British Columbia recently became the first Canadian province to allow the establishment of benefit companies. Businesses can now apply to become a benefit company under the BC Business Corporations Act (the “Act”).
What is a benefit company?
Maryland was the first state to allow the creation of benefit companies under law. Since then, 36 US states have adopted similar legislation. This legislation is designed to help companies pursue social goals by providing some protection for directors against liability for these actions.
A benefit company is a for-profit company committed to conducting its business in a responsible and sustainable way. These actions must be directed towards one or more “public benefits”. Companies can do this through a “benefit statement” and a “benefit provision”:
- Benefit statement – the notice of articles will state that “this company is a benefit company and, as such, is committed to conducting its business in a responsible and sustainable manner and promoting one or more public benefits.”
- Benefit provision – the articles will detail the public benefits chosen to be promoted by the benefit company. The articles will also describe the company’s commitment to:
- conduct its business in a responsible and sustainable manner; and
- promote its chosen public benefits.
A public benefit, as defined by the Act, is a “positive effect” that benefits a class of persons, a class of communities or organizations, or the environment. This does not include shareholders in their capacity as shareholders. A positive effect could include artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological effects.
For a company to conduct its business in a “responsible and sustainable” manner, the Act stipulates that a company must take into account the well-being of persons affected by the operations of the benefit company. The company must also “endeavour to use a fair and proportionate share of available environmental, social and economic resources and capacities.”
Why become a benefit company?
Becoming a benefit company could help a business gain social capital and brand recognition. At least initially, it could help the business stand out from its competitors. As more companies make the switch, this effect would level off.
There is also a class of investors focused on environmental and social issues. They invest in companies that share their aims and values. Becoming a benefit corporation could attract investment interest from this type of investor.
How are director and officer duties different for a benefit company?
For all companies, including benefit companies, directors and officers have certain duties. The central one is the fiduciary duty to act honestly and in good faith with a view to the best interests of the company.
Directors and officers of benefit companies have two further duties. They have the duty to:
- act honestly and in good faith with a view to conducting the business in a responsible and sustainable manner and promoting the public benefits specified in the company’s articles; and
- to balance the above duty with the fiduciary duty.
The Supreme Court of Canada has explored the fiduciary duties of directors. It has stated that in exercising their fiduciary duty and considering the best interests of the company, directors may give consideration to the interests of various stakeholders. This includes employees, suppliers, creditors, consumers, the government and the environment.
Benefit corporations, on the other hand, must consider non-shareholder stakeholders whose well being might be affected by the public benefits the company specified in their articles. Therefore, directors need to balance this interest with the interest of the company.
The Act provides some protection to directors and officers in discharging these responsibilities. For example, a director or officer who complies with benefit company responsibilities is not considered to have breached the director’s fiduciary duty to act in the best interests of the company.
This approach has critics. Some have argued that by defining public benefits broadly, director accountability is weakened. The Act does not provide guidance on how directors and officers should discharge benefit company responsibilities. Therefore, the balance between flexibility and accountability will be decided in the courts.
On the other hand, the Act states that directors and officers have no duty to any person whose well-being may be affected by the company’s conduct or who has an interest in a public benefit specified in the company’s articles. Proceedings for breach of the benefit company responsibilities can only be commenced by “shareholders holding, in the aggregate, at least 2% of the issued shares of the company or, in the case of a public company, the lesser of 2% of the issued shares of the company and issued shares of the company with a fair market value of at least $2,000,000.”
Finally, a court cannot order monetary damages for a breach of benefit company responsibilities. A court can, however, order non-monetary remedies such as an order to comply.
How can a company become a benefit company?
A new or existing company only needs to include a benefit statement in its notice of articles. A public benefit provision must also be included in its articles. These additions must be approved by shareholders through special resolution. A benefit company can cease being one by deleting the benefit statement in its notice of articles and the public benefit provision in its articles. Again, an approval of shareholders by special resolution is required.
Do Benefit Companies have ongoing responsibilities?
Benefit companies must produce an annual benefit report. This report provides an assessment of the company’s performance of its public benefits against a third-party standard. Examples of third-party standards are the B Corp certification, the Global Reporting Initiative and the Sustainability Accounting Standards Board. Benefit reports must be kept at the company’s registered office. They must also be posted on the company’s website. The Act punishes failure to comply with the above by a fine up to $5,000. Currently, there is no government oversight of these assessment reports.
There seems to be a growing public focus on the broader social purpose of corporations. BC’s benefit company legislation gives companies a path to pursue both economic and social goals. Furthermore, becoming a benefit company signals to customers, investors and other stakeholders that the company is committed to a social purpose.
For more information on any of the above, or if you are seeking legal advice more generally for your business, feel free to reach out to Alon Segev, Daleep Aujlay or Stefan Kruse, all experienced attorneys with Segev LLP.
The above blog post is provided for informational purposes only and has not been tailored to your specific circumstances. This blog post does not constitute legal advice or other professional advice and may not be relied upon as such. If you require legal advice, you should contact a qualified lawyer.