Good Business

California is poised to lead the nation in putting social and environmental good on an equal footing with a business's profits. Two bills wending their way through Sacramento this summer would allow companies to become a benefit corporation (AB 361) or a flexible purpose corporation (SB 201), fundamentally changing California's Corporations Code.

Currently if a company wants to undertake a mission other than earning profits, it faces substantial limitations, some say, especially during a merger or acquisition. To get around this, directors rely on the so-called business judgment rule, which permits them to do what they believe is best for shareholders' long-term interest even at the expense of short-term profits. Yet when a company decides to sell, directors are obligated to take reasonable steps to maximize shareholders' investment and accept the highest offer, which could put a company's social benefits practices at risk.

But a new generation of consumers, entrepreneurs, and investors are demanding change. Nationwide, they are pushing legislation that allows for-profit businesses to formally incorporate social and environmental responsibility into their missions. Bills similar to California's AB 361, have already been passed in Hawaii, Maryland, New Jersey, Vermont, and Virginia, and introduced in five additional states.

The benefit and flexible purpose corporation bills share some basic components, such as ensuring the dissenting rights of shareholders and protecting directors from liability. This has spawned a debate over whether the bills would compliment or compete with each other. "Each of the bills responds to a totally different need," argues Jonathan S. Storper, a partner at Hanson Bridgett and a drafter of AB 361.

The bill requires a benefit corporation to meet independent, third-party standards of social and environmental responsibility and transparency; a company could lose its benefit corporation status if the requirements are not satisfied. But according to Susan Mac Cormac, cochair of Morrison & Foerster's Business Department, SB 201 requires a flexible purpose corporation to detail its social purpose and provide shareholders with a progress report (permissibly its own). "There is nothing companies can do through AB 361 that they cannot do through SB 201," Mac Cormac says.

"There may be issues with each of the bills, and they will be sorted out in the courts over time," says professor Eric Talley at UC Berkeley School of Law. "We cannot know what forms do and do not work unless we try them."

---