San Jose Business Lawyers Blog
I recently taught a program in San Jose to lawyers concerning California B corporations, a subject I covered in prior blogs. As a corporate lawyer, I have been asked by current and prospective business owners whether this new type of entity was the right choice of entity for them. B corporations were created to enable a for-profit company to include as a criteria in its management decisions its pursuit of a public purpose. The B corporation, however, must disclose its public purpose activities.
California recently created two types of B corporations, a “Benefit Corporation” and a “Flexible Purpose Corporation”. Although there are a number of differences between the two, each requires that a company list in its formation documents that it is devoted, among other things, to a public purpose. Each type of B corporation must also discuss its activities directed toward satisfying its public purpose. Each type of B corporation must also post the required disclosure on its website, although financial or proprietary information can be excluded in the website posting, and the company must send the disclosure to its shareholders within 120 days after its fiscal year end. If the disclosure is not posted on its website, a free copy must be made available to anyone, in the case of the Benefit Corporation, or must be made available to anyone through “similar electronic means,” in the case of the Flexible Benefit Corporation.
Benefit Corporation Disclosures
The content of the disclosure differs with the type of B corporation. The Benefit Corporation must provide an Annual Benefit Report. In the report, the company must discuss the process and rationale behind choosing the third party standard which it uses to assess performance toward providing a public benefit. The company must also explain how it pursued the benefit, the extent to which the benefit was achieved, and the circumstances that hindered achievement. Last, the company must list the names of all persons owning 5% or more of the Benefit Corporation’s outstanding stock.
Flexible Purpose Corporation
The disclosure requirements of a Flexible Purpose Corporation roughly parallel those that exist for publicly held companies. The company must provide a Special Purpose Management Discussion and Analysis. The Special Purpose MD&A must identify and discuss short and long term objectives relative to its special purpose, and any changes made during the prior fiscal year. Among other things, the company must also disclose the material operating and capital expenditures required over the next three years to achieve its purpose.
In addition to the annual Special Purpose MD&A, a Special Purpose Current Report must be disclosed no later than 45 days after certain events have occurred. These events include such things as making or withholding a material operating and capital expenditure for achieving the corporation’s purpose, or a determination that the special purpose has been satisfied or should no longer be pursued. Because the law is so new, the extent of the disclosure required is a bit unclear, and best practices are expected to develop that will serve as the basis for a presumption that disclosure is complete.
One “advantage” of the Flexible Purpose Corporation, as opposed to the Benefit Corporation, is that the disclosure can be waived, but it is tricky. The waiver option only exists for corporations with less than 100 holders of record. Holders of 2/3 of the shares of record must waive the disclosure requirements, and the waiver must be provided annually within set time limits. The waiver is also revocable. Disclosure cannot be waived for a Benefit Corporation.
The discussion above is highly general and there are a number of highly technical requirements. The attorneys at Structure Law Group, LLP can assist companies that are looking to form, or convert into, a B corporation in carefully examining the disclosure requirements to make sure all requirements can be satisfied.
The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.