BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 361 (Huffman)
As Amended May 19, 2011
Hearing Date: July 5, 2011
Fiscal: Yes
Urgency: No
TW
SUBJECT
Benefit Corporations
DESCRIPTION
This bill would establish a new corporate business model called
the benefit corporation in order to authorize corporations to
participate in general and specific public benefits, as
specified. This bill would require a minimum status vote, as
defined, in order for a corporation to organize as a benefit
corporation. This bill also would limit a corporate director's
liability to shareholders for decisions in consideration of the
general or specific public purpose, and would not hold the
director liable for any failure to create a general or specific
public benefit.
BACKGROUND
Increasingly, businesses are interested in finding ways to be
profitable while taking care of their employees, communities,
and environment. However, corporations organized under
traditional corporate forms must be mindful of shareholder
interests in the profits of the corporations. As such,
directors are subject to the "business judgment rule" which
requires directors to utilize good faith in taking actions for
the best interests of the corporation and the shareholders.
Accordingly, directors are currently liable to shareholders in
the event shareholders disagree with not-for-profit activities
engaged in by the corporation. Such activities could include
donations of corporate property or money to employees and the
community.
(more)
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Several states have adopted statutes authorizing benefit
corporations (B Corps), which allow corporations to engage in
activities that benefit non-profit interests. In California,
several bills have been introduced in recent years to provide
directors with explicit legal authority to consider other
factors which the authors and their sponsors believed would give
corporations and directors more flexibility to adopt socially
responsible policies without fear of lawsuits from shareholders.
SB 917 (Alarcon, 2003) would have created a new private right of
action, effective in the year 2017, against California
corporations and directors for causing material damage to the
environment, human rights, public health and safety, the welfare
of the communities in which the corporation operates, or the
rights of the corporation's employees. Under that bill, any
person damaged by the corporate action would have standing to
sue, but no director would be liable if: (1) the director voted
against the action which led to the harm; or (2) the damage
occurred due to an action approved by the corporation prior to
the director becoming a board member. SB 917 was referred to
this committee and testimony was taken, but no vote was held.
SB 1528 (Alarcon, 2004) would have provided that in carrying out
his or her duty to the best interests of the corporation, a
director may take into account any or all of the following: (1)
the corporation's employees, customers, suppliers, or creditors;
(2) the economy of the region, state, and nation; (3) the impact
on the community; (4) the environment; and (5) the long- and
short-term interests of the company and its shareholders. SB
1528 was heard in this committee and passed 5-2, voted out of
the Senate 26-13, but died in the Assembly Banking, Finance and
Insurance Committee.
AB 2944 (Leno, 2008), among other things, would have allowed a
corporate director, when making business decisions on behalf of
the corporation, to consider several factors, such as the long
and short term interests of the corporation and shareholders,
the corporation's employees, suppliers, customers, and
creditors, community and societal considerations, and the
environment. AB 2944 was vetoed by Governor Schwarzenegger and
encouraged legislators to find and study alternative business
models that would adequately protect shareholder interests.
SB 1463 (DeSaulnier, 2010) was introduced as a new business
model that would protect shareholder interests while providing
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corporate directors the ability to designate for-profit and
not-for-profit activities in which the corporation would
participate. SB 1463 was referred to this committee, but was
not heard.
SB 201 (DeSaulnier, 2011) would create a new corporate business
model called the Flexible Purpose Corporation, which also would
allow a corporation to participate in for-profit and
not-for-profit corporate activities to be stated in the
corporation's articles of incorporation, giving the corporate
directors the ability to take corporate actions to support these
activities. SB 201 has been referred to the Assembly
Appropriations Committee.
This bill, sponsored by B Lab, a non-profit organization whose
stated mission is to create a new sector of the economy that
harnesses the power of business to solve social and
environmental problems, would create a new corporate business
model called the benefit corporation in order to authorize
corporations to participate in general and specific public
benefits, as specified. This bill would require a minimum
status vote, as defined, in order for a corporation to organize
as a benefit corporation. This bill also would limit a
corporate director's liability to shareholders for decisions in
consideration of the general or specific public purpose, and
would not hold the director liable for any failure to create a
general or specific public benefit.
This bill was heard by the Senate Banking and Financial
Institutions Committee on June 29, 2011 and passed out on a vote
of 5-1.
