BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 361| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 AB 361 Page 2 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 AB 361 Page 3 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 AB 361 Page 4 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. AB 361 Page 5 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 AB 361 Page 6 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 AB 361 Page 7 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. AB 361 Page 8 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 AB 361 Page 9 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 AB 361 Page 10 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. AB 361 Page 11 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. AB 361 Page 12 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 AB 361 Page 13 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, AB 361 Page 14 "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 AB 361 Page 15 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 AB 361 Page 16 JJA:kc 8/17/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****