California Real Estate Lawyers Blog
I recently wrote about the California Public Benefit Corporations law recently enacted in California. Enacted at the same time was legislation for creating a different type of corporation. Called a flexible purpose, it allows as its name described- joint purposes of profit and public benefit.
The standard corporation obligates directors to promote the long-term value growth and maximize profits for shareholders; nothing else. the business judgment rule rises as a presumption that the directors exercised good faith in pursuing the corporation’s interest; however, as experienced Sacramento and El Dorado Business Attorneys advise their clients, the rule does not arise is there is no reasonable connection between the directors’ actions and achieving and maintaining profitability.
New Corporations code section 2602 requires the flexible purpose corporation articles to state two things:
First,
“The purpose of this flexible purpose corporation is to engage in any lawful act or activity for which a flexible purpose corporation may be organized…, for the benefit of the long-term and the short-term interests of the flexible purpose corporation and its shareholders and in furtherance of the following enumerated purposes ____.
This allows a purpose more aligned with a traditional corporation. A reasonable profit or long term value purpose can be included.
Secondly, the Articles will further that:
“a purpose of the flexible purpose corporation is to engage in one or more of the following purposes, in addition to the purpose stated [above]
(A) One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.
(B) The purpose of promoting positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of, the flexible purpose corporation’s activities upon any of the following:
(I) The flexible purpose corporation’s employees, suppliers,
customers, and creditors.
(ii) The community and society.
(iii) The environment.”
This second part is more aligned with the public benefit -style corporation.
What is the difference between flexible purpose and public benefit corporations? I believe that the flexible purposes allows a corporation to make a profit (while doing some good) whereas the benefit corporation format does not. I an not sure that a benefit corporation is that far removed from a qualifying non-profit, and if so, why not qualify as a non-profit? It is subject to annual third party certification (which must be paid for), but is recognized in several other states. The flexible benefit corporation does allow more flexibility, but California is the only state in the country which recognizes it. The final answer will bee seen over time as shareholders object to directors’ actions which they think is not in compliance, and the courts respond.