Legislature(2017 - 2018)BARNES 124
04/01/2017 01:00 PM LABOR & COMMERCE
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HB 124-BENEFIT CORPORATIONS 3:38:48 PM CHAIR KITO announced that the next order of business would be HOUSE BILL NO. 124, "An Act relating to corporations, including benefit corporations, and other entities; and providing for an effective date." CHAIR KITO, sponsor, stated that his interest in introducing this bill is to modify Alaska's corporate structure to allow for the ability of a corporation to establish itself with a charitable component as opposed to being fiducially responsible to shareholders. A corporation would be able to use some of its profits, earnings, or other assets to benefit other or charitable or nonprofit organizations. This would allow many corporations that would like to provide some type of support outside their primary business mode, or even within their business mode, that is not reflective of expending profits, and allow them to do that without violating their fiduciary responsibility. CHAIR KITO drew attention to the sponsor statement and noted that the first paragraph might need to be amended because it appears to be a carryover from another bill. 3:40:20 PM BIANCA CARPENETI, Staff, Representative Sam Kito, Alaska State Legislature, explained the purpose of HB 124 on behalf of Representative Kito, sponsor. She spoke as follows: The purpose of HB 124 is to expand the options for Alaskan entrepreneurs and investors by placing a new type of corporate entity - Benefit Corporation or B Corp - in Alaska statute. A benefit corporation is a for-profit corporation that includes public benefits and community improvements into their business practices, no matter the principal services or products provided. Corporate law generally requires corporations to consider the financial impact to their shareholders as the top priority when making decisions. Maximizing corporate returns can interfere with other corporate goals, such as electing to do something beneficial for the community by enhancing social benefit. Some of the defining characteristics of a benefit corporation include expanded purpose beyond maximizing share value to explicitly include general and specific public benefit. A benefit corporation also considers and balances the impacts of their decisions not only on shareholders but also on their stakeholders. … Benefit corporations must make available to the public a regular benefit report that assesses their overall social and environmental performance against a third- party standard. Three arguments in support of laws establishing public benefit corporations are: First, it creates legal requirements that regulate corporations claiming to work toward social good. Becoming a benefit corporation as a legal entity means a business that says it is dedicated to the public good will have to substantiate this claim, similar to how qualifying as tax-exempt helps define non-profits as charitable. Moreover, benefit corporations' reporting requirements to shareholders, the state, and the public provide a degree of transparency the corporations could otherwise refuse to provide. Second, these laws promote societal benefits by clarifying fiduciary duty. Entrepreneurs are more likely to pursue lines of business in a socially beneficial way when the law ensures that the pursuit of profit does not need to be the highest priority. Likewise, investors concerned with the public good are given an alternative. Third, this provides legal protection for companies that seek purpose-driven partnerships. Benefit corporation legislation allows them to undertake beneficial partnerships that conventional corporations might shun out of fear that shareholders would not see it as a venture likely to be profitable. 3:43:33 PM MS. CARPENETI turned to a discussion of the bill itself. She said Section 1 amends Alaska Statute (AS) 10.06.633(a), regarding how corporations may be dissolved, to include benefit corporations. MS. CARPENETI stated that Section 2 adds to AS 10, Alaska's corporation code, a new chapter, Chapter 60, establishing benefit corporations. Article 1, she continued, establishes how a new business corporation or existing entity may become a benefit corporation, and it also declares that an amendment of an existing corporation must be adopted by at least the minimum two-thirds vote. She said Article 2 establishes seven factors that the board of directors and individual directors of a benefit corporation shall consider while discharging their duties. She pointed out that directors of the benefit corporation are not required to give priority to any of these listed factors unless the intention to prioritize them has been identified in the benefit corporation's articles of incorporation. MS. CAPENETI continued to address Section 2 and said Article 3 allows the board to include a benefit director who is not financially liable if acting in good faith. She explained that Article 4 directs an officer of a benefit corporation to consider the factors enumerated