California may soon offer a new corporate form for social enterprises. The California legislature is considering a bill, S.B. 1463, that would create a new corporate form called the Flexible Purpose Corporation. Similar in purpose to the L3C and the Benefit Corporation, the Flexible Purpose Corporation would provide directors with more flexibility to pursue environmental and social purposes in addition to profitability. To become a flexible purpose corporation, a company’s articles of incorporation would have to specify a special purpose that the corporation engages in, which can include but is not limited to charitable activities. Specifically, purposes that would qualify include:
- One or more charitable or public purpose activities that could be carried out by a California nonprofit public benefit corporation; or
- The purpose of promoting positive short-term or long-term effects of the Flexible Purpose Corporation’s activities upon stakeholders, the community and society, or the environment; or
- The purpose of minimizing adverse short-term or long-term effects of the corporation’s activities upon stakeholders, the community and society, or the environment.
Unlike the L3C, profitability is still an express purpose of the corporation, and directors are not required to prioritize the charitable purpose over profit. Unlike the Benefit Corporation, the CA legislation will not require that flexible purpose corporations and their special purposes be certified by a third party. The drafters intentionally did not require a standard baseline measure that flexible purpose corporations would have to meet to qualify for the form. Rather, they note in an article soon to be published that because no agreed-upon standard exists for assessing the quality of a social enterprise, the bill opts for greater transparency that could enable the market to ensure accountability.
To that end, the bill, if passed, would include the first ever public reporting obligation regarding a for-profit’s impact, other than financial impact. Pursuant to the reporting obligation, flexible purpose corporations would be required to publish an annual report that contains management discussion and analysis regarding the flexible purpose corporation’s stated purpose or purposes set forth in its articles. The discussion would have to include the following information:
- The corporation’s short and long-term special purposes and any changes made to those purposes during the year;
- Material actions taken to achieve the special purposes, the impact of those actions, and the extent to which the actions achieved the purposes;
- A description of the process for selecting as well as a description of the measures used by the company to evaluate its performance in achieving its special purposes;
- Material operating and capital expenditures incurred in furtherance of the objectives.
Where an expenditure on one of the special purposes has a significant adverse impact on the company’s financial conditions, a company would also have to issue a special purpose current report.
The bill is still undergoing revisions as it works its way through the legislative process. If and when the bill is signed, the requirements could differ from those described above.