BILL ANALYSIS Ó
AB 361
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 361 (Huffman)
As Amended July 12, 2011
Majority vote
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|ASSEMBLY: |58-17|(May 26, 2011) |SENATE: |23-7 |(August 22, |
| | | | | |2011) |
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Original Committee Reference: JUD.
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;
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;
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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
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.
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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.
The Senate amendments :
1)Clarify that corporate actions must be approved by a greater
vote than two-thirds of the outstanding shares of the benefit
corporation if such a margin is required in its articles of
incorporation.
2)Require that the articles of incorporation shall identify any
specific public benefit adopted by the benefit corporation and
also specifically state "This corporation is a benefit
corporation."
AS PASSED BY THE ASSEMBLY , this bill was substantially similar
to the version approved by the Senate.
FISCAL EFFECT : According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS : According to the author, the California Corporations
Code lacks a framework for corporations to voluntarily organize
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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
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
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fiduciary duty and standard of consideration and would
require a two-thirds majority vote of shareholders to remove
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."
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
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financial relationship with the benefit corporation or any of
its subsidiaries.
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: 0001814