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.

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.

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.

Revised Uniform Limited Liability Company Act

Limited liability companies have been around since the mid-1990s and law and practice regarding this type of business entity has been rapidly evolving. Progress has been slow at time due to the lack of a widely accepted model statute that could be followed by the various states.  In July 2006, a new Revised Uniform Limited Liability Company Act (the “RULLCA”) was adopted and states are now beginning to consider this model act as a foundation for changes to their LLC statutes.  This report summarizes key aspects of the RULLCA and provides a basic checklist of steps to be taken to form and organize an LLC.

Amending an LLC Operating Agreement

While a great deal of time effort should be invested in drafting the initial version of the operating agreement for a limited liability company it is inevitable that changed circumstances during the life of the LCC will cause the members to consider the need to amend various provisions of the agreement.  In this post I provide you with some basic guidelines  for preparing an amendment to an operating agreement including a sample template.

New Form 990 Reporting Requirements for Tax-Exempt Organizations

In this report on new Form 990 reporting requirements learn more about the sweeping changes that have been made in the public disclosure obligations of tax-exempt organizations, particularly with respect to providing information on their governance practices.  Make sure your clients are in compliance!

Checklist for Preparing Articles of Incorporation

Last week I discussed some common errors in drafting and filing the articles of incorporation.  Today I'd like to provide you with a simple checklist to follow when preparing the articles of incorporation to ensure that all legal and business requirements are satisfied.

Common Errors in Preparing and Filing Articles of Incorporation

One of the most embarrassing moments for corporate counsel is when the secretary of state rejects articles of incorporation when they are presented for filing.  As a preventive measure, it is important for counsel to be reminded of the following common errors in preparing and filing articles of incorporation: 

• Rejection of the proposed articles of incorporation because the corporate name is not available.

• Failure to conform the corporation's name as shown in the caption of the articles of incorporation to the name used in the first paragraph.

• Failure to include a word denoting corporate status such as corporation, incorporated, or corporation, or an abbreviation thereof, in the corporate name when such is required under state law.

• Failure to provide the street address, as opposed to a post office box, of both the corporation and its registered agent.

• Failure to state the county in which the principal office of the corporation will be located.

• Failure to state at least one principal purpose of the corporation, when required by state law.

• Failure to set forth the number of shares the corporation is authorized to issue.

• Failure to state the par value of the authorized shares, or to state that they are without par value, when required by state law.

• Failure to pay the proper filing fees.

• Failure to sign the check.

• Failure to date and/or sign the articles of incorporation or the designation of registered agent, including the occasional omission altogether of the designation document.

• Failure to type the incorporator's name under the signature (many signatures are illegible).

• Failure to properly complete acknowledgments on the articles, when required by state law.

 

The content in this report has been adapted from material that will appear in Fall 2008 in Alan Gutterman’s publication entitled “Business Transactions Solutions” and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.  Alan Gutterman is the Founder/Principal of Gutterman Law & Business (www.alangutterman.com), which publishes the Emerging Companies Blog and the Business Counselor Blog, and a Partner of The General Counsel LLC (www.thegeneralcounsel.net).