BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 361|
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THIRD READING
Bill No: AB 361
Author: Huffman (D), et al.
Amended: 7/12/11 in Senate
Vote: 21
SENATE BANKING & FINANCIAL INST. COMMITTEE : 5-1, 6/29/11
AYES: Vargas, Blakeslee, Kehoe, Liu, Padilla
NOES: Walters
NO VOTE RECORDED: Evans
SENATE JUDICIARY COMMITTEE : 4-0, 7/5/11
AYES: Evans, Harman, Blakeslee, Leno
NO VOTE RECORDED: Corbett
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 58-17, 5/26/11 - See last page for vote
SUBJECT : Benefit corporations
SOURCE : B Lab
DIGEST : This bill authorizes the creation of a new
corporate form called a benefit corporation, and provides
for the rules that must be followed by these types of
entities, and by other types of entities wishing to become
benefit corporations.
CONTINUED
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ANALYSIS : Existing law, the General Corporation Law,
authorizes and regulates the formation and governance of
general corporations. The Nonprofit Corporation Law
authorizes the formation and governance of nonprofit public
benefit corporations, nonprofit mutual benefit
corporations, and nonprofit religious corporations, and
specifies the respective purposes for which those
corporations may lawfully be formed. Existing law
specifies the duties of corporate directors and the rights
of shareholders. Existing law does not provide for the
formation and governance of benefit corporations.
This bill:
1. Establishes a new corporate form called a benefit
corporation, and provides that one or more natural
persons, partnerships, associations, benefit
corporations, or corporations, domestic or foreign, may
form a benefit corporation under the California
Corporations Code (CORP), by executing and filing
articles of incorporation with the California Secretary
of State. States that the provisions of the General
Corporation Law (Division 1, commencing with Section
100), apply to benefit corporations, except where those
provisions are in conflict with or inconsistent with the
benefit corporation provisions added by this bill.
2. Requires each benefit corporation to have the purpose of
creating a general public benefit. "General public
benefit" will be defined as a material positive impact
on society and the environment, taken as a whole, as
assessed against a third-party standard (see Ý4] below),
from the business and operations of a benefit
corporation.
3. Allows, in its articles of incorporation, each benefit
corporation to list one or more specific public
benefits, which would be additional purposes of the
corporation. Specific public benefits are defined in
this bill as all of the following: providing low-income
or underserved individuals or communities with
beneficial products or services; promoting economic
opportunity for individuals or communities beyond the
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creation of jobs in the ordinary course of business;
preserving the environment; improving public health;
promoting the arts, sciences, or advancement of
knowledge; increasing the flow of capital to entities
with a public benefit purpose; or the accomplishment of
any other particular benefit for society or the
environment.
4. Defines a third-party standard, for purposes of this
bill, as a standard for defining, reporting, and
assessing overall corporate social and environmental
performance, which meets all of the following criteria:
A. The standard would have to provide a comprehensive
assessment of the impact of the business and the
business' operations on employees of the benefit
corporation and its subsidiaries and suppliers,
customers of the benefit corporation, the communities
in which the benefit corporation and its subsidiaries
and suppliers are located, society, and the local and
global environments. The impact of the business and
the business' operations on shareholders would not
have to be assessed by the third-party entity.
B. The standard would have to be developed by an
entity that has no material financial relationship
with the benefit corporation or any of its
subsidiaries, and that satisfies both of the
following requirements:
(1). No more than one-third of the members
of the governing body of the organization could be
representatives of associations of businesses
whose members' performance is measured against the
standard, of businesses operating in a specific
industry, or of businesses whose performance is
measured against the standard;
(2). The entity could not be materially
financed by representatives of associations of
businesses whose members' performance is measured
against the standard, of businesses operating in a
specific industry, or of businesses whose
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performance is measured against the standard.
C. The standard would have to be developed by an
entity that accesses necessary and appropriate
expertise to assess overall corporate social and
environmental performance, and that uses a balanced,
multi-stakeholder approach, including a public
comment period of at least 30 days to develop the
standard.
D. All of the following information about the
standard would have to be made publicly available:
(1). The criteria considered when measuring the
overall social and environmental performance of a
business, and the relative weightings assigned to
each criterion;
(2). The identity of the directors, officers,
any material owners, and the governing body of
the entity that developed and controls revisions
to the standard;
(3). The process by which revisions to the
standard and changes to the membership of the
governing body are made;
(4). An accounting of the sources of financial
support for the entity, with sufficient detail to
disclose any relationships that could reasonably
be considered to present a potential conflict of
interest.
5. Requires each corporate entity wishing to become a
benefit corporation through conversion or reorganization
an affirmative vote of at least two-thirds of each of
its classes of shareholders, or a higher vote threshold,
if required in its articles of incorporation. The same
vote threshold would be required to amend a benefit
corporation's articles of incorporation, or to create or
dissolve a benefit corporation through merger or
acquisition.
