In April 2018, the Delaware State Bar Association’s Corporate Law Section approved an amendment to the Delaware Limited Liability Company Act that allows for the formation of public benefit limited liability companies (PBLLCs). The proposed new PBLLC statute – Subchapter XII of Chapter 18, Title 6 of the Delaware Code (PDF) – closely tracks the Delaware public benefit corporation (PBC) statute, so its material features will be familiar to most social entrepreneurs and impact investors.
The proposed PBLLC follows the PBC model in the following key ways:
- A certificate of formation must include a statement setting forth one or more specific public benefits the entity shall promote;
- A public benefit statement may not be amended or deleted (including through merger, consolidation, or division) without the approval of the holders of at least two-thirds of the percentage or other interest in the profits of the entity;
- Members or managers (or other persons with management authority) must manage the affairs of the entity in a manner that balances (i) the pecuniary interests of the members, (ii) the best interests of those materially affected by the entity’s conduct, and (iii) the specific public benefit(s) set forth in the entity’s certificate of formation;
- Such person’s fiduciary duties with respect to the balancing requirement are deemed met if a decision is informed and impartial, and not such that no person of ordinary sound judgment would approve;
- A PBLLC must report biennially to its members with respect to its promotion of the specific public benefit set forth in its certificate of formation, which report must include the objectives, standards, measurements, and assessments as to the entity’s efforts;
- Members may maintain a derivative lawsuit to enforce the PBLLC’s obligation to promote its specific public purpose and balance the above interests; however, no member or manager (or other persons with management authority) may have any liability for monetary damages for the failure to manage the entity’s affairs in such a manner; and
- Nothing in the PBLLC’s operating agreement may be inconsistent with the PBLLC’s statutory requirements.
While the impact community has broadly viewed the PBC form as an important tool to enable pursuit of social missions within the corporate construct, the same may not be true for the PBLLC given the contractual flexibility already embedded within existing LLC forms in many states. Specifically, a Delaware LLC’s operating agreement – the primary contract governing the operations of the LLC to which members and managers agree – may expressly elevate preservation of mission as a valid business objective by contractual agreement, and may alter or even eliminate traditional fiduciary duties. (We note that not all states allow for similar flexibility to contract around fiduciary duties; recent changes to the California LLC statute in 2014 imposed traditional fiduciary duties on California LLCs.)
Nevertheless, the advent of the PBLLC may offer certain practical benefits to the extent the statutory designation simplifies any diligence and review processes from an impact perspective – investors, evaluators and the public will understand that a PBLLC must operate in accordance with a baseline level of impact requirements without having to parse an operating agreement. In addition, as has occurred with the PBC, the PBLLC may become an important symbolic marker for those social entrepreneurs committed to achieving impact goals and attracting impact-first investors.
The PBLLC amendments to the Delaware LLC Act will become effective as of August 1, 2018, if they are approved by the Delaware State Bar Association and the legislature, and signed by the governor. In the meantime, Delaware LLC social enterprises can continue to contractually embed impact in their operating agreements, a practice which should continue for PBLLCs as well.
For additional information on social enterprise forms, see www.mofo.com/impact.