Until 2012 in California, if one wanted to have a corporation that was formed for the public good, one could only start a non-profit corporation. Corporate law required directors to pursue economic goals for the sole benefit of shareholders, with a fiduciary duty to maximize profits for the growth of the corporation and its owners. On January 1, 2012, two hybrids were authorized in California: the Benefit Corporation “BC” and the Flexible Purpose Corporation, or FPC. As of now, 19 states and the District of Columbia have similar laws, with 15 states having pending similar legislation. These two entities are for-profit corporations who may consider criteria in the public good realm when making corporate decisions. Both types have standards of accountability and transparency to ensure they pursue the benefits for which they were established. As they are very similar, I will discuss only the Benefit Corporation.
All these different state corporation acts share the following characteristics:
- Corporate purpose will create a material positive impact on society and the environment;
- Directors duties now include consideration of shareholders and outsiders; and
- Obligation to report the corporate performance vis a vis the social and environmental benefits using a “comprehensive, credible, independent and transparent third party standard.”
California Specifics
- CA BC’s elect to pursue benefits for the general public benefit that will have a “…material positive impact on society and the environment…assessed against a third-party standard, from the business and operations of a benefit corporation.” A BC may also choose to pursue specific public benefits such as:
- Providing products and services to low income people
- Promoting economic opportunity for individuals and communities outside of job creation
- Environmental preservation
- Public health improvements
- Promoting arts, sciences and education/knowledge
- Increasing capital contributions to public benefit entities
- Other societal or environmental specific benefits
2. New law applies to new and existing corporations. Specific language must be in the articles of incorporation.
3. Accountability: Directors and officers of the BC need to consider the impact of their actions on:
- Shareholders, employees and customers
- Local community and society in general
- Local and global environment
- Short-term and long term interests of the BC
- BC’s ability to accomplish its public benefit purpose
- Resources intent and conduct of persons seeking to acquire control of the BC
4. Transparency
- Must prepare an annual report to shareholders showing the success in achieving the public benefit
- Must self-assess using a third party standard that is comprehensive, credible, independent and transparent
- Must describe the process and reason for selecting the standard
- Must disclose any connection between the BC and entity establishing the standard
- BCs cannot have interests in 3rd party certifying organizations
- Self assessment need not be audited or certified
- Bd. of Directors must opine on whether BC failed to pursue its public benefit purpose
5.Officer and Director Liability
- Must pursue their duties in good faith, in best interest of BC, with the care of an ordinarily prudent person
- If pursued in good faith, directors are protected from monetary liability for failure to perform duty
- Claimants in enforcement proceedings are only: Directors, shareholders or owners of 5% or more of equity interests in an entity where BC is subsidiary (not beneficiaries of the social good)
- BC not liable for money damages for failure to create a public benefit
Need help with setting up a benefit corporation? Nancy Lewellen can help you do this with ease. Contact her today at nyl@palladianlawgroup.com or 415-399-0993 for a free 15-minute consultation.