BILL ANALYSIS Ó AB 361 Page 1 Date of Hearing: May 18, 2011 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair AB 361 (Huffman) - As Amended: May 11, 2011 Policy Committee: JudiciaryVote:7-2 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill, as proposed to be amended , authorizes and regulates the formation and governance of a new form of corporate entity known as a benefit corporation. Specifically, this bill: 1)Stipulates that a benefit corporation is to be formed in accordance with General Corporation Law (GCL), and states that all provisions of the GCL apply to benefit corporations, except where those provisions conflict or are inconsistent with the provisions of this bill. 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, and provides that these articles may also identify one or more specific public benefits, as defined, deemed to be in the best interests of the benefit corporation. 3)Requires the corporation to annually deliver to all shareholders a benefit report and to include in this report a statement indicating whether, in the opinion of the board of directors, the benefit corporation failed to pursue its general, and any specific, public benefit purpose in all material respects during the period. 4)Requires the benefit report to include an assessment of the corporation's overall social and environmental performance prepared in accordance with a third-party standard. 5)Requires the corporation to post the benefit report on its AB 361 Page 2 website, and if it does not have a website, to provide a copy to any person upon request without charge. FISCAL EFFECT Minor one-time costs to the Secretary of State's Office to train staff to accommodate the filing of a new type of corporation with that Office. COMMENTS 1)Purpose . 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 contends that the new form of corporate entity proposed in this bill-a public benefit corporation-would provide unprecedented flexibility to pursue a higher corporate purpose of benefitting society or the environment under higher standards of accountability and transparency to shareholders seeking such flexibility. This bill would regulate the formation and governance of benefit corporations largely within the existing framework of the 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, the bill revises 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 provides 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. This bill is sponsored by a nonprofit organization called B Lab, who indicates 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. 2)Opposition . The Corporations Committee of the Business Law Section (CCBLS) of the State Bar, among several concerns, argues that the bill is unclear as to whether corporate directors have any fiduciary duty to act in the interest of AB 361 Page 3 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." Supports counter 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. The California Association of Nonprofits (CAN) opposes 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 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." 3)Other States . According to the author, legislation to authorize the formation of benefit corporations has already been signed into law in Maryland, Vermont, New Jersey, and Virginia, and is currently under consideration in Hawaii, New York, North Carolina, Pennsylvania, and Colorado. 4)Prior Legislation . SB 1463 (DeSaulnier) of 2010, which 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, was referred to the Senate Judiciary Committee, but was not heard. 5)Related Legislation . SB 201 (DeSaulnier), substantially similar to SB 1463, is pending in Senate Appropriations. 6)The amendment deletes a requirement for benefit corporations to provide a copy of their annual benefit reports to the Secretary of State-and an associated filing fee of up to $70-and instead requires any benefit corporation lacking a AB 361 Page 4 website, on which benefit reports must be posted, to provide the benefit report to any person, upon request, at no charge. Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081