CS FOR HOUSE BILL NO. 124(FIN) "An Act relating to corporations, including benefit corporations, and other entities; and providing for an effective date." 9:45:22 AM Representative Sam Kito, Sponsor, introduced the legislation. He reported that HB 124 created a benefit corporation classification for C corporations in the state. The benefit corporation allowed for more than just a fiduciary duty to corporate activities. He provided the example of a bike shop that offered its employees paid work time for trail improvement work. In a traditional corporate structure, the individuals would be working outside of the fiduciary responsibility of the corporation risking shareholder objections. The bill allowed for the bylaws of a corporation to allow for employees to work on public service projects or engage in another manner to provide a public benefit. The benefit had to be clearly identified in the corporation's bylaws and a periodic report was required that indicated how the company was meeting its beneficial and fiduciary duties. 9:48:40 AM Senator Stevens asked whether other states had similar laws in place. Representative Kito answered in the affirmative and estimated that 30 other states adopted similar statutes. Senator Micciche thought the bill was interesting. He asked who defined whether the actions were beneficial, or if each company would define its "benefit." He believed that in some cases "some of these companies worked against the economy of the state of Alaska." He wondered if it was possible for the benefit to counter what others believed were beneficial. Representative Kito replied that the determination of whether the action of a company would be beneficial would be published in the articles of incorporation and bylaws, which was available for public scrutiny. He offered that a benefit would not be defined in stature or regulation. 9:51:05 AM Senator von Imhof understood that corporations currently, through mission statements and value statements, could express its objectives and intentions. She was unsure as to what problem the bill was trying to solve. She used the example of Wells Fargo, which had a corporate giving program. The bank had employees dedicated to the program. The bank offered defined allowances for employees to work on company sanctioned events or volunteer opportunities. She wondered what the bill was attempting to "fix." Representative Kito thought that the examples Senator von Imhof described did not violate the fiduciary responsibility the company had to its shareholders. The company had made profits and its board of directors directed some profits to the charitable activities that did not affect its "bottom-line." He advised that if a company started having employees working on non-billable hours for various beneficial projects, a complaint or lawsuit could ensue on the basis that the company was not meeting its fiduciary responsibility by paying for an employee that was not generating income. The bill attempted to protect a company whose board of directors wanted to offer company time or resources to benefit a nonprofit or some other public benefit like soup kitchens. He added that the bill could also apply to native corporations. A regional native corporation could provide resources to support its nonprofit arm without concerns over lawsuits from shareholders. 9:54:44 AM Senator von Imhof asked whether there was a numerical threshold in the bill that addressed a level of profit the benefit corporation must maintain. She guessed that the company could be accused of being too focused on the benefit in lieu of profit and she wondered whether the benefit corporation was subject to a certain level of profit. Representative Kito answered that the line would be drawn in the bylaws of the corporation and would be the measure of accountability to its directors and shareholders. He understood that the corporation that filed as a benefit corporation would be accountable to itself in identifying the benefit it wanted to offer and how it wanted to provide it. He remarked that the board of directors would regulate whether the corporation was providing the benefit as determined by the bylaws. Co-Chair MacKinnon asked if the sponsor knew of any cases in which a company had been sued for misusing proceeds. Representative Kito deferred the answer to his staff. Co- Chair MacKinnon asked if Representative Kito was aware of specific lawsuits that happened in other states under the terms he had discussed. Representative Kito was unaware of any lawsuits and added that he was aware that the trend was to provide corporations as many tools as possible to fulfill their mission. Senator von Imhof voiced that the sponsor had indicated that a corporation's bylaws currently allowed them to fill any mission they wish. She did not feel a state statute was necessary. Representative Kito responded that the challenge was whether a resource of a company could be used to benefit a community versus direct profit. Currently, a company could not perform an action that did not result in a profit. The bill allowed for more flexibility in how a corporation could perform community service and be shielded from shareholder lawsuits. Co-Chair MacKinnon asked if a benefit corporation would be required to pay corporate taxes in the state. Representative Kito replied that a benefit corporation was another classification of a C corporation with a benefit bylaw and would pay taxes and registration fees. Co-Chair MacKinnon inquired whether B corporations were required to pay taxes in the state. Representative Kito answered that the benefit corporation was a C corporation and the bill would not impact any other type of non-C corporation in the state. The benefit corporation would be subject to any applicable taxes. 