How To Convert Your Company Into A Benefit Corporation

Benefit corporations enable founders to create an aligned, mission-driven legal structure for their venture.

We are regularly asked to convert existing companies into California benefit corporations or Delaware public benefit corporations.

This post provides a high-level summary of the process.

Specific conversion requirements will vary depending on the entity and jurisdiction in question. But the following basic framework will apply across the board.

For convenience, I refer to both benefit corporations and PBCs as “benefit corps” in this article.

1 - Determine What Shareholder and Director Approvals Are Necessary.

Conversion into a benefit corp will require the approval of your shareholders and board of directors.

The specific threshold voting requirement depends on your state of incorporation and internal shareholder agreements. For example, conversion of a California entity into a California benefit corporation will require a 2/3 vote of each outstanding class or series of shares, whereas conversion of a Delaware corporation into a Delaware PBC will not have a supermajority voting requirement.

Once you’ve confirmed shareholder and director voting requirements, you should assess whether sufficient support exists for the conversion and what actions may be required to achieve the required consensus.

2 - Determine Whether The Approval Of Other Parties Is Required.

Credit agreements, investment agreements, shareholder agreements and other material corporate documents commonly contain provisions requiring prior approval to any amendment to the company’s certificate of incorporation or other material corporate changes. Accordingly, it’s important to confirm whether other parties, especially lenders and/or outside equity investors, may have the right to be notified of and/or approve the conversion. If so, you’ll need to develop a plan for providing the required notice and securing the required consent.

3. Draft a new Certificate of Incorporation and other required legal documentation.

Once you’re reasonably assured of having the required approvals, you’ll want to engage your corporate lawyer to prepare the necessary legal documentation.

It’s at this stage that you’ll have the opportunity to embed your company’s mission into the legal fabric of its corporate governance and leverage the benefit corp form to reflect their values and vision. You’ll also need to determine certain specifics around your benefit governance, such as the mechanics of benefit reporting, matters relating to director indemnification, the use of third party standards (like Certified B Corp), and the like.

For intra-state conversions (e.g., California corp into a California benefit corp), the conversion mechanism is an amendment to your articles of incorporation. Other conversions (for example, California or other LLCs into California benefit corps, California corps into Delaware PBCs) the required documentation will be more involved.

4. Conduct Required Shareholder and Director Votes.

With formal legal documentation in hand, you’ll be in a position to conduct form votes (or obtain formal written consents) approving the conversion and attendant legal documentation.

5. File Your New Corporate Charter.

Once your legal docs are approved, they can be filed with your Secretary of State. This step completes the formal conversion of the entity into a benefit corporation.

6. Print and Issue New Stock Certificates.

Delaware, California and other benefit corp jurisdictions require stock certificates to contain clear notices that the corporation issuing the shares is a benefit corporation. It’s accordingly advisable to issue new stock certificates or if your stock is not certificated, new notices to shareholders to reflect the change to benefit corp status.

7. Name Changes.

If your company has changed its name in connection with conversion, those changes should be implemented across the company’s accounts (e.g. bank accounts, vendor accounts, etc.) in a reasonable time frame.

Summary

In general, the process of conversion is a fairly straightforward, particularly for smaller companies with simple cap tables and balance sheets. As companies mature, a wider range of considerations and stakeholders come into play and so the process tends to be more involved. The above overview should provide a general sense of where your company falls on that spectrum.

Hat tip to Frederick Alexander, whose excellent book Benefit Corporation Law and Governance served as a helpful reference for this post.