COVID's Impact On PBC Fiduciary Duties: Understanding Director Obligations In An Economic Downturn

• Published date: 03 July 2020
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Morrison & Foerster LLP
• Author: Mr Alfredo B.D. Silva and Jesse M. Finfrock

In August 2019, a group of nearly 200 chief executives issued a statement, arguing that the role of corporations should be redefined from solely maximizing shareholder value to also "invest[ing] in their employees, protect[ing] the environment and deal[ing] fairly and ethically with their suppliers."¹ Making that shift is hard when boards of directors are subject to the standard fiduciary duties applicable to Delaware corporations, but being a standard Delaware corporation is hardly the only option available to a profitable business, even a publicly traded company.

Public benefit corporations (PBCs)² are a special flavor of Delaware corporation. They are statutorily required to pursue the creation of one or more public benefits as set forth in their certificates of incorporation, including, potentially, considering the interests of stakeholders such as employees, customers, and members of the community.³ Accordingly, the board of directors of a PBC has a fiduciary duty to weigh additional considerations when taking corporate action, beyond those of a board of directors of a traditional Delaware corporation.⁴ In times of plenty, this additional fiduciary obligation rarely creates a tension for PBC directors, as companies and shareholders that have opted into the PBC standards often have business models where social or environmental impact and financial returns inherently tend to be aligned.

However, in periods of economic stress'which we face today as a result of the coronavirus pandemic'directors may be required to make difficult decisions if a PBC faces a tradeoff between pursuing its social or environmental mission and protecting shareholder value. This article outlines some of the key issues that PBC directors should consider when balancing these interests.

Defining "public benefit" - A public benefit is defined in the Delaware PBC statute as "a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than shareholders in their capacities as shareholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature." Each PBC sets forth its unique public benefit, or benefits, in its certificate of information, so it is important for PBC directors to examine the nature and scope of the PBC's stated public benefit, in addition to the PBC's business model, to understand where tensions may arise, particularly as a result of changes in overall economic circumstances. For example, in bull markets, an obligation to consider worker well-being may go hand-in-hand with financial return, to the extent a well-trained, well-treated workforce may be more productive and reduce human resources costs. However, in bear markets, such an obligation may make it more difficult to furlough or lay off workers. Similarly, an obligation to donate a portion of profits may be a key...