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SENATE RULES COMMITTEE


Office of Senate Floor Analyses

1020 N Street, Suite 524

(916) 651
-
1520 Fax: (916) 327
-
4478

AB 361






THIRD READING




Bill No:

AB 361

Author:

Huffman (D), et al.

Amended:

7/12
/11 in
Senate

Vote:

21





SENATE BANKING & F
INANCIAL INST. COMMITTEE
: 5
-
1, 6/29/11

AYES: Vargas, Blakeslee, Kehoe, Liu, Padilla

NOES: Walters

NO VOTE RECORDED: Evans


SENATE JUDICIARY COMMITTEE
: 4
-
0, 7/5/11

AYES: Evans, Harman, Blakeslee, Leno

NO VOTE RECORDED: Corbett


SENATE APPROPRIATIONS
COMMITTEE
: Senate Rule 28.8


ASSEMBLY FLOOR
: 58
-
17, 5/26/11
-

See last page for vote




SUBJECT
:

Benefit corporations


SOURCE
:

B Lab




DIGEST
:

This bill authorizes 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 entitie
s wishing to become
benefit corporations.


ANALYSIS
:

Existing law, the General Corporation Law, authorizes and
regulates the formation and governance of general corporations.

The
Nonprofit Corporation Law authorizes the formation and governance of

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2




CONTINUED


no
nprofit public benefit corporations, nonprofit mutual benefit corporations,
and nonprofit religious corporations, and specifies the respective purposes
for which those corporations may lawfully be formed.

Existing law
specifies the duties of corporate dir
ectors and the rights of shareholders.

Existing law does not provide for the formation and governance of benefit
corporations.


This bill:


1.

E
stablish
es

a new corporate form called
a benefit corporation, and
provide
s

that one or more natural persons, pa
rtnerships, associations,
benefit corporations, or corporations, domestic or foreign, may form a
benefit corporation under the California Corporations Code

(CORP)
, by
executing and filing articles of incorporation with the California
Secretary of State.

S
tate
s

that the provisions of the General Corporation
Law (Division 1, commencing with Section 100), apply to benefit
corporations, except where those provisions are in conflict with or
inconsistent with the benefit corporation provisions added by th
is

bill
.


2.

Requires ea
ch benefit corporation to have the purpose of creating a
general public benefit. “General public benefit” w
ill

be defined as a
material positive impact on society and the environment, taken as a
whole, as assessed against a t
hird
-
party
standard (see [4]

below), from
the business and operations of a benefit corporation.


3.

Allows
, in its articles of incorporation, each benefit corporation
to
list
one or more specific public benefits, which would be additional
purposes of the corporatio
n. Specific pu
blic benefits are defined in this

bill as all of the following: providing low
-
income or underserved
individuals or communities with beneficial products or services;
promoting economic opportunity for individuals or communities beyond
the cr
eation of jobs in the ordinary course of business; preserving the
environment; improving public health; promoting the arts, sciences, or
advancement of knowledge; increasing the flow of capital to entities
with a public benefit purpose; or the accomplishme
nt of any other
particular benefit for society or the environment.



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3




CONTINUED


4.

D
efine
s

a third
-
par
ty standard, for purposes of this

bill, as a standard for
defining, reporting, and assessing overall corporate social and
environmental performance, which meets all o
f the following criteria:


A
.

The standard would have to provide a comprehensive assessment of
the impact of the business and the business’ operations on
employees of the benefit corporation and its subsidiaries and
suppliers, customers of the benefit corp
oration, the communities in
which the benefit corporation and its subsidiaries and suppliers are
located, society, and the local and global environments. The impact
of the business and the business’ operations on shareholders would
not have to be assessed

by the third
-
party entity.


B
.

The standard would have to be developed by an entity that has no
material financial relationship with the benefit corporation or any of
its subsidiaries, and that satisfies both o
f the following requirements:


(1
)
.


No m
ore than one
-
third of the members of the governing body
of the organization could be representatives of associations of
businesses whose members’ performance is measured against
the standard, of businesses operating in a specific industry, or of
businesses

whose performance is measu
red against the standard;


(2
)
.


