Maryland Benefit Corporations – Pursuing a Public Benefit and the Bottom Line
Kelley Drye Client Advisory
November 5, 2010
Earlier this year, the State of Maryland became the first state to adopt legislation recognizing a new type of corporation, the "Maryland Benefit Corporation," that can be formed to pursue both public benefits and company profits. Thus, a Maryland business may now organize as a corporate entity which combines the characteristics of both for-profit and non-profit corporations. The new statute became effective on October 1.

To qualify, a corporation will elect this new classification by including a statement in its charter that it is a "benefit corporation" and a description of its general public purpose (which may identify one or more specific public purposes). Existing corporations may amend their charters to adopt the new status as well.

Benefit corporation status is important for companies that want to carry on their business activities to provide both social benefits for the public good and profits for their shareholders. Electing to become a benefit corporation may also help a company attract customers and investors who favor businesses that will look beyond their own profits to pursue a social good.

The legislation is designed to address general corporate standards that are incompatible with the social benefit goals of many new businesses. In general, the directors of "regular" Maryland corporations are required to make their business decisions based solely on the best interests of the corporation and its stockholders. While those directors could consider other factors in determining the impact of their decisions (e.g., employees, community, environment), they ultimately cannot favor these other factors over the interests of the stockholders without risking potential liability for failure to carry out their duties.

The directors of a Maryland Benefit Corporation, on the other hand, must make business decisions to work towards a public benefit. The statute defines a "general public benefit" as a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits. Imposition of the third-party standard review is a key element of the legislation which is intended to ensure compliance with the public benefit requirement and to provide accountability. [The principal organization providing that certification currently is B Lab, a tax-exempt organization located in Pennsylvania and a key sponsor of the Maryland legislation.] Following certification, the corporation is subject to audit and public reporting obligations.

To carry out their duties, the directors of a Maryland Benefit Corporation must consider certain specified factors in addition to the interests of the company stockholders when making business decisions. Included in the list are: the impact on the company's employees; community and societal interests; local and global environment; and interests of the company's customers as beneficiaries of the public purpose. For example, the directors of a Maryland Benefit Corporation considering whether to move its manufacturing operations overseas must consider the impact that the move would have not only on the profits of the company but also on the company's employees and customers, and the local community. While the company may reduce manufacturing costs by moving overseas, the directors of the company can freely decide that the interests of the community, employees and customers in keeping jobs in the U.S. supersede the interests of the stockholders to save money on manufacturing. In this instance, because of the changes provided by the statute, the directors of the Maryland Benefit Corporation are protected from liability under the general corporation laws. Furthermore, the directors are protected from liability to any beneficiary of the public benefit purposes of the corporation.

Despite the anticipated social advantages of this new type of corporation, problems may arise when the directors, applying their broader mandate, make business decisions that clearly conflict with the interests of the stockholders and result in lower profits. Consequently, benefit corporations may have a more difficult time finding investors who will accept the business constraints. A successful benefit corporation will balance all of these factors to become a profitable business that creates a broader public benefit.

For more information about Maryland Benefit Corporations, please contact the Corporate Practice Group at Kelley Drye & Warren LLP.