Thursday, October 11, 2012
Like many other states, Massachusetts has recently passed an amendment to its corporate law that permits the incorporation of "Benefit Corporations" (Chapter 238, Section 52). I have opinions about whether this is anything more than just a marketing effort, but let me put those to the side for the time being. Here, I'd like to focus on the fact that the Secretary of State of the Commonwealth of Massachusetts apparently has a tenuous grasp on what the corporate law of Massachusetts presently is. In the Commonwealth's official notice and FAQ for Benefit Corporations, the Corporations Division describes the need for Benefit Corporations, thusly:
What are benefit corporations?
Benefit corporations are corporations organized under Chapter 156A (the professional corporation statute) or Chapter 156D (the business corporations statute) that have elected to be a benefit corporation in their Articles.
Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.
For example, the directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation's directors faced with similar economic circumstances could prioritize retaining the corporation's workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation's public benefit goals.
Or ... the board of a for-profit corporation could simply decide to not lay-off employees and not face any repercussions from shareholders for a decision (not to lay-off workers when times are tough) that already is well within their rights.
I've written on this before in the context of state anti-takeover laws. Constituency statutes were adopted here in the Commonwealth during LBO boom to help give directors the power to resist unwanted offers. Currently, the directors of a Massachusetts corporation can put "shareholder maximization" behind the interests of employees, suppliers, creditors, whatever. Here's 156D, Sec. 8.30:
Section 8.30. GENERAL STANDARDS FOR DIRECTORS
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) in good faith;
(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
So ... a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees. It's true that constituency statutes were originally adopted as anti-takeover statutes and they still play that role. But, for a publicly minded corporate board, the constituency statutes in place already provide plenty of legal cover to pursue public benefit in the corporate form.
I'll have more to say on Benefit Corporations later. For now, I am wondering whether Benefit Corporations might be a back door into supercharged state anti-takeover protections for firms that opt in? I don't think it's necessary, but lawyers have been known for pursuing belt-and-suspender defenses.