by the board of directors. Article 4 also states that an officer of the benefit corporation is not personally liable for monetary damages if the officer's duties are performed in compliance with Alaska statute. She said Article 5 identifies who may bring action or claims against a benefit corporation for a failure to pursue general or specific public benefit. MS. CARPENETI stated that Article 6 of Section 2 requires a benefit corporation to file a biennial benefit report in addition to the biennial report, and it also provides details of what must be in that report. She related that Article 7 establishes a status change for a merger or amendment for a benefit corporation or a domestic entity other than a business corporation, which must be approved by at least two-thirds the vote of all shareholders entitled to vote. Article 7 also establishes statutory guidelines for third-party standards used as an assessment tool in the required benefit report to ensure that the general or specific public benefits are being done. She said Article 8 provides for general provisions, including regulations, definitions, and applicability. MS. CARPENETI advised that the remaining sections of the bill deal with regulations and effective date. 3:45:47 PM MS. CARPENETI added that it is important to note the following: First, that benefit corporations are voluntarily formed. Second, that benefit corporations have the same tax status as for-profit corporations. Third, that benefit corporation is a legal designation, not a marketing label. Fourth, this legislation specifies the requirements for the biennial benefit report, which does two things: 1) It provides accountability to the shareholders who will be able to track and direct benefit, and 2) it provides transparency to investors who will know what the benefits are. MS. CARPENETI concluded by stating that HB 124 establishes a solid foundation for long-term mission alignment and value creation. It protects mission through capital raises and leadership changes, and creates more flexibility when evaluating potential sale and liquidity options. Further, she said, it prepares businesses to lead a mission-driven life. 3:46:54 PM REPRESENTATIVE JOSEPHSON brought attention to page 3 where the types of benefits that could be provided are laid out. He asked what would constrain the legislation from becoming politicized; for example, a debate about what a public benefit was. MS. CARPENETI replied that a benefit corporation is responsive to its shareholders. She inquired whether the question is about abuse of this system or what might happen in that event. REPRESENTATIVE JOSEPHSON said he assumes shareholders would know that if they have invested in Ben and Jerry's they are going to get a certain benefit corporation investment, and if they invested in Dow Chemical they might get a different one. MS. CARPENETI responded that that is the point of the benefit report - it outlines what the company is doing. In its articles of incorporation, a corporation outlines any potential priorities that it might have for the corporation. Those are publically available, so as informed consumers [people] can decide if that is the company they want to invest in. In terms of holding the company accountable, she said she would point to the biennial report as being the mechanism by which shareholders would be able to track what the corporation is doing and if a shareholder has concerns about the action, or concerns that the corporation is not conforming to its previously stated benefits or mission, then a shareholder would potentially have grounds for bringing claim against the directors or the board. 3:48:45 PM REPRESENTATIVE JOSEPHSON related that he once invested in Calvert Investment Funds, an ethics fund that was supposed to have a benign impact on the world, at least as perceived by Calvert Investments. He said he is mentioning that because he knew going in with his small investment that the return might be 6 percent instead of 10 percent. He inquired whether that is something [benefit corporation] shareholders would understand. MS. CARPENETI answered that the way it is set up it is often called the double bottom line. So, instead of the board of directors being responsible for only making decisions based on the financial impact, the board could also base its decisions on other factors, including social good. 3:49:52 PM REPRESENTATIVE KNOPP asked whether public benefit corporations exist today. MS. CARPENETI replied that Alaska is not groundbreaking with this legislation. Thirty-one other states have adopted similar legislation and other states are considering it. REPRESENTATIVE KNOPP requested Ms. Carpeneti to provide examples of benefit corporations. MS. CARPENETI responded by first clarifying that Ben and Jerry's is not technically a benefit corporation, but rather a Certified B Corp, which means the company has gone through third party analysis that says the company provides this good. Examples of current benefit corporations include Patagonia and King Arthur Flour, the