10:00:12 AM Senator Micciche asked if the sponsor could verify whether the bill would affect any liability of a C corporation to the state. Representative Kito stated that C Corporations that currently existed would not be changed at all unless they opted to become a benefit corporation. Senator Micciche asked if a C corporation chose to organize as a benefit corporation would the same tax rate paid prior to the change apply. Representative Kito answered in the affirmative and added that the only practical change would be to the corporation's bylaws and mission and would still be required and obligated to pay the same income tax. Co-Chair MacKinnon questioned his answer. She wondered whether more items were deducted against the bottom-line of profit resulting in less corporate taxes paid to the state. She surmised that the state would lose money by creating a new category of expenses to write off from profit. Representative Kito imagined that a tax impact would be difficult to determine. He restated that his intent was "not to take corporate profits and turn them into something else." The benefit corporation status was another tool for corporations to use. He elaborated that the amount of revenue the state received from corporate income tax and "the change in the bill was not substantial enough to make an appreciable difference." Co-Chair MacKinnon considered large oil companies that paid large amounts of taxes to the state and wondered what the impact would be if they chose to become benefit corporations. She was unsure how that would be accountable to the Internal Revenue Service (IRS). She would follow up on the issue. 10:03:19 AM Vice-Chair Bishop referred to the last sentence of the first paragraph of the Sponsor Statement (copy on file): "Allowing the creation of benefit corporations will give business owners more choice in how to run their business and will bring to Alaska a slice of the $6.6 trillion that is invested nationally in similar corporations." He understood that the intent of the bill was to protect the fiduciary responsibility of the shareholders. He offered a hypothetical scenario of benefit corporation employees rebuilding a playground during work hours. He deduced that the shareholders could protest that the corporation's bottom-line was not being increased by the benefit activity. Representative Kito replied that his description was exactly the type of situation the bill was attempting to protect against; a shareholder lawsuit because the employee was not fulfilling the fiduciary duty of the corporation when engaged in benefit activity. Vice-Chair Bishop mentioned the eventuality of an employee getting injured performing benefit activity. He characterized the situation as "going down another whole rabbit trail." Representative Kito presumed that the employee would still be covered by worker's compensation and whatever insurance the corporation offered. Vice-Chair Bishop deduced that insurance premiums would rise. CAITLYN ELLIS, STAFF, REPRESENTATIVE SAM KITO, stated that benefit corporations were formed voluntarily by a two- thirds vote of the shareholders. The shareholders endorsed whatever public good was defined by the company. She explained that benefits could include redistributing a percentage of profits or allow employees to perform benefit work. The result was a two-fold option for the business; a fiduciary responsibility and a public benefit responsibility. The bill allowed the company to prioritize its values and the shareholders were "well aware" of the mission. The state could benefit from the $6.6 trillion invested in B Corporations by allowing benefit corporations. She elucidated that a handful of companies in the state wanted benefit corporation status. 10:06:58 AM Senator von Imhof asked what would stop an existing corporation from switching to a B-Corporation and then writing off more expenses claiming the work is for the common good and paying less taxes. She characterized the bill as granting allowable and legal tax breaks. Ms. Ellis stated that the bill would not change what a company could do. The bill offered protection to a company from its shareholders. The same write-offs would be available that were currently in existence as under HB 124. She reiterated that benefit corporations were voluntary, and the shareholders were aware of the bylaws. Co-Chair MacKinnon asked whether Ms. Ellis was aware of a corporation that was sued by its shareholders. Ms. Ellis was not aware of a company sued by shareholders but offered to follow up with a definitive answer. Representative Kito commented that the state currently offered a series of tax credits currently available to C corporations that allowed them to reduce their tax liability by donating to things like the education system. He thought the scope of the change created by the bill would be significantly smaller than any of the tax credits the state currently offered. The bill would allow a new type of community and public involvement with corporations and permit a company to define its values in its bylaws. 