Public Benefit Corporations
§ 15.1Overview of Public Benefit Corporations
Effective September 1, 2017, Texas has a new type of corporation known as a public benefit corporation (PBC). The statutory provisions regarding the PBC (referred to as a “B-Corp” in some other states) are found in Tex. Bus. Orgs. Code §§ 21.951–.959. See Acts 2017, 85th Leg., R.S., ch. 776, § 4 (H.B. 3488), eff. Sept. 1, 2017.
A PBC is formed with the intent to produce a public benefit or benefits and to operate in a responsible and sustainable way. Tex. Bus. Orgs. Code § 21.953(a). Public benefit means a positive effect, or a reduction of a negative effect, on one or more categories of persons, entities, communities, or interests, other than shareholders in their capacities as shareholders. The effects may include those of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature. Tex. Bus. Orgs. Code § 21.952(1).
Unlike a for-profit corporation, which must operate solely for the purpose of maximizing the financial return to the shareholders, the PBC balances the shareholders’ interests with that of the public benefit declared by the PBC and the best interests of those persons materially affected by the PBC’s conduct. Tex. Bus. Orgs. Code § 21.953(b). The board of directors must manage or direct the business or affairs of the PBC in a manner that balances those same interests. Tex. Bus. Orgs. Code § 21.956(a). When making a decision implicating this balance, a director satisfies the duties to shareholders and the PBC if the decision is both informed and disinterested and is not a decision that no person of ordinary, sound judgment would approve. Tex. Bus. Orgs. Code § 21.956(c). The certificate of formation for the PBC may include a provision that any disinterested failure to satisfy these requirements does not constitute an act or omission not in good faith or a breach of the duty of loyalty. Tex. Bus. Orgs. Code § 21.956(d). A director does not owe any duty to any person because of any interest the person has in the specified public benefit or benefits or any interest materially affected by the PBC’s conduct. Tex. Bus. Orgs. Code § 21.956(b).
§ 15.2Distinguished from Nonprofit and Social Purpose Corporations
The Texas Business Organizations Code (TBOC) is clear that the PBC is not a nonprofit corporation. See Tex. Bus. Orgs. Code §§ 2.008, 3.007(e), 21.954(e). The PBC is also distinguished from a “social purpose” corporation already allowed under the Code. Tex. Bus. Orgs. Code § 3.007(d).
If a corporation elects to be a PBC, it is subject to the remaining provisions of the TBOC applicable to for-profit corporations. Tex. Bus. Orgs. Code § 21.951(b). In the event of a conflict between the PBC subchapter and the other for-profit corporation TBOC provisions, the PBC subchapter controls. Tex. Bus. Orgs. Code § 21.951(c).
§ 15.3Certificate of Formation Requirements
Tex. Bus. Orgs. Code § 3.007(e) provides that a PBC must include the following in its initially filed certificate of formation or in a certificate of formation amended in accordance with Tex. Bus. Orgs. Code § 21.954: (1) one or more specific public benefits, as defined by Tex. Bus. Orgs. Code § 21.952, to be promoted by the corporation; and (2) instead of the statement required by Tex. Bus. Orgs. Code § 3.005(a)(2), a statement that the filing entity is a for-profit corporation electing to be a public benefit corporation.
The secretary of state has not yet promulgated a form to use in forming a PBC. Therefore, the required language would need to be included either in a form custom-drafted by the practitioner or on SOS Form 201 in the “Supplemental Provisions/Information” box. See form 12-1 in this manual.
§ 15.4Corporate Name Requirements
The name of the PBC may contain the words “public benefit corporation,” the abbreviation “P.B.C.,” or the designation “PBC” instead of the words “company,” “corporation,” “incorporated,” or “limited” (or any abbreviation thereof). Tex. Bus. Orgs. Code § 21.953(c), (e). In the event the name does not include public benefit corporation, P.B.C., or PBC, it must provide notice in some other way to its shareholders that it is a public benefit corporation (unless the shares are registered under the Securities Act of 1933). Tex. Bus. Orgs. Code § 21.953(c), (d). Such notice would presumably be accomplished by the requirement that the stock certificate (or the notice required by section 3.205 for uncertificated ownership interests) specify that the corporation is a public benefit corporation. Tex. Bus. Orgs. Code § 21.955.
A PBC, at least biennially, shall provide to its shareholders (or to the public if required by the certificate of formation or the bylaws) a statement pertaining to the PBC’s promotion of the public benefit or benefits and promotion of the best interests of those materially affected by the PBC’s conduct. This statement must include:
1.the objectives the board of directors has established to promote the public benefit or benefits and interests;
2.the standards the board of directors has adopted to measure the PBC’s progress in promoting the public benefit or benefits and interests;
3.objective factual information based on those standards regarding the PBC’s success in meeting the objectives for promoting the public benefit or benefits and interests; and
4.an assessment of the PBC’s success in meeting the objectives and promoting the public benefit or benefits and interests.
Tex. Bus. Orgs. Code § 21.957.
All notices of shareholder meetings must contain a statement to the effect that the corporation is a public benefits corporation governed by chapter 21, subchapter S, of the TBOC. Tex. Bus. Orgs. Code § 21.957.
§ 15.6Converting between For-Profit Corporation and Public Benefit Corporation
See Tex. Bus. Orgs. Code § 21.954 regarding entities desiring to be governed as a PBC (or convert shares to such) or a PBC desiring to convert to a non-PBC entity, all of which require the approval of the owners of two-thirds of the outstanding shares of the corporation entitled to vote on the matter. However, a nonprofit corporation or nonprofit association may not convert to a PBC. Tex. Bus. Orgs. Code § 21.954(e).
A shareholder of a PBC may maintain a derivative action on behalf of the PBC to enforce compliance by its board of directors with the requirements to manage or direct the business and affairs of the PBC in a manner that balances its various interests. Tex. Bus. Orgs. Code § 21.958. See Tex. Bus. Orgs. Code § 21.958(a) for the definition of “shareholder” in the context of derivative suits.