BILL ANALYSIS Ó
SB 201
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Date of Hearing: June 20, 2011
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 201 (DeSaulnier) - As Amended: March 14, 2011
SENATE VOTE : 37-1
SUBJECT : Flexible purpose corporations: corporate mergers.
SUMMARY : Establishes the Corporate Flexibility Act of 2011.
Specifically, this bill :
1)Creates a new corporate form called a flexible purpose
corporation (FPC).
2)Provides that one or more natural persons, partnerships,
associations, FPCs, or corporations, domestic or foreign, may
form a FPC under the California Corporations Code, by executing
and filing articles of incorporation with the Secretary of State
(SOS).
3)Enacts conforming changes to the Corporations Code to recognize
FPCs.
4)Requires in the articles of incorporation that each FPC list its
flexible purposes, which could be any of the following:
a) One or more charitable or public purpose activities that a
nonprofit public benefit corporation is authorized to carry
out; or,
b) Promoting positive short-term or long-term effects of, or
minimizing adverse short-term or long-term effects of the
FPCs activities on the FPCs employee, suppliers, customers,
and creditors, the community and society and/or the
environment.
5)Provides that each FPCs articles of incorporation can include the
following:
a) A provision limiting the duration of the FPCs existence to
a specified date;
b) A provision limiting or restricting the business in which
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the FPC may engage or the powers that the FPC may exercise, or
both, provided these restrictions are consistent with the
purpose of the FPC; or,
c) A provision requiring a shareholder approval for any
corporate action.
6)Requires that each existing company wishing to become an FPC
through conversion or reorganization to take an affirmative vote
of at least two-thirds of each of its classes of shareholders, or
a higher vote threshold, if required in the articles of
incorporation.
7)States that the only type of action involving the formation or
dissolution of an FPC that would not require a two-thirds vote
would be a merger of one FPC into another FPC with a similar
special purpose.
8)Establishes that 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.
9)Requires each FPC to prepare an annual report, which must be sent
to its shareholders no later than 120 days after the close of the
FPCs 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
cash flows for that fiscal year, the annual report must also
include a management discussion and analysis (MD&A) regarding the
FPCs 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 FPCs MD&A is required to include the following information,
at a minimum:
a) 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;
b) An identification and discussion of material 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
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special purpose objectives for the fiscal year;
c) 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;
d) 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; and,
e) 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.
10) 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 FPCs 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 FPCs financial condition.
EXISTING LAW
1)Provides for the formation and regulation of corporations.
(Corporation Code, Section 100 et seq.)
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2)Provides for the formation and regulation of non-profit entities.
(Corporation Code, Section 5000 et seq.)
3)Provides a standard of care that a director must use in
discharging his or her duties. A director's duties must be
performed in good faith, in a manner the director believes to be
in the best interests of the corporation and the shareholders,
and with the care, including reasonable inquiry that "an ordinary
prudent person in a like position would use under similar
circumstances." (Corporations Code, Sections. 309(a) and 5231.)
FISCAL EFFECT : Unknown
COMMENTS :
Should AB 201 become enacted, California would be the first state
to establish "flexible purpose corporations." At least 4 other
states have established "benefit corporations" and a number of
other states are looking into creating benefit corporations.
Maryland, Vermont, Virginia and New Jersey have adopted benefit
corporations. Hawaii, Michigan, New York, North Carolina,
Pennsylvania and Virginia have introduced legislation to create
benefit corporations.
This measure stems from the California Working Group for New
Corporate Forms (ten attorneys) that has been looking into creating
a FPC since 2008. The goal of the working group was to design a
new division in the Corporations Code to facilitate the
organization of companies in California with greater flexibility
for combining profitability with broader social or environmental
purpose.
FPC
A FPC would encourage and expressly permit companies to be formed
or converted from other forms to pursue one or more purposes in
addition to creating economic value for shareholders.
FPCs would be required to set forth their special purpose in their
articles of incorporation. That special purpose mission would be
anchored, unless and until two thirds of each class of voting
shares decided otherwise (or a greater threshold, if so specified
in the articles of incorporation). The directors of a FPC would be
protected from decision-making involving trade-offs between
profitability and the special purpose(s). Any merger or
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reorganization materially altering or eliminating an existing FPCs
special purpose, and any decision by any other business entity to
become a FPC would require the same supermajority vote. Each FPC
would be required to provide annual reports on its impact toward
achieving its special purpose(s), and an estimate of future
anticipated expenditures. Shareholders of a FPC who object to an
action requiring a shareholder vote in connection with a
conversion, reorganization, or merger would have dissenter's
rights, which would allow them to cash out their shares in the FPC.
Dissenters' rights would not be available for shareholders who
object to a material change in a FPCs special purpose.
In contrast, a traditional corporation must be mindful of
shareholder interests in the profits of the corporation. In a
traditional corporation directors are required to utilize good
faith in taking actions for the best interests of the corporation
and the shareholders. A main goal is to maximize shareholder
value. Directors are liable to shareholders in cases where
shareholders disagree with not-for-profit activities. AB 201 has
the intention to make it easier for corporations to adopt and
implement meaningful strategies by allowing directors the
flexibility to pursue social and environmental purposes in addition
to profitability.
