OLR Bill Analysis

sSB 23

AN ACT CONCERNING BENEFIT CORPORATIONS AND ENCOURAGING SOCIAL ENTERPRISE.

SUMMARY:

This bill establishes a legal framework for forming a for-profit corporation that both pursues social benefits and increases value for its shareholders (benefit corporation or b-corp). Corporations formed under current law are legally obligated to do only the latter. B-corps formed under the bill operate under the same laws as traditional business corporations (business corporation laws (BCL)) and seek to increase shareholder value. But their corporate purpose also includes doing things that generally benefit society and the environment or create specific public benefits.

The bill's governance structure and accountability requirements align with the b-corp's public benefit purpose. The bill requires a b-corp's directors and officers to consider certain interests and constituencies besides the shareholders' financial interests when making decisions. It also requires b-corps to report annually on their overall social and environmental performance. Under BCL, traditional corporate directors and officers must further the shareholders' interest without having to consider public interests (although they may purse social and community goals in limited situations) or report on how the corporation benefitted society and the environment.

The bill specifies rules and procedures for establishing and dissolving b-corps, changing the specific public benefits they choose to create, disposing of a b-corp's assets, and entering into mergers or consolidations with traditional business entities or other b-corps. The bill also allows b-corps to include provisions in their bylaws and certificates of incorporation ensuring that their assets continue to serve a public purpose after they dissolve.

The bill provides a procedure for bringing an action against a b-corp for failing to create general or specific public benefits or violating any of the bill's provisions, but limits access to the procedure to shareholders and other parties specified in a b-corp's certificate of incorporation. Eligible parties may use the procedure to seek orders directed at a b-corp's conduct, but not to obtain monetary damages.

Lastly, the bill makes conforming and technical changes.

EFFECTIVE DATE: October 1, 2014.

3 & 16 — BENEFIT CORPORATION AS A FORM OF FOR-PROFIT CORPORATION

By law, traditional for-profit business corporations must maximize value for their shareholders by making decisions aimed at increasing earnings, dividends, and share prices (shareholder value). The bill creates a legal framework for establishing for-profit corporations that must legally create public benefits as well as increase shareholder value. It places that framework within BCL, specifying that b-corps are subject to the bill's and BCL's provisions, except for the bill's specific provisions, which supersede BCL's general provisions.

The bill's authorization to form b-corps creates no implication that a different or contrary law applies to corporations that are not b-corps. The bill does not affect or change BCL, except to extend statutory appraisal rights to a traditional corporation's shareholders when:

1. the corporation's certificate of incorporation is amended to make it a b-corp,

2. the corporation merges with another corporation and the surviving entity is a b-corp,

3. the corporation converts its shares into the right to receive shares in a b-corp, or

4. the corporation exchanges its shares for those of a b-corp.

(When a corporation (1) sells its assets or (2) merges or exchanges shares with another corporation, its shareholders have the right to have their shares appraised and purchased from them at the appraised price (CGS 33-856)).

The bill's other provisions address the relationship between a b-corp and various parties. The bill:

1. gives people no legal claims to the b-corp's income or assets simply because they might benefit from a b-corp's creation of general and specific public benefits,

2. requires b-corps to use their assets or property only for charitable purposes, and

3. does not deprive the attorney general of jurisdiction over b-corps under the BCL or other law.

A b-corp's bylaws or certificate of incorporation cannot limit, conflict with, or supersede the bill's provisions.

2 & 8 — GENERAL AND SPECIFIC PUBLIC BENEFITS

The authority to create general and specific public benefits sets b-corps apart from other traditional corporations, and the bill specifies that the creation of these benefits serves a b-corp's best interest.

The bill authorizes b-corps to create two types of public benefits. All b-corps must have a purpose of creating a “general public benefit,” defined as a material positive impact on society and the environment, taken as a whole and assessed against a third-party standard described below. This benefit is in addition to those legal purposes allowed under the BCL.

The bill also allows b-corp to create one or more of the following “specific public benefits:”

1. providing low-income or underserved people or communities with beneficial products or services;

2. promoting economic opportunity for individuals or communities beyond creating jobs in the normal course of business;

3. protecting or restoring the environment;

4. improving human health;

5. promoting the arts, sciences, or advancement of knowledge;

6. increasing the flow of capital to other b-corps or similar entities whose purpose is to benefit society or the environment; and

7. conferring any other particular benefit on society or the environment.

Benefit corporations choosing to create one or more of these benefits must still create a general public benefit.

The general public benefit and any specific public benefits a b-corp chooses to create must be stated in its certificate of incorporation. The b-corp can subsequently add a specific public benefit or change or delete an existing one, but must do so by a minimum status vote, which is described below.

