The recent IPO of Zymergen a SF-based biofacturing company caps an active year of public benefit corporations (PBCs) in the public markets. Unlike regular corporations, the legal charter of a PBC specifies one or more public benefits that the corporation intends to pursue alongside its mission to act in the best interests of its stockholders. As such, PBCs are required by Delaware General Corporation Law to take into account its stakeholders, among other things, when making decisions.
While only a year ago, there was just one such company in the US public markets, Laureate Education, there are now at least 10, and a number of other PBCs are planning to IPO in the coming months. Other recent IPOs include Lemonade, Vital Farms, Coursera, Broadway Financial Corporation and Zymergen. App Harvest also went public as a PBC through a SPAC, as did the SPAC Sustainable Development Acquisition Corporation (SDAC). Veeva Systemsand Amalgamated Bank converted to a PBC once they were already public. PBC Allbirds has signaled it would IPO in the future and United Therapeutics, which is already public, has announced they are considering becoming a PBC. 2020 and early 2021 is truly the year when PBCs in the public markets became a reality.
To learn more about this trend, I recently had the chance to interview Pam Marcogliese and Sarah Solum from Freshfields, the law firm that helped Zymergen in its initial public offering as a PBC.
Importantly, they report that analyst reactions to these companies’ PBC status was either neutral or favorable and there were no statements by analysts of concern that PBC status carried more risks than traditional corporations. The general approach taken by the analyst reports was that the PBC status was one more indicator of the consistency of the culture and mission that the company had been pursuing and would continue to pursue, and that it aligned with and supported the companies’ business models.
Marcogliese and Solum have also coauthored a recent book on the PBC movement “So you want to do well by being good” where they note they “expect the PBC status of a company with a compelling social mission to help attract impact investment funds and other investors looking to identify companies for their portfolios that satisfy social impact investment criteria and meet the growing demand of their own investors.”
Below is an edited excerpt from our on-line discussion.
Christopher Marquis: Why should companies convert to a public benefit corporation (PBC) structure?
Sarah Solum and Pam Marcogliese: Conversion to a PBC structure: (1) provides a favorable fiduciary duty framework for directors, (2) sends an important signal to stakeholders that the company is committed to a sustainable business model (which can help with recruiting/retention/morale for employees and branding/reputation for customers and others), (3) can help attract impact investors. As one of our clients put it, becoming a PBC is a way of ‘credentializing’ the company’s commitment to people and planet.
Marquis: What is the process companies need to go through for PBC conversion?
Solum and Marcogliese: Conversion requires board and shareholder consent to amend the Company’s certificate of incorporation. Companies need to amend the certificate of incorporation to describe, among other things, that they are PBCs and their selected public mission. This is now fairly easy to accomplish. Last summer, Delaware changed the rules such that there’s no longer a statutory need for supermajority approval to become a PBC (or to cease to be a PBC). Absent any special requirements in a particular company’s certificate of incorporation, a company need only obtain the approval of a majority of the outstanding stockholders to become a PBC.
Marquis: Why has there been such an up-tick recently in the public market support of PBCs?
Solum and Marcogliese: Until certain amendments to the PBC provisions of the Deleware General Corpoarte Law became law in July 2020, there were concerns among boards and their advisers about some of the costs of going the PBC route, including the onerous requirements for conversion and some lingering risks for directors. The recent amendments have resolved many of those concerns, principally by eliminating the supermajority approval requirement (Previously required 90%, then 66 2/3%, and now reduced to a simple majority) and any rights of appraisal in connection with the conversion to a PBC; by further insulating directors from liability if they are not conflicted when conducting the “tripartite balancing” whereby PBCs have a duty to engage in a good faith balancing of the interests of (a) the stockholders, (b) those constituencies materially affected by the corporation’s conduct, and (c) the public benefit(s) identified in the company’s charter. On its face, this duty to engage in a tripartite balancing of these three sets of interests gives directors greater flexibility.
The revision also clarified that any suits for enforcing the “tripartite balancing” can be brought only by stockholders holding a minimum amount of stock and not any other interested stakeholder group.
Marquis: Does becoming a PBC make more sense for some types of companies than others?
Solum and Marcogliese: It is critical that the conversion to a PBC be supported by, and consistent with, a sustainable business model. If the business model is consistent with the conversion, the benefits will be clear to investors and other stakeholders. If that’s not the case, the company could be accused of “greenwashing.”
Marquis: How do companies convince their board and investors that the PBC conversation makes sense? What roadblocks exist?
Solum and Marcogliese: First, there have been several successful IPOs of public companies, including Zymergen which recently completed its IPO and which we advised on. For all these companies, the feedback from investors during roadshows and from analysts in their research suggests that as long as the Company’s business model is consistent with a PBC conversion, the investors will view the PBC model as positive (or at the very least neutral). These are important data points for a board.
Marquis: Do PBCs have any competitive advantages over traditional corporate forms? If so, what are they?
Solum and Marcogliese: PBCs are very similar to traditional Delaware C corporations, except for certain specific differences. The principal one as noted is the fiduciary duty one whereby PBCs need to engage in a tri-partite balancing of the interests of the shareholders, the public benefit mission in the charter and the stakeholders most impacted by that public mission. In addition, the PBC statute statutorily enshrines the business judgment rule and otherwise sets up a very favorable framework for directors, which can be very helpful to directors’ legal duties and risk exposure.