HOUSE BILL NO. 49 "An Act relating to corporations, including benefit corporations, and other entities; and providing for an effective date." 2:18:44 PM REPRESENTATIVE PAUL SEATON, SPONSOR, read the sponsor statement for the bill: HB 49 expands the options for Alaskan entrepreneurs and investors by placing a new type of corporate entity, the Benefit Corporation, in Alaskan statute. A 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. 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. Corporate law generally requires a corporation to consider the financial impact to their shareholders as the top priority when making decisions. 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. Benefit corporations are formed voluntarily and have the same tax status of any other for-profit corporation. By electing in their articles of incorporation to become a benefit corporation, a business simply gains the flexibility to include mission and social impact in their business practices. Twenty-seven other states have passed benefit corporation legislation and many more have benefit bills in process. Over 1400 benefit corporations have incorporated in those states, 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. HB 49 also includes measures to ensure accountability and transparency. Just as a traditional corporation provides their shareholders with financial reports, a benefit corporation will additionally create and publish a biennial benefit report describing how the company has pursued the general public benefit. This report, which is held against a third party standard, allows shareholders, investors, and the public to confidently invest in benefit corporations that share their values. The goal of HB 49 is to give businesses more flexibility and control over their decisions and to provide investors with a clear social investment option. Representative Seaton relayed that the bill idea was brought to him by some of his constituents who were looking for ways for corporations to be accountable and to allow mission-based or social impact-based investments to advance. He had received feedback from Dianne Hughes, an owner from the Earth Friendly Coffee Company in Homer, and Gordon Blue, the director of Alaska Sustainable Fisheries Trust in Sitka. He pointed out letters in member packets from people around the state. He was available for questions. Co-Chair Thompson mentioned that there were agency folks available for questions. 2:24:34 PM Representative Gattis wanted to know what corporations were unable to do currently without passing new legislation. Representative Seaton mentioned that someone with a stock portfolio has probably noticed a plethora of stockholder lawsuits that have come about. He claimed they were typically a result of shareholders being disgruntled with the maximization of their returns. House Bill 49 allowed corporations to pursue a community or statewide goal as a general or specific benefit. All of the people investing in a B Corporation would be aware that the purpose of their investment was not only to make a profit but also to pursue a benefit goal. He furthered that often corporations were held back from doing what was socially responsible because of the potential of being sued by their stockholders. Representative Seaton continued that corporate law defines the primary purpose of a C Corporation; to earn money for its shareholders. In the case of a B Corporation, the corporation, the board of directors, and the investors could pursue mission or social impact investments without the fear of being sued. He spoke of the success of the B Corporation all around the country in terms of the pursuit of sustainability. A large corporate farm, as a C Corporation, might not be able to use sustainable farming practices if it meant lower profits for its shareholders. Shareholders might sue a corporation if they thought the farming method took away from their bottom line. Whereas, a B Corporation could select a general and specific public benefit. Representative Gattis had a difficult time thinking about a corporation that did not have profit as a primary goal. She understood the concept but was struggling with the idea. Representative Seaton responded that B Corporation's main mission could be to make a profit but could also have a goal of providing a general or public benefit. The B Corporation status benefited a corporation in certain other ways such as: maintaining a certain persona, being able to get action in the legislature, or providing an economic advantage to the corporation over others. Many of the stockholder lawsuits were based on certain kinds of things. 2:29:12 PM Co-Chair Thompson referred to an email he received from a supporter of the bill. The supporter suggested that, first, the bill provided legal protection to directors and officers to consider the interest of all stakeholders. Secondly, it created additional rights for stake shareholders to hold directors and officers accountable. Co-Chair Thompson believe that the two ideas conflicted with each other. Representative Seaton responded that the way in which people were held accountable was to select a public benefit and to measure themselves against third party standards. Directors and officers that did not pursue the corporation's general goal could be sued. However, a suit was not limited to the measure of financial benefit but also to the measure of meeting a public purpose. People in B Corporations to make a profit and to fulfil a public purpose. A benefit report had to be filed every two years. Otherwise, stockholders could claim that the director and board members were not fulfilling the goals of the corporation. Vice-Chair Saddler commented that it appeared that someone was trying to graft the efficiency and energy of the corporate capital model with the social idealism of public interest efforts. He had a difficult time completely understanding the idea because he believed corporations were in the business to make money. He asked about the tax implications for the State of Alaska. He wondered if benefit corporations would be exempt from or subject to paying taxes. Representative Seaton responded that there would be no tax implications. As a for-profit corporation a benefit corporation would be subject to the same taxes as a C Corporation without credits or benefits. 