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6. Entitles shareholders of an existing corporation that
decided to convert to a benefit corporation to
dissenter's rights, which are spelled out in existing
law (CORP Section 1300). Dissenters' rights generally
entitle dissenting shareholders to be cashed out for
their shares at the shares' fair market value, as of the
day before the first announcement of the terms of the
proposed reorganization or merger, adjusted for any
stock split, reverse stock split, or share dividend
which becomes effective after that date.
7. Requires the board of directors, committees of the
board, and the individual directors of a benefit
corporation to consider the impacts of any action or
proposed action upon all of the following: the
shareholders of the benefit corporation; the employees
and workforce of the benefit corporation and its
subsidiaries and suppliers; the interests of customers
of the benefit corporation as beneficiaries of the
general or specific public benefit purposes of the
benefit corporation; community and societal
considerations, as specified; the local and global
environment; the short- and long-term interest of the
benefit corporation, including benefits that could
accrue to the corporation from its long-term plans, and
the possibility that those interests could best be
served by retaining control of the corporation rather
than selling or transferring control to another entity;
and the ability of the benefit corporation to accomplish
its general, and any specific, public benefit purpose.
8. Provides that a director of a benefit corporation is not
liable for monetary damages for any failure of the
benefit corporation to create a general or specific
public benefit, and provides that a person who performs
the duties of a director in accordance with the
provisions of this bill is not liable for monetary
damages for any alleged failure to discharge the
person's obligations as a director.
9. Provides that a director of a benefit corporation does
not have a fiduciary duty to a person that is a
beneficiary of the general or specific public benefit
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purposes of a benefit corporation, and provides that a
benefit corporation is not liable for monetary damages
for any failure to create a general or specific public
benefit.
10.Prohibits any person from bringing an action or
asserting a claim against a benefit corporation or its
directors, except in a benefit enforcement proceeding,
and provides that a benefit enforcement proceeding may
only be commenced or maintained by the corporation, a
shareholder, a director, a person(s) that hold five
percent or more of the equity interests in an entity of
which the benefit corporation is a subsidiary, or other
persons specified in the articles or bylaws of the
benefit corporation.
11.Requires each benefit corporation to prepare an annual
benefit report, which must be sent to its shareholders
no later than 120 days after the close of the benefit
corporation's fiscal year, or at the same time it
delivers any other annual report to its shareholders,
and (with the exception of proprietary or financial
information) would have to post the benefit report on
its Internet Web site. The annual benefit report would
have to include a narrative description of all of the
following:
A. The process and rationale for selecting the
third-party standard used to prepare the benefit
report.
B. The ways in which the benefit corporation pursued
a general public benefit and one or more specific
public benefits during the applicable year, and the
extent to which those benefits were created.
C. Any circumstances that hindered the creation of a
general or specific public benefit by the benefit
corporation.
D. An assessment of the overall social and
environmental performance of the benefit corporation,
prepared in accordance with a third-party standard
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applied consistently with any application of that
standard in prior benefit reports or accompanied by
an explanation of the reasons for any inconsistent
application. The assessment would not need to be
audited or certified by a third party.
E. The name of each person or more that owns 5
percent or more of the outstanding shares of the
corporation.
F. A statement from the board of directors 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 covered by the
report. If, in the opinion of the board of
directors, the benefit corporation failed to pursue
its general, and any specific, public benefit
purpose, this statement would have to include a
description of the ways in which the benefit
corporation failed to pursue that purpose/those
purposes.
G. A statement of any connection between the entity
that established the third-party standard, or its
directors, officers, or material owners, and the
benefit corporation, or its directors, officers, and
material owners, including any financial or
governance relationship that might materially affect
the credibility of the objective assessment of the
third-party standard.
Similar Legislation
This bill is similar to SB 201 (DeSaulnier), which passed
the Senate (37-1) on June 1, 2011. Both bills allow for
the creation of for-profit companies with dual
for-profit/social-environmental missions written into their
articles of incorporation. Thus, these corporations could
simultaneously pursue missions of public good and private
wealth, with the knowledge and support of their
shareholders.
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Both bills require supermajority votes of the shareholders
of existing companies to enable the companies'
transformation into benefit/flexible purpose corporations,
and both provide dissenters' rights to shareholders of
existing companies, who decide they do not wish to own a
part of the newly formed benefit/flexible purpose
corporation. Both bills also require the publication of
annual reports, in which the corporations' success in
meeting their public benefits is discussed.
Yet, the supporters of both bills and many experienced
corporate attorneys assert that the two bills are very
different. The supporters of this bill and
SB 201 assert that both bills can become law, that they are
not duplicative or overlapping, and that the intended users
of the two corporate models, and the needs of these users,
are very different.
