BILL ANALYSIS �
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UNFINISHED BUSINESS
Bill No: SB 1301
Author: DeSaulnier (D)
Amended: 8/14/14
Vote: 21
SENATE BANKING & FINANCIAL INST. COMM. : 9-0, 4/9/14
AYES: Evans, Berryhill, Block, Correa, Hill, Hueso, Roth,
Torres, Vidak
SENATE FLOOR : 36-0, 5/1/14
AYES: Anderson, Berryhill, Block, Cannella, Corbett, Correa, De
Le�n, DeSaulnier, Evans, Fuller, Gaines, Galgiani, Hancock,
Hernandez, Hill, Hueso, Huff, Jackson, Knight, Lara, Leno,
Lieu, Liu, Mitchell, Monning, Morrell, Nielsen, Padilla,
Pavley, Roth, Steinberg, Torres, Vidak, Walters, Wolk, Wyland
NO VOTE RECORDED: Beall, Calderon, Wright, Yee
ASSEMBLY FLOOR : 64-14, 8/18/14 - See last page for vote
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
(SPCs);" and makes technical and clarifying changes to correct
and clarify the FPC law.
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Assembly Amendments authorize a corporation to elect to change
its status from an FPC to an SPC by amending its articles of
incorporation; require that any references to SPCs be deemed a
reference to FPCs; revise procedures for converting or changing
the status of a corporation formed pursuant to the Corporate
Flexibility Act; revise the information required to be contained
in the special purpose management discussion and analysis
(MD&A); authorize shareholder to maintain a derivative lawsuit;
make technical and conforming changes; and double-joint this
bill with SB 1041 (Jackson).
ANALYSIS :
Existing law:
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
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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.
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 an 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."
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2.Authorizes a corporation formed (pursuant to the Corporate
Flexibility Act of 2011) before January 1, 2015, to elect to
convert its status from an FPC to an SPC by amending its
articles of incorporation.
3.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
an SPC.
4.Requires when an SPC converts from an 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.
1.Requires (rather than authorizes) the directors of an 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.
2.Allows shareholders of an SPC to maintain a derivative lawsuit
to enforce the requirements.
3.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 or partnership.
B. Requiring existing business associations formed as
trusts and wishing to convert to social purpose
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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,
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.
1.Contains double-jointing language with SB 1041 (Jackson).
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." California was the
first and only state thus far to enact an FPC. California was
the sixth state to create benefit corporations, 15 states total
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have created benefit corporations. 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, 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 an FPC.
Comments
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."
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 8/18/14)
Morrison and Foerster LLP
OPPOSITION : (Verified 8/18/14)
California Association of Nonprofits
California Society of Association Executives
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
shareholder approval requirements for certain corporate
transactions[,] ?.underlines the fact that dissenting
shareholders of a Social Purpose Corporation are entitled to
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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."
ASSEMBLY FLOOR : 64-14, 8/18/14
AYES: Achadjian, Alejo, Ammiano, Bloom, Bocanegra, Bonilla,
Bonta, Bradford, Brown, Buchanan, Ian Calderon, Campos, Chau,
Ch�vez, Chesbro, Cooley, Dababneh, Dahle, Daly, Dickinson,
Eggman, Fong, Fox, Frazier, Beth Gaines, Garcia, Gatto,
Gonzalez, Gordon, Gorell, Gray, Hall, Roger Hern�ndez, Holden,
Jones-Sawyer, Levine, Linder, Lowenthal, Maienschein, Medina,
Mullin, Muratsuchi, Nazarian, Pan, Perea, John A. P�rez, V.
Manuel P�rez, Quirk, Quirk-Silva, Rendon, Ridley-Thomas,
Rodriguez, Salas, Skinner, Stone, Ting, Wagner, Waldron,
Weber, Wieckowski, Wilk, Williams, Yamada, Atkins
NOES: Allen, Bigelow, Conway, Donnelly, Grove, Hagman, Harkey,
Jones, Logue, Mansoor, Melendez, Nestande, Olsen, Patterson
NO VOTE RECORDED: Gomez
MW:e 8/18/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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