2, 4, 5, & 8 — CREATING A BENEFIT CORPORATION

The bill (1) allows parties to establish a new corporation as a b-corp or transform a traditional corporation into a b-corp and (2) specifies how they must do so. By law, parties may establish a new corporation by filing a certificate of incorporation with the secretary of the state. Under the bill, those establishing a new b-corp must also file with the secretary, but indicate in the certificate that the corporation is a b-corp.

An existing corporation can change itself into a b-corp by amending its certificate of incorporation to that effect, an action that requires its board's approval and a minimum status vote.

2 — LEGACY PRESERVATION PROVISION

The bill allows b-corps to adopt a “legacy preservation provision” (LPP), a legal device ensuring that their assets continue to serve a public purpose when a b-corp dissolves. A b-corp may add an LPP to its certificate of incorporation, but must wait at least two years after its formation before doing so. Under the bill, the LPP must require a dissolving b-corp to distribute its assets to one or more federal-tax-exempt charitable organizations or other b-corps with an LPP.

An LPP's adoption must be unanimously approved by the b-corp's shareholders for all shares in all classes or series, regardless of any limitations its bylaws or certificate of incorporation impose on any shareholder's voting or consent powers. The adoption must also comply with the BCL's procedures for amending certificates of incorporations (CGS 33-795 –803).

2 — MINIMUM STATUS VOTING REQUIREMENT

“Minimum status vote” refers to a voting requirement that must be met before certain actions can be taken under the bill. As discussed below, these actions include changing a traditional corporation into a b-corp, amending an existing b-corp's certificate of incorporation, and entering into mergers and share exchanges involving b-corps and traditional corporations or non-corporate entities, such as partnerships.

If the action involves two or more b-corps or a b-corp and a traditional corporation, the minimum status vote for both types of corporations is a vote of the shareholders in each class or series of shares, regardless of any limitations the bylaws or the certificate of incorporation place on their consent rights. The action must be approved by at least two-thirds of the shareholders in each class, series, or voting group as defined in the b-corp's certificate of incorporation, BCL, or the bill. This vote is in addition to any other approvals, votes, or consents required by the corporation's originating documents, bylaws, board resolutions or orders, or BCL.

If the action involves a merger between a b-corp and a partnership, limited liability company, or other noncorporate business entity, the minimum status vote for the business entity is a two-thirds vote of all equity holders in any series or class entitled to a distribution from the entity, regardless of any limitation on their voting or consent rights.

MERGERS AND SHARE EXCHANGES

The bill's requirements for mergers and consolidations vary depending on (1) whether a b-corp is subject to an LPP or (2) the types of business entities involved in the transaction.

7 — Rules Affecting B-Corps

Under the bill, a b-corp's ability to merge or exchange shares with another corporation depends on whether the b-corp is subject to an LPP. A b-corp subject to an LPP may merge or exchange shares with another b-corp that is also subject to an LPP. Specifically, the b-corp may:

1. merge with another corporate entity if the surviving entity is a b-corp with an LPP,

2. convert its shares into the right to receive the shares of another b-corp with an LPP, or

3. exchange its shares for those of another b-corp with an LPP.

Each of these transactions must be approved by a minimum status vote.

The bill allows b-corps that are not subject to an LPP to engage in the same transactions, but only if they do not result in or involve another b-corp. The merger or share exchange plan must be approved by a minimum status vote.

5 — Rules Affecting Traditional Corporations and Other Business Entities

Under the bill, a traditional corporation may merge or consolidate with a b-corp if the corporation's shareholders approve the action by a minimum status vote. Such a vote is specifically required for a merger or consolidation that would (1) result in the b-corp being the surviving entity or (2) exchange the traditional corporation's shares for the b-corp's.

The bill also allows noncorporate entities to merge or consolidate with b-corps. In these cases, the bill specifies that an entity's equity owners are entitled to appraisal rights under the same procedures BCL provides to the shareholders of a traditional corporation.

6 & 7 — DISPOSING ASSETS

The bill allows b-corps to sell, lease, exchange, or otherwise dispose of their assets, but the requirements for doing so vary depending on whether a b-corp is subject to an LPP. A b-corp with an LPP cannot take any of these actions unless (1) the assets are going to a charitable organization or another b-corp subject to an LPP and (2) the disposition is approved by a minimum status vote.

A b-corp without an LPP needs such a vote only for dispositions that would leave it without any significant business activity.

In both instances, the bill's disposition requirements do not apply to sales, leases, other transactions that occur during a b-corp's regular business operation.

