In an age when 90 percent of announced mergers face legal challenges from shareholders, several states, including Pennsylvania, are looking to protect corporations from investors upset with money being spent on things that don’t maximize the bottom line. But there’s a twist for the corporation.

The new business form — a benefit corporation — mandates a corporate purpose to create a positive impact on society and the environment.

Businesses juggling outside interests with those of shareholders might sound like a recipe for litigation. But backers of the new Pennsylvania Benefit Corporation Act, set to go into effect January 22 in Pennsylvania, are confident the law provides adequate protections for socially conscious corporations looking to reap more than just maximum profits, as well as protections for the shareholders who would invest in these corporations.

Pennsylvania became the 12th state since Maryland started the trend in 2010 to adopt the new business form, a benefit corporation, when Governor Tom Corbett signed the bill into law October 24. The benefit corporation aims to provide socially conscious corporations with the ability to invest in what advocates call a "triple bottom line," of "people, planet and profits," without fear of litigation from shareholders.

William H. Clark Jr. of Drinker Biddle & Reath, the main drafter and proponent of the variation on a business corporation, said the heart of this new type of for-profit entity is the redefinition of the duties of directors. Under existing Pennsylvania law, Clark said, directors are allowed to consider the interests of constituencies other than the shareholders, but don’t have to and often feel they cannot.

The Benefit Corporation Act requires directors and officers to weigh the effects of corporate actions on other stakeholders, such as employees, customers, suppliers and the public at large. A benefit corporation is required to report on its overall social and environmental performance through an annual report subject to an assessment by a third-party, independent reviewer. There is currently no tax advantage available to corporations that structure as a benefit corporation.

There is also no set list of what the corporation’s public benefit purpose would need to be, but some suggestions within the law include providing low-income individuals with beneficial products or services, preserving the environment, improving human health, promoting the arts or the accomplishment of any other particular benefit to society or the environment.

Clark said the new corporate form provides a benefit and an obligation to corporations looking to position themselves in the market as a legitimate "green" corporation that is environmentally friendly. He said the problem of "greenwashing," or companies claiming their products are environmentally friendly with no proof to back it up, can be combatted by benefit corporations that have a third-party stamp of approval for their socially conscious efforts.

Clark also noted that studies have shown there is roughly $3 trillion in investment dollars looking for socially responsible investments and the benefit corporation status will set those corporations apart for a better chance to get that money.

More or Less Liability?

Clark said one of the main goals behind the legislation is to protect corporate directors from litigation when they make socially conscious decisions. But he noted that shareholders of these corporations are likely to have the same outlook as the directors and would support the social goals of the organization. If an existing business wants to convert to a benefit corporation, that requires approval by two-thirds of the shareholders. The same goes for a business looking to merge into a benefit corporation.

The benefit corporation law, on its face, has the potential to lend itself to two types of litigation — suits from stakeholders who feel the corporation isn’t doing enough when it comes to socially responsible initiatives, and suits from shareholders who feel it is doing too much and not maximizing profits.

But the drafters had those scenarios in mind when writing the legislation, Clark said. He said he is confident the law builds in protections to avoid the bulk of those suits on either side. He said the statute is clear that the only people who have standing to challenge a benefit corporation’s behavior are the shareholders, not the additional stakeholders contemplated in the law.

"We didn’t want people to opt into a new form and suddenly become subject to suit by unions or the Sierra Club," Clark said.

For a shareholder to have standing to sue, he or she must own at least 2 percent of outstanding shares. The law also bars monetary damages and only allows for injunctive relief of shareholders’ claims, Clark said.

There is still the opportunity for plaintiffs attorneys to earn fees from the suit even if non-monetary relief is awarded, which is the outcome in many shareholder litigation suits. Clark said that while attorneys can be creative, he said the case would have to be strong enough to warrant the awarding of attorney fees. He said he hopes there wouldn’t be a flurry of suits, but rather only those that were really needed.

For the plaintiffs bar, the concern is not about the ability to sue to ensure corporations are focusing enough on social benefits, but rather what happens when shareholders are concerned with how those goals are being implemented.

Lee D. Rudy, head of Kessler Topaz Meltzer & Check’s shareholder derivative litigation, said it’s a great thing for corporations to devote resources to the public good with the support of fully informed shareholders.

"My concern would be that directors who might engage in self-dealing or other misconduct would then be able to hide behind this statute and claim yet another layer of protection from judicial scrutiny," Rudy said.

As an example, Rudy said, he wondered what recourse shareholders would have if a corporate officer gave a big contract to his brother’s company that happened to be a waste management corporation focused on environmentally friendly practices. Is that company the best for the job? Is such a contract even necessary? Rudy asked, and can the company defend its choice based on the fact that the contract supports a social good?

B Corp. Bandwagon

Clark has worked with the Berwyn, Pa.-based nonprofit B Lab in drafting and getting passed benefit corporation laws across the country. B Lab also serves as a third-party certifier of benefit corporations, though it doesn’t require the corporations it certifies to be incorporated under a state’s benefit corporation laws.

