HB 346-PUBLIC BENEFIT CORPORATION  3:21:33 PM CHAIR OLSON announced that the first order of business would be HOUSE BILL NO. 346, "An Act relating to corporations, including public benefit corporations; and providing for an effective date." 3:22:21 PM REPRESENTATIVE REINBOLD moved to adopt the proposed committee substitute (CS) for HB 346, labeled 28-LS1433\O, Bannister, 3/19/14, as the working document. CHAIR OLSON objected for the purpose of discussion. 3:22:32 PM REPRESENTATIVE PAUL SEATON, Alaska State Legislature, stated that HB 346 expands the options for Alaskan entrepreneurs and investors by placing a new type of corporate entity, the benefit corporations also known as B-Corps, in Alaska statute. The existing corporate structures in Alaska, the C-corporations, provide numerous benefits and jobs; however, the benefit corporation is a for-profit corporation which incorporates public benefits and community improvement into its business practices, no matter the principal service or product provided. REPRESENTATIVE SEATON stated that current corporate law generally requires a corporation to consider the financial impact to their shareholders as the top priority when making decisions. He summarized the ruling in a Michigan court decision, Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919), as indicating that a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed to that end. The discretion of directors is exercised in the choice of the means to attain that end and does not extend to change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes. REPRESENTATIVE SEATON explained that the goal of C-corporations is exclusively to make money for shareholders. While there is nothing wrong with that goal an instance may arise in which a corporation chooses to have other goals. Thus these corporations may be legally liable to shareholder lawsuits since the community involvement must have some nexus to corporate profit. Under the benefit corporate structure, owners and boards have the freedom to take actions which positively impact their communities without fear of violating a fiduciary duty. 3:26:59 PM REPRESENTATIVE SEATON explained HB 346 will give these corporations more flexibility in deciding how to run the businesses and will bring Alaska a slice of the $3.7 trillion invested nationwide in socially-responsible funds. Benefit corporations are formed voluntarily and have the same tax status of any other for-profit corporation. Thus the corporation wouldn't gain any tax advantage in electing a "B-Corp" status. The benefit corporations can participate in tax credits but only to the extent that other corporations can elect to do so. REPRESENTATIVE SEATON reported that 23 other states have passed benefit corporation legislation with West Virginia, Utah, and Nebraska just this year. He acknowledged this bill is not based on model legislation, but he did pull information from several other states since similarity in statutes make it easier for investors to attract investment in Alaska. Over 550 benefit corporations have incorporated in the U.S., including Ben & Jerry's, Patagonia, Rasmussen College, Epic Coffee, and King Arthur Flour Company - America's oldest flour company. Each of these companies works to benefit the public and their communities in the way that matters most to them. REPRESENTATIVE SEATON related that HB 346 also includes measures to ensure accountability and transparency so a benefit corporation will additionally create and publish an annual benefit report describing how the company has pursued the general public benefit. This report allows shareholders, investors, and the public to confidently invest in benefit corporations that share their values. He summarized that the goal of HB 346 is to give businesses more flexibility and control over their decisions and to provide private investors with a clear social investment option. 3:27:50 PM REPRESENTATIVE JOSEPHSON related he has invested in a company and the investors knew that the returns may be less than other investments. He asked whether that is how shareholders approached this and if they anticipated earning less while doing something good. REPRESENTATIVE SEATON answered yes; the shareholders know what the specific benefit the board of directors has voted on so people investing in the B-Corps generally share the same kind of philosophy, that it isn't just about maximizing dollars, but sharing the public benefit goal, whether it is education or research or some other specified goal. 3:29:00 PM REPRESENTATIVE JOSEPHSON asked whether any discussion of the treatment of workers in third world countries has been considered. He recalled a big debate about Old Navy, Gap, and other stores. He further recalled an explanation after a fire about why the U.S. pays so little for its clothing. REPRESENTATIVE SEATON answered that there can be, depending on what public benefit is selected by the corporation, such as whether it is more local farm jobs instead of cheaper grocery costs. That would be a benefit adopted in a particular corporation and people could invest in that corporation since they want to promote local foods and jobs although it would be cheaper to buy and have them shipped in. It's more difficult in a typical "C corporation" structure since it is not a fiduciary choice and the board of director's goal is to maximize profits. The "B Corp" structure allows those types of benefits to be selected as one of the criteria being use. 3:31:07 PM TANEEKA HANSEN, Staff, Representative Paul Seaton, Alaska State Legislature, added that there are two parts to the benefit corporations, the general public benefit purpose and the specific purpose. She referred to page 4 of HB 346, which lists the things the board of directors must consider, one of which is the community and societal factors including the interests of each community in which the offices or facilities of the benefit corporations, subsidiaries, or suppliers are located. She said that the specifics mentioned are considered by the benefit corporations and the third party standards used for the annual report will have questions relating to the purposes. 3:32:12 PM REPRESENTATIVE SADDLER asked whether the benefit corporation structure is aimed at existing corporations or if new corporations would take this form. REPRESENTATIVE SEATON said that it could be either. He noted a number of businesses exist that may want to do something locally but don't want to violate their primary duty of maximizing shareholder profits. This would allow the corporation, by a two-thirds vote, to become a benefit corporation and establish specific benefits, which is publicized. People can invest based on that but it also allows the flexibility for new corporations as well, including small tour companies that hire locals that give flavor to the ethnic tours. 3:33:32 PM REPRESENTATIVE SADDLER asked whether this is primarily focused at publically traded companies. He asked how many businesses in Alaska are publically traded. He further asked if this is related to smaller corporations, as well. REPRESENTATIVE SEATON answered that it could be smaller corporations and the Division of Corporations, Business & Professional Licensing could address the number of corporations. CHAIR OLSON removed his objection. [Version O was before the committee as the working document]. 