California Governor Jerry Brown recently signed into law two bills that provide alternative approaches for California corporations to promote the economic interests of shareholders and also pursue social objectives. Effective January 1, 2012, the bills authorize the formation of two new corporate entities: a “flexible purpose corporation” (Senate Bill No. 201) and a “benefit corporation” (Assembly Bill No. 361).
SB 201 was drafted by a group of lawyers, and is a more extensive amendment of the Corporations Code than AB 361. The source of AB 361 was B Lab, which promotes the adoption of benefit corporation legislation throughout the United States. Legislation authorizing the formation of benefit corporations (commonly known as “B Corps”) has become effective in five other states (Maryland, Virginia, New Jersey, Vermont and Hawaii). It was adopted in New York and is awaiting Governor Cuomo’s signature and is under consideration in several other states.
Both entities are structured much like traditional for-profit corporations, with a board of directors and shareholders, and will be taxed the same as for-profit corporations under current tax law.
Flexible Purpose Corporations
SB 201 adds a new division to the California Corporations Code, which is titled the “Corporate Flexibility Act of 2011.” A “flexible purpose corporation” is a corporation organized under the Act. The California General Corporation Law will apply, except as stated in the Act.
The articles of incorporation must state that it is a flexible purpose corporation organized under the Act, and the name must include the words “flexible purpose corporation.” The articles must also set forth that the purpose is to engage in any lawful act or activity for which a flexible purpose corporation may be organized for the benefit of the long-term and short-term interests of the corporation and its shareholders. The articles then must enumerate one or more of the following additional purposes:
- one or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out; or
- the purpose of promoting positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of, the corporation’s activities upon its employees, suppliers, customers and creditors, the community and society, or the environment.
An existing for-profit corporation can become a flexible purpose corporation by merger or conversion, with specific shareholder approval requirements and the application of dissenters’ rights.
In discharging his or her duties, “a director may consider those factors, and give weight to those factors, as the director deems relevant, including the short-term and long-term prospects of the flexible purpose corporation, the best interests of the flexible purpose corporation and its shareholders, and the purposes of the flexible purpose corporation as set forth in its articles.”
With certain exceptions, shareholders are entitled to receive an annual report, together with a management discussion and analysis concerning the corporation’s stated purpose or purposes (a special purpose MD&A). The MD&A is to include an identification and discussion of the objectives of the corporation related to its special purposes, the actions taken to achieve those objectives and a description of the process for evaluating its performance.
The provisions creating benefit corporations have also been added to the Corporations Code. A “benefit corporation” is a corporation organized under the General Corporation Law that has elected to become subject to these provisions.
The articles of incorporation must state that it is a benefit corporation. In addition to, and not in limitation of, the corporation’s general purpose, the corporation is to have the purpose of creating a general public benefit, which means a material positive impact on society and the environment, taken as a whole. This is to be assessed against a third-party standard, which is a standard for defining, reporting and assessing overall corporate social and environmental performance and to which a number of requirements apply.
The articles of incorporation may also identify one or more specific public benefits, including any of the benefits listed or any other particular benefit for society or the environment.
An existing for-profit corporation may become a benefit corporation by amending its articles or by merger, subject to specific shareholder approval requirements and in some cases the application of dissenters’ rights.
In discharging their duties, the directors of a benefit corporation are required to consider the impact of any action or proposed action upon the shareholders, the employees and workforce, the interests of customers as beneficiaries of the general or specific public benefit purposes, community and societal considerations, the local and global environment, the short-term and long-term interests of the corporation and its ability to accomplish its general, and any specific, public benefit purposes.
Shareholders are entitled to receive an annual report that includes a description of the process and rationale for selecting the third-party standard, the ways in which the corporation pursued a general public benefit and a statement as to whether, in the opinion of the board of directors, the corporation failed to pursue its general, and any specific, public benefit purpose in all material respects during the year.
While SB 201 and AB 361 were competing bills, they were not mutually exclusive. The fact that both were adopted by the Legislature and signed by the Governor undoubtedly will create some confusion. They represent very different approaches and will require considerable study before deciding which, if any, alternative to select. While there has been a good deal of support nationwide for the creation of entities that can pursue both social and profit-making objectives, it will be interesting to see how often this structure is used in California.