BILL ANALYSIS Ó
AB 361
Page 1
Date of Hearing: May 3, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 361 (Huffman) - As Amended: April 27, 2011
As Proposed to Be Amended
SUBJECT : BENEFIT CORPORATIONS
KEY ISSUE : SHOULD BUSINESSES THAT WISH TO PURSUE A SOCIALLY OR
ENVIRONMENTALLY BENEFICIAL MISSION, BROADER THAN SIMPLY
MAXIMIZING PROFIT, HAVE THE ABILITY TO VOLUNTARILY INCORPORATE
IN CALIFORNIA AS "BENEFIT CORPORATIONS" - A NEW FORM OF
CORPORATE ENTITY ATTRACTIVE TO SOCIALLY RESPONSIBLE INVESTORS
THAT, AMONG OTHER THINGS, PROVIDES GREATER ACCOUNTABILITY TO
SHAREHOLDERS TO ENFORCE THE BENEFICIAL CORPORATE MISSION?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
According to the author, the California Corporations Code lacks
a framework for corporations to voluntarily organize and operate
with a greater public benefit purpose than simply pursuing
profit or a narrow objective of corporate social responsibility.
The author helpfully seeks to fill this void with this
legislation seeking to authorize in California a new form of
corporate entity known as a benefit corporation, the form of
which, the author contends, would provide unprecedented
flexibility for the corporation to pursue a higher corporate
purpose-benefitting society or the environment, by definition of
this bill-- while at the same time establishing higher standards
of accountability and transparency to the shareholders who want
this flexibility in the first place. This commendable bill
would regulate the formation and governance of benefit
corporations largely within the existing framework of the
General Corporation Law (GCL) to minimize the extent to which
the benefit corporation might be treated differently than other
general corporations. In order to facilitate pursuit of the
public benefit purpose that is the hallmark of this new model,
the bill would revise the fiduciary duty of the corporate
directors of a benefit corporation to clarify that such duty
includes, but does not preclude, consideration of both
shareholder and non-financial interests. The bill would also
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provide the directors of a benefit corporation legal protection
for actions to further the public benefit purpose, even if those
actions do not necessarily maximize shareholder value. The bill
is supported by many associations and networks of small
businesses, other business leaders, the Green Chamber of
Commerce, and advocates for sustainable business and socially
responsible investing. These proponents assert that benefit
corporations offer entrepreneurs and investors like them the
option to invest in businesses that meet higher standards of
corporate purpose, the result of which is likely to be the
creation of broad social and environmental benefits for the
California public. The bill is opposed by the Corporations
Committee of the Business Law Section (CCBLS) of the State Bar,
who contend generally that it diverges from traditionally narrow
corporate principles regarding shareholders' rights and the
fiduciary duty of directors-which some supporters suggest is
precisely the purpose of and need for the bill. The California
Association of Nonprofits opposes on a different basis, namely
that the bill may result in philanthropy dollars being siphoned
off from existing nonprofits, presumably instead to investment
in benefit corporations.
SUMMARY : Authorizes and regulates the formation and governance
of a new form of corporate entity known as a benefit
corporation. Specifically, this bill :
1)Requires a benefit corporation to be formed in accordance with
Division 1 (the General Corporation Law, or GCL), and states
that all provisions of the GCL shall apply to benefit
corporations, except where those provisions conflict or are
inconsistent with the provisions of this act.
2)Provides that a benefit corporation shall have the purpose of
creating a general public benefit (defined as a "material
positive impact on society and the environment") that may
exist in addition to, or be a limitation on, the corporation's
other purposes as set forth in its articles.
3)Permits the articles of the benefit corporation to identify
one or more specific public benefits, which along with the
general public benefit, shall be deemed to be in the best
interests of the benefit corporation. Defines specific public
benefits to include all the following:
a) Providing low-income or underserved individuals or
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communities with beneficial products or services.
b) Promoting economic opportunity for individuals or
communities beyond the creation of jobs in the ordinary
course of business.
c) Preserving the environment.
d) Improving human health.
e) Promoting the arts, sciences, or advancement of
knowledge.
f) Increasing the flow of capital to entities with a public
benefit purpose.
g) The accomplishment of any other particular benefit for
society or the environment.
