Authorizes the incorporation of benefit corporations

Summary of provisions

Section 1 of the bill makes conforming changes to the general construction law.

Section 3 of the bill amends the New York Corporation Law by adding a new Article 17 entitled "Benefit Corporations."

Within Article 17, section 1701 establishes the application of the article only to benefit corporations and makes clear that Article 17 does not change the law applicable to corporations that do not elect to be benefit corporations.

The bill permits the incorporation in New York of "benefit corporations," which must have a "general public benefit" purpose, defined in the bill as a material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, through activities that promote a combination of specific public benefits. Likewise, the bill defines a "specific public benefit" to mean providing individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; preserving the environment; improving human health; promoting the arts, sciences, or advancement of knowledge; increasing the flow of capital to entities with a public benefit purpose; or the accomplishment of any other particular benefit for society or the environment.

The bill allows a corporation to elect to be a benefit corporation by amending its charter to include a statement that the corporation is a benefit corporation. An amendment electing benefit corporation status, and the subsequent termination of benefit corporation status, must be approved by the stockholders. The bill further allows a benefit corporation to identify and include one or more specific public benefits in its charter with the approval of the stockholders.

In determining what directors and officers reasonably believe are in the best interests of the benefit corporation, a director or officer must consider the effects of any action or decision not to act on: the benefit corporation's stockholders; the benefit corporation's employees and workforce, including the employees and workforce of subsidiaries and suppliers; the interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation; community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or the benefit corporation's subsidiaries or suppliers are located; and the local and global environment.

The bill requires a benefit corporation to deliver an annual benefit report to all stockholders that includes (1) the ways in which the benefit corporation pursued general public benefit during the preceding year and the extent to which the general public benefit was created; and (2) the ways in which the benefit corporation pursued any specific public benefit included in its charter and the extent to which that specific public benefit was created. The annual report must also discuss circumstances hindering the benefit corporation's ability to create the public benefit and an assessment of the societal and environmental performance of the benefit corporation. The report must be delivered to stockholders within 120 days of the end of the benefit corporation's fiscal year, and posted on the benefit corporation's public web site, if any exists.

Section 4 of the bill amends section 720 of the business corporation law to include actions against directors and officers for misconduct which are unique to benefit corporations. Such actions include (1) the failure to pursue the general public benefit purpose of a benefit corporation or any specific public benefit set forth in its certificate of incorporation, (2) the failure by a benefit corporation to deliver or post an annual report, or (3) the neglect of, or failure to perform, or violation of his or her duties or standard of conduct under article 17.

Section 5 of the bill provides that it shall take effect on the 60th day after it becomes law.

Fiscal impact on the state

Potential minimal increase in revenues from filings by existing corporations that elect to change their status.

Justification

Tens of thousands of companies are using sustainability and social innovation as a competitive advantage in the marketplace. Corporate leaders need to be able to shape business models that enable them to satisfy the demands of investors, employees and customers who increasingly demand that corporations serve both shareholders and society, considering the impact of their decisions on multiple stakeholders rather than maintaining a singular focus on short term maximization of financial profits. Benefit corporations have the potential to be the corporate entity that can offer entrepreneurs and investors the option to build and invest in businesses that meet higher standards of corporate purpose, accountability and transparency.

As a leading center of business, New York is well-positioned to become one of the first states to allow the incorporation of these cutting-edge benefit corporations. Currently, socially-minded companies are often left with the catch-22 of either not being able to earn a profit or opening their directors up to possible personal liability for decisions that do not maximize shareholder value or increasingly going to states other than New York that are pursuing this corporate form. This bill solves that dilemma.

Without increasing regulation or impacting the state budget, the bill:

* Removes legal impediments preventing businesses and investors from making their own decisions to use sustainability and social innovation as a competitive advantage;

* Gives New York a competitive advantage as a leading state by accelerating development of a new sector of the economy in New York by providing legal recognition for businesses that adopt higher standards of corporate purpose, accountability and transparency;

* Provides clarity to business leaders, general counsels and investors that the fiduciary duty of benefit corporations affirmatively includes creating public benefit;

* Expands shareholder rights to enforce this expanded definition of fiduciary duty, as well as a higher standard of conduct for directors to consider the impact of their decisions on both financial and non-financial interests;

* Includes higher standards of transparency, requiring annual reporting to shareholders and the public about the corporation's social and environmental performance;

* Helps ensure that these corporations and the positive social and environmental impact they create are built to last beyond marketing trends, strong business cycles or existing corporate leadership by requiring a 3/4 majority vote of shareholders to remove these higher standards.

Legislative history

2010: S.7855B (Passed Senate)/A.11498B

Effective date

Sixtieth day after becoming law.