BILL ANALYSIS Ó
SB 1301
Page 1
SENATE THIRD READING
SB 1301 (DeSaulnier)
As Amended June 30, 2014
Majority vote
SENATE VOTE :36-0
BANKING & FINANCE 10-2 JUDICIARY 9-0
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|Ayes:|Dickinson, Achadjian, |Ayes:|Wieckowski, Wagner, |
| |Bonta, Chau, Gatto, | |Alejo, Chau, Dickinson, |
| |Linder, Perea, Rodriguez, | |Garcia, Maienschein, |
| |Weber, Williams | |Muratsuchi, Stone |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Allen, Harkey | | |
| | | | |
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SUMMARY : Changes all references to a flexible purpose corporation
(FPC) to a social purpose corporation (SPC). Specifically, this
bill :
1)Authorizes a corporation formed (pursuant to the Corporate
Flexibility Act of 2011) before January 1, 2015, to elect to
convert its status from a FPC to a SPC by amending its articles of
incorporation.
2)Requires that any reference to SPC be deemed a reference to FPC,
for any FPC formed prior to January 1, 2015, that has not amended
its articles of incorporation to convert its status to a SPC.
3)Requires when a SPC converts from a FPC to:
a) Modify the name of the corporation, revise the statement of
purpose, and make such other conforming changes as may be
necessary or desired; and,
b) Be approved by the affirmative vote of at least two-thirds of
each class, or a greater vote if required in the articles, of
outstanding shares of that changing corporation.
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4)Requires the directors of a SPC to consider and give weight to
those factors the director deems relevant, including the short- and
long-term prospects of the corporation, the best interests of the
corporation and its shareholders, and the purposes of the
corporation as set forth in its articles of incorporation.
5)Allows shareholders of a SPC to maintain a derivative lawsuit to
enforce the requirements.
6)Makes several changes that are intended to make technical
corrections, fix drafting errors, resolve unintended confusion, and
insert language that was unintentionally omitted from the 2011 bill
that created FPCs (SB 201 (DeSaulnier), Chapter 740):
a) Clarifying that the term "domestic other business entity"
includes, but is not limited to, "a limited liability company,
partnership, or social purpose corporation";
b) Requiring the articles of incorporation of a SPC to enumerate
the specific purposes the corporation has been formed to
further;
c) Providing dissenters' rights to the shareholders of a SPC
whose shareholders vote to convert to a domestic corporation or
other business entity, or which is the disappearing corporation
in a corporate merger with an entity that is not a SPC;
d) Changing the approval threshold for a SPC to abandon a
proposed transaction to sell, lease, convey, exchange, transfer,
or otherwise dispose of all or substantially all of the assets
of the corporation to two-thirds of the outstanding shares
rather than to all of the outstanding shares; and,
e) Clarifying that the principal terms of a reorganization must
be approved by at least two-thirds, or a greater vote if
required in the articles of incorporation, of the outstanding
shares of any class of a social purpose corporation that is a
party to a merger or reorganization, if holders of shares of
that class receive shares of the surviving or acquiring social
purpose corporation having different rights, preferences,
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privileges, or restrictions than those surrendered.
EXISTING LAW :
1)Provides for the formation and regulation of corporations.
[Corporation Code Section 100 et seq.]
2)Provides for the formation and regulation of non-profit entities.
[Corporation Code Section 5000 et seq.]
3)Requires each FPC to list its flexible purposes in its articles of
incorporation. These flexible purposes may include any of the
following:
a) One or more charitable or public purpose activities that a
nonprofit public benefit corporation is authorized to carry out;
and,
b) Promoting positive short- or long-term effects of, or
minimizing adverse short- 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.
4)Provides that each FPC's articles of incorporation may 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.
5)Establishes that each existing company wishing to become an FPC
through conversion or reorganization of an existing corporate
entity requires 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
is 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 is not intended to require a two-thirds or higher vote, is
the merger of one FPC into another FPC with a similar special
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purpose.
6)Shareholders of an existing corporation that decide to convert to
an FPC are 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.
7)Each FPC is required to 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. To the extent consistent with reasonable
confidentiality requirements, each FPC must post its MD&A on its
web site. Each FPC's 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.
8)In addition to the annual report described above, each FPC must
prepare and distribute a special purpose current report to its
shareholders within 45 days of an expenditure, which is made in
furtherance of its special purpose objectives, and which had or is
believed likely to have a material adverse impact on the FPC's
results of operations or financial condition for a quarterly or
annual fiscal period. This special purpose current report must
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.
FISCAL EFFECT : None
COMMENTS : In 2011, SB 201 codified the product of a working group of
corporate law attorneys, organized in 2008 to facilitate the creation
of a new corporate form intended to give companies in California
greater flexibility to combine profitability with broader social or
environmental purposes. SB 201 called these new corporations "FPCs."
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California was the first and only state thus far to enact a FPC.
California was the sixth state to create benefit corporations, 15
states total have created benefit corporations. (AB 361 (Huffman),
Chapter 728, Statutes of 2011, see below).
According to the author, this bill is needed to "build on the
framework of SB 201, adjusting certain aspects of the existing
legislation to make the corporate form more workable for business
owners and more effective at protecting the social mission."
According to the Secretary of State's (SOS) Office, as of March 24,
2014, since FPCs and benefit corporations were created on January 1,
2012, 210 corporations have formed, with 62 considered FPCs. Of the
62 FPCs, 34 existing corporations changed their status to a FPC;
therefore only 28 entirely new corporations were created as a FPC.
Washington
On June 7, 2012, the State of Washington created SPCs. In
Washington, a SPC allows a corporation's shareholders and directors
to put a social purpose (such as saving the environment or saving the
whales) above the purpose of making a profit. The SPC in Washington
closely mirrors California's FPC. Unlike California, Washington did
not enact benefit corporations. Washington is the only state to have
"social purpose corporations."
Previous Legislation
SB 201 established the Corporate Flexibility Act of 2011 which
created a new corporate form called a FPC. Provided 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 SOS.
AB 361 authorized the creation of a new corporate form called a
benefit corporation, and provides for the rules that must be followed
by these types of entities, and by other types of entities wishing to
become benefit corporations.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916) 319-3081
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FN: 0004149