"The belief that the social responsibility of business is to increase profits has been absorbed into U.S. corporate culture and impacts how decisions are made," B Lab said on a portion of its website dedicated to the legal facts surrounding benefit corporations. "What is perceived as a legal impediment is often just a cultural impediment. This impediment can be removed by creating a new corporate form explicitly required to take multiple interests into consideration when making decisions."

All 12 states that have voted on the legislation — Pennsylvania, California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, South Carolina, Vermont and Virginia — have passed it.

B Lab co-founder Andrew Kassoy said there are nearly 700 corporations across the globe that his company has given "certified B corporation" status. While those companies aren’t necessarily incorporated under a benefit corporation form that legally requires them to meet certain social requirements, the certification does require the corporation to amend its governing bylaws to express that it will look out for stakeholders other than shareholders.

Kassoy said B Lab estimates there are between 150 and 200 companies that have incorporated as a benefit corporation across the handful of states where a benefit corporation law has gone into effect.

"This is a community of businesses that are run by entrepreneurs or management and supported by investors who want to use business in a proactive way to solve social or environmental problems," Kassoy said.

They are different than traditional corporations that try to make changes to become more socially responsible because benefit corporations are created with a public purpose in mind, Kassoy said. The companies range in size — with California-based apparel company Patagonia serving as one of the largest benefit corporations. Kassoy said benefit corporations typically are not publicly held businesses, though he said there are a number of them that are looking to go public in the next 12 to 18 months.

Fox Rothschild partner Michael Harrington is a big proponent of benefit corporation laws, which he said gives companies the ability to be recognized for what they should be doing anyway. It also recognizes that corporations can be a big part of social change. Harrington’s client, West Grove, Pa.-based Dansko was in the first group of certified B corporations in 2007.

Harrington said he would expect large corporations that are already socially aware to look to take the next step to be recognized for that awareness through state law benefit corporation status, as long as the process didn’t cause too much hassle. He said he would also expect a number of younger entrepreneurs who are part of a socially aware generation to take advantage of this corporate form when creating their businesses. Such a designation helps with marketing, recruiting employees and lining up vendors, Harrington said.

When it comes to the issue of fiduciary duties and officer liability, Harrington said the answer is "a great big ‘it depends.’" He said the laws do a good job of shielding directors from personal liability and the company from monetary damages. Harrington said there is no cause of action available to the other stakeholders mentioned in the corporation’s mission, but rather only allows for shareholder suits.

Model legislation in this area does expand officer liability to include a shareholder’s right to bring a "benefit enforcement proceeding" to challenge a corporation’s failure to consider other stakeholder interests aside from the shareholders.

Harrington said the benefit enforcement proceeding, which he likened to an administrative proceeding, would be the more likely challenge to the way benefit corporations are operating.

The Politics of Social Causes

Clark has run up against some opposition due to the specific political climates in certain states, though a benefit law has never been defeated when voted upon.

Michigan and North Carolina weren’t able to get to a vote on the bill by the end of their respective sessions and Colorado faced strong opposition from the state’s bar association.

That wasn’t the case in Pennsylvania, where the Pennsylvania Bar Association was a big backer of the Benefit Corporation Law. Business Law Section Chairman Lee S. Piatt of Rosenn Jenkins & Greenwald in Wilkes-Barre, Pa., worked with Clark on getting the bill passed.

"It really permits a corporation to be formed for purposes other than to make money for their shareholders, although that will continue to be obviously a principal purpose," Piatt said.

Under current Pennsylvania law, Piatt said, the interests of the shareholders are "paramount." Come January 22, there will be certain considerations a corporation must make for other stakeholders aside from shareholders.

"One of the things I guess it does is it doesn’t permit management to hide behind the fact that they have to do what’s in the best interest of shareholders," Piatt said.

Clark said the list of states that have adopted the law weren’t by design, but rather included some states that reached out to him unexpectedly, such as South Carolina. He said there were a few states with support from heavy-hitting Republican governors, such as New Jersey, Louisiana and South Carolina.

Democrats typically understood the purpose behind the legislation right away, while Republicans warmed to the concept after realizing it was a private method to support social change, Clark said.

It’s a situation of "Democrats understanding the ends and the Republicans understanding the means," Clark said.

Kassoy said he would expect about half of the country to have benefit corporation laws in place in the next couple years. He said there are about 10 to 15 states that are slated to address the issue next year and he would expect about eight to 10 of those to pass a benefit corporation law.

"The big question will be what Delaware does," Kassoy said.

He said Delaware historically has waited to enact a change to business law until about half of the country has done so. He said the state is paying attention to the idea, as evidenced by its creation of a working group to look at the issue. The greatest challenge from Kassoy’s perspective, he said, is that Delaware doesn’t adopt a "watered-down" version of the law.

Kassoy said two Delaware incorporated companies have already reincorporated in other states to take advantage of the benefit corporation laws in Massachusetts and New York.

Clark said the idea is that states gradually adopt this voluntary form of business incorporation. He said everyone is seeing how it plays out and he hopes it becomes a success. If it doesn’t, that’s OK too, Clark said.

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI.