Benefits Corporations
British Columbia is the First Canadian Province to Introduce Benefit Corporations
In May 2019, British Columbia amended its Business Corporations Act (BCA) to allow for the inclusion of “benefit corporations.”[1] This new business entity provides an intermediary position between the existing non-profit and for-profit options. Specifically, it allows new and existing companies to include a benefit provision within their articles of incorporation. This provision alters the corporate executives’ responsibilities by including a non-shareholder interest that must be factored into all major business’ decisions. In this respect, it differs from the traditional corporate structure where the corporation’s executive body is principally tasked with maximizing shareholders’ interests. The amendment was introduced as a private member’s bill by Andrew Weaver, the B.C. Green Party Leader. In his address to the legislature, Mr. Weaver explained that the introduction of benefit corporations would “provide…companies with the legal framework to operate in an environmentally sustainable and socially responsible way and to pursue public benefits, in addition to pursuing profits.” [2] While British Columbia is the first Canadian province to authorize benefit corporations, this new corporate structure has been widely recognized throughout the United States. In June 2018, 33 States, plus the District of Columbia, had passed similar legislation.[3]
What function does the benefit corporation serve? Similar to third-party certification programs which label a company as environmentally sustainable, committed to fair-trade practices, or otherwise, the designation of being a benefit corporation signals to prospective clients, investors, and businesses that a company is committed to a broader social, cultural, or environmental purpose. As Mr. Weaver argues, “by incorporating as benefit companies, businesses would achieve clarity and certainty for their directors and investors about their goals and mandate, thus enabling them to attract capital investment while staying true to their mission as they grow.”[4] That is, the benefit provision can serve to stabilize a company’s activities by ensuring it adheres to broader principles over the long-term. This may assist some companies in attracting new owners, investors, or clients, but simultaneously, it ensures that these new business participants cannot fundamentally alter the company’s foundational purpose. This stability can preserve a company’s brand by ensuring its reputation is not undermined by fundamental changes to its value-based practices, e.g. sourcing materials from certified supply-chains.
How do benefit corporations differ from Canada’s existing Community Contribution Company (C3) designation? The C3 framework is a share-capital corporate structure that incorporates both for- and not-for-profit elements. These companies adhere to market principles related to growth; however, they are subject to restrictions regarding their distribution of assets by dividends or dissolution. Benefit corporations, by contrast, have no such restrictions. Instead, a benefit corporation’s adherence to their beneficial purpose will be monitored by new transparency and accountability requirements that will be assessed against an independent, third-party standard. This structure is commonly observed in existing certification programs such as: Clean Marine B.C., The Forestry Stewardship Council, Leadership in Energy and Environmental Design, et cetera.
By special resolution, a majority of shareholders may alter a company’s articles of incorporation to become a benefit corporation. This requires the addition of a benefit statement. What is this statement? Under the Act, all participating corporations must include the following statement within its articles:
“This company is a benefit company and, as such, has purposes that include conducting its business in a responsible and sustainable manner and promoting one or more public benefits.”[5]
To clarify, all participating corporations must commit to responsible and sustainable business practices generally. This means that the company will “take into account the well-being of persons affected by the operations of the benefit company, and endeavour to use a fair and proportionate share of available environmental, social, and economic resources and capacities.”[6] Thereafter, companies must select a specific public benefit. Under section 51.991(1) of the amended Act, this benefit can include “artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological” objectives. However, the benefit must accrue to a class of persons, communities, or organizations other than the shareholders qua shareholders. That is, shareholders may indirectly benefit from an improved community, environment, etcetera, but they cannot be the class of person for whom the benefit is directed. Due to these provisions, benefit corporations cannot amalgamate with regular corporations, unless the amalgamation results in a benefit corporation.[7] Alternatively, a majority of shareholders may discontinue a corporation’s beneficial designation by simply removing the above provisions via a special resolution.
Once established a benefit corporation’s public commitment is assessed through annual benefit reports. These reports are to be published along with the corporation’s existing financial auditing obligations under the BCA.[8] As mentioned, these reports must be accompanied by and be evaluated against a third-party standard, e.g. a standards-setting body such as the Forestry Stewardship Council.[9] While the company may select this third-party comparator, there are various restrictions on this selection process to ensure the evaluation’s independence. For example, a standard-setting body is not independent whenever “a person who beneficially owns shares of the benefit company, or an associate of such a person, is a member of the governing body of, or controls the operation of, or otherwise controls, the third-party standard-setting body.” In other words, there can be no relationship between the principle company and its third-party comparator when that comparator is a standard-setting body (i.e. a charity or non-profit organization).[10] The report itself must specify what activities the company took to pursue its general and specific benefit provisions and any impediments experienced therein over the previous year.[11] It must be approved by the directors, signed by one or more of them, and published on the corporation’s website.[12]
The benefit corporation model could advantage entrepreneurs looking to gain market-share or attract capital investments by espousing a societal benefit. Should they fail to adhere to their self-selected third-party standard, their liability is limited. Under section 51.994(2)(b), stakeholders are barred from pursuing legal action against a company simply because it failed to realizes its espoused benefits. This limitation is supported by section 51.994(2)(a) which excludes persons “whose well-being may be affected by the company’s conduct, or … who [have] an interest in the public benefit specified in the company’s articles.” As for shareholders, their remedies are limited with regards to the company’s benefit provisions. Directors and officers cannot be found to have breached their fiduciary duty under section 142(1) simply because they failed to meet their beneficial duties under section 51.994(1). Should shareholders of a public corporation seek a remedy against their directors or officers for failing to adhere to the company’s third-party standards, they must—in aggregate—represent at least the lesser of 2% of issued shares or their shares must have a fair-market value equal to or greater than $2,000,000. Finally, shareholders are precluded from pursuing a monetary award under section 51.994(5). Rather, they are limited to injunctive relief.
In summary, the benefit corporation model introduces a legislative framework for third-party certification programs which enables companies to integrate a beneficial purpose into their articles of incorporation. This may strengthen a company’s brand by solidifying its value-based practices over time and over ownership arrangements. It may also help attract ethically motivated consumers and investors. To ensure compliance, participating companies are required to evaluate and publish their beneficial activities against independent third-party standards. Should directors or officers fail to abide by these standards, shareholders may seek injunctive relief. This limitation on directors’ and officers’ liability ensure that corporations can pursue their benefit provisions without facing onerous financial liabilities from their shareholders. If your company is interested in becoming a benefit corporation, please call our office for further information.
[1] Business Corporations Amendment Act, 2018, BC Legislature, Canada.
[2] Weaver, Andrew, “Introducing a bill to enable BC companies to be incorporated as benefit corporations.”
[3] Fitzpatrick, Sarah: “B.C. Considers Benefit Corporations,” Miller Tompson Blog
[4] Supra, note 2.
[5] Ibid., s. 51.992(2)
[6] Iibd., s. 51.991 (1)
[7] Ibid., s. 51.998
[8] Ibid., s. 51.996(1)
[9] Ibid., s. 51.996 (3)
[10] Ibid., s. 51.991(1)
[11] Ibid., s. 51.996 (2)(d)
[12] Ibid., s. 51.996 (4)-(5)