HB 124-BENEFIT CORPORATIONS  4:38:41 PM CHAIR KITO announced that the final 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." 4:38:46 PM REPRESENTATIVE WOOL moved to adopt the proposed committee substitute for HB 124, Version 30-LS 0348\D, Bannister, 4/4/17, as the working document. 4:39:00 PM CHAIR KITO objected for purposes of discussion. [Chair Kito passed the gavel to Vice Chair Wool.] 4:39:26 PM CHAIR KITO, prime sponsor of HB 124, stated that the committee heard the bill previously and there are some changes, most of which are technical. 4:39:56 PM BIANCA CARPENETI, Staff, Representative Sam Kito, Alaska State Legislature, on behalf of Representative Kito, prime sponsor of HB 124, reviewed the five changes in Version D. She said the first change is to standardize the use of the term "general public benefit". Since this term is a unitary concept it does not take an indefinite article, she explained, and there were some inconsistencies in the [original] bill where there was an indefinite article. This change is seen on page 5, line 29; page 9, lines 7 and 24; page 10, line 7; and page 11, line 2. The second change, she stated, is changing the word "reasonably" to "rationally" in keeping with model legislation establishing benefit corporations. This change occurs in four places twice on page 6, lines 9 and 11, and page 9, lines 17 and 19. She said the third change is removal of "for general public benefit purposes" to avoid redundancy on page 15, line 7. The fourth change, she continued, is deletion of the word "purpose" in order to use the definition of those terms in the definition section without tying them to the public benefit corporation requirements. This change occurs on page 15, line 11. The fifth change, she reported, is that the effective date is changed to July 1, 2018. This change occurs on page 17, line 7. MS. CARPENETI addressed questions asked by committee members during the bill's previous hearing. Regarding Representative Knopp's question about examples of benefit corporations, she noted that many types of businesses have become benefit corporations since the first law was passed in Maryland in 2010. The benefit corporations currently incorporated in the U.S. come from a range of industries, including retail, manufacturing, technological, service, professional services, private education, and food and beverage production. They come in all sizes from one-person service companies to large-scale international brands. Examples of well-known benefit corporations, she related, include Method, Kickstarter, Plum Organics, King Arthur Flour, Patagonia, Solberg Manufacturing, Laureate Education, and Alt School. MS. CARPENETI addressed the committee's question about whether a benefit corporation must be publicly traded and reported that they do not have to be publicly traded to be a benefit corporation. She said the legal designation of a benefit corporation does not set requirements as to whether a benefit corporation is publicly traded or privately held. Currently there are around 5,000 benefit corporations throughout the U.S. and only one of them is publicly traded and that is Laureate Education and Alt School, which went public in February 2017. MS. CARPENETI addressed the question about why the need for a benefit corporation if it isn't publicly traded. She explained that most of the 5,000 benefit corporations throughout the U.S. are private companies. However, she continued, many have also taken outside capital in the form of venture capital or private equity dollars and so being able to protect the company's mission over time and consider stakeholders is incredibly important to these entrepreneurs, especially when outside capital has been raised. MS. CARPENETI noted there were several questions about a special taxation benefit conferred to benefit corporations. She said there is no special tax benefit conferred, the benefit corporation status only affects requirements of corporate purpose, accountability, and transparency. Everything else regarding corporation laws and tax laws remain the same, she reported. So, a type of corporation whether C or S must still be elected. MS. CARPENETI addressed Representative Wool's question about whether Newman's Own is an example of a benefit corporation. She said she's found no indication of Newman's Own being registered as a benefit corporation, rather Newman's Own gives 100 percent of its after-tax profits to the Newman's Own Foundation, a private non-profit foundation, which in turn gives the money to various educational and charitable organizations. While the way Newman's Own operates is commendable, she continued, it's probably not a good example of being a benefit corporation because being a benefit corporation means the business is run in a particular way. So, if a company were a poor employer and had bad corporate citizens in a community where it operated but gave away some of its profits, that would not make it a benefit corporation. The focus of benefit corporations, she continued, is on being profitable in a responsible way, not what the corporation does with its profits once they've been earned. MS. CARPENETI addressed another question from Representative Wool about whether benefit corporations would be exempted if the tax law were changed. She explained that tax wise benefit corporations still elect whether to be C or S corporations, so this benefit corporation status only affects the requirements for corporate purpose, accountability, and transparency. Everything else regarding the tax status remains the same. 4:44:59 PM REPRESENTATIVE BIRCH posed a scenario of Microsoft with Bill Gates operates Microsoft as a regular corporation. He said whoever owns those shares can decide whether to direct shares to a charitable purpose. He said he is still trying to understand the merits of a benefit corporation since there is not a tax benefit he is aware of. CHAIR KITO recounted that in previous discussion it was mentioned that it is a culture of social responsibility, so a corporate structure that would allow individuals within the corporation as well as the earnings of the corporation to be utilized for a tangible beneficial purpose. With just a profit motive or fiduciary motive then the profits could be used for a charitable purpose or not. But as was heard last week from Mr. Letourneau, he continued, a corporation would like to operate with a culture of being responsible and giving back to the community and this can be done by registering as a benefit corporation, which allows the company to be accountable to its shareholders and that the shareholders would also expect certain behaviors from employees, directors, or others, so not just a profit or charitable giving motivation. REPRESENTATIVE BIRCH asked what the advantage is in doing it in that manner as opposed to a non-profit like United Way. CHAIR KITO replied that there are significant differences between the services provided by a non-profit and the services provide by a profit. For example, if he operated a for-profit corporation that made and sold a "widget", he doesn't know that he would be able to convert that into a non-profit organization and if he did, 100 percent of that benefit would go to the non- profit. He said it is about cultural sensitivity and giving back to the community and, depending on what form a particular owner, or a board of directors would want to take for their corporation, they could structure with this bill a corporation that would allow them to do what they would like to give back in their way. For example, if their company was a mountain guide company, rather than just making a profit the company could choose to have its employees do 20 hours of community service once a month and that could be part of the corporate culture and bylaws so that that whole mountain guide company is committed to giving back to some component of the community. 4:48:18 PM VICE CHAIR WOOL recalled that in the committee's conversation with the gentleman from Anchorage last week it was said that this could almost be used as a marketing badge to say, "This is how we run our company and another reason to support them." CHAIR KITO said that is one of those things that are identified specifically in the bill - that it is not a designation for marketing purposes - but it can be utilized as a selling point of the company and what the company might be able to offer. MS. CARPENETI added that corporations are also generally expected to put the interests of their shareholders as their primary consideration. Two cases have set the precedent for this, she said. One is Dodge v. Ford Motor Company and the other is eBay Domestic Holdings Inc. v. Newmark. Both cases affirmed that all activities of a for-profit corporation must seek to maximize the economic value for its stockholders. It is important to note, she continued, that the benefit corporation status is needed to protect mainly directors from being sued in a derivative suit. So, it is a legal protection as well for the corporation to say that it is going to add the consideration of its mission in addition to its economic. 4:50:10 PM CHAIR KITO removed his objection to the adoption of Version D as the working document. [Vice Chair Wool returned the gavel to Chair Kito.] 4:50:21 PM REPRESENTATIVE WOOL moved to report CSHB 124, Version 30-LS 0348\D, Bannister, 4/4/17, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 124(L&C) was reported from the House Labor and Commerce Standing Committee.