Accountability Archives - socentlaw

TWO BILLS HEADING FOR THE GOVERNOR’S DESK IN CA

Yesterday marked a big day in California.
As reported here, Assembly Bill 361 (the Benefit Corporation legislation sponsored by Assembly member Jared Huffman) passed the concurrence vote Tuesday in the Assembly and began the enrolling and engrossing process to end up on Governor Brown’s desk this week. (No, it is not technically on the Governor’s desk, but probably will be by the end of the week.)
Yesterday, Senate Bill 201 (the Flexible Purpose Corporation legislation sponsored by Senator Mark DeSaulnier) passed out of the Assembly and headed for its concurrence vote in the Senate (possibly as soon as today).  It will also end up on Governor Brown’s desk by the end of the week.
And just in case folks were still curious about whether this type of legislation is necessary or not, the news stories about CouchSurfing switching from a non-profit to a “for-benefit” corporation should help to dispel the disbelief.  (How long would it have taken them to raise $7.6 million in charitable contributions to scale?)
Now, the question that exists is whether Governor Brown will sign both bills. Or might he choose one?  And that really begs the two questions that I’m asked most frequently as I speak around the state:
Why are there two bills in California?
What are the differences in these two pieces of legislation?
I will answer these two questions over the coming days.
Stay tuned!

 

*Todd is a partner at the law firm of Jones Day, where he founded their Silicon Valley Office and runs their Renewable Energy and Sustainability Practice. The views expressed in this column are solely Todd’s personal views, not the views of Jones Day or its clients, and the information provided as to his affiliation with Jones Day is solely for purposes of identification and may not and should not be construed to imply endorsement or even support by Jones Day of the views expressed herein.

 © R. Todd Johnson, 2011. 

Business for Good.SM is a service mark of R. Todd Johnson. The thoughts, ideas and words expressed in this column are the property of R. Todd Johnson and may not be otherwise used or reprinted without express permission from Todd.
Photo: Rockinelle

FLEXIBLE PURPOSE CORPORATION

The Flexible Purpose Corporation is a new class of corporation, much like a C Corp or an S Corp, which allows the directors of a corporation to pursue broader objectives than the narrow focus of maximizing financial return for shareholders. On February 8, 2011 Senator Mark DeSaulnier introduced the Corporate Flexibility Act of 2011 (SB 201) into the California state legislature. It has not been passed into law yet, but we thought we’d give you a sneak peak of a potential new legal structure for social entrepreneurs.

Existing corporate law dictates that directors of corporations’ sole duty is to maximize shareholder value, which means that every decision of must be made with the goal of increasing the price of the stock. When a director makes a decision that does not maximize shareholder value, he opens the corporation up to a lawsuit from shareholders. This poses a problem for corporations that are seeking a financial return as well as other objectives such as positive environmental, social or community impact. The goal of the Flexible Purpose Corporation is to create a legal structure where profits can be pursued along side broader goals without opening the directors up to litigation.

Below are two key attributes of the Flexible Purpose Corporation.

SPECIFIC PURPOSE

As its name implies, the Flexible Purpose Corporation allows the directors a high degree of flexibility to choose a non-financial purpose that they want to pursue. This purpose is called a Specific Purpose and is defined as:

  1. Any charitable or public purpose that a nonprofit would be eligible to carry out or;
  2. Promoting positive or minimizing negative short term and long term affects of among any of the following:
    • employees, suppliers, customers, creditors;
    • the community and society; or
    • the environment.

A Flexible Purpose Corporation may have one or more Specific Purposes. They must be clearly stated in the Articles of Incorporation and approved by 2/3 of the shareholders.

TRANSPARENT REPORTING

After the Flexible Purpose Corporation has identified its Special Purpose, it must set annual objectives to achieve the Special Purpose. At the end of every fiscal year the Flexible Purpose Corporation must give a transparent account in its annual report detailing the actions taken by the Flexible Purpose Corporation to achieve the Special Purpose objectives. The report must include the following:

  1. Identification of short and long term objectives as they relate to the Special Purpose and identification of any changes made to those objectives in the last fiscal year.
  2. Identification and discussion of material action taken during the fiscal year to achieve the Special Purpose objective, the impact of those actions and the causal relationship between the actions and reported outcomes.
  3. Identification of material action that the Flexible Purpose Corporation expects to take in the short and long term to meet its Special Purpose objective.
  4. Identification and discussion of the process of for selecting metrics used for evaluating success of the Special Purpose objective.
  5. Identification of how much money the Flexible Purpose Corporation has spent to achieve the Special Purpose objectives, as well as a good faith estimate in how much it will spend in the next three fiscal years to do so.

The annual report must be publicly available on the Flexible Purpose Corporation’s website and be published within 120 days after closing the fiscal year.

The Flexible Purpose Corporation is focused on giving companies flexibility to choose how they want their company to pursue profit and purpose while requiring a high level of transparent reporting to ensure that they are taking tangible steps toward achieving that purpose. Should the Corporate Flexibility Act of 2011 be passed into law, social entrepreneurs will have more choice in how to structure their business to do well and do good.

Kyle Westaway is the founding partner at Westaway Law– an innovative New York City law firm that counsels social entrepreneurs. He has helped build Biographe – a sustainable style brand that employs and empowers survivors of the commercial sex trade. Kyle is a Cordes Fellow. He lectures on social entrepreneurship at Harvard Law School and Stanford Law School. He writes for Huffington PostGOODTriple PunditSocial Earth and Law for Change.

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