How does a FPC differ from a benefit corporation (B-Corp)? A
B-Corp allows corporations to engage in activities that benefit
non-profit interests. According to the Working Group the main
differences include:
a)B-Corp lives under a legislative prescribed standard that
requires a material positive impact on society and the
environment, taken as a whole, as compared FPCs that must include
one or more special purposes in their articles;
b)B-Corp requires that the benefit being achieved be measured in
accordance with the third-party standard, whereas, FPCs are
provided added protection in they apply "best practices";
c)In determining what is in the best interests of the corporation,
the directors of a B-Corp must consider the impacts of any action
or proposed action upon various constituents or stakeholders of
the corporation, whereas, the directors of a FPC must consider
the impacts of any action of any special purpose;
d)B-Corp legislation requires the appointment of a Benefit Director
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and Benefit Officer who must certify compliance with the public
benefit, whereas the FPC legislation does not; and,
e)B-Corp legislation creates a new right of action for enforcement
of benefit, whereas, the FPC legislation relies on the
transparency of requirements and seeks to provide the fullest
measure of protection to directors in order to permit innovation
and an unfettered application of their business judgment in
making any necessary trade-offs between special purpose and
maximizing shareholder value without fear of litigation.
In addition to the B-Corp, another alternative is the L3C or low
profit limited liability company. This alternative exists in 5
other states: Illinois, Michigan, Utah, Vermont, and Wyoming. It
is a statutory type of limited liability companies (LLC) that
permits LLCs to be organized both for income and wealth
accumulation and for socially beneficial purposes. This form would
be utilized by a for-profit company with a charitable purpose
wishing to attract program related investments by foundations. The
charitable purpose of the company would be the primary purpose with
making a profit the secondary purpose.
EXAMPLE
According to an article titled, "Protecting your Mission: Legal
tools to keep your Company on the Righteous Path," Ben Cohen and
Jerry Greenfield founded Ben and Jerry's Ice Cream in 1978. The
mission of Ben and Jerry's was to create top quality ice cream and
give back to the community. They donated 7.5% of pretax profits to
charity and partnered with nonprofits to open shops in inner city
neighborhoods to employ low-income residents. The company's feel
good image attracted the interest of multinational corporations.
In 2000, Unilever made a buyout offer to the company's
shareholders. Even though Ben and Jerry did not want to sell out,
they had little choice. The board could not risk accepting a lower
competing offer without exposing itself to litigation from
shareholders asserting their right to the highest possible return
at the expense of other considerations- a right upheld by many
courts. Since the takeover, the donations and inner-city shops
have gone by the wayside.
ARUGMENTS IN SUPPORT
According to the California Legal Working Group for New Corporate
Forms, AB 201 allows FPCs to integrate the for-profit orientation
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of the traditional corporation, with its statutory certainty and
standardization, with a special purpose mission, by encouraging and
expressly permitting companies formed or converted to pursue one or
more purposes in addition to creating economic value for
shareholders. AB 201 creates an important avenue for
entrepreneurs, corporate boards and investors to meld profitably
with a broader social or environmental purpose without the
traditional obstacles.
According to the State Bar of California, Business Law Section,
Corporations Committee, they perceive a demand among investors and
companies for a more flexible corporate regime and broad political
support in California for changing the Corporations Code to permit
Corporations and their boards of directors to consider interests
other than shareholder returns.
ARGUMENTS IN OPPOSITION
The California Association of Nonprofits believes the measure needs
a more public vetting. SB 201 presents historic and difficult
choices that will affect the type, scope and integrity of social,
educational, cultural, and environmental services delivered to the
people of California for decades to come. There is significant
risk involved that needs to be more closely examined, including
opportunity for abuse and detrimental impacts of qualify of
life-saving resources, such as the bloody supply.
The California Society of Association Executives opposes the bill
one two grounds: more time is needed to examine the potential
impacts of the measure on the non-profit community, and the scope
and impact of the bill is tremendous but unclear.
RELATED LEGISLATION
AB 361 (Huffman, 2011 Legislative Session) would authorize and
regulate a new corporate entity called the Benefit Corporation,
which would allow corporations to form in ways similar to this
bill.
PRIOR LEGISLATION
SB 1463 (Desaulnier, 2010 Legislative Session) would have created
FPCs in order to authorize corporations to participate in
designated for-profit and not-for-profit activities. (Senate
Judiciary Committee)
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AB 2944 (Leno, 2008 Legislative Session) would have allowed a
corporate director, when making business decisions on behalf of the
corporations, to consider several factors, such as the long and
short term interest of the corporation and shareholder, the
corporation's employee, suppliers, customers, and creditors,
community and societal consideration, and the environment. (Vetoed
by Governor)
QUESTIONS TO CONSIDER
This measure is similar to AB 361 (Huffman). Both bills take two
different approaches, would it benefit the state to determine,
possibility through an oversight hearing, which approach would
better serve California corporations and non-profits?
Could this measure not only encourage corporations to stay in
California but also persuade new corporations to come to
California?
REGISTERED SUPPORT / OPPOSITION :
Support
Benetech
Brightpath
California Legal Working Group for New Corporate Forms
Corporations Committee State Bar of California
GreenBiz
GreenOrder
iVeridis Corporation
Lawyers' Committee for Civil Rights of the San Francisco Bay
Leapfrog Network
Omidyar Network
OneSun
Pacific Community Ventures
Revolution Foods
Sierra Business Council
Social Profit Network
Source Trace Systems, Inc.
SPNCO, Inc.
The Troy and Alana Pack Foundation
Nonprofit & Unincorporated Organizations Committee State Bar of
California (support if amended)
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Opposition
Blood Centers of California
California Association of Nonprofits (CAN)
California Church IMPACT
California Society of Association Executives (CalSAE)
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081