Scope
This guide examines the fiduciary duties of public benefit corporation (PBC) directors under Delaware General Corporation Law (DGCL) Section 365 during change-of-control transactions. It is intended for directors, governance professionals, and legal advisors who need to understand how the statutory balancing requirement differs from traditional Revlon duties and what documentation practices will withstand judicial scrutiny.
You'll find requirement breakdowns, implementation steps for board processes, and a reference table for quick consultation before material transactions.
Key Concepts and Definitions
Balancing Requirement (DGCL Section 365(a)): PBC directors must balance three distinct interests when making decisions:
- The pecuniary interests of stockholders
- The best interests of those materially affected by the corporation's conduct
- The specific public benefit identified in the certificate of incorporation
Statutory Safe Harbor (DGCL Section 365(b)): A director satisfies fiduciary duties with respect to the Balancing Requirement if the decision is:
- Informed
- Disinterested
- Not such that no person of ordinary, sound judgment would approve (the waste standard)
PBC Enhanced Scrutiny: The Delaware Court of Chancery in Drakes Landing Associates, L.P. v. Tilden Park Capital Management, L.P. (decided July 29, 2026) suggested that courts may apply a modified enhanced scrutiny standard to PBC change-of-control transactions, though the court didn't definitively establish this framework.
Revlon Duties: Traditional Delaware corporations face a duty to maximize sale price in change-of-control scenarios. The Chancery Court ruled this stockholder-wealth-maximization mandate doesn't apply to PBCs as a standard of conduct.
Requirements Breakdown
Section 365(a): The Three-Prong Analysis
Your board must actively consider and document all three interests. A focus solely on stockholder value, sufficient for traditional corporations, won't meet the PBC standard.
Prong 1: Stockholder Pecuniary Interests This requires analysis of financial returns, valuation, premium to market price, and alternative transaction structures that could deliver greater economic value.
Prong 2: Materially Affected Stakeholders This involves identifying materially affected parties (employees, customers, suppliers, communities) and assessing how the transaction impacts them. In the Drakes Landing case, MPower Financing's stakeholders included international students relying on the company's loan products.
Prong 3: Specific Public Benefit Evaluate against the exact public benefit stated in your certificate of incorporation. Generic consideration of "doing good" won't suffice. Tie the analysis to your charter's language.
Section 365(b): Safe Harbor Elements
Informed Decision Standard Plaintiffs challenging a PBC board decision as uninformed must show an unreasonable failure to become informed as to all three Section 365(a) interests. Your board can't rely on thorough financial analysis alone. Document consideration of stakeholder impacts and mission alignment.
Disinterestedness Standard conflict-of-interest analysis applies. In Drakes Landing, plaintiffs conceded the special committee members were disinterested and independent, eliminating one avenue of attack.
Waste Threshold This is the "no person of ordinary, sound judgment" standard. It's deliberately high. Courts won't second-guess business judgment unless the transaction is so one-sided that it constitutes waste.
Implementation Guidance
Before the Transaction
Charter Review: Pull your certificate of incorporation and identify the exact public benefit language. If it states you exist "to provide accessible financial services to underserved populations," that's your benchmark, not a general concept of financial inclusion.
Stakeholder Mapping: Create a matrix of materially affected parties. For each group, document:
- How they interact with your business model
- What changes the transaction would introduce
- Quantitative and qualitative impacts where possible
Special Committee Formation: If the transaction involves conflicted parties, establish a special committee of disinterested directors with independent counsel and financial advisors.
During Evaluation
Three-Column Analysis: Structure board materials with parallel tracks:
- Column 1: Financial analysis (valuation, alternatives, price justification)
- Column 2: Stakeholder impact assessment (continuation of services, employment effects, supplier relationships)
- Column 3: Mission alignment (how the transaction affects your charter's public benefit)
Advisor Instructions: When engaging financial advisors, the mandate must cover all three interests. Your engagement letter should explicitly require analysis of how alternative structures affect stakeholders and mission.
Board Minutes: Document consideration of the Balancing Requirement. Record the substance: "The Board reviewed the impact on international student borrowers, noting that the transaction preserves the existing loan portfolio and maintains current underwriting criteria that serve the public benefit."
Documentation Standards
What Failed in Drakes Landing: The complaint used "public benefit" once, only to describe the entity type. It included no facts about MPower's specified public benefit, no assertions about stakeholders materially affected by the company's conduct, and no facts about how the board applied the Balancing Requirement.
What Succeeds: Every board resolution and consent for material decisions should include:
- Explicit reference to DGCL Section 365(a)
- Separate findings for each of the three interests
- Identification of information sources (management reports, advisor opinions, stakeholder feedback)
- Rationale for how the decision balances competing interests
Common Pitfalls
Pitfall 1: Treating PBC Status as a "Sweet Pill" Without Substance The Chancery Court acknowledged that PBCs aren't required to maximize sale price, which some view as a structural defense against unwanted acquirers. But this isn't a free pass. If you reject a higher offer, document how the alternative better serves the Balancing Requirement. A conclusory assertion won't survive challenge.
Pitfall 2: Importing Traditional Corporation Playbooks Standard change-of-control processes focus on stockholder value maximization. If you run a market canvass solely to identify the highest bidder, you've only addressed one-third of your duties. Your process must also evaluate which potential acquirers will maintain your mission and protect stakeholder interests.
Pitfall 3: Addressing the Balancing Requirement in Briefing, Not Pleadings In Drakes Landing, plaintiffs argued in their brief that "no balancing of interests" occurred. The court rejected this because you can't amend a complaint through briefing, and the assertion was conclusory. Build your record in real time, not in litigation.
Pitfall 4: Assuming Business Judgment Review Applies The Chancery Court left open whether "PBC enhanced scrutiny" applies to change-of-control transactions. Don't assume courts will defer to your business judgment. Apply heightened governance practices: conflict management, fulsome disclosure, independent advisors, and thorough documentation.
Pitfall 5: Skipping Stockholder Approval In Drakes Landing, the company didn't seek stockholder approval, though plaintiffs alleged both counsel and the CEO recommended a vote. While the court didn't rule on this issue, consider whether your transaction requires or benefits from stockholder approval under your charter and bylaws.
Quick Reference Table
| Decision Element | Traditional Corporation | Public Benefit Corporation |
|---|---|---|
| Standard of Conduct in Change-of-Control | Maximize sale price (Revlon duty) | Balance three interests per DGCL §365(a) |
| Required Board Analysis | Financial terms, alternatives, premium | Financial + stakeholder impact + mission alignment |
| Safe Harbor Elements | N/A (business judgment or enhanced scrutiny applies) | Informed + disinterested + not waste (DGCL §365(b)) |
| Burden in Litigation | Plaintiff proves breach under applicable standard | Plaintiff must rebut all three safe harbor elements |
| Documentation Focus | Valuation, market canvass, fairness opinion | Three-prong analysis with separate findings for each interest |
| Advisor Mandate | Maximize stockholder value | Evaluate all three Section 365(a) interests |
| Board Minutes | Record financial deliberations | Record consideration of Balancing Requirement with specifics |
| Highest Bidder Requirement | Generally required (absent competing duties) | Not required if lower bid better serves all three interests |
| Enhanced Scrutiny Trigger | Sale or change of control | Potentially applies (PBC enhanced scrutiny not yet defined) |
| Charter Language Relevance | Limited | Specific public benefit language controls analysis |
Version Note: This guide reflects Delaware law as of the Drakes Landing decision (July 29, 2026). The Chancery Court explicitly left open questions about PBC enhanced scrutiny standards. Monitor subsequent case law for refinements to this framework.
