United States: What Are My Exit Options As A Public Benefit Corporation?

In our March 25, 2019 article for VC Experts, "Can I Raise Venture Capital as a Public Benefit Corporation?" we described society's rising expectation that corporations, large and small, should generate positive social impact alongside profits.¹ More than a year and half later—in the face of a global pandemic, unprecedented economic downturn and a heightened focus on defeating systemic inequality—this trend has only accelerated. Executives and boards are making business decisions not just for the benefit of a corporation's shareholders—known as "shareholder primacy"²—but are also considering the benefit and/or harm to employees, customers, the community and the environment.³  

Entrepreneurs are, accordingly, increasingly starting for-profit companies with a social mission.⁴ Many entrepreneurs are incorporating such mission-driven companies as public benefit corporations (PBCs), a legal corporate form established in 2013 that allows a company to codify its social mission and protect its ability to consider the interests of all of those affected by the company's conduct.⁵

In our 2019 article, we provided advice on how to best position a PBC to receive successful venture capital financing (incorporate in DE, educate investors, run a tight ship, and generate profits). In this article, we address the logical follow-up question: what are potential exit options for PBCs?

Go Public

One option for a PBC is to go public, otherwise known as an initial public offering (IPO), which is when a private corporation sells shares to public investors in a new stock issuance. There are many reasons for a company to go public, from quickly reaching a wide range of new investors and capital to increased brand awareness and prestige. On the other hand, going public is complex and time consuming.  

The legal process for a PBC to go public is the same as a traditional C-Corporation, but the business risks are different. For example, when a company goes public, it must answer to a larger, likely more fickle group of investors than its early-stage investors. Public shareholders (including institutional investors like pension funds) might not be as interested in, or forgiving of, a company that makes business decisions that are not exclusively focused on boosting shareholder value. Any hesitation by large investors could negatively impact the value of the stock issued at a public offering and depress subsequent trading.

The first PBC to go public was Laureate Education ("Laureate"), the largest for-profit higher education company in the world, and a PBC since 2015. Laureate went public in 2017, stating in its Form S-1 filing that, "[a]s a public benefit corporation, since we do not have a fiduciary duty solely to our stockholders, we may take actions that we believe will benefit our students and the surrounding communities, even if those actions do not maximize our short- or medium-term financial results."⁶ Laureate's IPO was a watershed moment for the PBC movement,⁷ raising $490 million for the company, with an offering price of $14 a share.⁸ As of September 17, 2020, Laureate's shares are trading at approximately $13 per share ($20 per share prior to the pandemic).

Etsy, on the other hand, an online platform for artists to sell handmade items, decided not to go public as a PBC, despite the company's explicit social mission. Incorporated as a C-Corporation in 2006, in 2012 Etsy received a "B Corp" certification, a popular, non-legal seal of approval regarding a company's "social and environmental performance, public transparency, and legal accountability to balance profit and purpose."⁹

In 2015, after Etsy raised $113 million from angel and venture capital investors over nine years, Etsy decided to go public, but it encountered an obstacle: B Corp rules said that when a C-Corporation goes public it must convert from a C-Corporation into a PBC to retain its B Corp status.¹⁰ At the time, Delaware law conditioned such a conversion on the consent of stockholders holding more than two-thirds of the corporation's capital stock. After deliberation with its board and stockholders, Etsy's CEO announced that "Etsy [would] not seek conversion to a [PBC] . . . because converting is a complicated and untested process for existing public companies."¹¹

Etsy instead withdrew its B Corp certification and went public as a C-Corporation in April 2015 with an offering price of $16 per share. As of March 2020, prior to the pandemic, Etsy's shares were trading at approximately $60 per share. Etsy's stock price has continued to rise, trading at $111 per share as of September 17, 2020. This strong performance could be due to a number of factors, including the convenience of Etsy's online marketplace, but could also be a reaction to the company's social mission in these unprecedented times.¹²

On July 1, 2020, the PBC world saw its second IPO with Lemonade, Inc. ("Lemonade"), an insurance technology startup "transforming insurance from a necessary evil into a social good."¹³ Lemonade's stock debuted at $29 a share, raising $319 million and, as of September 17, 2020, the stock was trading at approximately $51 a share.¹⁴ It remains to be seen how Lemonade will perform in the long run, but so far it appears that investors are not concerned with its status as a PBC.

