BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 201|
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THIRD READING
Bill No: SB 201
Author: DeSaulnier (D), et al.
Amended: 3/14/11
Vote: 21
SENATE BANKING & FINANCIAL INST. COMMITTEE : 7-0, 4/6/11
AYES: Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla,
Walters
SENATE JUDICIARY COMMITTEE : 3-1, 4/12/11
AYES: Evans, Corbett, Leno
NOES: Harman
NO VOTE RECORDED: Blakeslee
SENATE APPROPRIATIONS COMMITTEE : 9-0, 5/26/11
AYES: Kehoe, Walters, Alquist, Emmerson, Lieu, Pavley,
Price, Runner, Steinberg
SUBJECT : Flexible purpose corporations: corporate
mergers
SOURCE : California Legal Working Group for New
Corporation Forms
DIGEST : This bill authorizes the creation of a new
corporate form called a flexible purpose corporation, and
provides for all of the rules that must be followed by
these types of entities and by other types of entities
wishing to become flexible purpose corporations.
CONTINUED
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ANALYSIS : Existing law authorizes and regulates the
formation and operation of corporations and nonprofit
corporations and specifies the respective purposes for
which they may lawfully be formed. Existing law specifies
the duties of corporate directors and the rights of
shareholders.
Specifics of the bill
1. Establishes a new corporate form called a flexible
purpose corporation (FPC), and provides that one or more
natural persons, partnerships, associations, FPCs, or
corporations, domestic or foreign, may form an FPC under
the Corporations Code, by executing and filing articles
of incorporation with the Secretary of State. Enacts a
significant number of conforming changes to the
Corporations Code, to recognize the existence of this
new corporate form.
2. In its articles of incorporation, each FPC would have to
list its flexible purposes, which could be any of the
following:
One or more charitable or public purpose
activities that a nonprofit public benefit
corporation is authorized to carry out;
Promoting positive short-term or long-term
effects of, or minimizing adverse short-term or
long-term effects of the FPC's activities on the
FPC's employees, suppliers, customers, and creditors;
the community and society; and/or the environment.
3. Each FPC's articles of incorporation could also provide
for, but are not required to include the following: a
provision limiting the duration of the FPC's existence
to a specified date; a provision limiting or restricting
the business in which the FPC may engage or the powers
that the FPC may exercise, or both, provided these
restrictions are consistent with the purpose(s) of the
FPC; and a provision requiring shareholder approval for
any corporate action.
4. Each existing company wishing to become an FPC through
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conversion or reorganization of an existing corporate
entity would require 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 an FPC's articles of incorporation, or
to create or dissolve an FPC through merger or
acquisition. The only type of action involving the
formation or dissolution of an FPC, which would not
require a two-thirds or higher vote, is the merger of
one FPC into another FPC with a similar special purpose.
5. Shareholders of an existing corporation that decided to
convert to an FPC would be entitled to dissenter's
rights, which are spelled out in existing law
(Corporations Code 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.
6. Each FPC must prepare an annual report, which must be
sent to its shareholders no later than 120 days after
the close of the FPC's fiscal year, and at least 15 days
prior to the shareholders annual meeting (35 days prior
if sent via bulk mail). In addition to a balance sheet,
income statement, and a statement of cashflows for that
fiscal year, the annual report must also include a
management discussion and analysis (MD&A) regarding the
FPC's stated purpose or purposes, as set forth in its
articles of incorporation, and, to the extent consistent
with reasonable confidentiality requirements, must post
the MD&A on its Web site. Each FPC's MD&A is required
to include the following information, at a minimum:
An identification and discussion of the short-and
long-term objectives of the FPC that relate to its
special purpose(s), and an identification and
explanation of any changes made to these special
purpose objectives during the fiscal year;
An identification and discussion of material
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actions taken by the FPC during the fiscal year to
achieve its special purpose objectives, the impact of
those actions, including the causal relationships
between the actions and the reported outcomes, and
the extent to which those actions achieved the
special purpose objectives for the fiscal year.
An identification of material actions, together
with the intended impact of those actions, which the
FPC expects to take in the short- and long-term to
achieve its special purpose objectives.
A description of the process for selecting, and
an identification and description of the financial,
operating, and other measures used by the FPC during
the fiscal year for evaluating its performance in
achieving its special purpose objectives, including
an explanation of why the FPC selected those measures
and an identification and discussion of the nature
and rationale for any material changes in those
measures made during the fiscal year.
An identification and discussion of any material
operating and capital expenditures incurred by the
FPC during the fiscal year in furtherance of
achieving its special purpose objectives, a good
faith estimate of any additional material operating
or capital expenditures the FPC expects to incur over
the next three fiscal years in order to achieve its
special purpose objectives, and other material
expenditures of resources incurred by the FPC during
the fiscal year, including employee time, in
furtherance of achieving its special purpose
objectives, including a discussion of the extent to
which that capital or use of other resources served
purposes other than, and in addition to, furthering
the achievement of the special purpose objectives.