2:31:56 PM Vice-Chair Saddler asked Representative Seaton if he had any idea how many existing C Corporations would switch to a benefit corporation structure if the legislation passed. Representative Seaton responded that Nevada passed similar legislation in January 2014. Since that time 499 companies had either formed or converted to a benefit corporation. He relayed that it took a two-thirds vote of stock holders to convert. Conversion standards were outlined in the bill. Vice-Chair Saddler anticipated that more corporations would start out as a benefit corporation and make a change to a C Corporation later. He asked about the practical impact on the state economy with the passage of HB 49. Representative Seaton responded there was a significant amount of money invested in social responsible and sustainable companies that would not invest in corporations in Alaska if they were not sustainable. There was 6.6 billion in capital available, according to Pew Charitable Trusts, for the investment in social responsible corporations. Some of the money could be brought to Alaska, but he did not know an amount. Vice-Chair Saddler spoke of seeing some non-profits had taken advantage of public laws such as water rights reservations with an avowed purpose not to use the water but to prevent other development projects from using it. He was concerned whether a benefit corporation might use the tools available to a for-profit corporation to deprive other for-profit corporations from developing Alaska's resources. He would address additional questions in the future. Representative Seaton suggested that becoming a benefit corporation did not establish additional rights to state resources. However, it did allow a benefit corporation to define its investment parameters to include a social impact element as part of its general purpose. Vice-Chair Saddler emphasized wanting be sure of the answer to his question prior to creating a new type of corporation. 2:35:29 PM Representative Gara told a story of a law case regarding Buster Brown Shoe Company. They wanted to attract employees by providing daycare at their business. The corporation was challenged by a shareholder that claimed that it was not maximizing profits under standard corporate law. Buster Brown lost in court. He asked if owners and shareholders of the benefit corporations were given notice of a change. Representative Seaton responded positively. As a benefit corporation, a corporate structure, was established in law with reporting requirements. There was a much higher threshold to convert to a B Corporation because of having to have an agreement among stockholders. Representative Gara wondered if one of the motivations in establishing a benefit corporation was to avoid litigation. Representative Seaton believed it was one motivation. He elaborated that the purpose was to allow corporations to have a specific public benefit as well as making money for shareholders without fear of a lawsuit. 2:38:29 PM Representative Gara asked if the proposed legislation would allow a group to donate profits to, for example, a veterans group or a faith-based cause as a for-profit corporation and still adhere to its values. Representative Seaton confirmed that Representative Gara was correct. He relayed it was not a non-profit and therefore could make money but could have a specific or general public benefit. The examples given were well within the aspects of the legislation. Representative Munoz believed her question had been answered regarding the proposed requirements to gain the approval of the existing shareholders of a C Corporation. She recalled a two-third majority vote of a corporation's shareholders was necessary to institute a change to the status of a benefit corporation. She was wondering if percentages were defined in statute. Representative Seaton deferred to his staff. TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON, asked if Representative Munoz was referring to a specific statute. Representative Munoz referred to page 2, Section 2 of the bill where it outlined the minimum voting requirement to establish a benefit corporation. She felt the voting prerequisites were not laid out clearly in the bill. She mentioned Representative Seaton alluding to the necessity of a two-thirds vote. Ms. Hansen confirmed that there was a two-thirds vote requirement. She would provide the information to the committee. Representative Munoz wanted to make sure that the requirement was referenced in the bill. 2:42:03 PM Representative Wilson wanted to better understand why a new type of corporation would be necessary in order for a corporation to change its vision. She suggested conferring with shareholders but making changes within the already- established laws. Representative Seaton responded that without establishing a benefit corporation a C Corporation would be without protection from shareholder litigation having to do with pursuing anything other than profit. In forming a B Corporation a company would be able to pursue not only a profit but also an identified public benefit. All shareholders would be aware of what they were buying and what benefits were being invested in. The filing of a benefit report by all B Corporations would be required. Representative Wilson was referring to the process of communicating with shareholders to inform them as to the goals of the company outside of making a profit. She wondered if a C Corporation could operate in such a way as long as shareholders were aware of the terms. Representative Seaton explained that the reason benefit corporations were springing up was because of lawsuits resulting from shareholders not agreeing to new terms. He furthered that unless there was a corporate structure that specifically defined terms and a corporation was required to produce benefit reports then the people in a corporation were at risk. He believed that within a closely held operation, such as a business with only five people, a group might be able to reach an agreement. However, a corporation pursuing the $6.6 billion in available investment monies designated for sustainable corporations, would purchase stock rather than negotiating around a table. 