Business Law

Author: Jennifer MacGregor-Greer

Effective June 30, 2020, changes to British Columbia corporate law have made it possible to incorporate a “benefit company”, a form of corporate entity that has been available in the United States for 10 years (in some states) but until now has not been available in Canada.  British Columbia is the first Canadian jurisdiction to adopt this form of incorporation.

What is a benefit company?

A benefit company is a corporation whose constating documents specify that it is committed to:

  • conducting its business in a responsible and sustainable manner, and
  • promoting one or more public benefits.

By incorporating as a benefit company, a business signifies to the public that it is committed to social and environmental goals.  While in practice this is something that any business can do, incorporating as a benefit company enshrines these goals in the company’s charter documents such that they become mandatory elements in the benefit company’s activities.  This can be attractive to investors who want assurance that their investment will be used in a socially and environmentally responsible manner, thereby increasing capital raising opportunities for the benefit company.

Incorporating as a benefit company does entail compliance with statutory obligations that do not apply to standard BC companies, and therefore may require additional administrative time and financial resources.  These additional obligations are outlined below.

Characteristics of benefit companies

BC benefit companies are fundamentally similar in structure to companies incorporated in BC in the ordinary course.  Like standard companies, benefit companies are formed under the BC Business Corporations Act and there is no requirement to include a special designation in the company’s legal name.  Benefit companies are also expected to be treated in the same manner as other companies for tax purposes.

However, benefit companies differ from standard companies in several ways:

  • Benefit Statement: The benefit company’s Notice of Articles must contain a statement that the company is a benefit company and, as such, is committed to conducting its business in a responsible and sustainable manner and to promoting one or more public benefits.  The benefit statement may only be amended or removed by way of special resolution of the voting shareholders of the company.
  • Public Benefits: The Articles of the company must (a) specify the public benefits to be promoted by the benefit company, and (b) set out a commitment to conduct the benefit company’s business in a responsible and sustainable manner, and to promote the specified public benefits.  The named public benefits may be of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature, for the benefit of a class of persons other than the shareholders of the company, or for the benefit of the environment.
  • Benefit Report: The benefit company must prepare and publish an annual benefit report, which must disclose:
  • how the company has demonstrated commitment to conducting its business in accordance with the benefit statement and the company’s named public benefits during the previous year; and
  • how well the benefit company has complied with a third-party standard in carrying out such commitments. The third-party standard used by the company for this purpose must be established by an entity that is not related to the benefit company and must assess the overall performance of the benefit company in relation to its conducting business in a responsible and sustainable manner, and in relation to the public benefits specified in the company’s Articles.

The benefit report must be maintained with the company’s corporate records, in its records office.

  • Fiduciary Duty: The directors of a benefit company must not only act in accordance with the general fiduciary duties shared by all corporate directors (i.e. acting honestly and in good faith with a view to the best interests of the company), but must also act honestly and in good faith with a view to conducting the business in a responsible and sustainable manner, and promoting the public benefits specified in the company’s Articles.  In performing their role, they are required to balance these two sets of duties.

While Canadian jurisprudence has established that directors may consider the interests of various stakeholders in exercising their fiduciary duty, the duties owed by directors of a benefit company codify this principle so that the directors must do so.  We note, however, that under the new legislation this heightened duty is balanced by a limitation on the directors’ liability in respect of the public benefit arm of their duty, since the directors of a benefit company have no statutory duty in respect of the company’s compliance with its public benefit goals to a person whose well-being may be affected by the company’s conduct or a person who has an interest in the specified public benefits.  A legal proceeding may only be commenced in relation to such duties by shareholders holding at least 2% of the issued shares of the benefit company.  Further, no pecuniary liability attaches to the breach of such duties – the sole available remedy to a shareholder wishing to commence such a proceeding would be injunctive relief.

Usage of benefit companies, community contribution companies and societies

Like benefit companies, community contribution companies (or C3s) and societies are designed to meet a social or public purpose.  However, unlike societies, which are required to be used for not-for-profit purposes, benefit companies are intended to be for-profit.

Benefit companies also differ from C3s since, while both types of entities are designed to as vehicles for for-profit enterprises, the ability of a C3 to distribute assets, including by way of dividend, is quite limited, which can make it difficult for an investor to exit from the enterprise.  In a benefit company, the only restrictions on the company’s ability to sell assets or distribute profits are those shared by any other BC company, making it easier for investors to transfer their interests.  Benefit companies are therefore likely to be attractive to impact investors who want to support social or environmental aims.

For this reason, already existing companies may wish to convert to become a benefit company.  This can be easily achieved simply by the company adding a benefit statement into its Notice of Articles and a public benefit provision to its Articles (which must be approved by special resolution of the shareholders).  Similarly, if a business incorporates as a benefit company and subsequently determines that it no longer wishes to be a benefit company, it is possible to do so by way of special resolution of the shareholders.

Utility of benefit companies in Canada vs the United States

As noted above, benefit companies have been available as a corporate form in some parts of the United States for 10 years.  In the United States, benefit companies were created to address the principle of shareholder primacy, under which directors owe a duty to the shareholders of a company (and in particular, a duty to maximize shareholder value).  However, in recent years investors have been demanding a higher degree of social and environmental citizenship from businesses.  Using a benefit company in the United States shifts director duties to expressly contemplate stakeholders other than the shareholders, thus addressing investor requirements for corporate citizenship.  In Canada, however, no such shift in duties is necessary since directors owe their duty to the company itself rather than its shareholders, and under existing law may consider a variety of stakeholders in exercising that duty.   As a result, benefit companies may not have the same degree of legal utility in Canada as in the United States.

Conclusion

We note that standard companies incorporated under the BC Business Corporations Act are not precluded from operating in a manner that takes into consideration environmental and social benefits, and disclosing this activity to their shareholders.  But for companies that wish to engage in this activity on a more formal basis, and attract investors who are specifically aiming to support such activities, benefit companies could prove to be a useful tool.

If you wish more information on incorporating a benefit company or converting an existing company to become a benefit company, please contact Marshall Pawar, Jesse Ahuja, Jennifer MacGregor-Greer or Rosalyn Chan.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.