BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 1301 (DeSaulnier) Hearing Date: April 9, 2014
As Introduced: February 21, 2014
Fiscal: No
Urgency: No
SUMMARY Would rename "flexible purpose corporations (FPCs)" as
"socially responsible corporations," require a 2/3rds vote
(rather than a majority vote) for an existing business
association formed as a trust to become a socially responsible
corporation, require (rather than allow) the directors of a
socially responsible corporation to consider the special purpose
of the socially responsible corporation when making their
decision, provide for dissenters' rights to shareholders of
socially responsible corporations, and make technical and
clarifying changes to correct and clarify the FPC law.
DESCRIPTION
1. Would change all references to FPCs in the Corporations
Code to "socially responsible corporations."
2. Would provide that any FPC formed before January 1, 2015
shall continue its existence on and after January 1, 2015 as
a socially responsible corporation (this language is
intended to ensure that the provisions of the Corporations
Code, which will no longer include the term FPC, still apply
to these corporations). However, these corporations will
not be required to formally change their names nor their
articles of incorporation to reflect themselves as socially
responsible corporations.
3. Would require (rather than authorize) the directors of a
socially responsible corporation 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.
SB 1301 (DeSaulnier), Page 2
4. Would make 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. Amendments that are represented by the author as
falling into these categories include amendments that would:
a. Clarify that the term "domestic other business
entity" includes, but is not limited to, a limited
liability company, partnership, or socially responsible
corporation."
b. Require existing business associations formed as
trusts and wishing to convert to socially responsible
corporations and socially responsible corporations
wishing to convert to domestic other business entities to
obtain votes of at least two-thirds of their
shareholders.
c. Require the articles of incorporation of a socially
responsible corporation to enumerate the specific
purposes the corporation has been formed to further.
d. Provide dissenters' rights to the shareholders of a
socially responsible corporation 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 socially
responsible corporation.
e. Change the approval threshold for a socially
responsible corporation 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.
f. Clarify that the principal terms of a reorganization
must be approved by at least two-thirds of each class, or
a greater vote if required in the articles of
incorporation, of the outstanding shares of any class of
a socially responsible corporation that is a party to a
merger or reorganization, if holders of shares of that
class receive shares of the surviving or acquiring
socially responsible corporation having different rights,
preferences, privileges, or restrictions than those
SB 1301 (DeSaulnier), Page 3
surrendered.
EXISTING LAW
5. Pursuant to SB 201 (DeSaulnier), Chapter 740, Statutes of
2011, effective January 1, 2012, authorizes the creation of
FPCs.
6. 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;
b. Promoting positive short-term or long-term effects
of, or minimizing adverse short-term 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.
7. Each FPC's articles of incorporation may, but are not
required, to 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.
8. 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 2/3rds or higher vote, is the merger
of one FPC into another FPC with a similar special purpose.
9. 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
SB 1301 (DeSaulnier), Page 4
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.
10. 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.
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
SB 1301 (DeSaulnier), Page 5
identification and discussion of the nature and rationale
for any material changes in those measures made during
the fiscal year.
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.
11. 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.
COMMENTS
1. Purpose: This bill is intended to change the name of FPCs
to better reflect the spirit of the FPC law. It is also
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.
2. Background: In 2011, the Legislature, enacted and the
Governor, signed SB 201 (DeSaulnier), Chapter 740, Statutes
of 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
SB 1301 (DeSaulnier), Page 6
with broader social or environmental purposes. SB 201
called these new corporations "FPCs."
In 2011, the Legislature also enacted, and the Governor also
signed, AB 361 (Huffman), Chapter 728, Statues of 2011,
which created benefit corporations, a different type of new
corporate form that also allowed directors to jointly pursue
profit and societal benefit.
According to the Secretary of State's Office, a total of 62 FPCs
and 148 benefit corporations have been formed since January
1, 2012. Of those, 34 converted from existing business
entities (all to benefit corporations), and the remainder
were new incorporations.
3. Discussion: This bill has two sets of provisions: 1)
technical and clarifying changes intended to further the
original intent of SB 201, and 2) a name change, which is
intended to rename FPCs to better reflect the spirit of the
FPC law. This analysis will not discuss the first set of
provisions, given their technical nature, and the fact that
none are intended to deviate from or modify the original
intent of SB 201.
