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How does a company become a public benefit corporation, and can it change back?

FormationPublic benefitGovernanceDelaware

A new Delaware corporation becomes a PBC by saying so in its certificate of incorporation: the heading states that it is a public benefit corporation, and the purpose clause names one or more specific public benefits. An existing corporation converts by amending its charter to add the same, which requires a board resolution and the approval of holders of a majority of the outstanding stock. Until 2020 the vote was two-thirds and dissenting stockholders could demand to be bought out; Delaware lowered it to a simple majority and removed the appraisal right, which is why conversions by established companies became common after that. Converting back to an ordinary corporation takes the same board approval and majority vote.

The charter language

Two changes. The heading or first article identifies the corporation as a public benefit corporation under the Delaware statute. The purpose article, which in an ordinary charter says the company may engage in any lawful business, adds the specific benefit or benefits it will promote. Write the benefit as narrowly as it is true, because the board will report against it and stockholders can sue on it. The name may include PBC or public benefit corporation but no longer has to.

The notices

Delaware requires that anyone buying stock in a PBC be told it is one, and if the name does not say so, the notice has to be given before the shares are issued. In practice that is a sentence in every stock purchase agreement, option agreement and SAFE, and a legend on stock certificates and notices of stockholder meetings. A company that converts should add the sentence to its forms the same day.

What conversion does not change

The EIN, the bank account, the cap table, the tax status and every contract stay as they were; a conversion is a charter amendment, not a new entity. Existing investors will have vetoes over charter amendments in the financing documents, so a company with preferred stock outstanding needs their consent, and a company planning to raise soon should ask whether to convert before or after the round rather than during it.

Arabella's 50-state formation questionnaire has an optional benefit corporation designation in the states whose filing offers it. The public benefit itself is a sentence you add to the charter, and one to have ready before you file.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.