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Benefit Corporation
SUMMARY
As of January 1, 2012, the California legislature allowed entities to organize as a “Benefit Corporation” under Cal. Corp. Code Section et seq. The positives of being a “Benefit Corporation” appear to be mainly in marketing the corporation either to customers or shareholders, as well as the formal legal requirement to consider the non-financial interests of employees, customers, the environment, society, and stakeholders. The downside[s] of being a “Benefit Corporation” are (1) increased reporting requirements and (2) the possibility of defending against a type of lawsuit that is unavailable against a normal California Corporation, a “Benefit Enforcement Proceeding.” The only requirement for forming a Benefit Corporation is that the articles of incorporation state a general benefit purpose and may state a specific benefit purpose. In all aspects, the Benefit Corporation must consider the interests of all stakeholders, not just shareholders, when making decisions, including employees, customers, suppliers, the community, and the environment, and balancing the financial interests of shareholders with the other stakeholders. Details follow.
A Benefit Corporation - a Type of Corporation that balances the interests of stakeholders with shareholders, requires annual reporting to a third-party standard
As of January 1, 2012, the California legislature allowed entities to organize as a “Benefit Corporation” under Cal. Corp. Code Section et seq. The positives of being a “Benefit Corporation” appear to be mainly in marketing the corporation either to customers or shareholders, as well as the formal legal requirement to consider the non-financial interests of employees, customers, the environment, society, and stakeholders. The downside[s] of being a “Benefit Corporation” are (1) increased reporting requirements and (2) the possibility of defending against a type of lawsuit that is unavailable against a normal California Corporation, a “Benefit Enforcement Proceeding.”
Requirements to Forming and a Benefit Corporation
All corporations in California must file Articles of Incorporation and an initial information statement that includes the name and address of an agent appointed for service of process. There are several established companies that act as an agent appointed for service of process for a moderate annual fee. Acting as an agent appointed for service of process is a requirement of all corporations and limited liability companies in California to have a physical address where papers can be delivered and considered served on the entity.
In addition to those requirements, the Benefit Corporation’s Articles of Incorporation must state a purpose clause. There must be a general purpose clause that states that the corporation's purpose includes creating a general public benefit. The Articles can and possibly should also be a specific public benefit the corporation will pursue.
Requirements of Regulatory Compliance as a Benefit Corporation
Except for a “Close,” corporation, each corporation must at least annually notice and hold a shareholder and board of director meeting, as well as document such, including resolutions. Each year an annual updating statement of information is required to be filed with the Secretary of State.
A “Close,” corporation is excused from those corporate formalities if the Articles state that the corporation is a close corporation and can be owned by no more than thirty-five shareholders and have only one class of stock. The shares of a Close corporation must also bear a specific restrictive legend stating the same, and noting that share transfer may be limited.
A Benefit Corporation bears the same requirements, but at least annually, within one hundred and twenty (120) days of the close of the fiscal year must issue a report that meets a third-party standard stating how the Benefit Corporation is doing towards meeting its goals. That report must be available online to the general public.
The Annual Benefit Report
Shareholders must receive the Annual benefit Statement first, within 120 days after the end of the fiscal year and a reasonable time after, the Annual Benefit Report must also be made publicly available, which can be done by posting it on the company's website, ensuring transparency for all interested parties.
Third Party Standards of Benefit Corporation Reports
The third-party standard used for the performance assessment must be developed by an organization that is independent of and neutral to the Benefit Corporation. The Information about the Third Party Benefit Corporate Reporting standard, including the criteria, weightings, and the organization behind it must be publicly available.
Benefit Enforcement Proceeding
A Benefit Enforcement Proceeding is a type of legal action that a Benefit Corporation may be subject to.
A Benefit Enforcement Proceeding is either direct, in which the corporation, itself, directly sues the board of directors, or management, or indirect in which (1) a director; (2) a shareholder; or (3) “a person or group of persons that owns beneficially or of record 5 percent or more of the equity interests in an entity of which the benefit corporation is a subsidiary,” sues for a Court order that the corporation fulfill its obligation to the benefited group.
Minimum Status Votes
A corporation may become a benefit corporation under this part by amending the Corporation’s articles so that the articles contain a statement that the corporation is a benefit corporation. The amendment shall not be effective unless it is adopted by at least the minimum status vote. Corporate Code section . Minimum status means that both must apply: (A) The shareholders of every class or series shall be entitled to vote on the corporate action regardless of any limitation stated in the articles or bylaws on the voting rights of any class or series, and (B) the corporate action shall be approved by the outstanding shares of each class or series by at least two-thirds of the votes, or greater vote if required in the articles of incorporation, that all shareholders of the class or series are entitled to cast on that action. Corporate Code section .
SOURCES
FPLG law firm blog on Benefit Enforcement Proceedings
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