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.  


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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
          U.S. 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)

          California Association of Nonprofits
          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, 
          "California leads the nation in innovation and 
          sustainability, but it does not have the statutory 
          framework to provide California businesses with the ability 
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          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 
          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 
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          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


          JJA:kc  8/24/11   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE
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