2 & 6 — TERMINATING A BENEFIT CORPORATION

As noted above, a b-corp with an LPP cannot dissolve without distributing its assets to one or more charitable organizations or b-corps. A b-corp without an LPP may terminate its status as a b-corp by amending its certificate of incorporation to delete the provision that identifies it as a b-corp. This amendment must be approved by a minimum status vote.

BENEFIT CORPORATION DIRECTORS AND OFFICERS

9 — Directors

Decision-Making Factors. The bill specifies the interest and factors a member of a b-corp's board of directors must consider when discharging his or her duties individually or collectively as a board or committee member. A director must specifically consider how a corporate action affects:

1. the b-corp's shareholders;

2. the employees and workforce of the b-corp and its subsidiaries and suppliers;

3. the interests of the b-corp's customers as beneficiaries of the b-corp's general and specific public benefits;

4. community and societal factors, including those of each community in which offices or facilities of the b-corp or its subsidiaries or suppliers are located;

5. the local and global environment;

6. the short- and long-term interests of the b-corp, including benefits that may accrue to it from its long-term plans and, in the case of a merger, the possibility that these interests may best be served by its continued independence; and

7. the b-corp's ability to accomplish its general and specific public benefit purposes.

(By law, the directors of a traditional corporation can consider similar factors in certain situations, such as merger proposal.)

The directors, individually or collectively, may also consider (1) any other interests BCL allows them to consider in particular circumstances and (2) other pertinent factors or interests of any other group they deem appropriate.

When considering the bill's factors, directors do not have to give priority to the interest of any particular person or group unless the certificate of incorporation requires them to do so.

Immunities. Under the bill, the directors are not violating their duties under BCL when they consider the factors described above. Their authority to consider these factors is in addition to their authority to consider those factors specified in BCL.

The bill further specifies the conditions under which the directors are not personally liable to the b-corp in a direct or derivative suit under the BCL. Under the bill, they are not liable for any act or omission they made or failed to make while performing their duties as a director in compliance with the bill and the BCL. Nor are they liable for the b-corp's failure to create a general public benefit or any of its specific public benefits.

Lastly, under the bill, b-corp directors have no duty to a person whose only connection to the b-corp is that he or she benefits from the b-corp's creation of the general or specific public benefits.

11 — Officers

The bill requires b-corp officers to consider the same interests and factors that directors must consider if (1) they have discretion to act on the matter under consideration and (2) it reasonably appears to an officer that the matter could materially affect the b-corp's ability to create its general or specific public benefit. A b-corp officer acting in these circumstances does not violate the BCL.

The bill generally affords b-corp officers the same immunities from personal liability as b-corp directors, and, like directors, they have no duty to mere beneficiaries of the b-corp's publically beneficial activities.

2 & 10 — BENEFIT DIRECTOR

Designation

Under the bill, the board of directors of a publically traded b-corp must, and the board of all other b-corps may, designate a benefit director responsible for preparing the b-corp's annual report and performing the other duties the b-corp's bylaws, resolutions, and orders specifically assign to the benefit director. Those duties, plus the powers, rights, and immunities these documents assign to the benefit director, are in addition to those this director has as a board member.

Under the bill, a benefit director can be designated in one of two ways. The board may elect one of its members to that position and may remove the member according the BCL's provisions for electing or removing board members. A benefit director may also be anyone, including a nonboard member, authorized to manage the b-corp's business and affairs under a shareholder agreement that complies with the BCL. The agreement must specifically assign to this person some or all of the powers, duties, and rights the bill assigns to a benefit director.

Whether designated by the board or under a shareholder agreement, a benefit director must not have a “material relationship” with the b-corp. Under the bill, this generally means that the director may not:

1. be or have been an employee of the b-corp or a subsidiary (other than as a benefit officer) within three years of serving as benefit director;

2. be immediately related to any current or recent executive officer of the b-corp or a subsidiary; or

3. generally (a) own 5% or more of the b-corp, (b) own 5% or more of an entity that owns 5% or more of the b-corp, or (c) hold an controlling position (such as a manager) in such entity.

A benefit director's current or previous service as the b-corp's or subsidiary benefit officer (see below) does not constitute a material relationship to the b-corp or its subsidiary. The b-corp's certificate of incorporation or bylaws may require additional, consistent qualifications of the benefit director.

Liability

The bill protects a benefit director's acts and omissions to the same extent it generally protects those of the b-corp's directors. But the bill protects a benefit director from personal liability to a greater extent than it does the other directors. Under the bill, the benefit director is liable only for self-dealing, willful misconduct, or a knowing violation of the law.

