Thursday, March 1, 2012

California Benefit and Flexible Purpose Corporations: Small- and Mid-Size Corporations vs. Large Corporations

California recently enacted two new forms of business entities: benefit corporations and flexible purpose corporations. While arguments are made that the two forms are redundant and unnecessary, one relevant difference between the two forms may be their target companies.

As mentioned in an article by Aman Singh on Forbes Corporate Social Responsibility Blog, benefit corporations have largely been limited to small- and mid-size corporations. One explanation for this may be the mandate for benefit corporations to consider certain other constituencies and use a third-party standard to assess the benefits to these other stakeholders. Such a mandate may scare off large corporations, either for implementation purposes or because large corporations cannot get all its shareholders on board.

Flexible purpose corporations, however, offer a slightly more tenable solution to large corporations. Flexible purpose corporations allow a corporation to specify one or more charitable or public purposes. Directors are then enabled to consider and weigh the short- and long-term prospects of such purposes in performing their duties. As the name entails, flexible purpose corporations provide flexibility in pursuing specific charitable or public purposes, allowing corporations to put one toe in the untested waters of for-profit social enterprises rather than diving head first in considering the numerous stakeholders required under benefit corporations.

While both benefit and flexible purpose corporations require a two-thirds vote of each class of shares in order to amend their articles to adopt a certain purpose, large corporations may find it easier to obtain the necessary shareholder approval for a single purpose rather than the mutli-stakeholder approach of benefit corporations. Moreover, flexible purpose corporations can pursue those charitable or public purposes that shareholders themselves are demanding without bringing in other considerations into the mix.

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