File No. 449

House of Representatives, April 16, 2012

The Committee on Commerce reported through REP. BERGER of the 73rd Dist., Chairperson of the Committee on the part of the House, that the substitute bill ought to pass.

AN ACT CONCERNING SOCIAL ENTERPRISE BUSINESSES.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective January 1, 2013) As used in this section and sections 2 to 9, inclusive, of this act:

(1) "Social enterprise business" means a corporation, as defined in section 33-602 of the general statutes, provided such corporation has the primary purpose of creating a social benefit;

(2) "Social benefit" means a material positive impact on society or the environment through one or more specific public benefits;

(3) "Specific public benefit" means:

(A) Providing low income or underserved individuals or communities with beneficial products or services;

(B) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;

(C) Preserving or improving the environment;

(D) Improving human health;

(E) Promoting the arts or sciences or the advancement of knowledge;

(F) Increasing the flow of capital to entities with a social benefit purpose;

(G) Accomplishing any other identifiable benefit for society or the environment; or

(H) Significantly furthering the accomplishment of one or more charitable, cultural, scientific, literary or educational purposes within the meaning of section 170(c)(2)(B) of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as amended from time to time;

(4) "Subsidiary" means an entity that the social enterprise business owns beneficially or of record fifty per cent or more of the equity interests;

(5) "Independent", for purposes of third parties in relationship to a social enterprise business, means having no material relationship with a social enterprise business or any of its subsidiaries, other than the relationship of serving as the director or officer of a social enterprise business, either directly or as an owner or manager of an entity that has a material relationship with the social enterprise business or any of its subsidiaries;

(6) "Material relationship" means a relationship between a person and a social enterprise business or any of its subsidiaries in which:

(A) The person is, or has been within the last three years, an employee of the social enterprise business or any of its subsidiaries;

(B) An immediate family member of the person is, or has been within the last three years, an executive officer of the social enterprise business or any of its subsidiaries; or

(C) The person or an entity of which the person is a manager or in which the person owns beneficially or of record five per cent or more of the equity interests owns beneficially or of record five per cent or more of the shares of the social enterprise business;

(7) "Third-party standard" means a recognized standard for defining, reporting and assessing corporate social and environmental performance that is: (A) Developed by an organization that is independent of the social enterprise business; and (B) easily understood because the following information concerning the standard is publicly available: (i) The factors considered when measuring the performance of a business; (ii) the relative weightings of those factors; and (iii) the identity of the persons that develop and control changes to the standard and the process by which those changes are made; and

(8) "Benefit enforcement proceeding" means a claim or action against a director or officer for:

(A) Failure to pursue the public social benefit purpose of the social enterprise business or any specific public benefit purpose set forth in its articles of incorporation; or

(B) Violation of a duty or standard of conduct under sections 1 to 9, inclusive, of this act.

Sec. 2. (NEW) (Effective January 1, 2013) (a) Any corporation organized pursuant to sections 33-635, 33-636, 33-637 and 33-639 of the general statutes may become a social enterprise business, as defined in section 1 of this act, by (1) amending its articles of incorporation and bylaws, as appropriate, to add a statement of social benefit; or (2) being a party to a plan of merger, adopted pursuant to chapter 601 of the general statutes, or share exchange in which the surviving corporation will be a social enterprise business.

(b) Such amendment or plan of merger shall be adopted and shall become effective in accordance with sections 33-795 to 33-803, inclusive, of the general statutes, provided:

(1) The notice of the shareholders' meeting to approve an amendment or plan of merger made pursuant to this section shall include a statement from the board of directors regarding (A) the reason why the board is proposing the amendment or plan of merger; and (B) the anticipated effect on shareholders of becoming a social enterprise business; and

(2) The amendment or plan of merger shall be approved by the higher of (A) the vote required by the articles of incorporation; or (B) two-thirds of the votes entitled to be cast by the outstanding shares of the corporation, provided if any class of shares is entitled to vote as a group, approval shall also require the affirmative vote of the holders of at least two-thirds of the votes entitled to be cast by the outstanding shares of each voting group.

(c) Any shareholder not voting in favor of an amendment or plan of merger pursuant to this section may require the social enterprise business to purchase for cash at their fair market value the shares owned by such shareholder.

Sec. 3. (NEW) (Effective January 1, 2013) (a) The articles of incorporation of a social enterprise business, as defined in section 1 of this act, may identify one or more specific public benefits in addition to the social enterprise business's purposes under section 33-645 of the general statutes. The adoption of a specific public benefit purpose under this section shall not limit the obligation of a social enterprise business to create a social benefit.