oldest flour producer in America. REPRESENTATIVE KNOPP asked what public benefit services are provided by the aforementioned corporations. MS. CARPENETI answered that she would get back to the committee with a list of all the public benefits that Patagonia provides, but that Patagonia is dedicated to outdoor recreation. REPRESENTATIVE KNOPP inquired whether this is talking about only publicly traded corporations, given not all corporations are publicly traded. He further inquired whether there is a tax benefit to the corporation to do this. Lastly, he inquired why any publicly traded corporation could not in its articles of incorporation or in its prospectus to shareholders list itself as public benefit. MS. CARPENETI replied that corporate law says a corporation could become liable if its shareholders disagree with doing this and bring suit against the corporation for not deciding based on the financial impact of its decisions in expanding to a public benefit good. It therefore provides legal protection for the corporation to include those benefits into its decision-making process. REPRESENTATIVE KNOPP reiterated his question about whether this is talking only about publicly traded corporations that trade stock on an exchange. MS. CARPENETI offered her belief that the answer is yes. CHAIR KITO interjected that he would get this clarified and provide the information to the committee. He said it is in the corporation statutes and offered his belief that any company filing an incorporation notice with the state could become a benefit corporation. The corporation would still be required to file its articles of incorporation, but the articles of incorporation may provide a public benefit as opposed to just a fiduciary responsibility. 3:52:54 PM REPRESENTATIVE BIRCH asked what the genesis is for this and whether someone requested that it be done. CHAIR KITO replied it was a proposal put forth by Representative Seaton in a past session. He said he thought the bill a great idea and so took it forward with the idea that a Native for- profit corporation might want to try doing something that benefits heritage. Right now many corporations have a for- profit as well as a non-profit heritage group, which sometimes share boards of directors. However, he continued, the for- profit has to make its decisions in supporting some of those other organizations based on what is a responsible fiduciary manner as opposed to, say, what might be culturally desirable for a Native corporation. Whether or not it gets used that way, he said, he saw the opportunity to strongly link, or more strongly link, the for-profit motive of a Native corporation or any other corporation to the values of the shareholders and allow a corporation to provide opportunities and benefits to a cultural group or charity. It is a voluntary choice, he pointed out, but if it is chosen then the corporation has to outline everything it is going to be doing in its articles, which thereby allows the corporation to not have to make all of its goals fiduciary goals. REPRESENTATIVE BIRCH reiterated his question as to whether someone specifically came to Chair Kito. CHAIR KITO answered that nobody came to him specifically. He further offered his belief that nobody went to Representative Seaton specifically. REPRESENTATIVE BIRCH said he is familiar with non-profits that are set up with public charitable purpose and while he is not opposed to the bill he doesn't fully understand the need for it. CHAIR KITO responded that the purpose is to get the information out and discover who might be interested in utilizing it. REPRESENTATIVE BIRCH stated he is more used to someone coming to a legislator with a problem that needs solving, rather than throwing something out there and asking whether anyone has a problem with it. MS. CARPENETI noted that there is correspondence accompanying Representative Seaton's previous iteration of the bill from an individual with the business Earth Friendly Coffees who had expressed interest. Additionally, she advised, Stephen Trimble of Anchorage will be testifying today that he is interested in gaining benefit corporation status for his business. 3:56:27 PM REPRESENTATIVE WOOL offered his understanding that the proposed concept would allow a corporation to make a decision that isn't totally financial as a benefit for something else, rather than being required to give top priority to financial. He surmised that this concept changes how a corporation would practice its business as opposed to what it does with its profits. MS. CARPENETI replied yes, this establishes a legal designation for a corporation that wants to be recognized as a benefit corporation. It doesn't change how traditional corporations operate; it just sets up the standards for benefit corporations. She added that it allows a great deal of latitude to the board of directors of the company to decide what that balance is. It doesn't provide any sort of table or schedule saying this is how the company must allocate its profits or this is how the company