The proposed name change, however, does warrant discussion. As
introduced, and as before this Committee, SB 1301 proposes
to rename FPCs as "socially responsible corporations."
After fielding several concerns that the term "socially
responsible corporation" could be misleading and could
suggest that companies without this name are somehow not, or
are less, socially responsible than "socially responsible
corporations," the author will propose amendments in
Committee to do away with the term "socially responsible
corporation" and instead call these corporations "social
purpose corporations." It remains an open question whether
the term "social purpose corporation" more clearly reflects
the mission of these corporations than the term "FPC."
However, Senator DeSaulnier notes that Washington State uses
the term "social purpose corporation" to describe these
types of corporations.
4. Will This Bill Create Confusion? As noted above, California
is currently home to 62 FPCs and 148 benefit corporations.
If SB 1301 is enacted, some portion of those 62 corporations
may choose to change their designations to "social purpose,"
but others are likely to retain their FPC designation.
SB 1301 (DeSaulnier), Page 7
Thus, beginning on January 1, 2015, California will have two
different corporate forms and three different names for
corporations that desire to pursue a double bottom line.
Will this confuse shareholders or consumers?
5. Summary of Arguments in Support: None received.
6. Summary of Arguments in Opposition:
a. Steven Hazen, a corporate law attorney who was a
member of the working group that drafted the text which
was ultimately enacted as SB 201 in 2011, is opposed to
the bill, unless it is amended to remove all references
to the term "socially responsible corporation" and
instead retain the name "FPC." After discussing several
reasons why the term "socially responsible corporation"
is problematic (reasons that are presented elsewhere in
this analysis), Mr. Hazen asserts that the choice of name
for the new entity envisioned by the working group was a
matter of significant deliberation within the group.
Although the name "FPC" may not seem particularly catchy,
it had several important characteristics. First, the
name of the entity gave notice of the new law's intent -
namely to enable a corporation to have a purpose that
goes beyond the economic interests of its shareholders,
and to give those shareholders the power to determine
what that purpose would be, rather than to dictate to
them what it had to be.
Second, the name avoided an implication that, by virtue of
holding such status, the entity was morally superior to
any other entity created under the Corporations Code.
Third, the name avoided any implication that entities
formed under other divisions of the Corporations Code
were somehow institutionally unable to accomplish
specific goals. Finally, the name avoided any
implication that the State of California was taking a
position in the nature of endorsement of one set of
values adopted by shareholders of a corporation over a
different set of values adopted by shareholders of
another corporation. Instead, the term "FPC" recognized
that the state and the society within it could
realistically benefit even when corporations achieve
larger contributions to society and the business world
using different paths to that point.
SB 1301 (DeSaulnier), Page 8
b. Keith Bishop, an attorney with Allen Matkins who
often opines on securities-related legislation, expressed
two concerns regarding the bill. First, Mr. Bishop
believes that the term "socially responsible corporation"
is misleading. Mr. Bishop is also concerned about the
requirement that corporate directors consider all of a
corporation's purposes when carrying out their duties.
Because there is no standard for weighing different
purposes, he believes that the bill's requirement to do
so is meaningless and unenforceable.
7. Amendments:
a. As noted above, Senator DeSaulnier will propose to
strike all references to the phrase "socially responsible
corporation" in the bill and instead refer to these
corporations as "social purpose corporations."
b. Senator DeSaulnier will also propose the following
clarifying amendments, to ensure that certain references
to Corporations Code Section 3500 reference the entire
section, rather than only subdivision (b) of Section
3500. These changes are intended to further the original
intent of SB 201, and are not characterized as
substantive by the author.
Page 76, line 19, strike: subdivision (b) of
Page 77, line 27, strike: subdivision (b) of
Page 77, line 36, strike: subdivision (b) of
Page 78, line 1, strike: subdivision (b) of
Page 78, line 14, strike: subdivision (b) of
8. Prior and Related Legislation:
a. SB 201 (DeSaulnier), Chapter 740, Statutes of 2011:
Authorized the creation of FPCs, as specified.
b. AB 361 (Huffman), Chapter 728, Statutes of 2011:
Authorized the creation of benefit corporations, as
specified.
SB 1301 (DeSaulnier), Page 9
SB 1301 (DeSaulnier), Page 10
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
None received
Opposition
Keith Bishop
Steven Hazen
Consultant: Eileen Newhall (916) 651-4102