Unique Considerations for Lending to a Delaware Utility Corporation – Corporate Law/Commercial Law

United States: Unique Considerations for Lending to a Delaware Utility Company

To print this article, all you need to do is be registered or log in to Mondaq.com.

In 2013, following in California’s footsteps, Delaware introduced a new form of business that could be chosen by businesses organized under its state law – the public benefit corporation (PBC). This type of corporation is described in Delaware General Corporation Law as “a for-profit corporation.” . . which is intended to produce one or more public benefits and to operate in a responsible and sustainable manner”. With the growing focus on impact investing and responsible consumer practices, the benefits of the public benefit form are increasingly recognized and a growing number of companies are incorporating as than PBC of Delaware.

With the growing popularity of Delaware utility corporations, many lenders have likely received requests for business financing that have chosen this form of corporation. When deciding whether or not to provide such financing, as well as typical underwriting considerations, lenders should be aware of the heightened corporate governance standards to which Delaware PBCs are subject. In particular, unlike a traditional Delaware C corporation, the management and board of directors of a Delaware PBC have a fiduciary duty to manage the corporation in a manner that balances both the pecuniary interests of shareholders of society and the public benefit(s) identified in the company’s charter, and must also specifically consider the stakeholders who are impacted by the company and its operations. The company is also required to produce a public interest report at least every two years which indicates (a) the objectives established by the board of directors to promote the public interest, (b) the standards adopted by the board of administration to measure progress in promoting this public interest, (c) objective and factual information based on these standards regarding the success of the promotion of the public interest, and (d) an evaluation of the company’s success in promoting the public interest of the company.

The additional governance requirements outlined above result in a different risk profile for a lender than one lending to a traditional Delaware C corporation. Among other things, the additional fiduciary duties for management could increase the likelihood of lawsuits from activist shareholders based on allegations that the company is operating in a manner inconsistent with the heightened standards of Delaware law. Additionally, questions have been raised about the impact that a Delaware PBC’s obligation to protect its public interest above other interests might have on outcomes for lenders in an insolvency proceeding. Lenders should seek advice from outside counsel familiar with the specific legal requirements of PBC in order to both perform additional due diligence to assess a potential borrower’s compliance with these requirements and to draft conditions in loan documents that mitigate additional risk to the lender. Additional terms in loan documents could include, for example, (a) enhanced litigation covenants and defaults to address shareholder lawsuits arising from the borrower’s failure to comply with PBC requirements, (b ) a requirement that the board of directors consider converting the borrower to a traditional C corporation if necessary to protect the interests of the lender, and (c) a requirement to provide the lender with copies of all specific reports and audits at the PBC.

The Morrison & Foerster team will continue to monitor legislative and case law developments related to Delaware PBCs and the potential impact these may have on lenders. Please contact any member of the Morrison & Foerster team if you have any questions.

Due to the generality of this update, the information provided here may not be applicable in all situations and should not be applied without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

POPULAR ARTICLES ON: US Corporate/Commercial Law

Misclassification of Independent Contractor

Benesch Friedlander Coplan & Aronoff

The nuanced distinctions between employees and independent contractors are very important, and recent court decisions and legislative actions have challenged these classifications.

Managing Disputes: Document Drafting Strategies

PC Jones & Keller

As litigators and instructors for the National Institute for Trial Advocacy, we constantly deal with contractual issues to prevent litigation. Over the years we’ve seen what works and what doesn’t…

About Jermaine Chase

Check Also

Note to money lenders – Government proposes to lower usury rate caps by end of 2022

This is an offense under the Money Lenders Ordinance (Cap. 163;”MLO”) to lend or offer …