BILL ANALYSIS Ó
SB 201
Page 1
SENATE THIRD READING
SB 201 (DeSaulnier)
As Amended August 25, 2011
Majority vote
SENATE VOTE : 37-1
BANKING & FINANCE 9-0 JUDICIARY 6-3
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|Ayes:|Eng, Achadjian, Fuentes, |Ayes:|Feuer, Atkins, Dickinson, |
| |Gatto, Roger Hernández, | |Huber, Monning, |
| |Lara, Morrell, Perea, | |Wieckowski |
| |Torres | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
| | |Nays:|Wagner, Beth Gaines, |
| | | |Jones |
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APPROPRIATIONS 10-5
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|Ayes:|Fuentes, Blumenfield, | | |
| |Bradford, Charles | | |
| |Calderon, Campos, Davis, | | |
| |Dickinson, Hill, Lara, | | |
| |Solorio | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Donnelly, | | |
| |Nielsen, Norby, Wagner | | |
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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
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Secretary of State (SOS).
3)Expands definition of "close corporation" to include a "close
flexible purpose corporation."
4)Defines "close flexible purpose corporation" as a flexible
purpose corporation that is also a close corporation.
5)Defines "flexible purpose corporation subject to the insurance
code as an insurer" as a flexible purpose corporation that has
approval from the Department of Insurance to operate as an
insurer and has filed the appropriate documents with the
Secretary of State.
6)Enacts conforming changes to the Corporations Code to
recognize FPCs.
7)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.
8)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 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.
9)Requires that each existing company wishing to become an FPC
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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.
10)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.
11)Establishes that shareholders of an existing corporation that
decide to convert to an FPC would be entitled to dissenter's
rights, which are spelled out in existing law.
12)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 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;
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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.
13) 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.
14)Specifies that unless previously reported in the most recent
annual report, the special purpose current report shall
identify and discuss any decision by the board or action by
management to do either of the following:
a) Withhold expenditures what were to have been made in
furtherance of the special purpose as contemplated in the
most recent annual report, and the nature of those planned
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expenditures, as well as, whether the propose expenditures
would have had a material positive impact on the
corporation's furtherance of its special purpose
objectives; or;
b) Determine that the special purpose has been satisfied or
should no longer be pursued, whether temporarily or
permanently.
15)Provides that nothing within the provisions created by the
bill shall be construed as negating existing charitable trust
principals or the Attorney General's authority to enforce any
charitable trust.
16)Makes various technical changes and renumbers various
sections and provisions of the Corporations Code.
17)Contains chaptering out language concerning AB 1211 (Silva).
FISCAL EFFECT : According to the Assembly Appropriations
Committee, the Secretary of State indicates initial costs of
approximately $10,000 to create new filing forms and
instructions, and to revise the Internet Web site. Ongoing
costs include personnel costs of about $50,000 annually. Staff
will review filings, respond to legal correspondence and oversee
any challenges that may arise with the new entities. Actual
costs will depend on the number of filings for the new business
type. The Department of Corporations indicates that costs will
likely be minor for overseeing the issuance of securities.
COMMENTS : Should SB 201 become enacted, California would be the
first state to establish "flexible purpose corporations." At
least four 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 (10 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
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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 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. This bill 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
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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 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
five 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
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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.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN:
0002119