Legislature(2017 - 2018)HOUSE FINANCE 519
04/26/2017 01:30 PM FINANCE
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HOUSE BILL NO. 124 "An Act relating to corporations, including benefit corporations, and other entities; and providing for an effective date." 2:15:57 PM Co-Chair Foster indicated there was one amendment that he would be offering. He asked the bill sponsor to provide the committee with a recap of the bill. REPRESENTATIVE SAM KITO, SPONSOR, reviewed the bill. He explained that the bill established a charter type of corporation that would allow a company to have, within its bi-laws, operations plan, and activities more than just a fiduciary responsibility to its shareholders. They would be allowed, under the "B" corporation statute, to provide a public benefit. The public benefit would be defined in the organizing documents of the corporation. He had covered several questions. He would defer to his staff to present his position on the amendment. Co-Chair Foster reviewed the list of available testifiers online. Co-Chair Foster MOVED to ADOPT Amendment 1 (copy on file): Page 15, following line 2: Insert a new section to read: "Sec. 10.60.725. Reliance by third parties. (a) A person who, in good faith, centers into a transaction with a benefit corporation may (1) assume without inquiry that the transaction, and each action or inaction by any director or officer of the benefit corporation giving effect to the transaction, is in furtherance of the benefit corporation's general public benefit purpose or specific public benefit purpose; and (2) enforce the transaction against the benefit corporation as if the transaction is in furtherance of the benefit corporation's general public benefit purpose or specific public benefit purpose. (b) Nothing in this section exempts a covered financial institution from identifying and verifying the beneficial owner of a legal entity that is a customer as required under a federal or state law or regulation. In this subsection, "covered financial institution" has the meaning given in 31 C.F.R. 1010.605." Representative Wilson OBJECTED for discussion. 2:18:24 PM BIANCA CARPENETI, STAFF, REPRESENTATIVE SAM KITO, indicated that the amendment was a friendly safe harbor amendment proposed by the Alaska Bankers Association. The proposed language was intended to function much like Alaska's certificate of trust statute. In particular, the subsection of the trust statute was AS 13.36.079(f)(g). The provisions provided third parties transacting business with a trust. They could rely on a trust statement that the transaction was permitted by the trust, and, as such, enforceable against the trust. The intent of the amendment was to provide the same contractual certainty to third parties that contracted businesses with proposed public benefit corporations. Ms. Carpeneti turned to Article 5, Actions and Claims, Sections 10, 60, 300, and 320 of the proposed legislation found on pages 9 and 10. The section provided that parties might bring action against a public benefit corporation for failing to pursue or create a public benefit. Since monetary damages were not permitted under the proposed legislation, the likely relief would be injunctive in nature. The relief could theoretically include a court, setting aside a contract under the theory that it did not satisfy or further a public benefit. Absent the proposed language, third parties might feel compelled to make an independent assessment of whether the transaction satisfied or furthered a public benefit. She relayed that there were some concerns that sort of analysis might increase the costs of completing transactions and might make some transactions more difficult to complete. Ms. Carpeneti reported that the bill sponsor's position on the amendment was neutral. He consulted with William Clark, the lawyer that testified in front of the committee at the prior bill hearing, who understood the intent of the amendment but thought it might go too far. Specifically, he had concerns with subsection 2 regarding the non-benefit corporation part of the contract. He disagreed that the non-benefit corporation should not have a duty to inquire about the purpose of the contract, but it might have said too much to allow the other party to enforce a contract in all cases. If a court declined to enforce a contract, the other party would still be protected because it would be entitled to any damages it could prove. She relayed Mr. Clark's suggestion was to strike subsection 2. Although he noted that his concerns were not extremely serious. Representative Kito's office also contacted DCCED to see if there were any concerns about the proposed amendment. Responses were received from Janey Hovenden, Director, Division of Corporations, Business and Professional Licensing. She noted that the division did not see an issue with the proposed changes. Representative Kito's office also heard from Kevin Anselm from the Division of Banking. The division requested the addition of subsection 3, as provided in the amendment before the committee. PETER PINNOW, SENIOR COUNCIL, WELLS FARGO, MINNEAPOLIS, MN, referred to section 2 and indicated the intent was to track the same rights and the same protections afforded under the trust certificate statute that was referenced. 