4)Permits a general corporation to become a benefit corporation
by amending its articles to state that it is a benefit
corporation, but only upon at least a 2/3 vote of the
shareholders, as specified. Permits dissenting shareholders
to require the corporation to purchase back dissenting shares
at their fair market value.
5)Requires directors to perform their duties in a manner they
believe to be in the best interest of the benefit corporation
and with that care as an ordinarily prudent person in a like
position would use in similar circumstances.
6)Requires directors and officers to consider the impacts of any
action upon the shareholders, employees, subsidiaries,
suppliers, customers, community and societal considerations,
short- and long-term interests of the corporation, and the
ability to accomplish its public benefit purposes, but are not
required to give priority to any particular factor or interest
over any other unless the articles state priority be given to
a specific public benefit purpose.
7)Provides that directors and officers shall not be liable for
monetary damages for any failure of the benefit corporation to
create a general or specific public benefit, or for any
alleged failure to discharge their duties in those offices,
and shall not have any fiduciary duty to a person that is a
beneficiary of a public benefit purpose arising simply from
that person's status as a beneficiary.
8)Requires the board of directors all prepare for inclusion in
the annual benefit report to shareholders required by Section
14630, a statement indicating whether, in the opinion of the
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board of directors, the benefit corporation failed to pursue
its general, and any specific, public benefit purpose in all
material respects during the period.
9)Provides that only directors and shareholders, but not third
parties, may exercise a right of action, which can be for any
of the following:
a) Failure to pursue the general public benefit purpose of
the benefit corporation or any specific public benefit
purpose set forth in its articles.
b) Violation of a duty or standard of conduct imposed on a
director.
c) Failure of the benefit corporation to deliver or post an
annual benefit report.
10)Requires the benefit corporation to publish an annual Benefit
Report assessing success and failure in achieving public
benefit purpose, as measured in accordance with a third party
standard for defining and assessing social and environmental
performance, and specifies other content to be included in the
Report.
11)Requires all shares of a benefit corporation to state in
conspicuous language on the face of the stock certificate that
the corporate entity is a benefit corporation.
EXISTING LAW :
1)Establishes the General Corporation Law to authorize and
regulate the formation and governance of general corporations,
including the duties and liability of corporate directors, the
rights of shareholders, and amendment of the articles.
(Division 1 of Title 1 of the Corporations Code, commencing
with Section 100. All further references will be to this Code
unless otherwise specified.)
2)Establishes the Nonprofit Corporation Law to authorize and
regulate the formation and governance of nonprofit benefit
corporations, nonprofit mutual benefit corporations, and
nonprofit religious corporations, including the duties and
liability of corporate directors, the rights of shareholders,
and the respective purposes for which those nonprofit
corporations may be lawfully formed. (Division 2 of Title 1,
commencing with Section 5000.)
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3)Authorizes and regulates the formation and governance of
corporations for specific purposes, including but not limited
to consumer cooperative corporations, small business financial
development corporations, and professional corporations, and
specifies the respective purposes for which those corporations
may be lawfully formed. (Division 3 of Title 1, commencing
with Section 12000.)
COMMENTS : According to the author, the California Corporations
Code lacks a framework for corporations to voluntarily organize
and operate with a greater public benefit purpose than simply
pursuing profit or a narrow objective of corporate social
responsibility. The author helpfully seeks to fill this void
with this legislation seeking to authorize in California a new
form of corporate entity known as a benefit corporation, the
form of which, the author contends, would provide unprecedented
flexibility for the corporation to pursue a higher corporate
purpose-benefitting society or the environment, by definition of
this bill-- while at the same time establishing higher standards
of accountability and transparency to the shareholders who seek
such flexibility in the first place. This commendable bill
would regulate the formation and governance of benefit
corporations largely within the existing framework of the
General Corporation Law (GCL) to minimize the extent to which
the benefit corporation might be treated differently than other
general corporations. In order to facilitate pursuit of the
public benefit purpose that is the hallmark of this new model,
the bill would revise the fiduciary duty of the corporate
directors of a benefit corporation to clarify that such duty
includes, but does not preclude, consideration of both
shareholder and non-financial interests. Among other things,
the bill would also provide the directors of a benefit
corporation specified legal protection for actions to further
the public benefit purpose, even if they do not necessarily
maximize shareholder value.
