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California Benefit Corporation Bill is on Governor Brown’s Desk

Assembly Bill 361, the bill that would authorize and regulate the formation and governance of a new form of corporate entity known as a benefit corporation, passed the California Assembly and is now on Governor Jerry Brown’s desk. The governor has 12 days to sign the bill into law or to veto it.

The new entity structure is voluntary, but when a business opts to organize as a benefit corporation they will be expected to follow the provisions set forth in the bill. These provisions include creating a material positive impact on society and the environment and meeting higher standards of accountability and transparency. Benefit corporations are required to report annually on social and environmental performance using third-party standards.

In addition, the bill requires directors to consider all stakeholders, including employees, customers and the environment, when making decisions. One key piece of the bill indicates that in the event of a sale or acquisition, the directors are required to consider the impact on all stakeholders, they are not confined by fiduciary responsibility to the shareholders. In other words, the business can maintain mission and social and environmental commitments without the possibility of being sued by the shareholders for not maximizing financial returns. For an organization working in the impact investing space, this is an extremely important piece of the legislation.

It’s worth commenting here on the phrase ‘benefit corporation’, as it can be a bit confusing. There is a certification called B Corporation (B for benefit). The B Corporation (generally referred to a B Corp) certification is offered for a fee by B Lab, a non-profit based in Philadelphia. The certification is based on the organization’s B Impact Assessment survey and looks at five impact areas: employees, consumers, community, accountability and environment. AB 361 is modeled after this framework and B Lab has been working with legislators in several states including Hawaii, Virginia, Maryland, Vermont, and New Jersey, where the benefit corporation legislation has successfully passed, and other states that are considering it. To be clear, the certification is not a legal form. A certified B Corp business can be incorporated as a C corporation, LLC, or other for-profit entity. Likewise, a business incorporated as a benefit corporation, is neither assumed nor required to be a certified B Corp. RSF Capital Management, a subsidiary of RSF Social Finance, is a B Corp and Don Shaffer, RSF President & CEO is on the B Corporation Standards Advisory Council.

AB 361 has moved through the legislature swiftly since it was proposed by Assembly Member Jared Huffman (D-San Rafael) in February of this year. Don Shaffer, RSF Social Finance President & CEO, testified at the Judiciary Committee hearing in May and again at the Committee on Banking and Finance hearing in July.

Don sent a letter to Governor Brown’s office this week, urging him to sign the AB 361 into law. Outlined in the letter was the fact that the passage of the bill will position California as a leader in the continually emerging green economy and will support many of the businesses RSF offers loans to. Don has chosen to support AB 361 rather than the competing bill, Senate Bill 201. SB 201, known as the Flexible Purpose Corporation Bill, has been making its way through the California legislature alongside AB 361. It has also passed the Assembly and is waiting to be signed or vetoed by Governor Brown. SB 201 allows businesses incorporated as a flexible purpose corporation to choose a special purpose, such as a charitable or public purpose activity. Like benefit corporations, they are required to report annually on the societal benefit of their activities but unlike benefit corporations, the report is only relating to their special purpose, not a review of the whole impact of the business.

Most supporters of AB 361 believe that SB 201 is too soft. Don noted in his letter that it lacks several provisions that are critical to RSF’s role as an impact investor including shareholder protection, director accountability, and has inadequate reporting standards to protect investors and the public. Supporters of SB 201 acknowledge that it’s not as stringent, but believe that this bill is a preferable first step, making it easier for businesses to engage.

Existing corporation law requires businesses to prioritize financial returns. To bring true change to how businesses impact their community and the environment, they need policy that supports and encourages them to do so. As Jared Huffman stated, “Socially responsible businesses, investors and consumers all over California are calling for this type of legislation. They believe this bill is the start of something transformational, that it embodies their forward thinking and entrepreneurship. But most importantly, this bill sends a message to socially minded companies and entrepreneurs that California is open for this emerging form of business.”

Article by RSF Social Finance, appearing courtesy 3BL Media

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One comment on “California Benefit Corporation Bill is on Governor Brown’s Desk

Sharon Hudnall

I can see where structuring as a benefit corporation would benefit society, workers and the environment, and attract impact investors, but are there any tax or other business benefits associated with this designation?

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