2, 10, & 12 — BENEFIT OFFICERS

The bill allows a b-corp to designate a benefit officer to prepare its annual report and exercise all the powers and duties related to its general and specific public benefits, as specified in the bylaws or the board's orders or resolutions authorizing the creation of such benefits. The bill gives the benefit officer the same duties and affords him or her the same immunities it affords to the b-corp's other officers. A benefit director may simultaneously serve as the benefit officer without forming a material relationship with the b-corp.

2 & 13 — BENEFIT ENFORCEMENT PROCEEDING

Under the bill, a b-corp or its shareholders may bring a benefit enforcement proceeding for (1) failing to create a general public benefit or specific public benefit or (2) violating the shareholders' appraisal rights (see below). Parties may bring a proceeding to order a b-corp to undertake an action or refrain from taking one, but not for money damages.

The b-corp can start a benefit enforcement proceeding directly against its directors or officers. One or more of its shareholders can also start one against the b-corp's directors, officers, or other shareholders (derivative action) if they (1) generally own at least 5% of the b-corp's shares when they start the suit or (2) own at least 10% of the entity that owns or controls the b-corp as a subsidiary. Under the bill, the beneficial owners of shares held in a voting trust or by a nominee may also start a proceeding.

Other groups may also start a proceeding if the b-corp's bylaws or certificate of incorporation allows them to do so.

ANNUAL BENEFIT REPORT

10 & 14 — Content

The bill requires a b-corp to prepare an annual benefit report for its shareholders and the public. The report must contain a narrative description of:

1. how the b-corp pursued its general public benefit purpose during the year and the extent to which a general public benefit was created;

2. how the b-corp pursued its chosen specific public benefit purposes, if any, and the extent to which any specific public benefit was created;

3. any circumstances that have hindered the b-corp's creation of general public benefit or any chosen specific public benefit; and

4. the process and rationale for selecting or changing the third-party standard used to prepare the benefit report.

The report must also provide an assessment of the b-corp's overall social and environmental performance against a third-party standard (see below), either:

1. applied consistently with any application of that standard in prior benefit reports or

2. accompanied by an explanation of the reasons for any inconsistent application or the change to that standard from the one used in the most recent prior report.

The report must also provide the benefit director's opinion regarding:

1. whether the b-corp acted in accordance with its general public benefit purpose and any chosen specific public benefit purposes in all material respects during the reporting period,

2. whether the directors and officers complied with their duties under the bill, and

3. if they failed to do so, how.

The report must include a statement regarding any connection between the organization that established the third-party standard and the b-corp. This requirement applies to a connection between the organization's directors, officers, or any holder of 5% or more of the voting power or capital interests in the organization, and the b-corp's directors, officers, or anyone holding at least 5% of the b-corp's outstanding shares. It also includes any financial or governance relationship that might materially affect the third-party standard's credibility.

The report must provide each director's annual compensation for serving as a director and the names and mailing addresses of the benefit director and benefit officer, if any.

Lastly, if the benefit director or officer resigned, was removed, or refused to be reelected, the report must include any written statement or correspondence from that director or officer concerning the circumstances of his or her departure.

Neither the report nor the performance assessment it contains needs to be audited or certified by the third-party standard provider (see below).

2 & 14 — Third-Party Standard

Under the bill, a b-corp's performance must be annually assessed against a recognized third-party standard for defining, reporting, and assessing corporate social and environmental performance. The standard must address the b-corp's impact on its employees, workforce, subsidiaries, and shareholders; its customers; the communities in which it operates; and the local and global environment. It must have been developed by an entity that has no “material relationship” with the b-corp (see 3 & 10 — Benefit Director above). The entity that developed the standard must allow the public to know:

1. the identity of the people and organization that develop and control the process for making changes to the standard,

2. the process for revising the standard,

3. how changes to the organization's governing body are made, and

4. where the entity derives its revenue and financial support so that the public can identify any potential conflicts of interests.

Under the bill, a b-corp cannot select or change its third-party standard without the approval of (1) at least a majority of its directors or (2) approval or written consent of that portion of directors or shareholders who must, under the bylaws or certificate of incorporation, approve such actions.

15 — Distribution

The b-corp must send a copy of the annual report to each shareholder within 120 days of the fiscal year's end or together with any other annual report it provides to shareholders, whichever is earlier. The b-corp must post and maintain each annual report publically on its website, but may omit its directors' compensation or any financial, confidential, or proprietary information. If the b-corp does not have a website, it must provide a copy of its most recent report, with compensation, financial, confidential, and proprietary information omitted, to anyone who requests a copy, at no charge.

COMMITTEE ACTION

Commerce Committee

Joint Favorable Substitute Change of Reference

Yea

16

Nay

0

(03/11/2014)

Judiciary Committee

Joint Favorable

Yea

34

Nay

4

(04/01/2014)