must act as a benefit corporation. It just allows the flexibility for a corporation to decide how to operate as best suits its mission and what it is trying to do. REPRESENTATIVE WOOL offered his understanding that for Newman's Own all profits go to charity. He surmised this is what Newman's Own does with its profit and is not necessarily how it operates its business. He asked whether Newman's Own is a benefit corporation or whether it is more a corporate decision as to what Newman's Own does with its profits. MS. CARPENETI responded that she would look at Newman's Own to see whether it is established as a benefit corporation and will get back to the committee with an answer. CHAIR KITO pointed out that his intent is not to change the way the corporation would operate, but just to allow the corporation to have more flexibility with what it does with its profits. 3:58:50 PM REPRESENTATIVE BIRCH inquired whether a traditional corporation could transition to a benefit corporation and whether it would take a shareholder vote. MS. CARPENETI answered yes, a corporation can start as a regular corporation and then if HB 124 became law the corporation could opt to change through a two-thirds vote of its shareholders. 3:59:32 PM REPRESENTATIVE KNOPP asked whether there is anything in the Internal Revenue Service (IRS) code as far as tax structures, or in states that have benefit corporations, that allow benefit. For example, he asked, whether the benefits that are expended are taxable benefits to the corporation. MS. CARPENETI replied that benefit corporations do not enjoy any special tax status, they are taxed the same as corporations. 4:00:16 PM REPRESENTATIVE WOOL offered his understanding that a benefit corporation would not get any special tax status. He observed that next on the committee's calendar is a bill related to taxing [non-C corporations]. He asked whether benefit corporations could in theory avoid a tax given that they would have a different designation than other types of corporations. MS. CARPENETI responded she is hesitant to comment on legislation she hasn't seen and how it would impact benefit corporations. She deferred an answer to someone with legal expertise and tax expertise. REPRESENTATIVE WOOL surmised that if there are certain tax laws that affect certain types of corporations and this is yet another type of corporation, then he would expect that the law would have to address that type of corporation, which hasn't yet happened. MS. CARPENETI replied that that is a reasonable expectation. 4:01:53 PM CHAIR KITO opened public testimony on HB 124. 4:02:14 PM STEPHEN TRIMBLE, Founder and Chief Executive Officer, Arctic Solar Ventures, speaking on behalf of his company, testified in support of HB 124, which would authorize the creation of benefit corporations in Alaska law. He said Arctic Solar Ventures is a residential and commercial solar design and installation company that operates statewide. He noted that his company is the second Certified B Corp in the history of Alaska. MR. TRIMBLE explained that the difference between a Certified B Corp and benefit corporation is that a certified B Corp is a third-party global standardized certification that is sort of like a fair-trade certification for coffee for businesses that incorporate social and environmental benefit into their mission. He said benefit corporation legislation is a compendium piece to certified B Corp status that allows companies like his to be able to also acknowledge that commitment to society and the environment within the structure of state law. MR. TRIMBLE advised that his company, a leading socially responsible business in Alaska, plans on becoming Alaska's first benefit corporation after the passage of HB 124 and has been actively working on it. During the previous iteration of the bill by Representative Seaton, he continued, he called and expressed interest in the bill and urged it be passed. His company has been following this for the past two to three years and has been pressing for its adoption because the entire company believes this is an incredibly valuable tool for Alaska businesses to be able to differentiate themselves. MR. TRIMBLE stated that this is uniquely critical to the "DNA" of his business and it will also present many other businesses the opportunity to codify their commitment to society and the environment within their bylaws. Differentiating businesses within their communities and within the global community at large sends a clear message that Alaska is a leading place for socially responsible businesses to form and thrive, he said. Profit, societal benefit, and environmental stewardship can powerfully coexist within business. He urged that the full legislature support the enabling of Alaska businesses to fully commit themselves to making the world a better place through their practices and policies. 