Business Law Blog

Over the past decade, a new corporate form, the “benefit corporation”, has become increasingly available and increasingly popular across the United States.[1] A benefit corporation is a special form of corporation that, in addition to aiming to generate profits by operating a business, promotes one or more public benefits that are identified in its constating documents. It is designed for businesses that place success in achieving social purposes on par with financial results.

As the paradigm of “shareholder primacy” fades and a new focus on corporate purpose takes form, it is not surprising that some entrepreneurs and investors would look to a vehicle that facilitates a broader scope of purposes.[2] And in a political climate where trust in business is low and leaders across North America are proposing a panoply of legislative solutions to perceived unfair treatment of stakeholders and short-termism, it is not surprising that legislation permitting benefit corporations is spreading.[3]

A Solution in Search of a Problem

With amendments to the Business Corporations Act (British Columbia) (the “BCBCA”) recently receiving royal assent, the benefit corporation will soon be arriving for the first time in Canada.[4] The delayed uptake in this country, and the fact that the amendments arose from a private member’s bill, may reflect the fact that while the benefit corporation may have an important role in the United States, where the interests of shareholders retain legal prominence, the utility of this legislation in Canada is more questionable.

It is well established that directors of Canadian corporations owe no direct duty to shareholders; rather, the object of their fiduciary duty is the corporation itself. The BCBCA, like corporate legislation in other jurisdictions in Canada, states that directors and officers are required to “act honestly and in good faith with a view to the best interests of the company.” Relying on that principle, Canadian corporate law has evolved in a way that allows - in fact requires - directors and officers to pursue their corporations’ purposes in the way they think best, even if the primary aim is not to maximize profits or “shareholder value” over any particular time period. [5] The pursuit of a company’s purpose may include promoting a particular public benefit, and almost certainly includes conducting business in a manner that is, to use the language of the approved amendments, “responsible and sustainable.”[6]

If benefit corporations were imported to Canada solely as a means to permit directors to supervise the management of a business in a way that achieves its corporate purpose, their importation would be puzzling - a solution in search of a problem, at best. Where the best interests of the company are to achieve its corporate purpose over the long term, it is nonsensical to say that directors and officers should “balance the duty” to act with a view to the best interests of the company with the duty to promote the public benefits set out in its articles in a responsible and sustainable manner. No balancing could be easier.

However, there may be uses for benefit corporations for which the traditional corporate form is less appropriate. Even in light of their limited utility from a purely legal perspective and the concerns voiced by commentators in Canada described below, a wider array of options to accommodate the vast diversity of businesses seeking capital in Canada is more likely, itself, a benefit.

Benefit Corporations, Liability and the Business Judgment Rule

Much like in other jurisdictions, B.C.’s new benefit companies will differ from their traditional corporate counterparts, broadly speaking, in two key areas, the first relating to disclosure, the second to governance.

On the disclosure side, benefit companies will be required to produce and publish a “benefit report” each year that discloses (i) how the company demonstrated commitment to conducting its business in a responsible and sustainable manner and promoted the public benefits specified in its articles and (ii) the directors’ assessment, against a third-party standard that must meet prescribed requirements, of the performance of the company in carrying out its social commitments. There is nothing preventing traditional corporations from publishing a benefit report in this form, but for benefit companies doing so will be mandatory.

It is on the governance side, where the duties of the directors and officers are altered from those that prevail in the traditional corporate form, that commentators have expressed concerns.[7] Most significantly, it has been said that the amendments create a “loophole” in the corporate law that could be used to shield directors and officers from liability for breaches of their statutory duties.

The concern arises from the limitations imposed by the statute, which states that directors and officers of a benefit company have no duty to (i) a person whose well-being may be affected by the company’s conduct, or (ii) a person who has an interest in a public benefit specified in the company’s articles, and that directors and officers do not contravene the duty to act in the best interests of the company due only to acting in accordance with the duty to promote the identified public benefit.[8] As a result, companies could theoretically be formed with numerous and broadly drafted public benefits set out in their articles, allowing directors and officers to defend themselves from shareholder claims on the basis that any given act was aimed at one of those public benefits.