CHANGES TO EXISTING LAW
Existing law provides for the formation and regulation of
corporations. (Corp. Code Sec. 100 et seq.)
Existing law provides for the formation and regulation of
non-profit entities. (Corp. Code Sec. 5000 et seq.)
Existing law provides a standard of care that a director must
use in discharging his or her duties. A director's duties must
be performed in good faith, in a manner the director believes to
be in the best interests of the corporation and the
shareholders, and with the care, including reasonable inquiry
that "an ordinary prudent person in a like position would use
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under similar circumstances." (Corp. Code. Secs. 309(a), 5231.)
The liability of directors for negligence is extremely limited.
When the act or omission involves a question of policy or
business judgment, a director cannot be held liable for an
erroneous decision or poor choice in the absence of a showing of
fraud, bad faith, or negligence. This is usually referred to as
the "business judgment rule" for director liability. (9 Witkin,
Summary of California Law 10th Ed. Sec. 102.)
Existing law provides that directors are liable to shareholders
for acts taken in contravention of the corporate or charitable
purpose. (Corp. Code Secs. 309, 5231.)
This bill would provide for the formation and regulation of a
new corporate entity called the benefit corporation.
This bill would require a benefit corporation to have the
purpose of creating a general public benefit, defined as a
material positive impact on society and the environment, as
specified, and authorize the benefit corporation to identify one
or more specific public benefits as follows:
providing low-income or underserved individuals or communities
with beneficial products or services;
promoting economic opportunity for individuals or communities
beyond the creation of jobs in the ordinary course of
business;
preserving the environment;
improving human health;
promoting the arts, sciences, or advancement of knowledge;
increasing the flow of capital to entities with a public
benefit purpose; and
the accomplishment of any other particular benefit for society
or the environment.
This bill would define a "benefit enforcement proceeding" to
mean a claim or action relating to any of the following:
failure to pursue the general public benefit purpose of the
benefit corporation or specific public benefit purpose stated
in the articles of incorporation;
violation of a duty or standard of conduct imposed on a
director; or
failure of the benefit corporation to deliver or post an
annual benefit report, as required.
This bill would require at least a two-thirds vote of
shareholders, as specified, of the proposed benefit corporation
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to organize as such.
This bill would require the board of directors of the benefit
corporation to prepare a descriptive statement indicating
whether, in the opinion of the board of directors, the benefit
corporation failed to pursue its general, and any specific,
public benefit purpose.
This bill would require a director, when discharging his or her
duties with respect to the corporation's general or specific
public benefits, to take the following social and environmental
factors, in no particular priority, into consideration:
shareholders of the benefit corporation;
employees and workforce of the benefit corporation and its
subsidiaries and suppliers;
interests of customers of the benefit corporation as
beneficiaries of the general or specific public benefit
purposes of the benefit corporation;
community and societal considerations, including those of any
community in which offices or facilities of the benefit
corporation or its subsidiaries or suppliers are located;
local and global environment;
short-term and long-term interests of the benefit corporation,
including benefits that may accrue to the benefit corporation
from its long-term plans and the possibility that these
interests may be best served by retaining control of the
benefit corporation rather than selling or transferring
control to another entity; and
The ability of the benefit corporation to accomplish its
general, and any specific, public benefit purpose.
This bill would limit a corporate director's liability to
shareholders for decisions in consideration of the general or
specific public purpose, and would not hold the director liable
for any failure to create a general or specific public benefit.
This bill would require the board of directors to submit an
annual statement to each shareholder, including, among other
things, an assessment of the overall social and environmental
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performance of the benefit corporation, prepared in accordance
with a third-party standard, as defined. This bill would not
require this assessment to be audited or certified by a third
party.
COMMENT
1. Stated need for the bill
The author writes:
A review of current case law and the code reveals that there
is no way for California corporations to emphasize the
environment, social welfare and other public benefits without
potentially being at risk of suit for breach of fiduciary
duty. That is because fiduciary duty has been interpreted
narrowly to be synonymous with maximizing profits. That said,
California leads the nation in innovation and sustainability;
we need the statutory framework to provide California
businesses the ability to do both simultaneously. There is
tremendous demand from the business community in California
and nationally for states to create this new kind of
corporation. These visionary entrepreneurs and investors want
to build businesses with an eye toward the triple bottom line
of people, planet and profit.