Author's Statement : This bill is sponsored by a nonprofit
organization called B Lab, who states that it represents a
network of over 100 businesses in California (and over 400
nationally) that support efforts to create benefit corporations
in the various states in order to promote the mission of solving
social and environmental problems through business. In support
of the bill, the sponsor and the author together state:
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California leads the nation in innovation and
sustainability, but we do not have the statutory framework
to provide California businesses the ability to do both
simultaneously. There is tremendous demand from the
business community in California and nationally for states
to create this new kind of corporation. These visionary
entrepreneurs and investors want to build businesses with
an eye toward the triple bottom line of people, planet and
profit. This bill will create a new kind of corporation
for a new, more sustainable and inclusive, economy. It
will create a new, voluntary class of California
corporation called "benefit corporations" that will: (1)
have a corporate purpose to create a material positive
impact on society and the environment; (2) redefine
fiduciary duty - for benefit corporations only - to
require consideration of non-financial interests when
making decisions; and (3) report on the corporation's
overall social and environmental performance using
independent, transparent, and credible third-party
standards.
Furthermore, the author and B Lab assert that this bill will
enables companies who elect to incorporate as a benefit
corporation to:
1)Provide clarity to directors and officers that their
fiduciary duty includes creating a material positive impact
on society and the environment, even in liquidity scenarios;
2)Offer legal protection to directors and officers to consider
the non-financial interests of the workforce, community, and
environment when making decisions, even in liquidity
scenarios;
3)Help maintain the business mission over time by expanding
shareholder rights to enforce this expanded definition of
fiduciary duty and standard of consideration and would
require a 2/3 majority vote of shareholders to remove these
higher standards;
4)Differentiate themselves from other companies claiming to be
green, responsible, or sustainable without meeting rigorous
standards of accountability and transparency;
5)Attract capital from the growing community of investors
seeking both financial return and social impact.
Stakeholders agree on the goal of broader corporate purpose, but
disagree as to how to create a workable corporate form to
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accomplish the goal. This bill is supported by numerous small
business and entrepreneur groups, but opposed by the
Corporations Committee of the Business Law Section (CCBLS) of
the State Bar. Both sides agree that the goal of enabling
corporations to have a broader corporate purpose is desirable,
but they disagree on the proper corporate form to accomplish the
goal. (This is evident from CCBLS's sponsorship of a competing
bill, SB 201 (DeSaulnier), which authorizes creation of a
similar new corporate form known as a "flexible purpose
corporation.")
A central tenet of this bill is that the fiduciary duty of
directors includes, not precludes, consideration of both
shareholder and non-financial interests. Existing law provides
a standard of care that a director must use in discharging his
or her duties, namely that a director's duties must be performed
in good faith, in a manner the director believes to be in the
best interests of the corporation and the shareholders, and with
the care, including reasonable inquiry, that "an ordinary
prudent person in a like position would use under similar
circumstances." (Section 309(a).) Opponents correctly identify
that Section 14620(a) of this bill reproduces the standard of
care language from Code Section 309, but omits the reference to
shareholders (in italics). They contend that this intentional
omission makes it unclear whether corporate directors have any
fiduciary duty to act in the interest of the shareholders,
particularly because Sec. 14620(d) of the bill also provides
that directors are not required to prioritize the shareholders
over any of the other particular interests or factors that they
must consider when evaluating the impact of their actions.
Opponents also contend that shareholders of benefit corporations
are "marginalized" because there is little protection for
shareholders "who do not agree with the directors' unilaterally
adopted fiduciary duty standards."
Proponents counter by arguing that this bill does not in fact
represent, in the words of CCBLS, "a fundamental shift away from
traditional fiduciary duty principles" but merely that the bill
complements the existing fiduciary duty to maximize shareholder
profits with additional beneficial duties to society and the
environment. They contend that directors are still required to
act in the best interests of the corporation, as well as the
shareholders, but that the fiduciary duty is redefined to
include consideration of both shareholder and non-financial
interests-a central tenet of benefit corporations. As recently
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amended, this bill explicitly provides shareholders with
dissenters' rights for decisions to amend the corporation's
articles to either establish benefit corporation status or to
terminate that status. Furthermore, this bill provides
shareholders with a right of action to enforce the benefit
purpose provisions of the statute by initiating a benefit
enforcement proceeding, as specified. According to the sponsor,
expanding shareholder rights to enforce the expanded definition
of fiduciary duty will increase accountability to investors
attracted by the broader public benefit purpose of the benefit
corporation.
