This article originally appeared in the ACBA Business Law Section February 2015 Newsletter.

Effective as of 2012, the California legislature amended California corporate law to add two new categories of corporation: the benefit corporation and the flexible purpose corporation. Both of these new designations were intended to allow a corporation to take into account broad social and environmental goals as well as shareholder returns in operating a corporate business. This provided greater flexibility to the board of directors to make decisions based on corporate policies that might not always align with an objective of increased shareholder profit. Each type of corporation had to declare its intentions and status in publicly filed Articles of Incorporation – the theory being that shareholders making an investment would have advance knowledge of the corporation’s plans.

A benefit corporation differs from a flexible purpose corporation. A benefit corporation must produce an annual benefit report that measures its own performance against an independent third-party standard; a flexible purpose corporation is merely required to prepare an annual report including a management discussion and analysis of its progress in achieving its purposes. Also, California statutes allow a benefit corporation (either directly or derivatively through a shareholder or director) to compel an officer or director to comply with the corporation’s public benefit purposes. There is no similar statutory provision involving flexible purpose corporations.

The new year brings several changes to the world of flexible purpose corporations: 

  • First, there is a new name for these corporations – commencing as of 2015, they are known as social purpose corporations, often referred to by the abbreviation SPC. Existing flexible purpose corporations will not be required to amend their articles to reflect this change in terminology.
  • Second, under prior law, a flexible purpose corporation could simply skip its annual management discussion and analysis if the corporation had fewer than 100 shareholders, and at least two-thirds of the shareholders approved. The new law requires all SPCs to prepare annual reports, effective as of 2015.
  • Third, an SPC’s board now must take into account the corporation’s stated special purposes in the board’s deliberations.  Prior law had provided that such consideration, while appropriate and acceptable, was not legally required.

The availability of benefit corporations and SPCs in California follows a national trend. The new formats add welcome flexibility to the formation and operation of corporate businesses, permitting directors to take into account both broad social objectives and shareholder welfare. Significantly, benefit corporations and SPCs are not subject to the burdensome rules against private inurement that California and federal law impose on public benefit corporations, thereby allowing benefit corporations and SPCs to make distributions to their shareholders. A continuing disadvantage of the benefit corporation or SPC format, however, is that a contribution to a benefit corporation or an SPC does not represent a charitable contribution for tax purposes.

These rules provide desirable freedom to entrepreneurs and investors to tailor their business activities in accordance with their convictions.  As with all expansions of flexibility and choice, however, there is a corresponding increase in complexity of the law. California business practitioners must develop a basic fluency with the new business forms so that they can properly advise their clients and place them into optimal business structures.

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