its shareholders, the board members could be liable to the shareholders.

If a corporation is incorporated in a state with a constituency statute, the company must add the following language to its articles of incorporation to become a B Corp:

In discharging his or her duties, and in determining what is in the best interests of the Company and its shareholders, a Director shall consider such factors as the Director deems relevant, including, but not limited to, the long-term prospects and interests of the Company and its shareholders, and the social, economic, legal, or other effects of any action on the current and retired employees, the suppliers and customers of the Company or its subsidiaries, and the communities and society in which the Company or its subsidiaries operate, (collectively, with the shareholders, the “Stakeholders”), together with the short-term, as well as long-term, interests of its shareholders and the effect of the Company’s operations (and its subsidiaries’ operations) on the environment and the economy of the state, the region and the nation.

Nothing in this Article express or implied, is intended to create or shall create or grant any right in or for any person or any cause of action by or for any person.

Notwithstanding the foregoing, any Director is entitled to rely upon the definition of “best interests” as set forth above in enforcing his or her rights hereunder and under state law, and such reliance shall not, absent another breach, be construed as a breach of a Director’s fiduciary duty of care, even in the context of a Change in Control Transaction where, as a result of weighing other Stakeholders’ interests, a Director determines to accept an offer, between two competing offers, with a lower price per share.

A corporation incorporated in a state without a constituency statute could face liability if it put this language into its articles.  Not wanting potential B Corps to be forced to subject themselves to such potential liability, B Lab has provided an alternative to B Corps located in one of the states without a constituency statute (such as California and Delaware).  Before becoming a B Corp, the corporation’s board of directors must pass a resolution that commits the company to change its articles within 90 days of the passage of constituency legislation.

A B Corp that is not a corporation, such as an LLC, can incorporate B Corp language into its founding documents (such as an operating agreement) regardless of what state it was formed in.

There are a few more steps to becoming a B Corp such as taking a survey to measure the social and environmental performance of the company.  To learn more, visit www.bcorporation.net.

Comments RSS