For these reasons, it does not appear to the Committee that the
shareholders of a benefit corporation can truly be said to be
marginalized within the framework of this bill, where the
shareholders voluntarily elected by a majority 2/3 vote to
organize as a benefit corporation-- precisely to allow the
directors discretion to pursue ways to further a corporate
purpose that produces a public benefit. The helpful amendments
to clarify dissenters' rights suggest it is even more likely
that the shareholders who remain understand and approve of the
special fiduciary duty that is required of the directors of the
benefit corporation.
Concern about selection of the third-party standard used to
assess social and environmental performance. Under this bill,
the directors select a third-party standard by which the benefit
corporation's social and environmental performance shall be
assessed and reported in the annual benefit report distributed
to all shareholders. The third-party standard is essentially a
specialized assessment tool, a form of intellectual property
developed by a third-party standards organization (of which B
Lab, the sponsor of this bill, is one example). Section
14601(g) specifies a number of characteristics that must be true
of the third party standard for its approved use by a benefit
corporation, perhaps the most important of which is that the
standard is developed by an entity that has no material
financial relationship with the benefit corporation or any of
its subsidiaries.
CCBLS expresses concern that directors will be free to shop for
standards that suit them best, outside the control of the
shareholders. This could mean defensive directors would shop
for the most protective standard to forestall shareholder
claims, or zealous directors would shop for increasingly
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demanding standards that may elevate the public purpose well
above the pursuit of maximizing shareholder value. In addition,
CCBLS expresses concern that the bill requires the third party
standard to meet such specialized criteria that B Lab is
"uniquely positioned" to take advantage of the bill it is
sponsoring and will become the principal certification agency of
benefit corporations qualified to form under the statute.
B Lab responds that there are many third party standards
organizations that meet the statutory criteria for a third party
standard. Some examples are: the Global Reporting Initiative
(GRI), GreenSeal, Underwriters Laboratories (UL), ISO2600, and
Green America, several of which have also submitted letters of
support to the Committee. B Lab reports that it and GRI both
offer companies the use of their reporting (GRI) and assessment
(B Lab) tools for free, and that more than 1,000 businesses
currently use B Lab's assessment tool for free.
Notwithstanding the sponsor's representations about the
suitability of other third party standards organizations, it is
indisputable that this bill does not require a benefit
corporation to use any particular third party standard to
prepare its benefit report, nor must the report be certified or
audited by any third party. The bill contemplates that,
ultimately, the directors and shareholders of the benefit
corporation are free to decide for themselves which third-party
standards they feel meet the statutory requirements and their
needs. It does not appear to the Committee that the sponsor
stands to realize any direct financial profit from this bill
from the information currently available to the Committee.
Author's clarifying amendments: In order to address ambiguity
in the bill as to how another business entity other than a
corporation (e.g. a LLC) converts to a benefit corporation and
what vote would be required, the author proposes to amend the
bill to provide that conversion from an LLC to a benefit
corporation shall require the same 2/3 vote as required for a
conversion from a corporation.
The author also proposes to amend the bill to require a 2/3 vote
for merger and exchange reorganizations in which a benefit
corporation might absorb another type of business entity, such
as a partnership or LLC, to ensure the owners of those entities
also enjoy the same 2/3 vote protection as the shareholders of a
standard corporation.
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RECENT LEGISLATION IN OTHER STATES: Benefit corporation
legislation has been enacted or is under consideration in
several states. According to the author, legislation to
authorize the formation of benefit corporations has already been
signed into law in four states-Maryland, Vermont, New Jersey,
and Virginia. In addition to California, similar legislation is
under consideration in five other states in 2011-Hawaii, New
York, North Carolina, Pennsylvania, and Colorado.
