On March 4, 2021, the US Securities and Exchange Commission announced the creation of a Climate and ESG Task Force to address increasing investor focus and reliance on climate and environmental, social, and corporate governance (ESG)-related disclosure and investment. The creation of this task force reflects the rise in ESG investing as government and corporate entities around the globe are increasing their efforts to “go green.” Building on the United Nations Sustainable Development Goals — a “universal call to action” to achieve a more sustainable future — Barclays predicts that the release of ESG-related standardized disclosures and new regulatory requirements within the next two years should prompt investment managers to integrate ESG considerations into their investment and disclosure processes.
AgTech and ESG
While relatively new, impact investing in sustainable agriculture is a growing field that presents a $12 trillion market opportunity for impact investors to effect change through a focus on ESG. Agricultural technology (AgTech) companies are highlighting sustainability’s role in increasing yield and decreasing climate impact, especially in light of how the COVID-19 pandemic has increased pressure on global supply chains. To aid in this mission-driven effort, we have assisted clients in investing in and becoming Public Benefit Corporations, which entity structure allows companies to function not solely for the benefit of their shareholders, but also for the benefit of certain other constituents as they operate in a sustainable manner and produce a public benefit. In this Alert, we discuss incorporating as or converting into a Public Benefit Corporation and how doing so can benefit AgTech companies looking to increase their focus on ESG.
Public Benefit Corporation
As AgTech companies increasingly are expected to generate positive social impact alongside profits, companies are considering incorporating as, or converting into, Public Benefit Corporations (PBCs). PBCs are designed for the social entrepreneur who desires to heighten focus on ESG by creating business models that benefit society, the environment, employees, customers, and investors. By expanding beyond the traditional focus on shareholder returns, the PBC seeks to balance the financial interests of shareholders, the interests of those materially affected by the PBC’s conduct, and the public benefit identified by the PBC in its organizational documents.
The PBC is a distinct legal entity under state corporation statutes, with states first adopting such statutes around 2010. Delaware, the state of choice for many public and private corporations, adopted its first public benefit corporation statute in 2013. Choosing the PBC entity form allows a corporation to codify its public benefit mission in its organizational documents (specifically its certificate of incorporation) and allows the corporation’s board of directors in managing the corporation’s business affairs to shift the corporate mandate toward balancing shareholder interests with the stated public benefit mission. Under the Delaware statute, a director making such a balanced decision will be deemed to satisfy his or her fiduciary duty to shareholders if such decision is (A) both informed and disinterested and (B) not such that no person of ordinary, sound judgment would approve. Further, a director of a PBC does not owe, by virtue of the PBC provision, a duty to a person on account of any interest such person would have in the PBC’s stated public benefit mission. PBC statutes also may provide disclosure requirements concerning the PBC’s public benefit mission, which may vary by state, but PBCs generally are required to measure and share their social and environmental performance in a benefit report to their shareholders. In Delaware, the PBC must issue a biennial report to its shareholders, which does not have to be made public, that discusses its promotion of the public benefit, including the PBC board’s objectives and standards for achieving general and specific public benefits and assessing the corporation’s success in achieving such benefits.
Four years after Delaware’s launch of its PBC corporate form, the first PBC went public when Laureate Education, a for-profit higher education company, raised $490 million in its 2017 IPO. More recently, two more PBCs successfully went public with IPOs in July 2020 — Vital Farms, a pasture-raised egg brand, and Lemonade, an insurance start-up. Acknowledging the PBC’s growing popularity, Delaware amended its PBC statute in July 2020 to make it easier for a C-Corporation, private or public, to convert into a PBC by (A) reducing the requisite supermajority shareholder vote to convert into a PBC to a simple majority, and (B) eliminating shareholder appraisal rights upon conversion. In February 2021, publicly traded cloud-computing solutions company Veeva Systems became the first public company ever to convert into a PBC with 99% of voting shareholders supporting the company’s proposal to become a PBC.
PBCs also have started going public through Special Purpose Acquisition Companies (SPACs), an alternative IPO strategy that has raised $38.3 billion since the start of 2021, compared to $19.8 billion raised by traditional IPOs (for further information on SPACs in the AgTech industry, see our previous Alert). With its IPO on February 5, 2021, Sustainable Development Acquisition I Corp., a PBC formed to acquire or merge businesses in the water, food, agriculture, and renewable energy sectors with a view to the United Nations Sustainable Development Goals, became the first public PBC SPAC. PBCs going public via a SPAC must draft their public filings carefully to clearly describe the opportunities of the PBC form as well as the associated risk factors (e.g., potential shareholder derivative litigation to enforce the codified social mission or the potential adverse reputational impact if the PBC fails to achieve that mission).
Impact
AgTech companies face an exciting opportunity to play a large role in achieving sustainability and promoting ESG. The increased prominence of PBCs serves as a testament to how much they, and the causes they advocate, stand to benefit by accelerating the transition to a sustainable food system on a global scale.
