Many profit-driven companies in California interested in providing a positive social and environmental impact experienced the problem of maintaining a fiduciary duty to their shareholders and being charitable and green at the same time. Effective January 1, 2012, this should be less of a problem as the state has adopted two different types of corporations – the “flexible benefit corporation” and the “benefit corporation” – offering businesses in Silicon Valley and elsewhere in California, the opportunity to operate with a view toward both increasing shareholder value and fulfilling socially beneficial goals.
The primary differences between the two corporations, often called “B corporations“, lies in the purpose flexibility allowed, and the extent of disclosure required. Greater flexibility means greater disclosure.
The flexible benefit corporation has greater freedom in defining alternate purposes for the corporation. It may engage in charitable and public purposes and, unless it is a professional corporation, add additional specific purposes.
The benefit corporation, however, must pursue a general public benefit as defined in detail in the statute. The general public benefit must also have a material positive impact on society as measured by standards developed by a third party. A director of a benefit corporation is subject to a duty of care, but is allowed to take into account the impact of a particular decision on a number of workforce, consumer, social, or environmental issues, and can consider interests of any other person or group. A director is free to change the weight the director gives to different impacts and considerations unless the benefit corporation’s Articles of Incorporation provide otherwise.
Formation or Conversion
Both types of B corporations can be created at formation, or by merger, reorganization, or conversion. Both require 2/3 shareholder approval for changes, such as where a standard corporation is converted into a B corporation, or where a standard corporation is merged into, or sells all or substantially all of its assets, to a B corporation. A company interested in changing its legal status to a “B corporation” should consult with a corporate law attorney to see if a B corporation is right for it.
The flexible benefit corporation must send an annual report to its shareholders within 120 days of the end of its fiscal year. The annual report requires a special purpose management discussion and analysis, which must include, among other things, analysis of management’s effort towards achieving its special purpose. Current reports are also required 45 days after the corporation makes any expenditure, excluding compensation, made to further the corporation’s special purposes, or withholds a similar planned expenditure. Corporations with less than 100 shareholders are not required to prepare the above reports if 2/3 of the shareholders have provided unrevoked waivers. Subject to reasonable confidentiality requirements, the reports must be posted on the corporation’s website.
Similarly, the benefit corporation must deliver an annual report to each shareholder. The report must describe a number of issues, including the manner in which the benefit corporation’s general public benefit was pursued, and an assessment of its performance. Unlike a flexible benefit corporation, management’s efforts must be assessed against a third party standard to determine overall corporate social and environmental performance. As with the flexible benefit corporation, the annual report must also be posted on the corporation’s website, or provided free of charge.
This discussion only touches the surface. Each of the two types of corporations has highly technical requirements which need to be followed to take advantage of these new forms of doing business.