Following Lemonade's successful debut on the public markets, another PBC, Vital Farms, went public at the end of July 2020.¹⁵ The largest pasture-raised egg brand in the U.S., Vital Farms set its opening stock price at $22 a share, which has risen to a $39 per share trading price as of September 17, 2020. Most significantly, Vital Farms leaned into its PBC status at the IPO, stating in its Form S-1 filing: "As a public benefit corporation we are required to balance the financial interests of our stockholders with the best interests of those stakeholders materially affected by our conduct, including particularly those affected by the specific benefit purposes set forth in our certificate of incorporation [and], accordingly, our duty to balance a variety of interests may result in actions that do not maximize stockholder value."

As the business world increasingly shifts to a stakeholder primacy approach (versus the aforementioned stockholder primacy model), the state of Delaware is taking steps to make it even easier for C-Corporations—private or public—to convert to PBCs. For instance, Delaware recently amended the PBC statute to (a) reduce the supermajority vote to convert to a PBC to a simple majority and (b) eliminate appraisal rights (i.e., the opportunity for stockholders to monetize their unlisted shares upon conversion).¹⁶ In light of these structural changes, and the acceptance of Lemonade and Vital Farms by the public markets, it seems likely that we'll see more PBCs successfully going public in the future.¹⁷

Sell to or Merge with Another Company

A PBC may also choose to sell itself to or merge with another corporation, which can increase efficiency and economies of scale and/or satisfy investors, employees or founders demanding a liquidity event.¹⁸ Unlike going public, however, engaging in a merger or acquisition (an "M&A") involves legal considerations unique to the PBC corporate form.For example, in order to sell itself, a C-Corporation typically must secure the affirmative consent of shareholders holding at least a majority of the corporation's outstanding capital stock (although the threshold is often higher because of previously negotiated investor protections). In contrast, historically, if a C-Corporation wanted to acquire or merge with a PBC via a stock-for-stock transaction, and such M&A would result in either the buyer C-Corporation or the seller PBC changing its corporate legal status (i.e. into a PBC or C-Corporation, respectively), then by statute the converting entity required at least two-thirds (or a "supermajority") of its stockholders to consent to the M&A.¹⁹ On July 16, 2020, however, the state of Delaware eliminated the supermajority consent requirement for M&A transactions in favor of a majority consent requirement.²⁰ This change should make M&A transactions involving PBCs less burdensome and, in turn, we may see PBC M&A activity accelerate.

The duties of a PBC's board of directors in evaluating an M&A opportunity are also distinct from that of a C-Corporation. For example, the board of a C-Corporation is obligated to maximize shareholder value (a.k.a. profits) when analyzing an offer from a buyer to purchase the company.²¹ The rules of a PBC, however, allow a board to accept a lower bid from a buyer that is more committed to the company's social mission and stakeholders rather than accept a higher bid from a buyer that would exclusively maximize financial gain to shareholders.²²  If the board of a PBC receives multiple bids of various dollar values, it has discretion to assess factors such as, for example, whether the bidder will (1) move all production outside of the U.S., (2) layoff a majority of the existing workforce, (3) change the quality of ingredients or materials in any given product in favor of cheaper ingredients or materials to decrease cost of production and increase profits, or (4) increase pollution or otherwise negatively impact the local and global environment, rather than being required to accept the highest bid. Interestingly, one could argue that giving a board more flexibility to make decisions based on the long-term sustainability of the corporation, rather than the short-term interests of its shareholders, will lead to more resilient, nimble corporations and, consequently, maximized shareholder value.

