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.