10:10:06 AM Ms. Ellis addressed portions of the Sectional Analysis (copy on file): Section 1 10.06.633(a) Establishes how corporations may be dissolved and is amended to include benefit corporations; (a8) declares that a benefit corporation is dissolved if delinquent for 6 months or more in including its benefit report in the biennial report or in paying the benefit report filing fee. Section 2 Adds a new chapter to AS 10 Alaska corporations code, chapter 60-Benefit Corporations. Article 1 Establishes how a business corporation may incorporate or amend its status to become a benefit corporation; that the benefit corporation shall have a purpose of creating general public benefit from all effects of its business and operations and may identify a specific public benefit; requires that any status change must be approved by the minimum two- thirds vote. Article 2 Establishes the duties of the board and the directors and enumerates seven factors that must be considered while making decisions; clarifies that a director of a benefit corporation is not personally liable for the failure to create a general public benefit if they are acting in compliance with the chapter and in good faith. Article 3 Directs how the board of a benefit corporation my designate a benefit director, who shall not have a material relationship with the corporation; outlines the benefit director's role, especially relating to the biennial benefit report; allows that the benefit director shall have the same role and rights as any other director of the benefit corporation. Article 4 Directs an officer of a benefit corporation to consider the factors enumerated under the board of directors; clarifies the duties of an officer acting in good faith; and allows that a benefit corporation may designate a benefit officer, who shall have duties similar to the benefit director. Article 5 Identifies the persons that may bring actions or claims against a benefit corporation for a failure to pursue general or specific public benefit. Article 6 Defines what must be contained in the required biennial benefit report; requires that the benefit report must be held against a third party standard; establishes a timeline for the delivery of the report to shareholders; requires public availability of the report; and directs the benefit corporation to file the benefit report with the department as part of their biennial report. Article 7 Identifies the process necessary for a benefit corporation to effect a status change; allows for shareholder dissent under a status change; defines guidelines for the third-party standards; clarifies that a benefit corporation is not eligible for any tax exemptions beyond those available for a traditional corporation; and states that this chapter does not prevent a non-benefit corporate entity from considering a general or specific public benefit. Article 8 Allows from the creation of regulations for this chapter; clarifies that this chapter does not affect non-benefit corporate entities; declares that benefit corporations are subject to Alaska corporate law unless specifically addressed; and defines terms used in the chapter. 10:13:35 AM Co-Chair MacKinnon asked whether it was unique with corporations to "indemnify or protect" directors who act on behalf of corporations. Ms. Ellis did not know the answer and offered to provide the information. Co-Chair MacKinnon asked whether it was common to extend the protection to third parties that engaged with the director of the benefit corporation. She requested more clarity on the difference between a benefit corporation and a C corporation. Co-Chair MacKinnon wanted the Department of Commerce, Community and Economic Development (DCCED) to provide feedback from a licensing perspective and whether the department supported the bill. SARA CHAMBERS, DEPUTY DIRECTOR, DIVISION OF CORPORATIONS, BUSINESS AND PROFESSIONAL LICENSING, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT (via teleconference), stated that the department had an administrative interest in the bill, but did not have a recommendation either way. She elaborated that the division did "very little qualitative work" with corporations that were required to register. The division only collected a filing tax and the tax would not change. Co-Chair MacKinnon OPENED public testimony. 10:17:05 AM STEVEN TRIMBLE, ARCTIC SOLAR VENTURES, ANCHORAGE (via teleconference), testified in support of the bill. He reported that the. company was Alaska's largest solar company and grew 300 percent each year since its inception in 2015. The company was expecting to build 1 megawatt of solar projects in the state through its two business locations in Anchorage. He delineated that Arctic Solar Ventures was a Certified B Corporation and was certified through and international body called B Lab that worked with other states to enact legislation creating benefit corporations. He explained that the international certification allowed his company to adopt a triple bottom- line approach to business; economic, societal and environmental. The benefit corporation legislation allowed a company to protect its certification from leadership changes and shareholders votes. He noted that a two-thirds vote was required to become a benefit corporation and the same vote would be required to undo it. He emphasized that he wanted state protection like the 33 other states that adopted similar legislation and operate as a benefit corporation. He mentioned that he was a co-owner of a nationwide cooperative of 48 other solar companies that were certified B Corporations and were benefit corporations or in the process of becoming one. The cooperative members shared the same values and reflected a national movement. He favored adoption of HB 124 as a tool that differentiated the way benefit companies engaged in business "with the backbone that we are here to do good for Alaska." He pointed out that B corporations were held accountable by a third party through a "very rigorous assessment process." The benefit corporation status protected the certification. 