7. In addition to the annual report described above, each
FPC would have to prepare and distribute a special
purpose current report to its shareholders within 45
days of an expenditure, which was made in furtherance of
its special purpose objectives, and which had or is
believed likely to have a material adverse impact on the
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FPC's results of operations or financial condition for a
quarterly or annual fiscal period. This special purpose
current report would have to identify the expenditure or
group of related or planned expenditures, which had or
was likely to have a material adverse impact on the
FPC's financial condition.
Comments
If this bill is enacted, California would be the first
state in the country to authorize flexible purpose
corporations. To date, a handful of other states have
authorized the creation of corporations that allow a
special purpose mission to be paired with a profitability
objective. Illinois, Michigan, Utah, Vermont, and Wyoming
have enacted so-called L3C statutes, while Arkansas,
Colorado, Georgia, Louisiana, Maryland, Missouri, New York,
North Carolina, Oregon, and Tennessee have considered or
are considering such statutes. However, the working group
notes that there is a clear difference between the FPC
being proposed and the L3C option, and states that the L3C
option would not achieve the purposes sought through
creation of an FPC statute. According to the working
group, the L3C is primarily designed to be used by
for-profit companies, for which a charitable purpose is
primary, and that wish to obtain program-related
investments from foundations. This distinguishes them from
FPCs, which are primarily intended to be used by for-profit
companies seeking traditional capital market investments.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13
2013-14 Fund
Admin expenses $65 $55 $55
General
SUPPORT : (Verified 5/26/11)
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California Legal Working Group for New Corporate Forms
(source)
State Bar of California, Business Law Section, Corporations
Committee
Benetech
Brightpath Capital Partners, LP
GreenBiz Group Inc.
Green Order
iVeridis Corporation
Lawyers' Committee for Civil Rights of the San Francisco
Bay Area
Leapfrog Network
Omidyar Network
OneSun
Pacific Community Ventures
Revolution Foods
Sierra Business Council
Social Profit Network
SourceTrace Systems, Inc.
SPNSO, Inc.
Troy and Alana Pack Foundation
OPPOSITION : (Verified 5/26/11)
California Association of Nonprofits
California Society of Association Executives
Blood Centers of California
California Church Impact
ARGUMENTS IN SUPPORT : The California Legal Working Group
for New Corporate Forms drafted the bill and requests
support for its passage. Members of this group include a
diverse collection of individual corporate lawyers in
California, with experience in academia, law firms serving
non-profit organizations, organizations fostering social
entrepreneurship, and large and small law firms serving
corporate and financial institution clients. Most of the
arguments justifying the creation of a new type of business
model like the one proposed by this bill were provided by
this group. In its letter of support, the group observes
that non-profit corporations often prove unsuitable for
social entrepreneurs, as the IRS places strict requirements
on the nature of tax-exempt activities, and the process of
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seeking tax-exempt status is prohibitively lengthy for some
organizations. For-profit entrepreneurs seeking to raise
traditional investment capital have been limited to two
corporate forms (the corporation and the limited liability
company), both of which have downsides for entrepreneurs
who wish to seek out multiple or blended objectives. The
working group believes that SB 201 offers a workable
alternative, which can be used by firms that are
constrained by existing alternatives available to them.
The Sierra Business Council, writing in support, observes:
"Today's business leaders have a deeply embedded sense of
commitment to their community. They believe that 21st
Century companies can be in the business of doing well and
doing good at the same time; advancing strategies and
products that create prosperity and act as catalysts to
solve some of our most vexing social and environmental
problems?SB 201 will help us engage shareholders who share
our sense of social entrepreneurship, access capital that
understands the concept, and demonstrate to the Internal
Revenue Service that non-profits can act entrepreneurially
while fulfilling their mission."
Omidyar Network, a firm that invests in market-based
efforts to catalyze economic, social, and political change
states that it frequently considers investing in
organizations that would benefit tremendously through use
of the Flexible Purpose Corporation corporate form. Using
a Flexible Purpose Corporation model, these companies can
achieve much greater scale, and eventually much greater
positive social impact.
ARGUMENTS IN OPPOSITION : The California Association of
Nonprofits (CAN) describes its mission as follows: "to
expand and strengthen the influence, professionalism and
effectiveness of nonprofit organizations in a manner that
builds their capacity to accomplish their missions and
preserves the idealism and value of nonprofit organizations
in California." Its concerns are centered on four issues
(capacity, sustainability, efficiency, and oversight), and
are reflected in the following questions, taken from CAN's
letter of opposition:
"Will flexible purpose corporations reduce demands on the
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capacity of already over-extended existing nonprofit and
public entities to meet social, educational, cultural,
and environmental needs, resulting in net gain in 'social
good'? Or will they simply dilute the pool of funds
available to meet community needs?
"Will flexible purpose corporations be independently
self-sustaining or will they compete in the philanthropic
and financial marketplace with existing nonprofit
entities?
"Will the addition of flexible purpose corporations as
potential competitors with nonprofits result in more
innovative, more efficient, and more effective use of
public, private, and charitable resources?"
CAN also observes that this bill does not provide for
external independent review, which would enable individuals
interested in a given special purpose to make informed
decisions about whether to invest in a flexible purpose
corporation or contribute to a nonprofit public benefit
corporation.
JJA:mw 5/26/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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