Saturday, April 17, 2021

Benefit Corporations Are Still Going Public

I previously blogged about benefit corporations going public, with my main point being that the legal requirements in the benefit corporation statute are so weak that they do not, as a practical matter, bind companies to adhere to their social purpose.  As a result, publicly traded benefit corporations are vulnerable to market pressures to favor shareholders over other stakeholders.  The newly-public benefit corporations have therefore chosen to adopt more mundane devices to insulate them from the market for corporate control – high inside ownership, staggered boards, etc – to stay on mission.  The drawback, however, is the same as exists for all antitakeover devices: managers may use their power to advance social purposes, but they may also use it to seek personal rents.

Anyway, I mention all of this because I noticed that another company recently went public as a benefit corporation, namely, Coursera, a provider of online education.  Coursera is in some ways following the path charted by Laureate Education, which is a for-profit university system that is also organized as a benefit corporation.  Both are also certified B-Corps (which provides a bit more reassurance of staying on mission; B-Corp status does not impose legal obligations but it functions as an independent monitor of corporate social performance), and both use inside ownership to insulate the company from public shareholder pressure.  Laureate has dual-class stock, and Coursera, well:

Our directors, executive officers and principal stockholders beneficially own a substantial percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Upon completion of this offering, our existing directors, executive officers, greater than 5% stockholders and their respective affiliates will beneficially own in the aggregate approximately 56.3% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock. Therefore, these stockholders will continue to have the ability to influence us through their ownership position, even after this offering

Additionally, Coursera does not allow shareholders to call special meetings or act by written consent, has a staggered board, an advance notice bylaw, and a supermajority voting requirement for certain bylaw and charter amendments.

One thing I find interesting – and I remarked on this in my earlier post – companies are still figuring out how they talk about benefit corporation status in their prospectuses.  That is, they can’t quite decide whether they want to say that benefitting stakeholders is itself a way of maximizing value to stockholders, so that benefit corporations are really just no different than any other corporation, or whether they want to say that they may sacrifice shareholder wealth to benefit other constituencies.  In my prior post, I pointed out that Lemonade goes more in the shareholder wealth maximization direction, while Vital Farms focuses on stakeholders.

Coursera seems to be in the former category, which makes sense to the extent that, as an educational institution in particular, creating at least the appearance of a stakeholder focus might really be necessary for profit maximization.  Anyway, this is what Coursera says in its prospectus:

There is no assurance that we will achieve our public benefit purpose or that the expected positive impact from being a PBC will be realized, which could have a material adverse effect on our reputation, which in turn may have a material adverse effect on our business, results of operations and financial condition…

As a PBC, we are required to publicly disclose at least biennially on our overall public benefit performance and on our assessment of our success in achieving our specific public benefit purpose. If we are not timely or are unable to provide this report, or if the report is not viewed favorably by parties doing business with us or by regulators or others reviewing our credentials, our reputation and status as a PBC may be harmed.

If our publicly reported B Corp score declines, our reputation could be harmed and our business could suffer

We believe that our B Corp status enables us to strengthen our credibility and trust among our customers and partners. Whether due to our choice or our failure to meet B Lab’s certification requirements, any change in our status could create a perception that we are more focused on financial performance and no longer as committed to the values shared by B Corps. Likewise, our reputation could be harmed if our publicly reported B Corp score declines and there is a perception that we are no longer committed to the B Corp standards. Similarly, our reputation could be harmed if we take actions that are perceived to be misaligned with B Corp values. …

[W]e may take actions that we believe will be in the best interests of those stakeholders materially affected by our specific benefit purpose, even if those actions do not maximize our financial results. While we intend for this public benefit designation and obligation to provide an overall net benefit to us and our partners and learners, it could instead cause us to make decisions and take actions without seeking to maximize the income generated from our business, and hence available for distribution to our stockholders. Our pursuit of longer-term or non-pecuniary benefits may not materialize within the timeframe we expect or at all and may have an immediate negative effect on any amounts available for distribution to our stockholders. Accordingly, being a PBC and complying with our related obligations could harm our business, results of operations, and financial condition, which in turn could cause our stock price to decline….

Our focus on the long-term best interests of our company as a PBC and our consideration of all of our stakeholders, including our shareholders, learners, partners, employees, the communities in which we operate, and other stakeholders that we may identify from time to time, may conflict with short- or medium-term financial interests and business performance, which may negatively impact the value of our common stock.

We believe that focusing on the long-term best interests of our company as a public benefit corporation and our consideration of all of our stakeholders, including our shareholders, learners, partners, employees, the communities in which we operate, and other stakeholders we may identify from time to time, is essential to the long-term success of our company and to long-term shareholder value. Therefore, we have, and may in the future, make decisions that we believe are in the long-term best interests of our company and our shareholders, even if such decisions may negatively impact the short- or medium-term performance of our business, results of operations, and financial condition or the short- or medium-term performance of our common stock. Our commitment to pursuing long-term value for the company and its shareholders, potentially at the expense of short- or medium-term performance, may materially adversely affect the trading price of our common stock…

This is not to say it entirely ignores the possibility that it may favor nonshareholder constituencies – it’s more like, Coursera emphasizes the shareholder-centric view of PBC status while also warning shareholders that Coursera’s Board is, you know, unaccountable:

[B]y requiring the boards of directors of PBCs consider additional constituencies other than maximizing stockholder value, Delaware public benefit corporation law could potentially make it easier for a board to reject a hostile bid, even where the takeover would provide the greatest short-term financial yield to investors.

Our directors have a fiduciary duty to consider not only our shareholders’ interests, but also our specific public benefit and the interests of other stakeholders affected by our actions. If a conflict between such interests arises, there is no guarantee such a conflict would be resolved in favor of our shareholders.

I also note that under its “Description of Capital Stock,” Coursera says:

We believe that an investment in the stock of a public benefit corporation does not differ materially from an investment in a corporation that is not designated as a public benefit corporation. Further, we believe that our commitment to achieving our public benefit goals will not materially affect the financial interests of our stockholders.

That’s almost word-for-word what Lemonade says as well:

We do not believe that an investment in the stock of a public benefit corporation differs materially from an investment in a corporation that is not designated as a public benefit corporation. We believe that our ongoing efforts to achieve our public benefit goals will not materially affect the financial interests of our stockholders.

But not Vital Farms, which doesn’t say anything like that in its Description of Capital Stock; instead, it simply redescribes what was then the existing legal regime for public benefit corporations, and adds “We believe that our public benefit corporation status will make it more difficult for another party to obtain control of us without maintaining our public benefit corporation status and purpose.”

 

https://lawprofessors.typepad.com/business_law/2021/04/benefit-corporations-are-still-going-public.html

Ann Lipton | Permalink

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