2. Creation of a new corporate form
This bill would create a new corporate form called the benefit
corporation in order to allow corporations to engage in general
or specific public benefit activities. Existing law provides
that corporations may engage in specified purposes according to
the purposes listed in their articles of corporation. (Corp.
Code Sec. 202.) Non-profit corporations must state in the
articles of incorporation that they are not for profit. (Corp.
Code Sec. 5130.) As such, a non-profit corporation is not
entitled to operate for the gain of any person.
Wendel Rosen Black & Dean (Wendel Rosen) LLP, a supporter of
this bill, argues that existing law requires corporate directors
to consider shareholder profit at the expense of public benefit.
Wendel Rosen argues that corporate directors are fearful of
taking actions that, while socially or environmentally
beneficial, may be seen as contrary to the for-profit purpose of
the corporation. An example of this dilemma, provided by Wendel
Rosen, is when "a company decides to keep jobs in California by
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rejecting a proposal to move its manufacturing overseas, or it
voluntarily chooses to remove toxics from its manufacturing
process," but directors are wary of making positive social and
environmental changes because of a shareholder's ability to
challenge any director decision that appears to be in
contravention of earning higher profits.
The author argues that California law "lacks a framework for
corporations to voluntarily operate with a greater public
benefit purpose than simply pursuing a profit or a narrow
corporation social responsibility objective." This bill would
provide a new way for corporate directors to make decisions to
not only earn profits but also pursue socially and
environmentally responsible activities.
3. Transparency of public purpose relating to director's
fiduciary duty
This bill would allow a corporate director to consider general
and specific public benefits when making decisions on behalf of
the corporation. Under this bill, the corporate director is
shielded from liability to the shareholders when making
decisions based on a general or specific public purpose. This
bill also shields a corporate director from shareholder
liability for any failure of the benefit corporation to create a
general or specific public benefit. Existing law requires
corporations to set forth the purpose(s) of the corporation.
(Corp. Code Sec. 202.) Existing law provides that directors are
liable to shareholders for acts taken in contravention of the
corporate or charitable purpose. (Corp. Code Secs. 309 and
5231.)
This bill would not require a general or specific public purpose
to be stated in the benefit corporation's articles of
incorporation. Concern has been raised that there is no other
document that specifically identifies for shareholders the
public benefits in which the corporation is engaged. Wendel
Rosen argues that "the Bill dramatically increases transparency
by requiring Benefit Corporations to provide shareholders an
annual benefit report that assesses the company's performance
against a third-party standard that considers the full range of
social and environmental criteria." Although this bill would
create a private right of action for shareholders to enforce the
pursuit of a general or specific public purpose set forth in the
articles of incorporation, the shareholders, who arguably would
have invested in the benefit corporation based on the public
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benefit represented in the corporation's assessment, would have
no recourse if the articles are silent on the benefit
corporation's public benefit.
This bill would provide that this assessment does not need to be
audited or certified by a third party. The Corporations
Committee of the Business Law Section of the State Bar of
California argues that this bill would allow directors to be
"wholly in control of the nature of their fiduciaries. This is
because they have the ability to select the third party standard
by which their conduct will be measured with no input from
shareholders, and there are only vague substantive requirements
in the Bill regarding the third party standard. This
arrangement presents the possibility that directors will be able
to shop for third party standards that suit their purposes to
the detriment of shareholders."
Potential investors, as well as existing shareholders, should
know up front the non-profit activities in which the corporation
is engaged. The proponents of this bill have clearly stated
that the goal of this bill is to provide investors and consumers
an easy and transparent way to differentiate truly socially and
environmentally businesses from businesses who merely market
themselves as such. To further this intention and provide
better transparency for shareholders, the author has agreed to
accept an amendment which would clarify that when a specific
public benefit is adopted as a corporate purpose, the specific
public benefit must be identified in the articles of
incorporation.
Author's Amendment :
On page 6, line 21, after "corporation" insert "and shall
identify any specific public benefit adopted pursuant to
Section 14610."
