BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 1301|
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THIRD READING
Bill No: SB 1301
Author: DeSaulnier (D)
Amended: 4/22/14
Vote: 21
SENATE BANKING & FINANCIAL INST. COMM. : 9-0, 4/9/14
AYES: Evans, Berryhill, Block, Correa, Hill, Hueso, Roth,
Torres, Vidak
SUBJECT : Corporate Flexibility Act of 2011: Social Purpose
Corporations Act
SOURCE : Author
DIGEST : This bill renames the Corporate Flexibility Act of
2011 as the Social Purpose Corporations Act; renames "flexible
purpose corporations (FPCs)" as "social purpose corporations;"
requires a two-thirds vote (rather than a majority vote) for an
existing business association formed as a trust to become a
social purpose corporation; requires (rather than allows) the
directors of a social purpose corporation to consider the
special purpose of the social purpose corporation when making
their decision; provides for dissenters' rights to shareholders
of social purpose corporations; and makes technical and
clarifying changes to correct and clarify the FPC law.
ANALYSIS :
Existing law:
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1.Authorizes the creation of FPCs and 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.
1.Provides that 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.
2.Specifies 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 purpose.
3.Provides that shareholders of an existing corporation that
decide to convert to an FPC are entitled to dissenter's
rights. 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.
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4.Provides that 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 cash flows 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 Internet Web site. Each FPC's MD&A is required to include
specified information.
5.Requires in addition to the annual report described above,
each FPC to 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.
This bill:
1.Changes all references to FPCs in the Corporations Code to
"social purpose corporations."
2.Provides that any FPC formed before January 1, 2015, shall
continue its existence on and after January 1, 2015, as a
social purpose 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 social purpose
corporations.
3.Requires (rather than authorizes) the directors of a social
purpose corporation to consider and give weight to those
factors the director deems relevant, including the short- and
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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.
4.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 existing business associations formed as
trusts and wishing to convert to social purpose
corporations and social purpose corporations wishing to
convert to domestic other business entities to obtain votes
of at least two-thirds of their shareholders.
C. Requiring the articles of incorporation of a social
purpose corporation to enumerate the specific purposes the
corporation has been formed to further.
D. Providing dissenters' rights to the shareholders of a
social purpose 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 social purpose
corporation.
E. Changing the approval threshold for a social purpose
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. Clarifying 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 social purpose
corporation that is a party to a merger or reorganization,
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if holders of shares of that class receive shares of the
surviving or acquiring social purpose corporation having
different rights, preferences, privileges, or restrictions
than those surrendered.
Background
In 2011, SB 201 (DeSaulnier, Chapter 740) 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."
AB 361 (Huffman, Chapter 728, Statutes of 2011) 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 4/23/14)
Morrison and Foerster LLP
OPPOSITION : (Verified 4/23/14)
California Association of Nonprofits
ARGUMENTS IN SUPPORT : Morrison & Foerster LLP writes, "SB
1301 builds on the framework created by SB 201 and offers
important improvements to the existing legislation. ?[T]he new
name - Social Purpose Corporation - better captures the essence
of the corporate form and reflects the fact that the corporation
is at its core devoted to the special mission. SB 1301 more
closely aligns the actions of directors with the special mission
of the corporation by requiring them to consider the special
mission in carrying out their duties[,] ?creates consistent
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shareholder approval requirements for certain corporate
transactions[,] ?.underlines the fact that dissenting
shareholders of a Social Purpose Corporation are entitled to
dissenters' rights under the General Corporation Law [, and]
?.enables a domestic corporation to easily convert into a Social
Purpose Corporation."
ARGUMENTS IN OPPOSITION : The California Association of
Nonprofits writes, "While we welcome the ability of for-profit
corporations to form as flexible purpose corporations, we are
strongly opposed to ?changing the name to 'social purpose
corporations' or any similar name. The term 'flexible purpose'
was chosen after much consideration by the authors of SB 201 in
2011, and it is an accurate description of these corporations.
The proposed terms 'socially responsible corporations' or
'social purpose corporations' will mislead the public into
confusing such corporations with nonprofit organizations,
leading them mistakenly to think that these corporations are
tax-exempt nonprofits. As a result they may make donations of
good[s] and/or investments of cash in the mistaken belief that
they are donating to a nonprofit. The conflation of nonprofit
and for-profit corporations has already proven to be a source of
confusion for Californians. ?While there may be some value to
aligning terminology with that used in other
states, we are unaware of a national effort to unify language
regarding this corporate designation."
MW:e 4/23/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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