The following are some of the key differences between the
two bills, as described by the supporters of this bill,
augmented by a review of both bills by the Senate Banking
and Financial Institutions Committee:
1. SB 201 will likely attract the interest of large
corporations. It requires identification of one or more
specific public benefits by a flexible purpose
corporation, but does not require the use of any
specific metric to evaluate the ability of that
corporation to achieve its benefit(s), and does not
require review of the corporation's actions by a third
party. Instead, it provides a safe harbor for
corporations that utilize best practices to report on
their success in achieving their missions. It also
requires a very comprehensive annual report, in which
the flexible purpose corporation is required to list
material actions it took during the fiscal year to
achieve its special purpose objectives, and the impact
of those actions; and in which the corporation is
required to cite which metrics it used to evaluate its
performance, and why those metrics were selected.
Furthermore, any flexible purpose corporation that
incurs an expense related to the achievement of its
special purpose, which is expected to have a material
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adverse impact on its shareholders, is required to
prepare a special report describing that expenditure,
for submission to its shareholders, within 45 days of
the expenditure.
2. This bill is likely to attract small and medium-sized
businesses. It requires each benefit corporation to
achieve a general public benefit; the identification and
achievement of specific benefits is optional. Review of
the corporation by a third party, according to a
standard developed by that third party, is required.
The public benefit report required by this bill places
considerable emphasis on the benefit corporation's
ability to meet that third party standard. (Staff
observes that B Lab is one entity that has developed a
third party standard, which could be used by a benefit
corporation; thus, the company could stand to benefit
from enactment of this bill).
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/17/11)
B Lab (source)
Abacus Wealth Partners
Academies for Social Entrepreneurship
Accountable Develop
AGSJ
Alan Briskin Management Consultants
Alter Eco Fair Trade
American Lung Association in California
American Sustainable Business Council
AnewAmerica Community Corporation
Aquamantra
Bay Area Council
Bay Point Benefits
Beacon Management Consulting
Beam Inc.
Beck with Associates
Bike station/Mobis Transportation Alternatives
Birkenstock
Blitz Bazaar
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Blueprint Research and Design
BP Stewart and Co., Contracting
Bridge the Gap Consulting Inc.
Brion and Associates
Build It Green
California Association of Micro Enterprise Opportunity
CAMEO
Canal Alliance
Cannourish
CAP Global
Caratnet
Care2
Catalyst Coaching and Training
Center for Dynamic Governance
Chapman University
Chosen Futures
Clean Fund LLC
CleanFish
Common Sense Counseling
Communications Inc.
CORE Foods
Creative Management
Dana Smirin
Detour Agency
Dharma Merchant Services
Direct Dental
DNAGlobalNetwork.com
Dragonfly Designs
Dzambuling Imports
Elemental Herbs
Ellen Weinreb Sustainability Recruiting
Emerge
Enlightened Brand Incorporated
Environmental and Public Health Consulting
Equinox Landscape
Eurous Global Executive Leadership
Evergreen Lodge
Everson Financial
Exygy Web and Mobile
Fox Acupuncture
Give Something Back
Global Alliance for Incinerator Alternatives
GoodGuide, Inc.
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Great Place to Work Institute
Green Age 360
Green America
Green Chamber of Commerce
Green Design Systems
Green Retirement Plans, Inc.
GreenLab Creative
Guayakí Sustainable Rainforest Products
Hanson Bridgett LLP
Harrington Investments Inc.
Heller Consulting
Herriford Consulting
IdeaEncore Network
Image Integration
Imprint Capital
Indigenous Designs Corporation
Inquiring Systems, Inc.
Inspiring Results
Institute for Social Entrepreneurship
Integral Partnerships LLC
Integrative Psychophysical Therapy
Johnson and Associates
Jungwirth, Blackburn and Associates
KC Building
KINeSYS Inc.
Lake Royal Apartments
Latham Film LLC
Leadership and Strategy for Sustainable Systems
Living City Partners
LO*OP Center, Inc.
Longsplice Investments
Mal Warwick Associates| Donordigital
Mark Leibowitz Photography, Inc.
Marti Spiegelman MFA
Mendocino Wine Group, LLC
Meridian University
Merlone Geier Partners
Method Home Products Inc.
Mindful Investors
Minerva Consulting
MJ Everson Financial
Nancy Southern and Associates
Natural Logic, Inc.
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Nest Collective
New Avenue
New Foundry Ventures
New Harvest Capital
New Leaf Paper
New Paradigm Digest
New Resource Bank
New Voice of Business
NZ Consulting, Conscious Business
Opticos Design, Inc.
Oxford Leadership Academy USA
Partnership Capital Growth Advisors
Planet Cents
Planning for Sustainable Communities
Presidio Graduate School
Progressive Wealth Management
Project: Liftoff
Public Works, LLC
Quantum Intech, Inc.