2:45:53 PM Representative Wilson commented that they would not all be around a table, the majority would rule, 50 percent plus 1. She asked if a benefit corporation and B Corporation were the same thing. She asked if there was a difference. Representative Seaton indicated that a benefit corporation was statutorily designated. He volunteered that B Lab, similar to Pew Charitable Trust, provided a B Corporation certification which had no force in law. He provided other examples such as sustainable salmon labels, and certified LEED buildings that have no official recognition in state statute. He clarified that B Corporation was generally a shorthand for a benefit corporation. Representative Edgmon referred to page 2, lines 22 to 24, which allowed a corporation to amend its articles of incorporation to add an extra layer of indemnification. He clarified that when the board of directors purchased directors and officers insurance they would be protected from an errant lawsuit. Otherwise, as a corporation, it could spin off of subsidiaries, or form a limited liability corporation, or incorporate as a non-for profit. However, as a for-profit corporation it would allow for a provision such as day care like in Representative Gara's earlier example. He saw the bill being complicated in terms of many pages in length, but he felt the substance was one theme. Representative Seaton agreed that Representative Edgmon was correct in his interpretation. 2:48:58 PM Representative Pruitt relayed a scenario in which instead of being sued by a shareholder who felt that the corporation was not effectively running the business to make them money they sued the corporation because they felt the corporation was not investing enough capital into the public benefit. He suggested that at any point an investor of a benefit corporation could take issue with the amount being invested in the benefit. He asked if a B Corporation could be sued for a reason opposite of making a profit. Representative Seaton directed his attention to page 9, Article 5. He confirmed that claims against a corporation for failing to pursue or create a general public benefit could be filed but not for monetary damages. He used the example of a retail sports complex that was supposed to benefit little league but had not spent money on it as reflected on a benefit report. A shareholder could litigate against the corporation influencing the entity to invest money to benefit little league. 2:52:11 PM Representative Pruitt was uncertain that litigation would be avoided by establishing a new type of B Corporation in Alaska. He opined that litigation would still occur but on another footing. Representative Seaton responded that the difference was that someone could sue but not for a financial gain. Representative Pruitt argued that a shareholder could sue for financial gain even if they were not receiving money directly. They could claim that not enough money was being directed to an entity or organization of which they were a beneficiary. Representative Seaton indicated that Representative Pruitt was correct. He pointed out that it was totally voluntary for a B Corporation to have a general or specific benefit. The bill provided protection for a corporation that wanted to have a general or public benefit as part of its mission. There was nothing requiring a change to or the establishment of a B Corporation. He furthered it was totally up to the vote of the shareholders. Representative Pruitt understood that a two-thirds vote was required to establish a B Corporation. He wondered if the voting requirement was the same for a corporation wanting to convert from a B Corporation to a for-profit corporation. Representative Seaton responded positively. He conveyed that he had to leave the committee meeting to chair another but his staff would remain to answer any further questions. 2:56:36 PM Co-Chair Neuman pointed out the simplicity of the bill. He highlighted that the bill allowed a company to structure itself as a B Corporation and outlined that a specified percentage would be given to a public purpose or non- profit. A benefit corporation paid taxes on its total profits but was required to inform its stockholders what portion of the profits would go to a certain non-profit company upon the approval of the board. He wondered if he was accurate. Representative Seaton confirmed that Co-Chair Neuman was correct in his interpretation. Co-Chair Thompson stated that the committee would be hearing more complicated bills than HB 49 indicating the potential need to hold morning meetings. Ms. Hansen provided additional information. She reported that the bill allowed a corporation to define its purpose in the articles of incorporation so that the shareholders were informed. It was not only for the purpose of contributing to non-profits. There were many corporations that did things such as paying for volunteer hours to promote employee and community wellness. There were other options but corporations needed to articulate them in their benefit report and to their shareholders through their articles of incorporation. Co-Chair Neuman opined that further involving private industry was essential based on the state's fiscal situation. The legislation before the committee helped towards that end. He reiterated that shareholders expected to have a maximum profit and the bill established that part of the profit would go towards a non-profit. He used Ben and Jerry's as an example. He did not believe the ice cream company had ever been sued. Ms. Hansen indicated that Ben and Jerry's was the model for the legislation. She reported that they would have been a benefit corporation but they were currently a subsidy of Unilever. Ben and Jerry's pursued their status through a certification process. They did not have legal protection. Upon being taken over there was a requirement to seek the best financial offer but somehow the board was able to remain part of the decision making process to protect its social benefit. HB 49 would protect a corporation's mission and upon a change in ownership social benefit could be part of the consideration. Co-Chair Neuman talked about public radio seeking other funding sources other than through the state. The legislation would allow a corporation to help non-profit corporations. He reiterated that there were budgetary costs that the state could no longer support like public radio. He commended Representative Seaton for bringing HB 49 forward. 