Maintain a Steady State

If your PBC is generating consistent, significant revenue, and you have patient investors who are not demanding an imminent exit or liquidity event, you may decide to just keep doing what you are doing. But to do so, you will likely need to keep stockholders and employees content in other ways. One option is to establish a robust employee stock option plan (ESOP) where employees and other stakeholders (directors, consultants, etc.) can buy into the PBC, a potentially mission-focused approach to equity ownership. Another option is to conduct private placements or "tender offers" to specific, friendly investors (new and existing) who are aligned with the PBC's mission. Depending on your stockholder base, the PBC may also be able to offer alternative exits to existing stockholders through secondary transfers. These secondary transfers will need to be navigated with care to avoid any broker-dealer issues or claims that sales were at artificially low prices, but often constitute a productive mechanism to provide liquidity to, and strategically re-align, stockholders.²³

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In the context of a chaotic, rapidly changing world, leaders of companies with a social mission—whether PBCs or C-Corporations—are demonstrating that making a positive difference in the world and generating significant financial returns are not mutually exclusive, but are in fact deeply intertwined. To successfully navigate the complexity of running a company with a social mission, however, such leaders should align as early as possible with trusted experts who can provide seasoned advice and counsel about this exciting, but ever-shifting, legal and business landscape.

Footnotes

1. Stone, Benjamin D. "Can I Raise Venture Capital as a PBC?" VC Experts, 25 March 2019. https://blog.vcexperts.com/2019/03/25/can-i-raise-venture-capital-as-a-public-benefit-corporation/#more-2171.

2. Rhee, Robert J. "A Legal Theory of Shareholder Primacy." Harvard Law School Forum on Corporate Governance, 11 April 2017. https://corpgov.law.harvard.edu/2017/04/11/a-legal-theory-of-shareholder-primacy/.

3. See, for example, the Business Roundtable's Statement on the Purpose of a Corporation, released in August 2019 and signed by 181 CEOs, in which members state "a fundamental commitment to all . . . stakeholders." See also "Statement on the Purpose of a Corporation." Business Roundtable, 19 August 2019. https://opportunity.businessroundtable.org/ourcommitment/.

4. Puskoor, Dayakur, "Pandemic Spurs Social Entrepreneurship in Startup Communities," Forbes, 5 June 2020. https://www.forbes.com/sites/forbesfinancecouncil/2020/06/05/pandemic-spurs-social-entrepreneurship-in-startup-communities/#2f1d668b7d6b.

5. While many states have established a version of the PBC, for purposes of this article we are referring to the state of Delaware's version of the PBC, which is the most robust and accepted form (for more information, see "Can I Raise Venture Capital as a PBC?" https://www.mintz.com/insights-center/viewpoints/2151/2019-03-can-i-raise-venture-capital-public-benefit-corporation).

6. Debter, Lauren. "The World's Biggest For-Profit College Company, Laureate Education, Raises $490 Million In Public Debut." Forbes, 1 February 2017. https://www.forbes.com/sites/laurengensler/2017/02/01/laureate-education-initial-public-offering/#392c7032b3da; "Form S-1 Registration Statement Under the Securities Act of 1933: Laureate Education, Inc." Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/912766/000104746916017211/a2228849zs-1a.htm.

7. "Laureate Education chose to exercise the courage of their convictions that the conventional wisdom was wrong. They rejected the existing market paradigm of shareholder primacy": "Laureate Named 'B Corp MVP' in 2017." Laureate International Universities, 2017. http://www.laureate.net/laureate-named-b-corp-mvp-in-2017/.

8. Debter, "The World's Biggest For-Profit College Company." https://www.forbes.com/sites/laurengensler/2017/02/01/laureate-education-initial-public-offering/#52fecc72b3da.

9. "Benefit Corporations & Certified B-Corps." Benefit Corporation. https://benefitcorp.net/businesses/benefit-corporations-and-certified-b-corps.

10. Dimri, Neha. "Crafts website company Etsy valued at $4 billion in market debut." Reuters, 16 April 2015. https://www.reuters.com/article/us-etsyinc-ipo/crafts-website-company-etsy-valued-at-4-billion-in-market-debut-idUSKBN0N71T420150416.

11. Steiner, Ina. "Etsy Gives Up B-Corp Status to Maintain Corporate Structure." eCommerce Bytes, 30 November 2017. https://www.ecommercebytes.com/2017/11/30/etsy-gives-b-corp-status-maintain-corporate-structure/.

