Senate Bill 21 – Benefit Corporations

On December 18, 2020, Governor Mike DeWine signed Senate Bill 21 (the “Act”) into law, amending Ohio corporation law to provide for a new form of for-profit corporation: a benefit corporation. The Act also provides added liability protection for benefit corporations and their directors.

What is a benefit corporation?

A benefit corporation is a for-profit corporation that is expressly authorized in its organizational documents to pursue one or more beneficial purposes in addition to the other lawful purposes for which for-profit corporations may be formed.

A beneficial purpose can be any purpose intended to positively impact society, the environment, or any other interests other than that of the corporation’s shareholders in their capacity as shareholders. Ohio Revised Code §1701, as amended by the Act, sets forth a non-exhaustive list of “beneficial purpose[s],” which include the promotion of artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological interests.

To form a benefit corporation under Ohio law, a corporation must expressly set forth one or more beneficial purposes in its articles of incorporation. An existing Ohio corporation may convert into a benefit corporation by amending its articles of incorporation. However, a corporation whose shares are listed on a national securities exchange may not amend its articles to include a beneficial purpose.

What are the advantages of benefit corporation status?

In recent years, some investor attitudes have begun to demand that corporations are managed to operate in a way that delivers value not only to shareholders, but also to the environment, their employees, the communities in which they operate or for some other altruistic purpose that does not consist solely of making a profit for its shareholders. Although Ohio law currently allows directors of for-profit corporations to consider the interest of a variety of constituencies in making decisions, organizing as a benefit corporation enables a corporation to institutionalize one or more beneficial purposes into its legal framework, signaling its long-term commitment to operate in a manner that prioritizes profitability, while also promoting one or more beneficial purposes.  Notably, establishing a beneficial purpose does not preclude a benefit corporation from pursuing any other purpose for which it is formed, including the realization of profit. No singular purpose of a benefit corporation has priority over any other articulated purpose.

The Act also contains legal protections for benefit corporations and their directors. Officers and directors of a benefit corporation are shielded from certain suits to enforce the corporation’s beneficial purpose. Under Ohio law, a benefit corporation owes no duty to a beneficiary of the corporation’s beneficial purpose based solely on the beneficiary’s status as such. Accordingly, a corporation is not liable to a beneficiary for its failure to seek, achieve, or comply with a beneficial purpose set forth in its articles of incorporation. Instead, an action to compel a benefit corporation to comply with its stated beneficial purpose may only be brought by the corporation itself or in a derivative action by (i) a director of the corporation; (ii) a holder of at least twenty-five percent of the corporation’s outstanding voting shares; (iii) a holder of greater than $2 million in shares (if the corporation’s shares are traded on a national exchange); or (iv) any person authorized to bring such an action in the corporation’s articles of incorporation or code of regulations. As a result, the directors and officers have greater latitude to pursue the corporation’s beneficial purpose, as well as any other lawful purpose, free from the specter of litigation.

Unlike other states, which require benefit corporations to produce annual public benefit reports, Ohio does not impose mandatory public reporting obligations on benefit corporations. However, an Ohio benefit corporation may, at its option, elect to prepare a public report regarding its beneficial purpose to attract investment, promote transparency, or shape public perception.

How is a benefit corporation different than a nonprofit corporation?

As the name suggests, nonprofit corporations are expressly formed for a purpose other than for profit.  Benefit corporations – or B Corporations - are formed under Ohio’s for profit corporation (Chapter 1701 of the Ohio Revised Code) and therefore still have the intention to generate profit.  However, the corporation also has stated a beneficial purpose in its articles of corporation for which the corporation is formed.

In enacting the Act, Ohio becomes the 39^th state to pass legislation allowing for the creation of benefit corporations, joining Delaware, New York, Connecticut, and California, among others. For more information please contact a member of KMK’s Business Representation & Transactions Group.