3:01:14 PM Vice-Chair Saddler asked if there was an exclusion for making money under a benefit corporation. He asked if a benefit corporation was a solution to a problem in Alaska. Ms. Hansen indicated that it was more prominent in states that had a greater number of publically owned corporations. She referred to Gordon Blue of Sitka. She explained that his company was currently a Limited Liability Corporation (LLC) which functioned somewhat to protect its mission of being community centered. The company needed to generate profit in order to do what it did but had a very specific community goal. The LLC functioned for Mr. Blue but in previous testimony he indicated it limited the company's profits quite a bit which in turn limited its ability to have funds to carry out its mission. She furthered that Mr. Blue was closely tied to a non-profit which was complicated with the LLC. He had expressed that the benefit corporation structure could potentially be much simpler way to achieve the same goal of protecting a community benefit. Vice-Chair Saddler asked about page 12, lines 8 to 11. He thought there would be public interest in seeing to what extent a benefit corporation was achieving its benefit mission. However, this section would limit the results of a benefit audit to someone with a connection to the benefit corporation. He wondered if a person with a benefit corporation was a shareholder. In other words, he asked if someone would have access to a benefit audit if they bought only one share of a stock. Ms. Hansen explained that the section clarified that a benefit corporation was not required to have its benefit report audited. However, there were third-party standards that the report was required to meet. The report had to include the third-party standards the company chose, explain why the company selected them, and clarify any financial connection between the third-party standards and the benefit corporation. There was no requirement that corporation select a particular third-party standard. It was dependent upon the focus of the corporation. She reported that Global Reporting Initiative was one of the third-party standards. She mentioned a sustainable farm standards, more appropriate for a business in agriculture. The core of the third-party standard was currently accepted best practice policy for employment and worker wellbeing and community support. 3:05:23 PM Vice-Chair Saddler commented that in the following section of the bill it indicated that a benefit corporation shall send a report to each shareholder. Therefore, a person purchasing only one share received a report. Ms. Hansen relayed that it was required that the benefit report be available to the public. If the company had a website the report had to be on the site. Co-Chair Thompson asked if there were any further questions. Representative Pruitt wondered what kind of entity would be interested in forming a benefit corporation. He specifically asked if non-profits had expressed an interest in moving from a non-profit structure to a B Corporation. Ms. Hansen responded that although it was possible that a non-profit would want to make the shift it would also require a shift in philosophy. An entity would no longer be a non-profit changing one of its main goals to making a profit. Mostly she had seen new corporations or current C Corporations that had nurtured certain social values. Creating a benefit corporation was an opportunity to protect what were already goals held by corporations. Representative Pruitt did not see the simplicity of the bill. He believed the legislation created a loophole for a non-profit corporation to make a profit, potentially competing against for-profit entities. If a corporation's goal was to have a benefit and was shielded from lawsuits for placing company profits into a benefit, the non-profit essentially and legally made money. Whereas, previously the corporation had to be a non-profit. He reiterated that there was more to the bill than the committee was aware of as well as potential ramifications. Co-Chair Thompson commented that a corporation would be responsible for paying taxes if it moved away from being a non-profit to becoming a for-profit corporation. Representative Pruitt responded that a benefit corporation could take all of its profits and place them into a public purpose benefit to avoid paying taxes. He believed that the taxes would offset profits. Ms. Hansen relayed that the bill did not allow for any special tax exemptions of any sort. The only way that the money going towards a benefit would be tax exempt was whatever was currently allowed under corporate law for a charitable donation. Representative Pruitt used the example of running a day care, which he claimed was the cost of doing business. He suggested that income monies [from a B Corporation] could be placed into a benefit [purpose] claiming it as a business expense, leaving the B Corporation without a tax liability. Therefore, he surmised the B Corporation would be competing with other for-profit businesses but would have the ability to write-off tax liability. He referred to a B Corporation as a for-profit non-profit. He stressed that he bill was not simply to donate money towards a certain benefit. Co-Chair Thompson commented that there were more complications in moving from a non-profit to a profit corporation. He mentioned assets and loans and speculated that it would not be advantageous for a non-profit to become a B Corporation. The entity would end up paying taxes one way or another. 3:09:44 PM Representative Gara said there were a million ways to avoid paying taxes. He provided examples such as increasing the compensation for executives or managers who would then pay taxes on their income. He saw the bill as an extension of freedom to decide about what type of corporations they want to form and for what purpose. The bill added a new option to choose their investment. Like any part of the marketplace a person had the freedom to go somewhere else if they wanted. The legislation did not take away taxes nor would it shrink businesses. Co-Chair Thompson commented that executives would be paying more money in taxes. He pointed out that the bill had a new fiscal note dated 3/13/15. He commented that the original note had a misprint and the new fiscal note reflected the amounts. HB 49 was HEARD and HELD in committee for further consideration. Co-Chair Thompson announced that the meeting scheduled on Friday, March 20, 2015 was canceled.