With the new year will come a new, socially responsible corporate form in California. New laws will enable California corporations to do something they could never do before: Pursue both social or environmental goals and financial returns for their shareholders.
Two new laws, effective January 1, 2012, will make this possible:
- 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,” and
- 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.”
Under current laws, for-profit corporations may choose to promote environmental or socially beneficial causes, but such actions have to serve the long-term economic interests of shareholders or else the directors may be liable in an action by dissatisfied shareholders.
By contrast, non-profit corporations have to act for the benefit of society and can’t engage in substantial profit-making activities without risking loss of tax-exempt status and enforcement actions by the state attorney general.
These new 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.
Existing for-profit corporations can make the switch and become a flexible purpose corporation or a benefit corporation by a two-thirds’ shareholder vote.
Not surprisingly, some are concerned about these hybrid corporations. As a New York Times article explains, some executives in charge of charities “fear increased competition for philanthropic dollars fueled by the enthusiasm for the new formats among foundations.”
What do you think? Is this the dawning of a new day for corporations in California?
For more details on these two new laws, check out the law alert on CEB.com. On corporations generally, turn to CEB’s Counseling California Corporations, Advising California Nonprofit Corporations, Organizing Corporations in California, and Selecting and Forming Business Entities. Check out CEB’s wiki on flexible purpose corporations and program California’s New Social Purpose Corporate Entities: What Are They and How Do They Differ?, available On Demand.
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