Tax Law

New From California: Flexible Purpose Corporations

[Editor's Note:  This narrative is derived from Trust Administration and Taxation, § 3.03[5] (Matthew Bender) by Joseph L. Wyatt, Jr., J.D., Morrison & Foerster LLP, Los Angeles, CA.  It describes California's Corporate Flexibility Act of 2011, establishing a new Division of the Corporations Code making it possible for California for-profit businesses to introduce social responsibility and environmental awareness objectives into their missions - to let those corporations (with shareholder approval) follow a new program of "profit meets conscience."  Other states may follow.]

In 2011 California enacted SB 201, creating the Corporate Flexibility Act of 2011 (effective January 1, 2012), and in California Corporations Code sections 2500-3503 establishing Flexible Purpose Corporations and detailed provisions for their formation, directors and management, shares and share certificates, shareholder derivative actions, amendment of articles, sales of assets, merger, conversions, reorganizations, and records and reports.

The new law makes it possible for California businesses to fold goals of sustainability and social morality into their missions.  Previously, companies in California were required to consider only profits and shareholder returns.  But now - with the approval of shareholders - businesses can follow a new paradigm of "profit meets conscience."  The statute creates a new Division 1.5 in the Corporations Code with an objective goal to facilitate the organization of companies with greater flexibility to combine profitability with broader social or environmental purposes.

At least four other states - Maryland, Vermont, Virginia and New Jersey - have adopted so‑called benefit corporations, and Hawaii, Michigan, New York, North Carolina and Pennsylvania are considering legislation to create such benefit corporations.

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