T
he entity could not be materially financed by representatives
of associations of businesses whose members’ performance is
measured against the standard, of businesses operating in a
specific indu
stry, or of businesses whose performance is
measured against the standard.


C
.

The standard would have to be developed by an entity that accesses
necessary and appropriate expertise to assess overall corporate social
and environmental performance, and that

uses a balanced, multi
-
stakeholder approach, including a public comment period of at least
30 days to develop the standard.


D
.

All of the following information about the standard would have to be
made publicly available:



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4




CONTINUED


(1)
.

The criteria considered whe
n measuring the overall social and
environmental performance of a business, and the relative
weightings assigned to each criterion;


(2)
.

The identity of the directors, officers, any material owners, and
the governing body of the entity that developed and
controls
revisions to the standard;


(3)
.

The process by which revisions to the standard and changes to
the membership of the governing body are made;


(4)
.

An accounting of the sources of fi
nancial support for the entity,
with sufficient detail to disclos
e any relationships that could
reasonably be considered to present a potential conflict of
interest.


5.

Requires e
ach corporate entity wishing to become a benefit corporation
through conversion or reorganization an affirmative vote of at least two
-
third
s of each of its classes of shareholders, or a higher vote threshold, if
required in its articles of incorporation. The same vote threshold would
be required to amend a benefit corporation’s articles of incorporation, or
to create or dissolve a benefit co
rporation through merger or acquisition.


6.

Entitles s
hareholders of an existing corporation that decided to convert
to a benefit corporation to dissenter’s rights, which are spelled out in
existing law (
CORP

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 any stock
split, reverse stock split, or sh
are dividend which becomes effective after
that date.


7.

Requires t
he board of directors, committees of the board, and the
individual directors of a benefit corporation to consider the impacts of
any action or proposed action upon all of the following:

the
shareholders of the benefit corporation; the employees and workforce of
the benefit corporation and its subsidiaries and suppliers; the interests of
customers of the benefit corporation as beneficiaries of the general or
specific public benefit purpos
es of the benefit corporation; community

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5




CONTINUED


and societal considerations, as specified; the local and global
environment; the short
-

and long
-
term interest of the benefit corporation,
including benefits that could accrue to the corporation from its long
-
term
p
lans, and the possibility that those interests could best be served by
retaining control of the corporation rather than selling or transferring
control to another entity; and the ability of the benefit corporation to
accomplish its general, and any specifi
c, public benefit purpose.


8.

P
rovide
s

that a director of a benefit corporation is not liable for
monetary damages for any failure of the benefit corporation to create a
gene
ral or specific public benefit, and

provide
s

that a person who
performs the dutie
s of a director in accor
dance with the provisions of
this

bill is not liable for monetary damages for any alleged failure to
discharge the person’s obligations as a director.


9.

P
rovide
s

that a director of a benefit corporation does not have a
fiducia
ry duty to a person that is a beneficiary of the general or specific
public benefit purp
oses of a benefit corporation, and
provide
s

that a
benefit corporation is not liable for monetary damages for any failure to
create a general or specific public benefit
.


10.

P
rohibit
s

any person from bringing an action or asserting a claim against
a benefit corporation or its directors, except in a benefit enforcement
proceeding, and provide
s

that a benefit enforcement proceeding may
only be commenced or maintained by

the corporation, a shareholder, a
director, a person
(s)

that hold five

percent

or more of the equity interests
in an entity of which the benefit corporation is a subsidiary, or other
persons specified in the articles or bylaws of the benefit corporation.


11.

R
equire
s

each benefit corporation to prepare an annual benefit report,
which must be sent to its shareholders no later than 120 days after the
close of the benefit corporation’s fiscal year, or at the same time it
delivers any other annual report to i
ts shareholders, and (with the
exception of proprietary or financial information) would have to post the
benefit report on its Internet
W
eb site. The annual benefit report would
have to include a narrative description of all of the following:


A
.

The proc
ess and rationale for selecting the third
-
party standard used
to prepare the benefit report.


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6




CONTINUED



B
.

The ways in which the benefit corporation pursued a general public
benefit and one or more specific public benefits during the
applicable year, and the extent
to which those benefits were created.


C
.

Any circumstances that hindered the creation of a general or specific
public benefit by the benefit corporation.


D
.

