BILL ANALYSIS Ó
AB 361
Page 1
ASSEMBLY THIRD READING
AB 361 (Huffman)
As Amended May 19, 2011
Majority vote
JUDICIARY 7-2 APPROPRIATIONS 12-5
-----------------------------------------------------------------
|Ayes:|Feuer, Atkins, Dickinson, |Ayes:|Fuentes, Blumenfield, |
| |Huber, Huffman, Monning, | |Bradford, Charles |
| |Wieckowski | |Calderon, Campos, Davis, |
| | | |Gatto, Hall, Hill, Lara, |
| | | |Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Wagner, Jones |Nays:|Harkey, Donnelly, |
| | | |Nielsen, Smyth, Wagner |
| | | | |
-----------------------------------------------------------------
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
communities with beneficial products or services;
AB 361
Page 2
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; and,
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 two-thirds 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
AB 361
Page 3
that person's status as a beneficiary.
8)Requires the board of directors to prepare for inclusion in an
annual benefit report to shareholders, 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.
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; or,
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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, 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 : 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
AB 361
Page 4
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 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, this 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.
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. 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 two-thirds majority vote of shareholders to remove
AB 361
Page 5
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.
This bill is supported by many associations and networks of
small businesses, the Green Chamber of Commerce, and many
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 bill is opposed by the Corporations Committee of the
Business Law Section (CCBLS) of the California State Bar. They
contend that it is unclear under this bill whether corporate
directors have any fiduciary duty to act in the interest of the
shareholders, particularly because the bill does not require
directors to prioritize the shareholders over any of the other
particular interests or factors that they must consider when
evaluating the impact of their actions. CCBLS also contends
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. In fact, a central tenet of this bill is that the
fiduciary duty of directors includes, not precludes,
consideration of both shareholder and non-financial interests.
The proponents 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
AB 361
Page 6
interests-a central tenet of benefit corporations. 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.
Despite the argument that shareholders of a benefit corporation
are marginalized within the framework of this bill, it should be
noted that the shareholders must voluntarily elect, by a
majority two-thirds vote, to organize as a benefit corporation
before the directors are allowed discretion to pursue ways to
further a corporate purpose that produces a public benefit.
Because this bill provides dissenters' rights identical to those
for corporations generally, it seems even more likely that
non-dissenting shareholders understand and approve of the
special fiduciary duty that is required of the directors of the
benefit corporation.
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). The bill 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
demanding standards that may elevate the public purpose well
AB 361
Page 7
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 Assembly Judiciary 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. In
any case, 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.
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. Recent amendments appear to address some of the
concerns raised by CCBLS. For example, this bill now requires
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, in order to make the corporation
more recognizable to the public.
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
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."
AB 361
Page 8
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.
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
FN: 0000733