Tuesday, July 22, 2014

Corporate Counsel: Florida Considers Enabling Benefit Corporations

By Clara Arrington

A benefit corporation is a for-profit entity that is operated to produce a public benefit in addition to a profit. The corporation’s board is required to balance stockholders’ interests, the best interests of those materially affected by the corporation, and the public benefit(s) identified in the certificate of incorporation. The idea was originated by the “B Lab,” a 501(c)3 that drafted a model benefit corporation statute and lobbies for its enactment. The statute requires a benefit corporation to report how it furthers the stated benefit and how shareholders are able to hold the corporation accountable for failure to pursue that benefit. Twenty states have now adopted this legislation. Even Delaware has adopted a variation of the benefit corporation statute provided by B Lab. Currently, there are bills in the Florida House and Senate that would bring benefit corporations to Florida. FL Senate Bill 654 and House Bill 685.

Proponents of the benefit corporation argue that the existing legal framework does not accommodate a for-profit company that desires to benefit society. Dodge v. Ford, 170 N.W. 668 (Mich. 1919), is cited as proof that corporations cannot “do good” because they are forced to pursue shareholder wealth maximization in myopic fashion. The court specifically stated that “[t]he discretion of directors is to be exercised in the choice of means to attain [profits for the stockholders], and does not extend to a change in the end itself, reduction of profits, or the non-distribution of profits among stockholders.” Given this holding, it is argued that the only way to break the stranglehold of Dodge v. Ford is through the benefit corporation.

Although this may be true in some states, Florida, unlike Delaware, already has legislation that allows corporations to consider and pursue public benefits. Florida Statute 607.0830(3) allows directors to “consider such factors … including the long-term prospects and interests of the corporation and its shareholders, and the social, economic, legal, or other effects of any action on the employees, suppliers, customers of the corporation or its subsidiaries, the communities and society in which the corporation or its subsidiaries operate.” In Kloha v. Duda, 246 F. Supp. 2d 1237, M.D. Fla., the directors of a Florida corporation exercised their business judgment in deciding to sell certain assets instead of closing an unprofitable branch of the business. The court protected the directors from liability under the statute because the directors stated they continued to run the unprofitable branch to ensure employment for family members.

Proponents of benefit corporations note that Florida’s present statute allows directors to take these considerations into account, but the new statute would require directors to balance these things against the single-minded pursuit of profit. This distinction may not have much meaning given that corporations that don’t want to “do good” will not become benefit corporations and will not be affected by the mandatory language of that statute. Whereas, companies that do want to “do good” are currently able to do just that in Florida.