BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 361
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          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 


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