3:34:33 PM GORDON BLUE, Executive Director, Alaska Sustainable Fisheries Trust (ASFT), testified in support of HB 346. He explained that the ASFT's mission is to increase the retention of benefits of the fisheries in the Gulf of Alaska community. He reported three projects. First, this project is modeled on community- supported agriculture called Alaskan Zone. It is a community- supported fishery project in which local fishermen and processors produce product subsequently sold to local consumers. He explained that it is primarily an educational venture, but it also produces small net proceeds shared back to a second project, which is a community fisheries conservation network. The network is a collaboration of scientists and fishermen who work to solve some of the fishery problems, including reduction of unwanted bycatch. Third, the ASFT is working to launch another project: the Local Fish Fund. The Local Fish Fund was designed to try to increase the retention of the fishery quota in the halibut/sablefish fisheries in the Gulf of Alaska communities. There have been several attempts in financing mechanisms and this is a further articulation on that to try to bring some success to it since quota is being lost to the outside. He related the essence is that the aforementioned fund will provide a vehicle for fishermen who are about to retire from the fishery to make an inter-generational transfer of quota to a new fisherman who has made a commitment to stay in the community. This process is complicated by the halibut/sablefish regulations so the ASFT has worked with attorneys to construct an arrangement to accomplish this. The ASFT has created a subsidiary of a nonprofit, Local Fish LLC. The LLC's agreement allows the ASFT to balance the interest of participants, which include fisherman about to retire who would like to sign their quota over on a time contract and those fishermen who would like to purchase the quota. It would provide financing to pay the taxes generated by that transaction. 3:37:54 PM MR. BLUE related that the agreement works legally, but it is very complicated; however, over time if it increases the size of business it will provide improvements to the social benefits. He explained that it has become difficult to administer the LLC membership interests and to describe accurately and identify the specific interests. Thus the benefits corporation would suit the ASFT admirably and would allow the organization to use the corporate stock structure to keep a clear statement of the interests of the participants that is easy to transfer and understand, yet would allow them to continue the public benefits. He referred to the addendum in the final part of the bill. The savings would benefit the corporation and the entire community. He expressed strong support for HB 346. 3:39:31 PM ERIK TROJIAN, Director of Policy, B-Lab Benefit Corporation, lauded the sponsor's description of the benefit corporations. He stated that 23 states have passed bills in the past few years, and currently 550 benefit corporations have been formed. The key thing to consider is that the purpose of a benefit corporation is to deregulate the purpose of a corporation. He reiterated Representative Seaton's comparison between a "C corporation" and a benefit corporation or "B Corporation." He explained that if a corporation can only do one thing it inhibits the free market from truly acting as a free market. Opening this up will allow entrepreneurs to discover new and innovative ways of running a company. This can lead to new ways of thinking about how a company is run. He referred to Mr. Blue's testimony, with respect to the LLCs, who raised a good point. An LLC is based on contract law, which is not a good vessel for multiple shareholders. If a corporation chooses to go public - although none of the B corps are - and has a social mission the corporation must deviate from that mission to bring in investors or growth will become stagnant. There are $3.7 trillion of social impact investment funds in the marketplace that is being targeted towards companies like this. He offered his belief that by opening this up it sets the stage for investors and entrepreneurs to operate. Not only is it a great way to protect directors, but it is a great vehicle to protect shareholders. He related a scenario in which an individual would invest in a company that has a social mission, but the corporation can deviate from the mission since there isn't a legally binding document. In fact, the purpose of the corporation is to maximize profit, as previously stated, except that his understanding was that the company would do something else. This bill would fill that gap. He pointed out one other key element is that this bill stays fairly consistent with the model legislation, with each state having its particular nuances; however, the general concept is very consistent so it will attract investors. 3:43:42 PM MR. TROJIAN related that lastly the younger generation, and 80 percent of college graduates want to work for companies with a mission that provides a means to be connected to society and not just having a job. He offered his belief this is another way to keep the younger population in the state by expanding opportunities for them to come up with new innovative ideas. He acknowledged that there is no tax benefit. In fact, some states such as South Carolina have seen this as a great opportunity for businesses tying to alleviate problems in our society since tax monies cannot solve all the problems so why not harness the power of the free market to try to solve problems. MR. TROJIAN further stated that this bill does not dictate what is good for society, but it is left up to the free market. For example, it allows companies to bestow conservative or liberal values in the companies, as determined by the marketplace and the entrepreneur. He offered his belief that if they have a good idea it will attract investors and consumers, but it is not government dictating what is good for society and this bill would provide the stage for them to operate. 3:45:52 PM REPRESENTATIVE HERRON asked for an example of how the state would enforce these rights under the bill. MR. TROJIAN answered that the benefits corporations would be enforced in the same manner as traditional corporations enforce its duties to maximize profits. He said it is enforced through the shareholders and not government. The same principles are taken here, which really allow a contractual agreement theatre statute that the shareholders and board can entertain, enforced through benefit enforcement proceeding in which the shareholders are the only ones with a private right of action. For example, if a corporation wanted to consider a particular aspect of the community that the people in community cannot sue them for not meeting the goal, but the shareholder can do so or could elect to add outside interests with a two-thirds vote to the private right of action; however, it would be up to the company. 3:47:44 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on HB 346. REPRESENTATIVE JOSEPHSON remarked that this is good bill. He offered his belief that the bill is well considered, plus he liked the concept of deregulating corporations. He said he hopes the committee will move today. 3:48:27 PM REPRESENTATIVE HERRON moved to report the proposed committee substitute (CS) for HB 346, labeled 28-LS1433\O, Bannister, 3/19/14, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 346(L&C) was reported from the House Labor and Commerce Standing Committee.