BILL ANALYSIS �
SB 201
Page 1
SENATE THIRD READING
SB 201 (DeSaulnier)
As Amended March 14, 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 Hern�ndez, | |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 Secretary of State
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(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
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
decide to convert to an FPC would be entitled to dissenter's
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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
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
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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.
FISCAL EFFECT : Unknown
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 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
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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 decisionmaking 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 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";
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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 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.
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Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0001632