NORTH BAY — Two new forms of business incorporation became part of the California Corporations Code on Jan. 1. These statutes, Assembly Bill 361 and Senate Bill 201, enable for-profit firms to legally converge social responsibility and environmental awareness objectives with traditional economic and profit goals.
There has been a spike in new firms organized under the new AB 361 and SB 201 corporate forms since January, according to B-Labs, a nonprofit organization dedicated to using the power of business to solve social and environmental problems.
Currently, some 30 companies are recognized as benefit corporations under the new legislation and some 30 to 60 more are in the process of becoming a B-Corp. Typically, existing firms can take from three to four years to make the transition.
Both laws also allow for the redefinition of the corporate purpose for existing firms given a two-thirds vote of shareholders and other safeguards, such as compliance with third-party standards, comprehensive public reporting and transparency disclosures.
Assembly Bill AB 361, a voluntary corporate form introduced by Jared Huffman, D-San Rafael, 6th Assembly District, establishes a new “Benefit Corporation” entity with the intent of producing beneficial products and services, preserving the environment and improving human health.
The officers of a Benefit Corporation are also required to consider the impact of their actions on the beneficiaries of the firm’s stated benefit purposes — such as shareholders, employees and customers — as well as their effects on the environment.
Senate Bill SB 201, introduced by Mark DeSaulnier, D-Walnut Creek, 7th Senate District, creates a new Flexible Purpose Corporation (FPC).
This law allows a firm to integrate its for-profit philosophy with a special purpose mission that is similar to a charitable or public purpose.
With an FPC, consideration of the impact of director actions extends beyond shareholders, employees and customers to also encompass suppliers, creditors, society and/or the environment. However, no third party standard is required to measure and assess these effects under provisions prescribed for a FPC.
Instead, a comprehensive section of an FPC’s annual report, containing a detailed analysis of efforts by officers of the corporation to meet special purpose goals, would be required to specify objectives and measures taken to achieve them.
California has become the first state to enact a Flexible Purpose Corporation statute.
Six states already have enacted laws similar to California’s AB 361 Benefit Corporation law, including New York, New Jersey, Vermont, Maryland, Virginia and Hawaii. In addition, comparable legislation is pending in Colorado, Michigan, North Carolina and Pennsylvania.
“Until January 1, the business judgment rule required California companies to operate exclusively to maximize shareholder value, with social responsibility subordinated to the director’s fiduciary responsibility,” said Ron Wargo, partner with Friedemann Goldberg LLP. “Now corporate officers can also make social concerns part of their decision-making process.”
He said he is interested in seeing which firms embrace the new entities. “Frankly, given the higher legal and accounting costs associated with public disclosures, I would dissuade clients from rushing into this. In theory, investors participating in these hybrid models go in knowing that their profits may not be as high and are OK with that.”
The two new corporate forms introduce protection for companies wishing to create a business model “that emphasizes a triple bottom line of people, the planet and profits,” according to Assembly Member Jared Huffman.
Tanya Narath, executive director, CEO and a fellow of the Leadership Institute for Ecology and the Economy, believes that collectively these bills represent a positive step forward.
“I’m excited that they passed. There is a strong interest in creating freen enterprise and the North Bay is becoming known for its sustainable businesses.”
She said Sonoma County is home to several companies already certified as B (Benefit) Corporations by B-Labs, a nonprofit that has developed a process for assessing a company’s social and environmental impacts.
“These days many investors are looking to help fund companies that truly operate, or plan to operate, in a sustainable fashion,” Ms. Narath said.
Proponents of AB 361 say that this new corporate entity:
Expands the corporate purpose to consider society and the environment in addition to profits.
Expands accountability of directors to include consideration of society and the environment.
Expands transparency through the publication of an annual benefit report on the company’s overall social and environmental performance assessed against an independent, third party standard — while also disclosing the criteria upon which decisions based on these standards were made.
Proposed benefits of a benefit corporation include:
Greater access to social impact investing due to increased accountability and the recognizable corporate branding as a socially-oriented entity.
Legal protection for directors and officers in their more broadly defined roles of maximizing profits and ensuring social/environmental considerations.
Marketing opportunities allowing consumers to distinguish, in a real and ascertainable fashion, between a business that claims to be responsible and one that is responsible.
Rob Rutherfurd, with the law firm of Anderson Zeigler Disharoon Gallagher & Gray, says these new entities “help to clarify the role of directors and enable them to think about the interests of other constituencies, besides shareholders.”
While these bills have hundreds of supporters who say they will increase jobs, spur the economy and increase the number of socially responsible entrepreneurs going into business, opponents see potential problems.
The California Association of Non-Profits says that these new entities could divert giving away from non-profit charitable 501(c)3 and/or 501(c)6 mutual benefit organizations.
The Corporations Committee of the Business Law Section of the California State Bar Association also opposed these measures saying that they could substantially change the fiduciary duties of corporate directors.
According to Jeremy Olsan, a partner with the law firm of Perry Johnson Anderson Miller & Moskowitz LLP, the benefits of these new corporate forms remain to be seen.
“The true test of these bills will be realized when new entities advance the goals set forth under AB 361 and SB 201, or if these laws will have to be amended as more experience is gained in implementing them. Additional costs will be incurred with the third-party standard review.”
John Mackie, managing partner with the law practice Carle, Mackie, Power & Ross, voiced similar sentiments. “It’s premature to know how these innovative corporate structures will play out. I’m not sure if existing companies will want to embrace them. Company management has to determine if their shareowners agree with the new purpose and the not-for-profit aspects.”
Political Analyst Brian Sobel sees other issues that could arise.
“The outcome from this new legislation is unknown. While these bills provide some protection for directors wanting to devote a larger share of company profits for social purposes, if shareowners think profits are being given away excessively, they will object. The board could still face liability if there is no rational basis for a given action in light of the corporation’s purpose.”
He observed that there is no formula set forth in either bill for determining how pre-tax corporate profits will be disbursed.
“While the potential exists for management to distinguish their company by holding it to a higher standard, it is also possible that a company’s accountant could take advantage of the new entity to bury debt and/or losses in order to realize a tax write off,” Mr. Sobel said. “A watchdog agent is needed to help prevent abuses.”
Kevin J. McCullough, a partner with the law firm of Spaulding McCullough & Tansil LLP, does said it will take time to see if the new model takes hold.
“Back in the mid 1990s when a new entity — the limited liability company — was first authorized in California, it took several years for this entity to take hold and to start being used with any regularity. The business community typically has to reach a point of collective comfort before it feels confident using a new form of business entity.”
A list of certified Benefit Corporations and information on the certification process is available at http://www.bcorporation.net/.
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