BILL ANALYSIS �
SB 1301
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Date of Hearing: June 9, 2014
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
SB 1301 (DeSaulnier) - As Amended: May 29, 2014
SENATE VOTE : 36-0
SUBJECT : Corporate Flexibility Act of 2011: Social Purpose
Corporations Act.
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
change 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 change its status to
a SPC.
3)Requires in the case of a change of status to a SPC that the
corporation shall:
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.
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
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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.
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, privileges, or restrictions
than those surrendered.
EXISTING LAW
1)Provides for the formation and regulation of corporations.
[Corporation Code, Section 100 et seq.]
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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-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.
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 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
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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.
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.
e) An identification and discussion of any material
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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 (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." 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, see below).
According to the Author, this measure 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."
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According to the Secretary of State's 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."
Arguments in Support
According to Morrison & Foerster LLP, "the 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"
Arguments in Opposition
According to the California Association of Nonprofits, "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 term "social purpose
corporation" will mislead the public into confusing such
corporations with nonprofit organization, leading them to
mistakenly think that these corporations are tax-exempt
nonprofits. We are also concerned that the term "social purpose
corporation" is confusingly similar to "socially responsible
corporation" a term in high usage in the field of corporate
social responsibility, where it is a descriptor that can be
applied to for-profit corporations of all types that act in
socially responsible ways?.."
According to an attorney who participated in the working group
which created SB 201, Steven Hazen states, "I can confirm that
the choice of name for the entity was a matter of significant
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deliberation by the working group and by the interests of the
Bar that supported enactment of the 2011 FPA. The name on which
the working group settled was the FPC. While that name may not
seem particularly catchy, it has several important
characteristics that led to its adoption.
1) The name of the entity gave notice of what the new
Division 1.5 did: enable a corporation to have a purpose
that goes beyond the economic interests of its shareholder
but gives those shareholders that power to determine what
that purpose would be rather than dictate to them what it
had to be. ?."
Previous Legislation
SB 201 (DeSaulnier, Chapter 740, Statutes of 2011) 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 Secretary of State (SOS).
AB 361 (Huffman, Chapter 728, Statutes of 2011) 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.
Questions
1)While the measure makes technical changes, the significance of
the bill is the name change to from FPC to SPC. The need for
this change after just 18 months since FPCs were established
is not clear. Those who were in the working group behind SB
201 do not have a consensus behind this name change.
2)While this measure is keyed non-fiscal, would this measure
incur costs through the name change with the Secretary of
State's office in regards to changing forms and adopting new
forms?
3)This measure does not force existing FPCs to change their
status to social purpose corporations, therefore, would CA
essentially have three very similar corporate forms, benefit,
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FPCs and social purpose and would this create more confusion?
4)What current problems exist behind the name of a flexible
purpose corporation?
Double-referral
Should this bill pass out of the Assembly Banking and Finance
Committee, the measure will proceed to the Assembly Judiciary
Committee.
Suggested Amendments
The committee may wish to recommend that the measure move
forward without changing the name from FPC to SPC. The need for
the name change is not clear.
Technical Amendments
On page 36, lines 1-6,
(4) If the flexible purpose corporation is a flexible purpose
corporation subject to the Banking Law (Division 1 1.1
(commencing with Section 99 1000) of the Financial Code), the
articles shall set forth a statement of purpose that is
prescribed by the applicable provision of the Banking Law
(Division 1 1.1 (commencing with Section 99 1000 ) of the
Financial Code).
REGISTERED SUPPORT / OPPOSITION :
Support
Morrison & Foerster LLP
Concerns
Hanson Bridgett LLP
Opposition
California Association of Nonprofits (CalNonprofits)
One individual
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Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081