10:22:04 AM Vice-Chair Bishop asked whether Mr. Trimble would have access to more capital if the bill was to become law. Mr. Trimble answered in the affirmative and added that because his company was a certified B corporation people opted to patronize his business, which "directly contributed" to his company's bottom-line. Co-Chair MacKinnon asked whether Mr. Trimble could provide a copy of the third-party rigorous assessment standards that he complied with. Mr. Trimble agreed to provide the requested information from B Lab. Co-Chair MacKinnon asked if Mr. Trimble served on the board since he had an owner interest in setting the standards. Mr. Trimble clarified that he was a member of the board of the national cooperative where he was a member owner. He answered that each of the 48 solar companies had one voting member that voted in the decisions of the cooperative. The cooperative had a board of directors, but each member had one equal vote within the cooperative. Co-Chair MacKinnon asked whether he served on the board or if he was the one voting member out of the 48. Mr. Trimble responded that he was one voting member. Co-Chair MacKinnon asked if Mr. Trimble could speak further about protecting the company through leadership changes. Mr. Trimble hypothesized that if he left the company and someone else took over who did not want to engage in the benefit activity the new owner could simply change the directive without protective statutes. He emphasized that the benefit was an integral part of the way he built and operated the company and without the state's benefit corporation status leadership change could reverse everything his company accomplished. 10:26:32 AM Co-Chair MacKinnon asked if Mr. Trimble's company competed with other corporations as an energy company. Mr. Trimble answered in the affirmative and stated that he competed with other solar companies that installed solar panels. Co- Chair MacKinnon asked if Mr. Trimble could practice as a B corporation under a C corporation and maintain the culture of his company. Mr. Trimble stated that there was nothing preventing his company from operating as a C corporation, but the issue of limited protection still existed. He detailed that his company had a publicly published scorecard through the assessment and certification of B Lab. He reiterated that he could establish a corporation like a benefit corporation in the state but lacking the protection and reporting requirements. He furthered that a corporation could claim they were providing public benefits without being required to show accountability. 10:29:57 AM Co-Chair MacKinnon asked if Mr. Trimble was aware of lawsuits in which shareholders were challenging a director. Mr. Trimble replied in the affirmative and elucidated that Ben and Jerry's Company was subject to a hostile takeover because they were operating like a benefit corporation, before benefit corporation legislation was adopted in Vermont. A group of shareholders got together and sued the company in an attempt to take it over, which lead to a lengthy and costly lawsuit that removed many of the co- founders of the company. Senator von Imhof asked if passage of the bill would provide the ability of benefit corporations to undercut prices and compete against profit-driven competitors in order to gain market share and in Artic Solar Venture's case, in order to get customers off oil and gas through renewable energy. She asked if the bill provided an unfair business advantage because increased volumes at a lower price could yield a higher net profit. Mr. Trimble answered in the negative. He pointed out that his company was branded as a premium solar provider and were not the lowest cost option as per a "strict" company philosophy. He stressed he did not see any scenario where the benefit status could provide an unfair competitive advantage. 10:33:01 AM Co-Chair MacKinnon CLOSED public testimony. Vice-Chair Bishop discussed FN2 (CED) from DCCED. He detailed that the cost for FY 19 was $22.4 thousand allocated to Corporations, Business and Professional Licensing. He read from page 2 of the fiscal note: To implement this legislation the corporation's database will need a systems change to create a new entity indicator, new types of officials, and a new reporting requirement. A regulations project will be necessary to adopt regulations for the newly created Chapter 60, Benefit Corporations, and to amend AS 10.06.633. If the bill passes the following expenses will be incurred: Services: $11.9 (legal costs to amend regulations, printing, and postage in the first year) $10.5 (information technology services for system change) Corporation filing fees are General Fund/Program Receipts fund source 1005 GF/Prgm (DGF). Corporation filing fees are set in regulation per AS 10 and 32, and revenue in excess of authorized budgeted expenses reverts to the State of Alaska general fund. Co-Chair MacKinnon wondered whether the state would initially use receipts from other corporations licensing to support the new licensure. Ms. Chambers stated that any cost incurred would be recouped in the same fiscal year from the benefit corporations. The division generated approximately $6 million to GF each year from corporate licensing. 10:36:47 AM Co-Chair MacKinnon asked what the filing fee for a benefit corporation was. Ms. Chambers stated that all filing fees for corporations were the same. She deemed that it was possible that if an existing C-corporation changed to a B- corporation, they would generate additional revenue due to a fee to reincorporate. She reported that the fee was $250, which $100 was a tax and the remainder were fees. In addition, other fees were charged for multiple required reporting. Reincorporating would generate additional revenue to the state. Co-Chair MacKinnon estimated that it would take approximately 90 new B corporations to break even or the division would utilize other corporate licensing funds. Ms. Chambers had not performed the calculation required to answer the question. She offered to provide an answer. HB 124 was HEARD and HELD in committee for further consideration.