By Jeff Hacker, Hacker Law Group

California became the first state in the country to authorize Flexible Purpose Corporations (FPC). Starting after the first of this year, California permits this new corporate form permitting a corporation to integrate the for profit hallmark of a traditional corporation with a special purpose mission analogous to a charitable purpose. SB 201, also known as the Corporate Flexibility Act of 2011, permits companies to have flexibility to combine profitability with a greater sense of social purpose.

A traditional for–profit corporation requires directors to have a fiduciary duty to the corporation’s shareholders. This way profits can be maximized and the long term value of the company can be enhanced. In a for-profit corporation societal, charitable, or environmental benefits could be pursued so long as this coincided with or was incidental to benefiting a shareholder’s financial return on the investment in the company. This model created risk to for officers and directors of a for-profit corporation if the actions pursed by the officers and/or directors were not aligned with the corporation’s purpose. Notwithstanding the business judgment rule (this rule inoculates good faith corporate decisions in pursuit of the corporation’s interest(s)); corporate officers or directors could face liability if there is no rational basis for corporate decisions in light of the corporation’s purpose.

The new law allows a FPC to engage in one or the more of the following:

1. One or more charitable or public purposes that a traditional nonprofit corporation engages in.
2. The purpose of promoting positive effects of the FPC’s activities upon any of the FPC’s suppliers’ employees, customers, and creditors; the community and society; or the environment.

The articles of incorporation and share certificates for a FPC must include the “special purpose” and must declare the company is taking the FPC form. The articles may specify the duration of the FPC’s existence and can restrict the business of the FPC provided those limitations are consistent with the stated special purpose.

Existing corporations can merge or convert from an existing traditional corporation into a FPC. However, the conversion requires approval of a super-majority, 2/3rds, vote of the shareholders except in a limited circumstance.

Directors of a FPC may consider the prospects of the FPC, the best interest of the FPC and its shareholders, and the FPC’s specified purpose(s). Directors who perform their duties consistent with the FPC’s purpose and the new law will not be liable for any alleged breach of fiduciary duties.

A FPC may be a suitable business from for shareholders to designate a particular charity or other cause to benefit from the FPC’s activities.

For more information please contact Jeff Hacker at Hacker Law Group. You may reach Mr. Hacker at 661-259-6800 or Jeffh@hackerlawgroup.com, and you can always find out more by going to www.HackerLawGroup.com.