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Maryland Leads the Country to Socially-Conscious "Benefit Corporations"

Lerch Early & Brewer's Legal Update

In April 2010 , Maryland became the first state in the country to recognize a new form of corporation – the “Benefit Corporation.” In an ordinary business corporation formed under most states' laws, directors arguably can consider only profit and maximizing share value when making major decisions. In some situations, directors actually fear personal liability if they base key decisions on what is best for the public, the poor or the environment.

Enter the Benefit Corporation. Designed for socially conscious for-profit companies and investors that view sustainability and social innovation as core business values, the law enables businesses organized as Benefit Corporations to consider the impact of their decisions on more than simply the bottom line. For directors of a Benefit Corporation, the standard of fiduciary duty is expanded to limit director liability for consideration of non-financial public interests in an effort to empower directors to consider what they believe to be in the best interest of the public, or other social goods, in addition to what is most profitable.

The legislation, which becomes effective in October 2010, gives legal recognition to businesses electing to adopt higher standards of corporate purpose and responsibility. Policy makers hope that this new law will enhance public trust in business by demonstrating that businesses can create social value in addition to value for investors, as well as provide an opportunity for the development of tax, procurement and investment incentives for socially beneficial private sector businesses. The law requires that a Benef it Corporation's charter documents and stock certificates include a clear, prominent reference to its Benefit Corporation status. Each Benefit Corporation must have the purpose of creating a general public benefit, defined as a material, positive impact on society and the environment, which can be objectively measured, through activities that promote a combination of specific public benefits. In addition, the charter may include one or more stated specific public benefits, such as promoting economic opportunity,preserving the environment, improving human health, promoting the arts and sciences and increasing the flow of capital to entities with a public benefit purpose. Under the new law, the creation of these public benefits is deemed to be in the best interests of the Benefit Corporation. An existing corporation may elect to become a Benefit Corporation by amending its charter to meet the requirements. Similarly, a corporation may terminate its Benefit Corporation status by amending its charter.

In determining what is in the best interest of the corporation, the directors of a Benefit Corporation are required to consider the impact of their decisions on a variety of community-based stakeholders and the environment in addition to its stockholders. Stakeholders include the corporation's employees, subsidiaries and suppliers, its customers, the community at large and the environment. The legislation encourages the directors of a Benefit Corporation to consider the effect of company decisions on these outside stakeholders by shielding the directors from liability for weighing these non-financial outside interests when making decisions. The law also specifically states that a director does not owe a duty to mere beneficiaries of the corporation's public benefit purposes.

Benefit Corporations will be subject to an annual reporting requirement. The corporation must provide each stockholder a benefit report that includes a description of the ways in which the corporation pursued public benefits during the year, the extent to which those benefits were created and any circumstances that have hindered the creation of public benefits by the corporation. The report must also contain an assessment of the corporation's beneficial performance, prepared in accordance with a third party standard. In addition, the benefit report must be made available on the corporation's website, or if the corporation does not have a website, on demand and without charge to anyone who requests a copy.

Although Maryland is the first state to pass a Benefit Corporation law, other states around the county are considering Benefit Corporation legislation as well. Policy makers have provided a mechanism for businesses to maximize value for themselves and their community. Now it's up to Maryland's entrepreneurs to decide if that makes good business sense.

David Kay,an attorney in the firm’s Business & Tax group, advises individuals and businesses with respect to business transactions, commercial lending, real estate transactions, real estate finance, commercial leasing and entity formation. To learn more about creating or electing to become a Benefit Corporation, contact David at dekay@lerchearly.com or301-657-0724.

This article originally appeared in Lerch, Early & Brewer's Legal Update, 2010, Vol. III. It is for your information only and is not intended to constitute legal advice. Please contact your attorney for more information.

Copyright 2010 Lerch, Early & Brewer, Chtd.

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