The Business Counselor Blog™

California Recognizes Two New Special Purpose Corporations

The corporation is the most widely used form of business organization in the United States. Several different types of corporations are recognized in most jurisdictions: general business or profit corporations; statutory close corporations, which offer the opportunity for shareholders of a small closely held enterprise to combine the flexibility of the partnership form with the advantages of the corporate form; non-profit corporations; cooperative corporations; and professional corporations. Also, many jurisdictions provide for the creation of special purpose corporations.  California is an example of the level of creativity in this area.  For many years that state has recognized consumer cooperative corporations, small business corporations and business and industrial corporations.   Recently, however, the choices have been expanded to include two additional corporate entities: flexible purpose corporations and benefit corporations.  The formation and operations of California flexible purpose corporations is governed by the California Corporate Flexibility Act of 2011 (“CFA”) [Ca. Corp. Code §§ 2500 et seq.], which provides that a flexible purpose corporation may be formed for special purposes, in addition to any other lawful purpose, including, but are not limited to, charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation. [Ca. Corp. Code § 2602(b)(2)]  The CFA requires management and directors to specify objectives for measuring the impact of the flexible purpose corporation's efforts relating to its special purpose, and to include an analysis of those efforts in annual reports, together with specified financial statements, to shareholders and requires that specified information be made publicly available. [Corp. Code §§ 3500]  California benefit corporations are governed by Ca. Corp. Code §§ 14600 et seq. and may be formed for the purpose of creating general public benefit, defined as a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard that satisfies certain requirements. [Ca. Corp. Code § 14601(c)]  A benefit corporation may also identify one or more specific public benefits as an additional purpose of the corporation including, without limitation, providing low-income or underserved individuals or communities with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, preserving the environment and improving human health. [Ca. Corp. Code § 14601(e)(1)-(7)] Directors of benefit corporations are required to consider the impacts of any action or proposed action upon specified considerations including, among others, the shareholders and employees of the corporation, customers of the corporation who are beneficiaries of the general or specific public benefit purposes and the environment. [Ca. Corp. Code § 14620(b)(1)-(7)]  In addition, directors of benefit corporations are allowed to consider the impacts of those actions on, among other things, the resources, intent, and conduct of any person seeking to acquire control of the benefit corporation. [Ca. Corp. Code § 14620(c)]  Benefit corporations must prepare an annual benefit report which includes, among other things, a statement indicating whether, in the board's opinion, the benefit corporation failed to pursue its general public benefit and any specific public benefit, a description of the ways in which the benefit corporation pursued those benefits, the extent to which those benefits were created and the process and rationale for selecting the third-party standard used to prepare the benefit reports. [Ca. Corp. Code § 14630]  A handful of other states have adopted similar legislation covering benefit corporations, sometimes referred to as “B corporations”, and there viability will depend in large part on the development of case law regarding the permissible purposes of such corporations and the flexibility afforded to directors in discharging their fiduciary duties.

Modification of Existing Contracts

While parties to a contract generally assume that the contract will extend for the entire term originally contemplated with no need for modifications, the reality is that change is commonplace and it is often necessary to prepare one or more additional documents that memorialize the evolution of the relationship described in the original contract.  This month's edition of Business Counselor Update describes some of the drafting tools that counsel should have available when contracts need to be modified and also includes a sample form of modification agreement.

New Supply Chain Management Disclosure Requirements

This issue of Business Counselor Update includes new forms and commentary that will be incorporated into the Westlaw database Business Transactions Solutions (BTS) in December.  Access to further information requires a Westlaw subscription, which can be obtained by using the contact and ordering information included in the materials.  This issue highlights new supply chain management disclosure requirements adopted in California and include information on launching relationships with new vendors.  Protection of personal information is addressed by a social security number policy and counsel representing employers can take advantage of a template for disclosure of certain basic employment-related information to new employees.  Finally, the issue provides advice on creating a library of the forms needed to quickly and efficiently assist clients in forming and organizing a new corporation.

US Patent Law Changes Finally Approved

This issue of Business Counselor Update describes changes that have been made over the last quarter in the Westlaw database Business Transactions Solutions (BTS).  Access to further information requires a Westlaw subscription, which can be obtained by using the contact and ordering information below.  The most notable development has been the passage of sweeping changes to the US patent laws after years of debate and controversy.  Business counselors should review the new rules carefully in order to inform and advise their clients.

Assignment of Joint Venture Interests

While the parties to a joint venture generally intend that their relationship will survive until the end of the projected term of the project for which the joint venture was formed, it is recommended that plans be made in advance for the possibility that a joint venture interest will be assigned and transferred during the joint venture term either to the other joint venturer or to a third party following compliance with transfer procedures that should be detailed in the shareholders’ agreement and/or the bylaws of the joint venture.  This month's report provides references to practice tools that can be used to faciliate the assignment of joint venture interests.

Supplier Management

Companies that contract with a significant number of outside suppliers should prepare a formal policy that describes the procedures for initiation and management of supplier relationships and one of the areas that needs to be considered is the scope of any compliance obligations that will be imposed on suppliers, a topic that is discussed in this report. 

New Dodd-Frank Whistleblower Requirements Approved by SEC

A public company’s “whistleblower” policies and procedures must take into account the potential impact of Section 21F of the Securities Exchange Act of 1934 entitled “Securities Whistleblower Incentives and Protection.”, which was adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Among other things, Dodd-Frank established a whistleblower program that requires the Securities and Exchange Commission (“SEC”) to pay an award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC with “original information” derived from the independent knowledge or analysis of the whistleblower about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action.  Dodd-Frank provides for bounties of 10% to 30% of the monetary sanctions exceeding $1 million resulting from an SEC enforcement action, or several enforcement actions rising out of the same set of facts. Dodd-Frank also prohibits retaliation by employers against individuals who provide the SEC with information about possible securities violations.   On May 25, 2011, the SEC voted to approve the Final Rules implementing the whistleblower provisions of Dodd-Frank and this report summarizes some of the key issues that public companies must now take into account in designing their internal procedures relating to employee reporting.

Preincorporation Agreements

Preincorporation agreements can be invaluable tools in focusing the principals of a new business on the hard decision that need to be made about governance of the new business and the roles that all of the key personnel will be playing in the operation and success of the venture.  These types of agreements include various contracts entered into by incorporators, promoters, subscribers and the principals (e.g., executive officers and directors) regarding the future organization of a corporation.  The agreements establish the ground rules for the organization, capitalization, and management of the proposed corporation.  This report provides an overview of the issues that should be considered by counsel and clients and also includes a sample of an agreement to incorporate as a Subschapter S ("pass-through taxation") corporation.  Westlaw subscribers interested in further information should review the materials in Chapter 5 of Business Transactions Solutions authored by Alan Gutterman.

Board Meetings and Actions: A Practical Primer

This report is intended as a practical primer on one very important aspect of counseling the board of directors--making sure that board meetings and other actions of the directors in the official capacity are conducted efficiently and in line with applicable legal requirements.

New SEC Rules on Shareholder Compensation Votes & Progress on US Patent Law Reforms

This month’s Business Counselor Update highlights the adoption of final rules by the Securities and Exchange Commission implementing required shareholder votes on executive compensation and golden parachute compensation and the latest developments in the ongoing efforts to reform the US patent laws.