Delaware Eases Conversion to a Public Benefit Corporation

Since Delaware adopted the public benefit corporation form in 2013, public and private institutional investors have increasingly devoted their attention and investment capital to socially conscious investing.  Such investors evaluate investments not only using traditional financial metrics, but also by examining the company’s business practices through one or more environmental, social, and/or corporate governance lenses.

Delaware law provides a means for existing companies to convert themselves into a public benefit corporation, a for-profit entity form that seeks to compete in the market while also furthering at least one specified public good.  In an amendment to the Delaware General Corporation Law (the “DGCL”) on June 23, 2020, the Delaware Legislature passed a bill making such conversion easier (the “PBC Amendment”).¹  Once the Governor signs the PBC Amendment, it will become law. 

Below, this post describes the amended provisions of the DGCL relating to the conversion of a corporation to a public benefit corporation. The PBC Amendment removed or amended two of the biggest roadblocks to such a conversion.

Provision 1: Amendment to Certificate of Incorporation / Exchange of Shares – Required Vote.

In order for a corporation to convert to a public benefit corporation (or vice versa), the DGCL previously required the affirmative vote of two-thirds (2/3) of the shareholders entitled to vote in order to make the necessary amendments to the Certificate of Incorporation. Similarly, if the conversion occurs in connection with a merger, a two-thirds (2/3) vote of the shareholders was required to exchange the shares of the ordinary corporation for public benefit corporation shares (or vice versa). 

The PBC Amendment reduces this required vote to a bare majority of the shareholders entitled to vote.  This reduction is far more important than it sounds.  In seeking a company vote, particularly where the shares are held by a diffuse, large number of shareholders, seeking any form of consent or vote is extremely difficult.  Most shareholders simply do not read the materials sent to them and do not respond.  Under the DGCL, however, shareholder consent to an action must be express and written, as must an affirmative vote be clearly cast.  Many companies and lawyers will attempt to squeeze by with a form of negative consent (e.g., consent is assumed if no reply is received), but such efforts are of dubious enforceability.

The PBC Amendment represents a trend in making it easier for existing corporations to become public benefit corporations.  As originally enacted, the DGCL required that a company converting to a public benefit company obtain the consent of ninety percent (90%) of shareholders. As public benefit corporations grow in popularity, the Delaware Legislature is increasingly facilitating conversions by existing corporations.

Provision 2: Removal of Appraisal Rights for Dissenting Shareholders

As a result of the PBC Amendments, a shareholder dissenting from the conversion of a corporation to a public benefit company can no longer assert appraisal rights and receive the cash value of his or her shares.  Prior to the PBC Amendments, such shareholders had “appraisal rights,” meaning the right to ask a court to value the company as a going concern and to require the converting company to cash out the shareholders shares at the judicially-determined price.

Removing this right to appraisal makes the process of conversion far easier, faster, and less expensive. Coming to an appraisal value often requires that the parties conduct in depth valuations using expert service providers and consultants, and the hearings on such matters often become battles of experts. 

Appraisal actions often take years to litigate.  Between 2010 and 2014, one study found that appraisal actions took an average of 3.6 years to resolve, and some at the longest taking over 12 years.  Further, appraisal actions generally added a premium to the value that a business could otherwise obtain because it generally does not take certain factors in to account, such as the illiquidity discount.  It is an artificial value that favors those investors pursuing appraisal, as it does not reflect what a shareholder could seek on the open market.  The removal of appraisal rights, then, is a significant boon to corporations seeking to join the growing trend of socially and environmentally conscious investing.

The growth in socially-conscious investing evidences that it is not a passing trend.  Just as the LLC form saw explosive growth as it met the need for flexibility and malleable terms desired at the time, so the public benefit corporation (and public benefit LLC) may see similar growth as they form natural outgrowths of the trends dominating the era of their creation.

[1]  House Bill 341, 150th DE General Assembly, available at https://legis.delaware.gov/BillDetail/48122.