BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 201|
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                              UNFINISHED BUSINESS


          Bill No:  SB 201
          Author:   DeSaulnier (D), et al.
          Amended:  8/25/11
          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

           SENATE FLOOR  :  37-1, 6/1/11
          AYES:  Alquist, Anderson, Berryhill, Blakeslee, Calderon, 
            Cannella, Correa, De León, DeSaulnier, Dutton, Evans, 
            Fuller, Gaines, Hancock, Hernandez, Huff, Kehoe, La 
            Malfa, Leno, Lieu, Liu, Lowenthal, Negrete McLeod, 
            Padilla, Pavley, Price, Rubio, Runner, Simitian, 
            Steinberg, Strickland, Vargas, Walters, Wolk, Wright, 
            Wyland, Yee
          NOES:  Harman
          NO VOTE RECORDED:  Corbett, Emmerson

           ASSEMBLY FLOOR  :  52-21, 8/30/11 - See last page for vote


                                                           CONTINUED





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          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.  

           Assembly Amendments  expand the definition of "close 
          corporation," define "close flexible purpose corporation," 
          provide that nothing in the bill shall be construed as 
          negating existing charitable trust principals or the 
          California Attorney General's authority to enforce any 
          charitable trust, specify that unless previously reported 
          in the most recent annual report, the special purpose 
          current report shall identify and discuss specified board 
          or management actions, and add double-jointing language 
          with AB 1211 (Silva).

           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.

          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. Expands definition of "close corporation" to include a 
             "close flexible purpose corporation." 







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          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 SOS. 

          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 







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             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. 

          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; 








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             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. 

          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. 








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          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 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). 

           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 







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          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  :   (Per Assembly Judiciary Committee analysis of 
          6/28/11) (Unable to reverify)

          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 







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           OPPOSITION  :    (Per Assembly Judiciary Committee analysis 
          of 6/28/11) (Unable to reverify)

          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 
          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 







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          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 
            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 







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          corporation.


           ASSEMBLY FLOOR  :  52-21, 8/30/11
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, 
            Block, Blumenfield, Bonilla, Bradford, Brownley, 
            Buchanan, Butler, Charles Calderon, Campos, Carter, 
            Cedillo, Chesbro, Davis, Dickinson, Eng, Feuer, Fletcher, 
            Fong, Fuentes, Furutani, Galgiani, Gatto, Gordon, Hall, 
            Hayashi, Roger Hernández, Hill, Huber, Huffman, Lara, 
            Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning, Olsen, 
            Perea, V. Manuel Pérez, Portantino, Skinner, Solorio, 
            Swanson, Torres, Wieckowski, Williams, John A. Pérez
          NOES:  Conway, Cook, Donnelly, Beth Gaines, Garrick, Grove, 
            Hagman, Halderman, Harkey, Jeffries, Jones, Knight, 
            Logue, Mansoor, Miller, Nielsen, Norby, Silva, Smyth, 
            Valadao, Wagner
          NO VOTE RECORDED:  Bill Berryhill, Gorell, Hueso, Morrell, 
            Nestande, Pan, Yamada


          JJA:mw  8/30/11   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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