The Harms of the Benefit Corporation

INTRODUCTIONThe list of business associations is vast: the corporation, close corporation, nonprofit, general partnership, limited partnership, limited liability partnership, limited liability limited partnership, limited liability company, and low-profit limited liability company, just to name a few. This list of corporate forms continues to expand, with each offering a unique set of advantages based on the type of business and its founders' objectives. The emergence of new corporate forms gives credence to the saying ?Necessity is the mother of invention.? The seemingly unmet needs of social entrepreneurs served as the catalyst for the emergence of yet another corporate form: the benefit corporation.1The Model Benefit Corporation Legislation (?MBCL?), drafted by William Clark and promulgated by the nonprofit B Lab,2 seeks to better protect directors' decisions that take into consideration other constituencies as opposed to solely shareholder value.3 Under the MBCL, benefit corporations are required to (1) have a corporate purpose to create a material positive impact on society and the environment, (2) consider non-shareholder constituencies along with the financial interests of shareholders, and (3) assess their annual performance through the use of third-party standards and benefit reports.4In 2010, Maryland became the first state to adopt and pass benefit corporation legislation.5 As of October 2015, thirty states and the District of Columbia have followed suit and successfully enacted benefit corporation legislation.6 In 2013, Delaware enacted a series of statutory provisions that recognized the benefit corporation as a corporate form.7 While some proponents of the benefit corporation predict that Delaware's actions tipped the national scale in favor of the benefit corporation by legitimizing the legal status of these corporations, Delaware's modifications to the MBCL further accentuate the weaknesses of the benefit corporation: the lack of an effective enforcement mechanism and the potential for abuse.8The current state of benefit corporation legislation has created drastically varying models of the corporate form that potentially promote legalized 'greenwashing,' the phenomenon that occurs when marketers attract consumers by using terms like green, responsible, sustainable, or charitable to describe their products without substantiating any of their claims.9 While the use of the benefit corporation's legal status to verify the efficacy of social enterprises attempts to ameliorate greenwashing by pairing green consumers with companies that are required to use third-party standards to verify their social and environmental impact, the promulgation of the MBCL predates the establishment of an effective enforcement and compliance program. As a direct consequence of its untimely rollout, the implementation of the MBCL led to many states enacting benefit corporation legislation that actually demands little in terms of cost and action of its early adopters. The result is a corporate form primed for abuse by pseudo-social entrepreneurs looking to profit off consumers' and shareholders' misplaced trust in the new legal status. In this sense, a very real public problem could emerge. The benefit corporation's intended purpose of fostering consumer reliance on legal status to verify whether a company is in fact a genuine social enterprise creates a harmful dichotomy with traditional for-profit companies, further exacerbating the problem.10 As a result, socially and environmentally conscious consumers may be more likely to circumvent judging a corporation based on its business practices and instead rely on perceived greenness conferred by organizing as a benefit corporation.The success of the MBCL legislation in influencing state lawmakers is partly the result of exploiting the uncertainty that exists in the realm of social enterprises and the legality of considering other constituencies in the ordinary course of business. …