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.