BILL ANALYSIS                                                                                                                                                                                                    ”



                                                                  SB 201
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           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 HernŠndez,   |     |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


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