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Jax Daily Record Monday, Feb. 25, 201312:00 PM EST

Business Law Section proposal would create 'benefit corporation'

by: The JBA Corporate & Business Law Committee Vice Chair Matt Detzel

The Florida Times-Union printed a column Feb. 3 by Frank Denton titled "Companies Doing Well by Doing Good" that highlights the trend of companies emphasizing social responsibility.

In the article, Susan Towler, Florida Blue Community Affairs executive director, explained, "more and more customers are saying they want to do business with a company that cares about our community, about the environment, about more than just making a profit, especially among millennials and younger consumers."

Lawmakers in several states have begun to address the growing public concern over corporate social responsibility through legislation that creates a new form of business entity called a "benefit corporation."

In a traditional corporation, directors and officers may risk personal exposure to substantial liability for causing the corporation to pursue social goals at the expense of the corporation's bottom line.

The benefit corporation is intended to let socially conscious entrepreneurs and investors choose a business entity that can pursue a blended mission of earning profits and promoting one or more public benefits.

Philadelphia attorney William Clark Jr. is a leading authority of benefit corporations and co-author of the white paper, "The Need and Rationale for the Benefit Corporation: Why it is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors and, Ultimately, the Public."

According to Clark, the benefit corporation diverges from the traditional corporate form in several critical ways.

For example, benefit corporations must have a corporate purpose to create a material, positive impact on society and the environment. They may expand the duties of directors to require consideration of nonfinancial stakeholders or social goals, as well as the financial interests of shareholders. They also have an obligation to report on the benefit corporation's overall social and environmental performance using a comprehensive, credible, independent and transparent third-party standard.

Generally, benefit corporation statutes merely augment or supplement a state's existing corporation code, which applies to benefit corporations in every respect except where explicitly provided by the benefit corporation statute.

Legislation establishing the benefit corporation as a new type of corporate entity has been adopted in 12 states and is under consideration in others. Florida is not far behind.

The Corporations, Securities & Financial Services Committee of the Business Law Section of The Florida Bar has closely worked with state Sen. Jeff Clemens (D-Lake Worth) and University of Florida law professor Stuart Cohn on proposed legislation that would insert a benefit-corporation supplement as a subpart to Florida's general corporate statute.

This placement in the statutory framework would emphasize that all the provisions of the regular corporate statute would apply to benefit corporations, except as specifically provided in the benefit corporation supplement.

Chief among those benefit corporation provisions are addressing formation and termination of benefit corporations, mandating the selection of a public-benefit purpose, limiting liability for directors and officers, and providing two accountability measures not found in traditional corporate statutes.

The first of these accountability provisions is the benefit-enforcement proceeding, which would create a right of action against an officer or director by the corporation, or derivatively by a shareholder, for failure to pursue or create a public benefit. This measure does not provide for personal monetary liability of officers and directors.

Perhaps the more important accountability measure is the proposal's requirement that a benefit corporation prepares and distributes an annual benefit report to shareholders that set a narrative analysis and assesses the extent to which the corporation pursued and achieved its stated public-benefit goals. The proposal requires the annual benefit report measure the corporation's performance against a credible, independent and transparent third-party standard such as B-Lab's "B Impact Assessment" or Ceres' "Roadmap to Sustainability."

Critics of the benefit corporation contend a new business entity is unnecessary because traditional corporations already enjoy the freedom to make donations for the public welfare or for educational, scientific and charitable purposes and directors and officers are protected by the business-judgment rule.

Critics also have raised the possibility of "green-washing" because enterprises that do not meaningfully pursue any social goals or public benefit could abuse the benefit corporation by trading on the goodwill accumulated by responsible companies using the benefit corporation entity.

Yet, despite these criticisms, the benefit corporation appears to be more than a fad or short-term phenomenon.

Last year, more than 75 companies incorporated as benefit corporations in California. Corporate-law bellwether Delaware is currently considering its own legislative proposal on benefit corporations.

An outdated legal framework not equipped to accommodate for-profit entities whose social-benefit purpose is as central to their existence as profit-seeking inhibits the continued development of the sustainable business movement and related trends like impact investing.

The benefit corporation precisely offers the kind of flexible legal entity to meet the needs of entrepreneurs and investors in these sectors, while offering consumers an attractive, socially responsible option in the marketplace.

If Florida fails to adopt the proposed legislation or a substantially similar analogue, socially conscious entrepreneurs and investors interested in taking advantage of this emerging trend will incorporate elsewhere and Florida will miss the potential administrative revenue and other possible economic benefits.

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