An assessment of the overall social and environmental performance
of the benefit corporation, p
repared in accordance with a third
-
party
standard applied consistently with any application of that standard in
prior benefit reports or accompanied by an explanation of the
reasons for any inconsistent application. The assessment would not
need to be aud
ited or certified by a third party.


E
.

The name of each person

or more that owns 5 percent

or more of the
outstanding shares of the corporation.


F
.

A statement from the board of directors indicating whether, in the
opinion of the board of directors, the
benefit corporation failed to
pursue its general, and any specific, public benefit purpose in all
material respects during the period covered by the report. If, in the
opinion of the board of directors, the benefit corporation failed to
pursue its general
, and any specific, public benefit purpose, this
statement would have to include a description of the ways in which
the benefit corporation failed to pursue that purpose/those purposes.


G
.

A statement of any connection between the entity that established
the third
-
party standard, or its directors, officers, or material owners,
and the benefit corporation, or its directors, officers, and material
owners, including any financial or governance relationship that
might materially affect the credibility of the o
bjective assessment of
the third
-
party standard.


Similar Legislation


This bill is similar to SB 201 (DeSaulnier), which passed the Senate (37
-
1)
on June 1, 2011.
Both bills allow for the creation of for
-
profit companies
with dual for
-
profit/social
-
envir
onmental missions written into their articles

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7




CONTINUED


of incorporation. Thus, these corporations could simultaneously pursue
missions of public good and private wealth, with the knowledge and support
of their shareholders.


Both bills require supermajority vote
s of the shareholders of existing
companies to enable the companies’ transformation into benefit/flexible
purpose corporations, and both provide dissenters’ rights to shareholders of
existing companies, who decide they do not wish to own a part of the newl
y
formed benefit/flexible purpose corporation. Both bills also require the
publication of annual reports, in which the corporations’ success in meeting
their public benefits is discussed.


Yet, the supporters of both bills and many experienced corporate a
ttorneys
assert that the two bills are very different. The supporters of
this bill

and

SB 201 assert that both bills can become law, that they are not duplicative or
overlapping, and that the intended users of the two corporate models, and the
needs of t
hese users, are very different.


The following are some of the key differences between the two bills, as
described by the supporters of
this bill
, augmented by a review of both bills
by the Senate Banking and Financial Institutions Committee:


1
.

SB 201
will likely attract the interest of large corporations. It requires
identification of one or more specific public benefits by a flexible
purpose corporation, but does not require the use of any specific metric
to evaluate the ability of that corporation t
o achieve its benefit(s), and
does not require review of the corporation’s actions by a third party.
Instead, it provides a safe harbor for corporations that utilize best
practices to report on their success in achieving their missions. It also
requires
a very comprehensive annual report, in which the flexible
purpose corporation is required to list material actions it took during the
fiscal year to achieve its special purpose objectives, and the impact of
those actions; and in which the corporation is re
quired to cite which
metrics it used to evaluate its performance, and why those metrics were
selected. Furthermore, any flexible purpose corporation that incurs an
expense related to the achievement of its special purpose, which is
expected to have a mate
rial adverse impact on its shareholders, is
required to prepare a special report describing that expenditure, for
submission to its shareholders, within 45 days of the expenditure.


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CONTINUED



2
.

This bill

is likely to attract small and medium
-
sized businesses. It
r
equires each benefit corporation to achieve a general public benefit; the
identification and achievement of specific benefits is optional. Review
of the corporation by a third party, according to a standard developed by
that third party, is required. The

public benefit report required by
this
bill

places considerable emphasis on the benefit corporation’s ability to
meet that third party standard. (Staff observes that B Lab is one entity
that has developed a third party standard, which could be used by a
benefit corporation; thus, the company could stand to benefit from
enactment of
this bill
).


FISCAL EFFECT
:

Appropriation: No Fiscal Com.: Yes Local: No


SUPPORT
:

(Verified
8/16/11
)


B Lab (s
ource
)

Abacus Wealth Partners

Academies for Social

Entrepreneurship

Accountable Develop

AGSJ

Alan Briskin Management Consultants

Alter Eco Fair Trade

American Lung Association in California

American Sustainable Business Council

AnewAmerica Community Corporation

Aquamantra

Bay Area Council

Bay Point Benefi
ts

Beacon Management Consulting

Beam Inc.