4. Conversion of existing corporations into benefit corporation
This bill would provide a mechanism whereby existing
corporations could convert into a benefit corporation. Existing
law authorizes corporations to convert into other forms of
corporate entities as long as the shareholders approve of the
conversion by at least two-thirds of each class of outstanding
shares of that converting corporation unless the articles of
incorporation authorize a simple majority vote for conversion.
(Corp. Code Sec. 1152.)
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Wendel Rosen argues that this bill "grants Benefit Corporation
shareholders the strongest protections afforded to any business
entity recognized in the State of California. . . . The Bill
only affects companies whose shareholders vote by an
overwhelmingly 2/3 majority for the company to become a Benefit
Corporation. Dissenting shareholders are protected by the
Bill's requirement that the Benefit Corporation purchase their
interests upon demand. . . ."
This bill would provide that, in the case of a corporation,
shareholders of every class or series are entitled to vote on
the corporate action, regardless of any limitation stated in the
articles or bylaws, and the corporate action must be approved by
at least two-thirds of the votes that all shareholders of the
class or series are entitled to cast on that action. In the
case of a domestic other business entity, the holders of every
class or series of interest that are entitled to receive
distribution of any kind from the entity, regardless of any
other limitation on the voting rights, and the action must be
approved by at least a two-thirds vote or consent of these
interested holders. Accordingly, this bill strikes a balance
between flexibility of corporate special purposes and
shareholder protections.
Some corporations may require a shareholder vote greater than
two-thirds to make significant changes to the corporation. This
bill would allow a corporation to convert to a benefit
corporation to provide for-profit and not-for-profit activities,
which will have substantial effects on the shareholder's
financial interest in the corporation. This conversion is a
significant change for shareholders. Accordingly, in the event
the company's articles of incorporation require a vote higher
than two-thirds for significant events such as conversion, the
author has agreed to accept an amendment to clarify the minimum
status vote to include a vote greater than two-thirds if stated
in the corporation's articles of incorporation.
Author's Amendments :
1. On page 4, line 20, after "votes" insert ", or a greater
vote if required in the articles of incorporation,"
2. On page 4, line 36, after "votes" insert ", or a greater
vote if required in the articles of incorporation,"
5. Opposition's concerns
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The California Society of Association Executives (CalSAE), an
opponent of this bill, argues that this bill, by allowing a
for-profit corporation to provide public benefits such as
"providing low-income or underserved individuals or communities
with beneficial products or services," or "improving human
health," places these corporations "squarely in the arena of
current non-profits." The California Association of Nonprofits
(CAN) shares these concerns and argues that although this bill
"could expand California's capacity to deal with major problems
impacting our people and our environment . . . it could siphon
off much-needed resources from effective existing nonprofits by
redirecting donor dollars from charitable contributions. . . ."
CalSAE and CAN also raise oversight and reporting concerns
similar to those discussed under Comment 3.
In response, the author argues that a benefit corporation would
not be organized for the sole purpose of providing monetary or
product donations to the community. Rather, a benefit
corporation, as a whole, would be formed for a public benefit
while also making profits for shareholders who have invested in
the company. Accordingly, the decision to form a benefit
corporation is one of director liability to shareholders rather
than an attempt to become a non-profit organization. One
example is a benefit corporation that makes shoes. Under this
bill, this benefit corporation could provide a specific public
benefit by utilizing local materials in the manufacturing of the
shoes in order to reduce transportation carbon emissions. This
benefit corporation also may have a specific public purpose of
donating a portion of the shoes made in order to provide
low-income or underserved individuals with this beneficial
product. In a standard corporation, shareholders could
challenge either of these specific public purposes. If the
shareholders believed that that the materials used to make the
shoes are cheaper in other countries, and the purchase of local
materials cuts into the shareholder's profits, the shareholders
could bring an action against the directors for failing to act
in the best interest of the shareholders. Further, the
shareholders could claim that shoe donations are
counterproductive to their profit interests and bring a similar
action against the directors. However, in a benefit
corporation, the shareholders would be aware that, in addition
to making shoes for profit, lowered carbon emissions or shoe
donations are also part of the mission of the benefit
corporation. In situations such as this, there would be no
impact on non-profit organizations because the non-profit
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organization arguably has no interest in where the benefit
corporation obtains its materials, and the donation of shoes
helps low-income individuals whom the non-profits may be
serving.