These fears of the benefit company being used to shield directors from the liabilities that exist in the traditional corporation are likely overblown. The breadth of the “business judgment rule” in Canada is well known and well established. Courts are highly deferential to the business decisions of directors, who are given considerable latitude to pursue the company’s purpose in the way they see fit, provided they do so in good faith, without conflict and through a range of reasonable alternatives. At the same time, deference to business judgment ends where directors are conflicted, dishonest or fail to discharge their duties. In other words, the circumstances in which the business judgment rule should not apply in a traditional company align squarely with the circumstances that would be expected to invite scrutiny under the altered duty for benefit companies.

The new legislation therefore neither expands the deference afforded to directors in a material way in practice, nor does it detract from other remedies available to shareholders and other stakeholders under B.C. corporate law, such as the oppression remedy. On the contrary, the amendments create a new remedy to be layered on top of those that already exist, albeit a remedy that is only enforceable by shareholders and only providing for injunctive relief.

Any dilution of liability for breach of duty inherent in the new legislation is likely offset, if not overcome, by this additional exposure to litigation - even if only for injunctive relief - and the obligation to publish an annual “benefit report” that incorporates a third-party standard. There is no reason to think that the shareholder activism that has sought to impose the will of certain shareholders on boards, using much more diverse means than simply claims for breach of duty, would not be used against benefit companies, via a tailor-made injunctive remedy, by shareholders attempting to impose their wills. In that light, there is little risk of the B.C. corporate sector converting to benefit companies with the intent or the effect of avoiding liability.

Mostly Harmless

Because every corporate purpose is unique, every corporation will engage a unique constellation of risks, opportunities and stakeholders and, as noted in my February 2019 blog post, that means that the fiduciary duty itself must be wrought into a unique form for each individual corporation. While Canadian corporate law has developed the flexibility to allow for this corporate diversity already in its current form, broadening the array of tools for entrepreneurs and investors to pursue their purposes through a benefit company has little potential to fundamentally harm the Canadian corporate sector or capital markets. In fact, it may instead establish practices of disclosure and governance that cross-pollinate with other business vehicles. In the realm of corporate law, especially in a time when the value of governing and managing a company sustainably towards the long-term achievement of its corporate purpose is being recognized by entrepreneurs, investors and others throughout the business community, more options for private ordering are preferable to legislated limitations.

[1] For an overview of the current status of benefit corporations in the United States, see The Corporate Form for Social Good, a post by David Katz and Laura McIntosh of Wachtell, Lipton, Rosen & Katz, available on the Harvard Law School Forum on Corporate Governance and Financial Regulation at: https://corpgov.law.harvard.edu/2019/05/24/the-corporate-form-for-social-good/.

[2] The fading relevance of shareholder primacy and increasing adoption of a governance framework based on “corporate purpose” is discussed in my February 2019 blog post, The New Corporate Governance: Corporate Purpose and Corporate Leadership.

[3] See, for example, the opinion piece published on February 3, 2019 in the New York Times by United States Senators Chuck Schumer and Bernie Sanders in the New York Times; the “Accountable Capitalism Act” proposed by United States Senator Elizabeth Warren and described on her website at: https://www.warren.senate.gov; and, in Canada, the recently proposed amendments to the Canada Business Corporations Act discussed in our April 2019 blog post.

[4] The amendments will come into force by regulation.

[5] The evolution of the fiduciary duty in Canadian corporate law to encompass the doctrine of corporate purpose is discussed in my April 2019 blog post, Corporate Duties, Indeterminacy and the 2019 Federal Budget. Most boards and managers, it is suggested, would be of the view that the strategy that they have approved and implemented in pursuit of the corporate purpose would maximize profit over the long-term.

[6] Though not necessarily in the particular way “responsible and sustainable” is defined in the amendments to the BCBCA.

[7] See, for example, statements by Professor Carol Liao in Andrew MacLeod, “Taking Care of Business? Experts Call New BC Law a Gift to Corporations” (4 June 2019) online: The Tyee <thetyee.ca/News/2019/06/04/Experts-Call-New-BC-Law-Gift-To-Corporations/>. Professor Liao is the author of “A Critical Canadian Perspective on the Benefit Corporation” (2017) 40:2 Seattle UL Rev 683, which recommended against the adoption of benefit company legislation in Canada on the basis of its redundancy, among other things.