2 Social Enterprise Bills in California

If you have even skimmed the contents of this blog you likely know about AB 361, the California legislation that would create a new corporate form for social enterprise called a benefit corporation.

You may not have heard of SB 201, however. It is a different bill that also proposes a new corporate form for social enterprise in California, called a flexible purpose corporation.

Note: it is great coincidence that there are 2 social enterprise bills heading to the Governor’s desk at the same time. Additionally, they are not mutually exclusive—i.e. both bills can be passed into law. In fact, arguably, the fact that there are 2 different social enterprise bills seem do twice as much to suggest that the time is ripe for legislation recognizing social enterprise in California.

Key Features of AB 361 (Benefit Corporations)

Read the full text of AB 361 here. Summaries of key features are numbered in bold, while text exactly or very closely mirroring the actual language of AB 361 is in italics.

1. Creates Benefit Corporations (benefit corps). This bill would authorize and regulate the formation and governance of a new form of corporate entity known as a benefit corporation.

2. Existing corporations can become benefit corps with 2/3 shareholder vote. The bill would also permit an existing corporation to become a benefit corporation by amendment to its articles of

incorporation, as specified, adopted by at least a minimum status vote (2/3 of vote or greater if required by articles of incorporation) and would permit a corporation to become a benefit corporation through a merger, reorganization, or conversion, or domestic other business entity, as specified.

3. Benefit corps must create material positive impact on society and the environment, as determined by an independent 3rd-party standard. The bill would provide that a benefit corporation may be formed for the purpose of creating general public benefit, defined as a material positive impact on society and the environment, taken as a whole, as assessed against a 3rd-party standard.

Third-party standard is a comprehensive assessment of the impact of the business developed by an entity that has no material financial relationship with the benefit corporation or any of its subsidiaries and where: A) not more than 1/3 of members of the governing body of the entity are representatives of associations of businesses in a specific industry, businesses whose performance is assessed against the standard; and B) the entity is not materially financed by an association of business described in (A).

Additionally, the third-party standard must be developed by an entity that accesses necessary and appropriate expertise to assess overall corporate social and environmental performance; and uses balanced multistakeholder approach, including a public comment period of at least 30 days to develop the standard. The following information on the 3rd party standard must be made publicly available: criteria considered when measuring the overall social and environmental performance.

4. Benefit corps may be formed to create a general public benefit and can also identify additional specific public benefit(s). The bill would also provide that a benefit corporation may identify one or

more specific public benefits as an additional purpose of the corporation. Examples of specific public benefit include: providing low-income/underserved individuals or communities with beneficial products/services, providing economic opportunity beyond creation of jobs, preserving the environment, improving human health, promoting arts, science, or advancement of knowledge, increasing capital to entities with a public benefit purpose, or another particular benefit to society or the environment.

5. Board members must consider multiple stakeholders (including shareholders, beneficiaries of the public benefit, the environment) when making business decisions. This bill would require directors to consider the impacts of any action or proposed action upon specified considerations, including, among others, the shareholders and employees, and of customers who are beneficiaries of the general or specific public benefit purposes, and the environment, and would allow directors to consider the impacts of those actions on, among other things, the resources, intent, and conduct of any person seeking to acquire control of the benefit corporation.

6. Certain reporting accounting and transparency formalities must be met. This bill would require the board of directors to prepare a specified statement relating to the public benefit purposes of the corporation. The bill would require the benefit corporation to prepare an annual benefit report.

7. Duties of director/officer with regard to public benefit may only be enforced in a benefit enforcement proceeding. This bill would include provisions governing the fiduciary duty

and liability of an officer or director of a benefit corporation. The bill would provide that the duties of a director or officer, and the general, and any specific, public benefit purpose of a benefit corporation, may be enforced only in a benefit enforcement proceeding, as defined, that would be permitted to be commenced or maintained only as specified.

Additional Features:

8. Is part of a nation-wide effort to create benefit corporations in various states. As of writing this 6 states have passed benefit corporation legislation.

9. There is an option for a voluntary certification. B corporation is a voluntary certification which calls for many of the same features as a benefit corporation. A company can choose to be both/either a B corporation and a benefit corporation (if their state has passed legislation)

Key Features of SB 201 (Flexible Purpose Corporations)

Read the full text of SB 201 here. Summaries of key features are numbered in bold, while text exactly or very closely mirroring the actual language of AB 361 is in italics.

1. Creates Flexible Purpose Corporations (flexible purpose corps). This bill would enact the Corporate Flexibility Act of 2011 and would authorize and regulate the formation and operation of a new form of corporate entity known as a flexible purpose corporation.

2. Existing corps can become flexible purpose corps with 2/3 vote of shareholders. The bill would authorize existing corporations and other forms of business entities to merge into or convert into a flexible purpose corporation upon completion of specified requirements, including approval of the transaction by a supermajority 2⁄3 vote of shareholders, or a greater vote if required in the articles, as specified.

3. Flexible purpose corps can convert to corp, non-profit, etc. The bill would also authorize a flexible purpose corporation to convert into a nonprofit corporation, a corporation, or a domestic other business entity, upon satisfaction of equivalent conditions.

4. Can provide dissenters’ rights of appraisal for shareholders. The bill would also provide dissenters’ rights of appraisal for shareholders voting against certain transactions, as specified.

5. Must list special purpose and complete corporate formalities. The bill would specify the required and permitted contents of articles of incorporation that a flexible purpose corporation would be required to file with the Secretary of State, including the special purposes, in addition to any other lawful purpose, that the corporation shall engage in, which may include, but are not limited to, charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation.

6. Requires managers/directors to specify objectives for assessing achievement of special purpose. Certain formalities related to accounting and transparency must be met. The bill would also require management and directors to specify objectives for measuring the impact of the flexible purpose corporation’s efforts relating to its special purpose, and to include an analysis of those efforts in annual reports, together with specified financial statements, to shareholders and would require specified information to be made publicly available, as specified.