Arizona Benefit Corporations: Fiduciary Duties

By December 19, 2015 Articles, Business
B-Corporation as Subsidiary for Non-Profits

Arizona law requires directors and officers of B-Corporations to look out for non-owner stakeholders, in addition to the company’s shareholders. This is an extraordinary fiduciary duty. But although B-Corporations raise the bar — as compared to corporations, generally — Arizona law does not provide a robust mechanism to enforce violations.

As a general definition: a fiduciary duty is a standard of good faith, care, and loyalty owed in managing someone’s money or property. A fiduciary acts for another’s benefit on matters within the scope of their relationship. Fiduciary duties are about accountability.

The big idea of the B-Corporation movement is that B-Corporations are accountable to stakeholders, persons affected by the company’s operations, not just shareholders. Thus, Arizona law on B-Corporations gives directors and officers the discretion to widely consider the interests of persons outside the company. Specifically, directors and officers of B-Corporations are required by statute to “consider the effects of any action or inaction” on its shareholders, as well as others who do not hold an economic interest:

  • the “employees and workforce” of not only the company but also of its subsidiaries and suppliers,
  • its customers, and
  • its community where its own offices — and the offices of its subsidiaries and suppliers — are located.

They also must consider the local and global environment, the company’s short and long term interests including its continued independence, and the ability of the B-Corporation to accomplish its general public benefit purpose and any specific public benefit purpose. A.R.S. §§ 10-2431 (directors); 10-2432(A) (officers). And Arizona law expressly provides a safe harbor, stating that those considerations are not violations of the officers and directors’ fiduciary duties. A.R.S. §§ 10-2431(B) (directors), 10-2432(B) (officers), referring to A.R.S. §§ 10-830 (directors) and 10-842 (officers).

A few observations.

The B-Corporation must affirmatively advance to meet threats of harm to its stakeholders. It takes responsibility for both its “action and inaction.” Further, the phrase “employees and workforce” suggests that the company’s independent contractors are on the same plane as its employees. There is no distinction. Also, the B-Corporation shepherds the organizations under its control, including its subsidiaries, as well. It does not use creative legal structures to carve out certain assets or operations from its heightened responsibilities. Even more, its suppliers are within its care, even though the B-Corporation does not have direct control over them. In sum, the law of B-Corporations expands the field-of-view of corporate directors and officers. Within a B-Corporation, officers and directors promise to consider others.

This ideology is markedly different than the bare-bones legal requirement for officers and directors of corporations to maximize profit.

Limited Remedies

Although Arizona law imposes heightened obligations on B-Corporation directors and officers, there is little means to enforce them. The B-Corporation itself, along with its directors and officers, are generally protected from claims by both shareholders and third-party stakeholders. In fact, the sole remedy belongs to shareholders, who can seek an injunction to compel the officers and directors to follow the B-Corporation’s stated mission.

More specifically, the fiduciary duties to consider others are duties owed to shareholders, not the outsiders to whom they benefit. The relevant Arizona law plainly states that no duties are owed directly to the third-party stakeholders. A.R.S. §§ 10-2431(D) and 10-2432(D). The law also clarifies that these third parties have no legal right of action. A.R.S. §§ 10-2433(C) and 10-2402(2).

Further, shareholders and third-party stakeholders, alike, cannot pursue a claim for money damages.

Additionally, there is a statutory business judgment rule to protect B-Corporation officers. An officer who makes a business judgment in good faith fulfills the duty, if:

  1. The officer is not interested in the subject of the business judgment;
  2. The officer is informed with respect to the subject of the business judgment to the extent the officer reasonably believes to be appropriate under the circumstances; and
  3. The officer rationally believes that the business judgment is in the best interests of the benefit corporation.
    A.R.S. § 10-2432(E).

And so, any potential claim for an injunction would need to allege that officers failed to consider B-Corporation purposes, at all — not that the officers made a poor decision. But, as an aside, notice that while officers have a safe harbor, directors do not. And so, directors would not possess the same legal presumption in litigation.

And Arizona law provides that B-Corporation directors and officers are not personally liable for any failure to pursue the public benefits promised. A.R.S. §§ 10-2431(C), (E)(directors), and 10-2432(C)(officers). Neither is the B-Corporation. A.R.S. § 10-2433 (B-Corporation). The only exception appears to be that directors can be liable in transaction where they improperly act upon a conflict of interest.

Application / Conclusion

In total, corporate life as a B-Corporation adds a measure of risk that shareholders might sue the company, asking the court for an injunction, compelling the company to adhere to its stated benevolent mission.

To mitigate that risk, here are two thoughts.

First, your B-Corporation might add a “Benefit Director” to oversee your stated mission and reporting to confirm your performance. Second, your board of directors ought to record in their meeting minutes an entry showing that they considered the company’s declared general and specific benefits for all stakeholders.
These two practices would allow the company to create a record to support its compliance with Arizona law on B-Corporations.