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On October 9, 2011, Governor Brown signed into law two separate bills that will enable California corporations to pursue social or environmental goals as well as financial returns for their shareholders. S.B. 201 enacts the Corporate Flexibility Act of 2011 (to be codified at Corp C §§2500-3503), which authorizes the formation and operation of a new type of corporate entity known as a "flexible purpose corporation." A.B. 361 (to be codified at Corp C §§14600-14631) authorizes the formation and operation of a similar, but not identical, type of corporate entity known as a "benefit corporation." Both laws take effect on January 1, 2012.
Traditional for-profit corporations may promote environmental or socially beneficial causes, but such actions must serve the long-term economic interests of shareholders or else the directors may be liable in an action by dissatisfied shareholders. In contrast, traditional non-profit corporations must act for the benefit of society, but they cannot engage in substantial profit-making activities without risking loss of tax-exempt status and enforcement actions by the state attorney general. Flexible purpose corporations and benefit corporations are hybrids. They are each for-profit entities, but they offer protection from liability for officers and directors who pursue societal objectives at the expense of corporate profits.
The key difference between the two new types of California corporations is that benefit corporations are required to pursue a general public benefit and to adhere to an independent third-party standard for defining, reporting, and evaluating their social and environmental performance. To maintain their status, benefit corporations must undertake annual comprehensive assessments, measured against the third-party standard, of the corporation's impact on society and the environment.
The flexible purpose corporation law was drafted by a team of experienced California corporate attorneys and is well integrated with California's General Corporation Law. Unlike benefit corporations, flexible purpose corporations are not obligated to pursue a generalized public benefit. The founders of a flexible purpose corporation select (and identify in the articles) one or more special purposes from an extensive list in the statute. The list includes objectives such as promoting positive short- or long-term effects on the corporation's employees, customers, and suppliers, the community, or the environment-as well as the traditional charitable objectives of non-profit corporations. Moreover, flexible purpose corporate directors must send annual and current reports to shareholders concerning the corporation's activities relating to its special purposes, but are not required to interact with any outside third parties.
Both laws enable existing for-profit corporations to become either a flexible purpose corporation or a benefit corporation, as the case may be, by a two-thirds' shareholder vote, and both laws include provisions for dissenters' rights.
On corporations generally, turn to CEB's Counseling California Corporations, Advising California Nonprofit Corporations, Organizing Corporations in California, and Selecting and Forming Business Entities. CEB plans to cover these new corporate laws, along with sample forms that will be useful for creating and maintaining the two new types of entities, in upcoming updates to our publications.
Also check out our blog post on this topic.
© The Regents of the University of California, 2011. Unauthorized use and/or duplication of this material without express and written permission is strictly prohibited.
* Posted December 1, 2011
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