California to Allow Corporations to Blend Mission and Profit

A California bill, SB 201, authored by state senator Mark DeSaulnier, proposes a new corporate form that blends money and mission.

The idea is to allow social enterprises, which are often organized as either non-profits or for-profit/non-profit hybrids, to access capital from mainstream investors. As a Flexible Purpose Corporation (Flexible Corp.), a company could make profits while pursuing at least one do-good purpose akin to the charitable missions traditionally pursued by nonprofits, or promote the interests of employees, suppliers, customers, creditors, community or public interests like the environment.

via Responsible Investor, March 6, 2011.

One basic idea is to relieve directors of the obligation to maximize long-term profits. “Although Chancellor William Chandler was specifically addressing a Delaware corporation, I think that his opinion in eBay Domestic Holdings v. Newmark (Sept. 9, 2010) gives a very good explanation of why a traditional, for-profit corporation isn’t the right vehicle for pursuing purposes that are unrelated to maximizing shareholder value, says Keith Bishop, who blogs at California Corporations and Securities Law:

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that.

The bill requires a high level of transparency, since investors will need to know the risks. In its articles of incorporation, each Flexible Purpose Corporation (FPC) would have to list its flexible purposes, which could be any of the following:

  1. One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out;
  2. Promoting positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of the FPC’s activities on the FPC’s employees, suppliers, customers, and creditors; the community and society; and/or the environment.

Each existing company wishing to become an FPC through conversion or reorganization of an existing corporate entity would require an affirmative vote of at least two-thirds of each of its classes of shareholders, or a higher vote threshold, if required in its articles of incorporation.

Shareholders of an existing corporation that decided to convert to an FPC would be entitled to dissenter’s rights, which are spelled out in existing law (Corporations Code Section 1300). Dissenters’ rights generally entitle dissenting shareholders to be cashed out for their shares at the shares’ fair market value, as of the day before the first announcement of the terms of the proposed reorganization or merger, adjusted for any stock split, reverse stock split, or share dividend which becomes effective after that date.

Traditional corporations often attempt to anchor the mission either by being overly broad (e.g., super-voting stock such as used in Google, which places investors at risk of decisions made only by the founders) or overly narrow (where they may either be ignored if they conflict with a director’s fiduciary duty, or diluted or deleted by amendment).

This bill is the product of a working group of corporate law attorneys to give companies in California greater flexibility to combine profitability with broader social or environmental purposes. Members of the working group came from a diverse background, including academia, non-profit law firms, organizations that foster social entrepreneurship, and both large and small corporate law firms.

The working group believes that FPCs will attract equity capital (something LLCs cannot readily do), while mitigating the liability issues and other challenges posed by corporations
which seek to do well while doing good. The bill is in the Senate Committee on Banking and Financial Institutions. To track the bill’s status, go to LegInfo.Ca.Gov.

Many years ago I headed the Cooperative Development Program in the California Department of Consumer Affairs. Cooperatives have some of the advantages of traditional for-profit corporations, like limited liability, and some of the advantages of the proposed FPC, like not having to focus on making a profit for investors. However, they often have a difficult time raising capital.

As I recall, I helped push through changes that would allow each member of consumer cooperatives to invest $300, up from $200.  That shouldn’t be a problem for the FPC format. I think many would be willing to sacrifice a lower return if their investments are more likely to bring jobs, and better environment or other benefits to their community or even the world at large.

What if Bill Gates or Warren Buffett had been able to convert their firms to FPCs? Their legacies might be even greater. I think it is beyond the scope of California law, but the proposed FPCs might be even more effective if they were also able to accept investments from employee stock ownership plans (ESOPS).

See also, A New Type of Hybrid, Stanford Social Innovation Review, Spring 2011.

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