12. "Etsy: Continues to Deliver." Seeking Alpha, 17 June 2020. https://seekingalpha.com/article/4354227-etsy-continues-to-deliver.

13. Chernova, Yuliya. "Lemonade to Test IPO Waters as a Public Benefit Corporation." Wall Street Journal, 12 June 2020. https://www.wsj.com/articles/lemonade-to-test-ipo-waters-as-a-public-benefit-corporation-11591995018?mod=djemVentureCapitalPro&tpl=vc; Rapier, Graham. "The $2 billion SoftBank-backed insurance startup Lemonade has filed to go public." Business Insider, 8 June 2020. https://www.businessinsider.com/lemonade-insurance-startup-files-ipo-paperwork-to-go-public-2020-6.

14. Kunthara, Sohpia. "Insurtech Startup Lemonade Stock Surges On First Day Of Trading." Crunchbase News, 2 July 2020. https://news.crunchbase.com/news/insurtech-startup-lemonade-raises-319m-in-ipo/.

15. Sorvino, Chloe. "Vital Farms' Blockbuster IPO Proves Wall Street Has An Appetite For Sustainable Farming." Forbes, 1 August 2020. https://www.forbes.com/sites/chloesorvino/2020/08/01/vital-farms-blockbuster-ipo-proves-wall-street-has-an-appetite-for-sustainable-farming/#2d0920d2345b.

16. See House Bill 341, 150^th General Assembly, An Act to Amend Title 8 (§ 102, title 8) of the Delaware Code Relating to the General Corporation Law, https://legis.delaware.gov/BillDetail?legislationId=48122.

17. Klingsberg, Ethan; Solum, Sarah; Marcoglies, Pamela. "Changes To Del. Law May Boost Public Benefit Corp. Appeal" (July 31, 2020). https://www.law360.com/articles/1296316/changes-to-del-law-may-boost-public-benefit-corp-appeal.

18. Plum Organics, a children's organic baby food company which incorporated as one of the first PBCs in August 2013, seems to represent one of the few sales of a PBC to date, and it appears to have gone well based on the available evidence. After selling itself to the Campbell Soup Company for $250 million in May 2013, Plum Organics has maintained its PBC status as a subsidiary.

19. See Delaware Code, Title 8, Chapter 1, Subchapter XV, § 363, https://delcode.delaware.gov/title8/c001/sc15/. Note that, if executed via a reverse triangular merger, the PBC can remain a subsidiary in this fact pattern.

20. See House Bill 341, 150^th General Assembly, An Act to Amend Title 8 (§ 102, title 8) of the Delaware Code Relating to the General Corporation Law, which was signed into law.  https://legis.delaware.gov/BillDetail?legislationId=48122.

21. See Revlon, Inc. v MacAndrews & Forbes Holdings, Inc., 506 A 2d 173 (Del. 1986); eBay Domestic Holdings b Newmark, 16 A.3d 1 (Del. 2010); Rhee, Robert J. "A Legal Theory of Shareholder Primacy." Harvard Law School Forum on Corporate Governance, 11 April 2017. https://corpgov.law.harvard.edu/2017/04/11/a-legal-theory-of-shareholder-primacy/.

22. See Delaware Code, Title 8, Chapter 1, Subchapter XV, § 365. https://delcode.delaware.gov/title8/c001/sc15/

23. An interesting example of the steady state approach is Kickstarter, a crowdfunding platform for creative projects originally formed as a C-Corporation. At Kickstarter's inception, the founders stated that they "would never sell the company or go public." After years of growth and profit, in 2015, instead of going public or sale, Kickstarter's stockholders voted unanimously in favor of a conversion into a PBC and, at the time, a steady state approach. See Thomas, Marcus. "Why Kickstarter Decided To Radically Transform Its Business Model." Fast Company, 16 Apr. 2017. http://www.fastcompany.com/3068547/why-kickstarter-decided-to-radically-transform-its-business-mode1.

Originally published by VC Experts

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