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On June 30, 2020, British Columbia will become the first province in Canada to allow companies to incorporate as “benefit companies”. In doing so, the progressive western province follows in the footsteps of 35 US states and Washington DC, which likewise allow benefit company incorporation.
Benefit companies, sometimes also called benefit corporations or public benefit corporations,* are for-profit companies committed “to conducting [their] business in a responsible and sustainable manner and promoting one or more public benefits,” per the wording BC benefit companies must include in their articles. In this respect they resemble B Corporations, with the difference between a B Corporation and benefit company being that B Corporations are certified by the non-profit organization B Lab (or one of its international affiliates, like B Lab Canada), whereas benefit companies are distinct legal entities recognized by government as different from the traditional ‘C’ corporation by virtue of their social and/or environmental commitment. Well-known B Corporations include Patagonia, Kickstarter and Ben & Jerry’s.
Though B Corporation and benefit company status are not the same thing, they can be viewed as complimentary, with B Corporation certification indicating a company’s social and/or environmental commitment has been assessed and verified by B Lab, whereas benefit companies have no third-party oversight requirement. In BC, for example, benefit companies will be required to complete an annual “benefit report” providing an assessment of their performance against a third-party standard. But the report, which must be published on the company’s website, need not be audited by a third party, and will not be reviewed by the government. Notably, in Delaware, which serves as the state of incorporation for over 66% of Fortune 500 companies, benefit companies do not even have to publish their annual report or use a third party standard for assessment.
From a legal standpoint, benefit company status is important because it may provide corporations with social and/or environmental goals protection from shareholder lawsuits for breach of fiduciary duty. Such lawsuits could theoretically allege that a corporation’s allocation of resources to accomplishing social and/or environmental goals, rather than simply maximizing profits, constitutes a breach of the directors’ fiduciary duty to shareholders. The traditional response to such an allegation would be that the directors were acting in the best long-term interests of shareholders by, for example, strengthening the company’s brand, and as such, the directors are shielded by the business judgment rule. If, however, a company incorporates as a benefit company, the directors may have an additional defense: the corporation’s social and/or environmental commitment was made clear from the get-go or approved by shareholders. If investors had a problem with that, they should have simply gone elsewhere with their money.
This is more of a concern in the US, where, particularly in Delaware, corporate law recognizes the principle of shareholder primacy, meaning corporations’ chief objective is to produce shareholder profits. By contrast, the Supreme Court of Canada, interpreting the federal Canada Business Corporations Act (CBCA) in cases such as Peoples Department Stores Inc. (Trustee of) v. Wise (2004) and BCE Inc. v. 1976 Debentureholders (2008), has determined that a Canadian corporation’s duty is to act in the best interest of the company itself. Accordingly, directors can consider the interests of stakeholders, such as debtholders and employees, among others (including shareholders), when deciding matters on behalf of the corporation.
The CBCA was amended in 2019 to reflect the Supreme Court of Canada rulings, with new language specifying that directors may consider, among other parties, the environment when acting with a view to serving the corporation’s interests. It may be worth noting, however, that provinces such as Ontario have not mirrored this amendment in their own provincial corporate legislation, and the Supreme Court of Canada’s rulings pertained to federal rather than provincial corporate law.
If you have questions about benefit companies, B Corporations, or would like assistance with incorporating a company, please feel free to contact the firm.
*In Ontario, a public benefit company is a charitable corporation or a non-charitable corporation that receives more than $10,000 per financial year in either (a) donations or gifts from people who are not members, directors, officers or employees of the corporation; or (b) grants or similar financial assistance from federal, provincial or municipal governments or a government agency. As such, Ontario has a different definition of public benefit company than a jurisdictions like Delaware, which defines public benefit companies to be the same as what other jurisdictions call benefit companies.