Beck with Associates

Bike station/Mobis Transportation Alternatives

Birkenstock

Blitz Bazaar

Blueprint Research and Design

BP Stewart and Co., Contracting

Bridge the Gap Consulting Inc.

Brion and Associates


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Build I
t Green

California Association of Micro Enterprise Opportunity

CAMEO

Canal Alliance

Cannourish

CAP Global

Caratnet

Care2

Catalyst Coaching and Training

Center for Dynamic Governance

Chapman University

Chosen Futures

Clean Fund LLC

CleanFish

Common Sense Co
unseling

Communications Inc.

CORE Foods

Creative Management

Dana Smirin

Detour Agency

Dharma Merchant Services

Direct Dental

DNAGlobalNetwork.com

Dragonfly Designs

Dzambuling Imports

Elemental Herbs

Ellen Weinreb Sustainability Recruiting

Emerge

Enlightene
d Brand Incorporated

Environmental and Public Health Consulting

Equinox Landscape

Eurous Global Executive Leadership

Evergreen Lodge

Everson Financial

Exygy Web and Mobile

Fox Acupuncture

Give Something Back

Global Alliance for Incinerator Alternatives

Goo
dGuide, Inc.


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CONTINUED


Great Place to Work Institute

Green Age 360

Green America

Green Chamber of Commerce

Green Design Systems

Green Retirement Plans, Inc.

GreenLab Creative

Guayakí Sustainable Rainforest Products

Hanson Bridgett LLP

Harrington Investments Inc.

Hel
ler Consulting

Herriford Consulting

IdeaEncore Network

Image Integration

Imprint Capital

Indigenous Designs Corporation

Inquiring Systems, Inc.

Inspiring Results

Institute for Social Entrepreneurship

Integral Partnerships LLC

Integrative Psychophysical The
rapy

Johnson and Associates

Jungwirth, Blackburn and Associates

KC Building

KINeSYS Inc.

Lake Royal Apartments

Latham Film LLC

Leadership and Strategy for Sustainable Systems

Living City Partners

LO*OP Center, Inc.

Longsplice Investments

Mal Warwick Associ
ates| Donordigital

Mark Leibowitz Photography, Inc.

Marti Spiegelman MFA

Mendocino Wine Group, LLC

Meridian University

Merlone Geier Partners

Method Home Products Inc.

Mindful Investors


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Minerva Consulting

MJ Everson Financial

Nancy Southern and Associates

Natural Logic, Inc.

Nest Collective

New Avenue

New Foundry Ventures

New Harvest Capital

New Leaf Paper

New Paradigm Digest

New Resource Bank

New Voice of Business

NZ Consulting, Conscious Business

Opticos Design, Inc.

Oxford Leadership Academy USA

Partners
hip Capital Growth Advisors

Planet Cents

Planning for Sustainable Communities

Presidio Graduate School

Progressive Wealth Management

Project: Liftoff

Public Works, LLC

Quantum Intech, Inc.

Raphael Medicine and Therapies

Raymond H Katz, DMD

ReliaTech

Renesc
h Advisory Services

REthink Development

Revolution Foods

Rimon Law Group

RippleQ

RSF Social Alliance

SABEResPODER

Salesforce.com Foundation

Sara Ellis Conant Coaching and Consulting

Sergio Lub Handcrafted Jewelry, Inc.

ShareExchange

Silicon Valley Innovati
on Associates

Silicon Valley Leadership Group


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Small Business California

Social Venture Network

Solar Works

Sparked

Spirit Rising Productions

Sun Light and Power

Sustainable Enterprise Conference

Sustainable World Coalition

SVT Group

Swanton Berry Farm

TGNA

The Ballroom

The Clarity Project

The Green Riders

The Redwood Grove Group

The Rosebud Agency

The Sanders Partnership

The Terry Mandel Collaborative

The Vianova Group

TomZanders.com LLC

Tracking the Wisdom

Traditional Medicinals

Transportation Power, Inc.

Transpower

Turner Real Estate

US Green Building Council


CA Advocacy Committee

VeeV Spirits

Veritable Vegetable

Wendel Rosen

Wespay

West Company

WildEarth Guardians

Wise Solutions, Inc.

