New Socially or Environmentally Responsible Corporate Entities

10/25/2011 Articles

California Governor Jerry Brown signed into law two separate bills which allow companies to pursue social or environmental goals using a corporate structure that expressly authorizes the consideration of such goals and not just profitability. These laws will become effective January 1, 2012.

SB 201 enacts the Corporate Flexibility Act of 2011 allowing the formation of a flexible purpose corporation ("FPC"). The FPC is distinct from other corporate forms in the following ways:

1. An FPC would be required to specify in its articles of incorporation at least one special purpose, in addition to any other lawful purpose, that the corporation shall engage in, which may include but is not limited to any purpose generally pursued by a nonprofit public benefit corporation.

2. An FPC's directors and management would be protected from liability when making decisions that do not put shareholders' financial returns above all, subject to standards of reasonableness.

3. An FPC would be required to specify objectives for measuring the impact of its efforts relating to its social purpose and to analyze its success in annual reports.

AB 361 allows companies to become a benefit corporation ("BC") with the purpose of creating a "material positive impact on society and the environment," thus meeting the broad goals of societal and environmental benefits. The entity must be assessed against standards relating to defining, reporting, and assessing overall corporate social and environmental performance as established by a third party that satisfies certain requirements. In their actions, the board of directors of a BC must also 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. In its annual report, the BC must include its overall social and environmental performance.

Note that there has been debate that a BC removes too many of the standard protections that shareholders are accustomed to and the directors are not provided adequate guidance as to how to make decisions. The bill was opposed by both the Corporations Committee and the Nonprofit and Unincorporated Organizations Committee of the Business Law Section of the State Bar of California.