Raphael Medicine and Therapies
Raymond H Katz, DMD
ReliaTech
Renesch Advisory Services
REthink Development
Revolution Foods
Rimon Law Group
RippleQ
RSF Social Alliance
SABEResPODER
Salesforce.com Foundation
Sara Ellis Conant Coaching and Consulting
Sergio Lub Handcrafted Jewelry, Inc.
ShareExchange
Silicon Valley Innovation Associates
Silicon Valley Leadership Group
Small Business California
Social Venture Network
Solar Works
Sparked
Spirit Rising Productions
Sun Light and Power
Sustainable Enterprise Conference
Sustainable World Coalition
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SVT Group
Swanton Berry Farm
TGNA
The Ballroom
The Clarity Project
The Green Riders
The Redwood Grove Group
The Rosebud Agency
The Sanders Partnership
The Terry Mandel Collaborative
The Vianova Group
TomZanders.com LLC
Tracking the Wisdom
Traditional Medicinals
Transportation Power, Inc.
Transpower
Turner Real Estate
US Green Building Council - CA Advocacy Committee
VeeV Spirits
Veritable Vegetable
Wendel Rosen
Wespay
West Company
WildEarth Guardians
Wise Solutions, Inc.
WorkLore
World Centric
OPPOSITION : (Verified 8/17/11)
Associated Builders and Contractors, Golden Gate Chapter
California Association of Nonprofits
California Park and Recreation Society
California Peace Officers Association
California Society of Association Executives
CASSS
Corporations and Government subcommittees of the Business
Law Section of the State Bar of California
Credit Management Association
San Diego County Apartment Association
The Diving Equipment and Marketing Association
ARGUMENTS IN SUPPORT : According to the author,
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"California leads the nation in innovation and
sustainability, but it does not have the statutory
framework to provide California businesses with 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. AB 361 creates a new corporate
form, which allows businesses to voluntarily elect an
alternative corporate structure with higher standards of
corporate purpose, accountability, and transparency."
The American Sustainable Business Council (of which B Lab
is a member) describes itself as a growing coalition of
business networks and businesses committed to advancing a
new vision, framework, and policies that support a vibrant,
equitable, and sustainable economy. To date, the
organizations that have joined the Council represent over
65,000 businesses, many of which are in California. The
Council believes that businesses need to have missions that
are broader than simply maximizing profit, and that
business leaders and investors need to be able to run their
businesses in ways that focus on more stakeholders. They
observe that 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. This bill provides the business model
needed by these entities.
ARGUMENTS IN OPPOSITION : The Corporations Committee of
the Business Law Section of the California State Bar
(Corporations Committee) is concerned that this bill will
enact a fundamental change to the fiduciary duties of
corporate directors and will pose a consequent risk to
shareholder protections. The Corporations Committee is
concerned that this bill will create a framework in which
directors are no longer accountable to their shareholders.
Under this bill, directors are wholly in control of the
nature of their fiduciary duties, because they have the
ability to select the third party standard by which their
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conduct will be measured, with no input from shareholders,
and because there are only vague substantive requirements
in this bill regarding the third party standard. This
presents the possibility that directors will be able to
shop for third party standards that suit their purposes to
the detriment of shareholders. The Corporations Committee
is concerned that, over time, varying third party standards
will develop, which will allow directors great discretion
to choose not just how stringent or lenient their duties
will be, but also the very substance of the duties
themselves.
The Corporations Committee also asserts that this bill
provides almost no protection to shareholders. Section
14620(a) (the portion of this bill which spells out the
fiduciary duties of the directors of benefit corporations)
tracks the traditional fiduciary duties found in Section
309 of the General Corporations Code, but eliminates any
references to shareholders, essentially eliminating any
duty of care or loyalty to shareholders. Furthermore,
because this bill lists so many topics that directors are
allowed to consider when making actions, this bill will
allow them to briefly consider, and then dismiss,
shareholder interests.
ASSEMBLY FLOOR : 58-17, 5/26/11
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Charles Calderon, Campos, Carter, Chesbro,
Conway, Cook, Dickinson, Eng, Feuer, Fletcher, Fong,
Fuentes, Furutani, Galgiani, Gatto, Gordon, Hagman, Hall,
Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman,
Jeffries, Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell,
Monning, Nestande, Olsen, Pan, Perea, V. Manuel Pérez,
Portantino, Skinner, Smyth, Solorio, Swanson, Torres,
Wieckowski, Williams, Yamada, John A. Pérez
NOES: Achadjian, Bill Berryhill, Donnelly, Beth Gaines,
Garrick, Grove, Halderman, Harkey, Knight, Logue,
Mansoor, Miller, Morrell, Nielsen, Silva, Valadao, Wagner
NO VOTE RECORDED: Cedillo, Davis, Gorell, Jones, Norby
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JJA:kc 8/17/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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