Strange Creatures: A Hybrid Approach to Fiduciary Duty in Benefit Corporations

Abstract

Benefit corporations, or “B-corps,” represent a new corporate legal form designed to accommodate the dual profit-making and public benefit goals of the social enterprise movement.  A B-corp commits to pursue public benefit purposes in its articles of incorporation.    Over the past year and a half, six states (including California and New York) have passed legislation that recognizes and regulates B-corps as a distinct species of business corporation.  While these new statutes are well-intentioned, they create divided loyalties for corporate directors.  B-corp statutes also appear to impose on B-corp directors a fiduciary duty in addition to the traditional duties of care and loyalty.  However, the statutes fail to identify this duty and provide little guidance to courts called on to adjudicate claims for breach.  This Note analyzes the treatment of directors’ fiduciary duties in recently enacted B-corp statutes and in model legislation on which the statutes are based.  This Note argues that B-corp directors owe an additional “duty of obedience” to the benefit purposes of the corporation, similar to that of directors of nonprofit organizations.  Shareholders—and in some states, non-shareholder constituencies—may have derivative standing to sue for a breach of this duty.  This Note also examines how the duty of obedience alters the factors that B-corp directors must consider in the context of a change-of-control transaction.