4:06:03 PM REPRESENTATIVE KNOPP asked whether Mr. Trimble's company is publicly traded on an exchange and whether it issues shares. MR. TRIMBLE responded that his is a privately held corporation. He advised it is not required that a benefit corporation be publicly traded. REPRESENTATIVE KNOPP inquired as to the number of board members for Mr. Trimble's company. MR. TRIMBLE replied that his corporation has five board members. REPRESENTATIVE KNOPP asked why Mr. Trimble's corporation would need to be a benefit corporation if the purpose is to disseminate information about the purpose of the corporation and the company only has board members and no shareholders. MR. TRIMBLE answered that this legislation would enable his corporation to consider, as a company, other aspects of societal and environmental benefit as opposed to merely profit as its predominant driver and measure of business success. This is an incredibly powerful tool for businesses to be able to differentiate themselves within the local community, he reiterated, because making those commitments public and being upheld to those commitments in the form of reporting is very powerful. It goes far above and beyond just saying a company does good - the company has to actually show it does good. That is also the reason why his corporation has already pursued the extremely stringent third-party B Corp certification. It's different than simply just being able to report to the company's shareholders or board. 4:08:43 PM REPRESENTATIVE BIRCH inquired as to what the distinction is that this would offer Mr. Trimble and his business aspirations versus a conventional configuration. MR. TRIMBLE replied that this would allow his corporation to volunteer to a higher level of scrutiny and obligation to do good in its business practices. It is a voluntary thing, but to be able to offer yourself to be held up to the reporting requirements to a broader mission beyond profit is something that every Alaskan company should want to do because businesses are here to make Alaska a better place. As founder of Arctic Solar Ventures, he said, this is his company's DNA. To have the state acknowledge that and join his company in its voluntary reporting of that is hugely important. 4:10:28 PM REPRESENTATIVE WOOL asked whether Mr. Trimble's business could still operate the same way it does and make the same decisions without the benefit corporation designation other than the recognition of it. MR. TRIMBLE responded that his business, through its internal practices, does that now, but he can't guarantee that other companies will do the same. If a company is volunteering to be held to that standard and wanting to receive the public relation benefits that are associated with being in a business that has considerations above and outside of pure profit, he said, then the company needs to be held to a standard. This structure has been designed and implemented by other states so that businesses can't claim societal benefit without a standard and proof under the state's corporate structure. MR. TRIMBLE addressed the committee's earlier discussion about the use of profits and how that plays in. He pointed out that there is no requirement under HB 124 that profits be donated to a non-profit or used for a non-profit, which is the case for benefit corporation structure anywhere. It has nothing to do with how profits are dispersed or where they should go, he advised, rather it has to do with internal practices and policies of the business. For example, his company firmly believes that one of its public benefits is that it deploys clean energy and the deployment of clean energy has many societal benefits. His company is creating local jobs and stimulating the local economy, as well as reducing carbon footprints of people and cleaning the air. It's not only about being able to be acknowledged for being held to a higher standard, he reiterated, but that the company is volunteering to be held to that standard, and that is why HB 124 is important. 4:14:02 PM REPRESENTATIVE WOOL offered his understanding that it is a standard of corporate behavior that a company would be adhering to, as well as the public recognition and benefit that the company would get from being identified as that type of corporation. MR. TRIMBLE confirmed that that is a very fair assessment. 4:14:26 PM REPRESENTATIVE KNOPP inquired whether B Corp certification is a federal certification. MR. TRIMBLE answered that it is an international certification with over 4,000 corporations now certified throughout the world, and that this certification is administered by the organization, B Lab. He explained that B Lab is the organization that helped states develop the first benefit corporation legislation. The idea behind B Corp certification and the B Lab organization was to create a global framework where businesses can volunteer to be a part of this very rigorous assessment and to work with states to then develop the benefit corporation designation within their corporate state structure, so it completes the puzzle. The benefit corporation piece is a U.S. specific piece, he said, but the B Corp certification is a global certification. 4:15:49 PM CHAIR KITO held over HB 124.