Bankruptcy & the Benefit Corporation

Abstract

As pressure grows for money-making businesses to prioritize social goals, the benefit corporation—a recent innovation in corporate governance—promises to require the directors of socially minded businesses to balance public benefit with shareholder interests. But will that promise survive the crucible of financial distress? While most discussions of the benefit corporation give only passing treatment to insolvency (or ignore it altogether), this Article provides the first complete analysis of how bankruptcy principles would apply to benefit corporations, informed by the practical context of out-of-court workouts and negotiations that take place in the shadow of the bankruptcy laws. After analyzing three normative models, including an innovative application of the chanelling function of law, this Article answers that the benefit corporation’s key innovations should persist in bankruptcy. But with the reticulated provisions of creditor-debtor law and the Bankruptcy Code, the Article warns that the application of that principle is complicated and provides a detailed map of some of the major considerations—and pitfalls.

Keywords: bankruptcy, benefit corporation, benefit corporations, social entrepreneurship