PREVIOUS LEGISLATION: AB 2944 (Leno) of 2008 would have allowed
a corporate director, when making business decisions on behalf
of the corporation, to consider several factors, such as the
long and short term interests of the corporation and
shareholders, the corporation's employees, suppliers, customers,
and creditors, community and societal considerations, and the
environment. This provision is substantially similar to
language contained in this bill. AB 2944 was vetoed by Governor
Schwarzenegger who stated that it "was a package of concepts
that could produce unknown ramifications and the need for which
have not been fully demonstrated."
SB 1463 (DeSaulnier) of 2010 would have created a new form of
corporate entity known as a Flexible Purpose Corporation (FPC)
in order to authorize corporations to participate in designated
for-profit and not-for-profit activities. SB 1463 was referred
to the Senate Judiciary Committee, but was not heard.
PENDING LEGISLATION : SB 201 (DeSaulnier) is a repeat of last
year's SB 1463 by the same author, and seeks to create a new
form of corporate entity known as a Flexible Purpose Corporation
(FPC). This bill has been approved by Senate Banking, Senate
Judiciary, and now awaits hearing in Senate Appropriations
Committee.
ARGUMENTS IN SUPPORT : The bill is supported by many
associations and networks of small businesses, other business
leaders, the Green Chamber of Commerce and advocates for
sustainable business and socially responsible investing. These
groups generally contend that benefit corporations will offer
entrepreneurs and investors the option to invest in businesses
that meet higher standards of corporate purpose or that seek to
create broad public social or environmental benefits, and that
increased investment will grow jobs in California. The American
Sustainable Business Council concisely summarizes this position:
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We believe that business leaders and investors need to
be able to run their businesses in ways that focus on
more stakeholders and whose mission is broader than
simply maximizing profit. Unfortunately, traditional
corporate law defines the fiduciary duty of corporate
officers and directors narrowly, making it difficult
for businesses with a social mission to make the kinds
of complicated decisions they face every day. These
businesses need AB 361. A new economy is blossoming
across the country, made up of businesses that are
finding ways to do well while helping our environment
and society at large. States that welcome these new
businesses will be poised for growth.
We think California has a chance to be a real leader in
creating the legal infrastructure necessary to support
sustainable businesses in America by passing Benefit
Corporation legislation.
ARGUMENTS IN OPPOSITION : The Corporations Committee of the
Business Law Section (CCBLS) of the State Bar submitted the most
comprehensive letter of opposition received by the Committee,
and several but not all of its concerns have been discussed
above. Among the concerns CCBLS raised that were not discussed
in greater detail above are: (1) organization and placement of
the bill's provisions are not well integrated into the
Corporations Code; (2) the bill requires adoption of a broad,
fixed general public purpose that will exclude participation by
many non-profit and for-profit organizations that may have more
specialized goals than the formula required by the bill; and (3)
the bill fails to make benefit corporations easily recognizable
to the public. The author disputes each of these concerns, but
has expressed the willingness to keep dialogue open with
opposing stakeholders. Recent amendments appear to address some
of the concerns raised by CCBLS. For example, the addition of
Sec. 14631 to the bill, requiring conspicuous language to appear
on the face of the corporation's certificates of stock
identifying it as a benefit corporation formed pursuant to this
act, appears to be a direct effort to address concern (3) above.
The California Association of Nonprofits (CAN) also opposes this
bill, largely on the general principle that more information
should be gathered by the Legislature before it acts to
authorize the formation of a new and unprecedented corporate
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form, particularly one that in this case CAN speculates may
"siphon off much-needed resources from effective existing
nonprofits by redirecting donor dollars from charitable
contributions to Ýbenefit] corporation investments."
REGISTERED SUPPORT / OPPOSITION :
Support
B-Lab (sponsor)
American Sustainable Business Council
Bay Area Council
California Advocacy Committee
California Association for Micro Enterprise Opportunity (CAMEO)
Clean Fund LLC
Direct Dental
Friends Committee on Legislation
Green America
Green Business Networking
Green Chamber of Commerce
Green Economy League
KINeSYS Inc.
Mindful Investors
New Harvest Capital
New Voice of Business
Silicon Valley Leadership Group
Small Business California
Social Venture Network
United States Green Building Council- California Advocacy
Committee
Opposition
California Association of Nonprofits (CAN)
Corporations Committee of the Business Law Section (CCBLS) of
the State Bar
Steven K. Hazen, Esq. (An individual)
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334