The Nonprofit & Unincorporated Organizations Committee of the
State Bar of California, an opponent of this bill, argues that
"Ýp]romoters of the benefit corporation have also voiced their
objectives of seeking the same tax breaks and contract
preferences currently enjoyed by nonprofits and minority-run
companies. While there is currently no tax advantage to forming
a corporation under the Bill in California, it might be expected
that the promoters will pursue tax preferences for benefit
corporations in California if AB 361 is adopted." In response
to this argument, the author argues that, regardless of tax
revisions other states make to their own laws, this bill would
provide for a new corporate model but would not change the
corporation's tax responsibilities under existing law.
6. Author's amendments to address concern of the Secretary of
State
The Secretary of State expressed concern that the information
required in this bill to be included on the articles of
incorporation is not specific enough to identify the
corporation's organization as a benefit corporation. To address
this concern, the author has agreed to take the following
amendments:
Author's amendments :
1. On page 8, line 9, strike out "a"
2. On page 8, line 13, strike out "The" and insert "In
addition to the provisions required by Section 202, the
articles of incorporation of a benefit corporation shall
contain the statement "This corporation is a benefit
corporation. Notwithstanding Section 202(b), the"
3. On page 8, lines 15 through 16, strike out "to create in
addition to its purposes under Section 206 and subdivision
(a)"
4. On page 8, line 18 strike out "any other"
7. Governor Schwarzenegger's veto of AB 2944
This bill is similar to the enrolled version of AB 2944 (Leno,
2008). In vetoing AB 2944, Governor Schwarzenegger stated:
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While this bill proposes a new model of corporate governance
consisting of a package of many intriguing concepts, it is
just that; a package of concepts that could produce unknown
ramifications and the need for which have not been fully
demonstrated. Corporate governance is a serious matter and
changes should not be entered into without deliberate study
and evaluation.
While I have concerns with the approach taken with this bill,
I am interested in many of the issues raised in support of
this measure. California should be at the forefront of all
states in considering alternative models of corporate
governance for the new millennium. This is potentially
another opportunity for California to once again lead to a new
era of innovation. I urge the Legislature to consider and
study new styles of corporate governance that can offer
alternatives to the current model, but that maintain the vital
shareholder protections that have helped turn California into
the economic powerhouse of the world.
Support : AGSJ; Alliance of Chief Executives; American
Sustainable Business Council; Bay Area Council; Beckwith
Associates; Build It Green; California Association for Micro
Enterprise Opportunity; Center for Dynamic Governance; Clean
Fund LLC; Direct Dental; Friends Committee on Legislation of
California; Great Place to Work Institute; green age 360; Green
America; Green Business Networking; Green Chamber of Commerce;
Green Seal; Guayakí Sustainable Rainforest Products; Hanson
Bridget LLP; Indigenous Designs Corporation; KINeSYS; Mendocino
Wine Group, LLC; Mindful Investors; Minerva Consulting; New
Harvest Capital; New Voice of Business; Presidio Graduate
School; Public Works, LLC; Quantum Intech; Silicon Valley
Leadership Group; Small Business California; Social Venture
Network, Solar Works; The Rosebud Agency; The Vianova Group,
LLC; Traditional Medicinals; United States Green Building
Council California Advocacy Committee; Wendel Rosen Black &
Dean, LLP; WorkLore; six individuals
Opposition : California Association of Nonprofits; California
Society of Association Executives; Corporations Committee of the
Business Law Section of the State Bar of California; Nonprofit
and Unincorporated Organizations Committee of the Business Law
Section of the State Bar of California; two individuals
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HISTORY
Source : B Lab
Related Pending Legislation : SB 201 (DeSaulnier, 2011) See
Background.
Prior Legislation :
SB 1463 (DeSaulnier, 2010) See Background.
AB 2944 (Leno, 2008) See Background.
SB 1528 (Alarcon, 2004) See Background.
SB 917 (Alarcon, 2003) See Background.
Prior Vote :
Senate Banking and Financial Institutions Committee (Ayes 5,
Noes 1)
Assembly Floor (Ayes 58, Noes 17)
Assembly Appropriations Committee (Ayes 12, Noes 5)
Assembly Judiciary Committee (Ayes 7, Noes 2)
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