2:22:33 PM Co-Chair Seaton commented that either the general public benefit or the specific public benefit were not the sole reason for the company's existence. He read from the amendment (see above). He understood that in a trust there was an obligation to only act on behalf of the beneficiaries of the trust. The amendment encompassed an additional benefit that was offered by a corporation but was not its sole benefit. He thought the language would interfere with a company's right to make a profit by not furthering the specific or benefit purpose. He wanted someone to address the issue of mixing trusts with an auxiliary purpose, which could become problematic. Mr. Pinnow understood the representative's comment. He explained that whenever there was a public benefit requirement imposed by a statute Wells Fargo wanted to make sure it had contractual certainty. It did not want to run the risk of having its contracts set aside with 20/20 hind sight. The proposal was intended to ensure that parties transacting business with a public benefit corporation felt safe and secure that the contract they entered into would not be set aside in the future under the theory that the contract did not further the public benefit. He reiterated that the intent was to make sure there was contractual certainty. He explained that the reason he analogized it to the trust certificate was because, much like parties that transacted business with trusts, they needed contractual certainty that the transaction was authorized and in furtherance of the trust purpose. As a third party who would be interacting and lending money to a benefit corporation, Wells Fargo would want to make sure it had certainty just as a third party relying on a trust certificate would. 2:27:09 PM Co-Chair Seaton remarked that general benefits and specific benefits were additional values to the operation of the corporation. Neither were the sole purpose of the corporation. He thought that, the way the amendment was written, the entirety of the contract had to accomplish the accessory benefit, rather than the sole purpose of a corporation. A trust had a sole purpose. He suggested that the amendment was converting the general benefit or specific benefit into the sole purpose of the company and that everything in the contract would have to comply. He asked Mr. Pinnow to comment on the potential interpretation of the language contained in the amendment. Mr. Pinnow did not believe the purpose of the language would require that a public benefit corporation only engage in transactions that would serve a public benefit. The purpose of the language was intended to make it clear and provide third parties with the protection against their contract right being set aside because of the contract not furthering a public benefit objective. He suggested that the language should not be interpreted as fundamentally changing the requirements of a public benefit corporation. It was intended solely to provide protection to third parties transacting with a public benefit corporation. 2:29:42 PM Co-Chair Seaton highlighted line 5 and asked if Mr. Pinnow was saying that it was assumed without inquiry that the transaction and each action or inaction by any director or officer was to further the public benefit. Mr. Pinnow responded that he could see Co-Chair Seaton's point that the contract might be for the benefit of the corporation but that the contract might not further the public benefit purpose. He was concerned that a contract might be set aside because someone argued that a contract did not serve a public benefit. Co-Chair Seaton did not have a problem with the intent of the bill, but argued that the amendment did not accomplish that goal. He indicated he objected to adopting the offered specific language. He proposed having the Legislative Legal Services redraft the amendment. He recommended taking out the trust language as well. Co-Chair Foster asked the bill sponsor how he wanted to proceed. Representative Kito was comfortable with revisiting the bill later and changing the language to better satisfy the chair. Representative Guttenberg thought the amendment was, at best, neutral and potentially cloudy. He referred to the section of the amendment that contained the language causing confusion. He was concerned that someone would enter a contract with a benefit corporation and have it overridden. He asked Mr. Pinnow to comment. Mr. Pinnow replied that the language spoke to the public benefit purpose or the specific public benefit purpose. The language was intended to deal solely with whether a transaction furthered the public benefit purpose. He suggested that if there were concerns about a contract that would otherwise apply under general corporate law, the language should not be interpreted to address that. The language was intended to deal with the specific and unique characteristics of the public benefit corporations and that they had a public benefit purpose requirement that could be enforced by shareholders. 2:35:58 PM Co-Chair Seaton asked Mr. Pinnow about the concern the amendment was trying to address. He wondered if the intent was to ensure that when a party entered a transaction with a benefit corporation that the transaction did not have to further the general public benefit or the specific benefit purpose to be valid. Co-Chair Seaton provided an example regarding maintaining trails around Juneau. He asked if he was correct in his assumption about Mr. Pinnow's intent. Mr. Pinnow responded in the affirmative. Wells Fargo wanted certainty. He provided the example of Wells Fargo lending money to a public benefit corporation to do an addition such as building a parking ramp that someone later questioned the public benefit. Wells Fargo would not want to have a transaction or contract set aside or called into question as being outside of the corporate authority simply because with hind sight it did not accomplish, achieve, or further a public benefit. Co-Chair Seaton understood what Mr. Pinnow was hoping to achieve. He thought that the intent could be accomplished by having Legislative Legal Services redraft the amendment. He thought the issue could be resolved with the use of different language. Representative Wilson asked if the amendment could be provided in time for her to speak with bankers at home to make sure it worked for them. Co-Chair Foster WITHDREW Amendment 1. HB 124 was HEARD and HELD in committee for further consideration. Co-Chair Foster reviewed the agenda for the following day. He recessed the meeting to a call of the chair [Note: the meeting never reconvened].