WorkLore

World Centric


OPPOSITION
:

(Verified 8/16/11
)


Californi
a Association of Nonprofits


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13




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California Society of Association Executives

Corporations and Government subcommittees of the Business Law Section
of the State Bar of California


ARGUMENTS IN SUPPORT
:

According to the author, “California
leads the nation in

innovation and sustainability, but it does not have the
statutory framework to provide California businesses with the ability to do
both simultaneously. There is tremendous demand from the business
community in California and nationally for states to cre
ate 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. AB 361 creates a new corporate form, which allows businesses to
voluntarily el
ect an alternative corporate structure with higher standards of
corporate purpose, accountability, and transparency.”


The American Sustainable Business Council (of which B Lab is a member)
describes itself as a growing coalition of business networks and b
usinesses
committed to advancing a new vision, framework, and policies that support a
vibrant, equitable, and sustainable economy. To date, the organizations that
have joined the Council represent over 65,000 businesses, many of which
are in California.
The Council believes that businesses need to have
missions that are broader than simply maximizing profit, and that business
leaders and investors need to be able to run their businesses in ways that
focus on more stakeholders. They observe that tradition
al corporate law
defines the fiduciary duty of corporate officers and directors narrowly,
making it difficult for businesses with a social mission to make the kinds of
complicated decisions they face every day.
This bill

provides the business
model needed

by these entities.


ARGUMENTS IN OPPOSITION
:

The Corporations Committee of the
Business Law Section of the California State Bar (Corporations Committee)
is concerned that
this bill

will enact a fundamental change to the fiduciary
duties of corporate di
rectors and will pose a consequent risk to shareholder
protections. The Corporations

Committee is concerned that this

bill will
create a framework in which directors are no longer accountable to their
shareholders.


Under this

bill, directors are wholly i
n control of the nature of their fiduciary
duties, because they have the ability to select the third party standard by

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14





which their conduct will be measured, with no input from shareholders, and
because there are only vague substantive requirements in th
is

bill regarding
the third party standard. This presents the possibility that directors will be
able to shop for third party standards that suit their purposes to the detriment
of shareholders. The Corporations Committee is concerned that, over time,
varyi
ng third party standards will develop, which will allow directors great
discretion to choose not just how stringent or lenient their duties will be, but
also the very substance of the duties themselves.


The Corporations Committee also asserts that th
is

bi
ll provides almost no
protection to shareholders. Section 14620(a) (the portion of th
is

bill which
spells out the fiduciary duties of the directors of benefit corporations) tracks
the traditional fiduciary duties found in Section 309 of the General
Corpor
ations Code, but eliminates any references to shareholders, essentially
eliminating any duty of care or loyalty to shareholders. Furthermore,
because th
is

bill lists so many topics that directors are allowed to c
onsider
when making actions, this

bill will

allow them to briefly consider, and then
dismiss, shareholder interests.



ASSEMBLY FLOOR
:

58
-
17,
5/26/11

AYES:

Alejo, Allen, Ammiano, Atkins, Beall, Block, Blumenfield, Bonilla,
Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos,
Carter,
Chesbro, Conway, Cook, Dickinson, Eng, Feuer, Fletcher, Fong,
Fuentes, Furutani, Galgiani, Gatto, Gordon, Hagman, Hall, Hayashi,
Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffr
ies, Lara, Bonnie
Lowenthal, Ma, Mendoza, Mitchell, Monning, Nestande, Olsen, Pan,
Perea, V. Manuel Pérez, Portantino, Skinner, Smyth, Solorio, Swanson,
Torres, Wieckowski, Williams, Yamada, John A. Pérez

NOES:

Achadjian, Bill Berryhill, Donnelly, Beth Ga
ines, Garrick, Grove,
Halderman, Harkey, Knight, Logue, Mansoor, Miller, Morrell, Nielsen,
Silva, Valadao, Wagner

NO VOTE RECORDED:


Cedillo, Davis, Gorell, Jones, Norby



JJA
:
kc

8/16
/
11

Senate Floor Analyses

SUPPORT/OPPOSITION: SEE ABOVE

**** END *
***