New Maryland Benefit Corporations

Effective October 1, 2010, a new Maryland statute permitting the formation of “benefit corporations” goes into effect. The statute adds subtitle 6C to Title 5 of the Maryland Corporations and Associations Article. It provides the ability for a corporation to elect to be a benefit corporation, either by incorporating with language in its Articles indicating that the corporation is being formed as a benefit corporation, or by amending its Articles to reflect this fact.

Benefit corporations differ from regular, for-profit entities in two ways:

1. Benefit corporations are organized to allow directors of the corporations to consider benefits to employees, customers, society at large, or the environment when making decisions for the corporation, while sheltering directors from liability under the Courts and Judicial Proceedings Article, section 5-417. See Md. Corp & Assoc. Code Ann. § 5-6C-07.

2. Benefit corporations are required to have a third party review the corporation’s performance in meeting its “beneficial” activities, and publish a report annually of the corporation’s progress in meeting its beneficiary objectives.  See Md. Corp. & Assoc. Code Ann. § 5-6C-08.

As to limiting director liability, directors previously had immunity when they performed their duties in conformity with the standard of care described in section 2-405.1 of the Corporations and Associations Article, which requires directors to act in good faith, and both subjectively and objectively in the best interests of the corporation.  Of course, what’s in the best interests of a corporation is not necessarily in the best interests of the environment or the corporation’s employees.  In economics, these reality is called a “negative externality.”

For example, a non-benefit corporation may elect to buy coal-power from the power company because it is cheaper than a wind-energy alternative (which is generally true in Maryland, unfortunately).  The pollution to generate and transmit the power to the company is a negative externality, because the power company does not have to pass along the long-term costs of the pollution that is a byproduct of the energy production.  Instead, the rest of us (and future generations of us) bear these costs in the form of lost productive land, global warming, and other health costs.

A benefit corporation could consider these external costs when renewing its energy contract with the power company, and may ultimately decide to pay more for wind power in order to reduce the corporation’s impact on the environment, and the directors would still have immunity from liability for this decision (so long as the decision otherwise complied with the applicable statutes).  The economic result of this decision won’t change – the corporation will almost certainly need to raise its prices to consumers to cover its increased energy costs – but the directors who made this decision will not be liable for considering the environment when deciding to contract with a wind-generated energy supplier.

Maryland and Vermont are the two jurisdictions that presently recognize a “benefit corporation” as a legal entity.  More states are considering changes to their laws  to permit this corporate form.

Published by

faithatlaw

Maryland technology attorney and college professor.

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