Legislator Proposes To Eliminate Flexibility In Name And Purpose

In 2011, the California legislature enacted not one, but two, laws allowing for the incorporation of for-profit businesses with broader purposes.   The Corporate Flexibility Act of 2011, SB 201 (DeSaulnier), 2011 Stats. ch. 740, was the product of a diverse collection of lawyers in California (including to a very small extent this post’s author).   Corporations formed under this act are defined as “flexible purpose corporations”.  Cal. Corp. Code § 171.08.  The other law, which created “benefit corporations”, was sponsored by B Lab, a nonprofit organization that has promoted similar legislation throughout the country and provides the certification required by those laws.  SB 361 (Huffman), 2011 Stats. ch. 728.  Corporations formed under this law are defined as “benefit corporations”.  Cal. Corp. Code § 14601(a).

Last week, Senator Mark DeSaulnier introduced legislation, SB 1301,  that would rename flexible purpose corporations as “socially responsible corporations”.   Corporations formed under the law would be required to include “socially responsible corporation” or an abbreviation thereof in their names.  Senator DeSaulnier believes that this new branding would more accurately reflect the spirit of the law.  However, I find it potentially misleading in two respects.  First, it implies that other corporations, including nonprofit corporations, are not socially responsible.  Second, and more importantly, it is potentially misleading to the public as there is no guaranty that corporations formed under the law will in fact be socially responsible.

More significantly, Senator DeSaulnier is proposing to require, rather than to permit, directors to consider “those factors, and give weight to those factors, as the director deems relevant, including the short-term and long-term prospects of the  flexible purpose socially responsible corporation, the best interests of the  flexible purpose   socially responsible corporation and its shareholders, and the purposes of the flexible purpose socially responsible corporation as set forth in its articles.”  An obvious problem is created by the indefiniteness of this requirement.  How is a director suppose to weigh these factors?  See How Should Benefit Corporation Directors Make Decisions?


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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