(b) A social enterprise business may amend its articles of incorporation to add, amend or delete a specific public benefit, provided there shall always be at least one specific public benefit. Any such amendment shall be adopted and become effective in accordance with sections 33-795 to 33-803, inclusive, of the general statutes.

(c) No social enterprise business shall have as a specific public benefit a political or legislative purpose, as defined in Section 170(c)(2)(D) of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as amended from time to time.

(d) A social enterprise business shall at all times maintain and enforce an ethical code of conduct and conflict of interest policy consistent with the highest and best business practices in the industry in which it conducts its business.

Sec. 4. (NEW) (Effective January 1, 2013) A social enterprise business shall distribute at least twenty per cent of any distributed profits to a charitable organization that serves the business's specific public benefit.

Sec. 5. (NEW) (Effective January 1, 2013) (a) Each director of a social enterprise business, as defined in section 1 of this act, in discharging his or her duties as a director:

(1) Shall, in determining what the director reasonably believes to be in the best interests of the social enterprise business, consider the effects of any action or inaction upon the:

(A) Shareholders of the social enterprise business;

(B) Employees and workforce of the social enterprise business and its subsidiaries and suppliers;

(C) Interests of customers to the extent they are beneficiaries of the social benefit or specific public benefit purposes of the social enterprise business;

(D) Community and social considerations, including those of any community in which offices or facilities of the social enterprise business or its subsidiaries or suppliers are located;

(E) Local and global environment; and

(F) Long-term and short-term interests of the social enterprise business, including the possibility that those interests may be best served by the continued independence of the social enterprise business;

(2) Shall not be required to give priority to the interests of any particular person or group referred to in this subsection over the interests of any other person or group unless the social enterprise business has stated its intention to give priority to interests related to its specific public benefit purpose in its articles of incorporation; and

(3) Shall not be subject to a different or higher standard of care when an action or inaction might affect control of the social enterprise business.

(b) The consideration of interests and factors as described in subsection (a) of this section shall not constitute a violation of section 33-756 of the general statutes.

(c) A director shall not be liable if a social enterprise business fails to create a social benefit or specific public benefit.

(d) A director shall not be liable to the social enterprise business or any person entitled to bring a benefit enforcement proceeding for any action or failure to take action in his or her official capacity if such director performed the duties of his or her office in compliance with this section and section 33-756 of the general statutes.

(e) A director of a social enterprise business shall have a fiduciary duty only to those persons entitled to bring a benefit enforcement proceeding against the social enterprise business. A director of a social enterprise business shall not have any fiduciary duty to a person who is a beneficiary of a social benefit or specific public benefit purpose of the social enterprise business arising only from the person's status as a beneficiary.

Sec. 6. (NEW) (Effective January 1, 2013) (a) An officer of a social enterprise business shall consider the interests and factors described in subsection (a) of section 5 of this act in the manner provided in said subsection (a) when:

(1) The officer has discretion in how to act or not act with respect to a matter; and

(2) It reasonably appears to the officer that the matter may have a material effect on:

(A) The creation of a social benefit or specific public benefit by the social enterprise business; or

(B) Any of the interests or factors referred to in subsection (a) of section 5 of this act.

(b) The consideration of interests and factors in the manner described in subsection (a) of this section shall not constitute a violation of the fiduciary duty of an officer to the social enterprise business.

(c) An officer shall not be liable to the social enterprise business or any person entitled to bring a benefit enforcement proceeding for any action or failure to take action in his or her official capacity if the officer performed the duties of the position in compliance with this section and sections 33-763 and 33-764 of the general statutes.

(d) An officer of a social enterprise business shall have no liability for actions taken that the officer believes, in his or her good faith business judgment, are consistent with (1) the general public benefit or any specific public benefit specified in the certificate of incorporation or bylaws or otherwise adopted by the board of directors, and (2) the requirements of any third-party standard in effect for the social enterprise business.

(e) An officer of a social enterprise business shall have a fiduciary duty only to those persons entitled to bring a benefit enforcement proceeding against the social enterprise business. An officer of a social enterprise business shall not have any fiduciary duty to a person that is a beneficiary of the social benefit or specific public benefit purposes of the social enterprise business arising only from the person's status as a beneficiary.

Sec. 7. (NEW) (Effective January 1, 2013) A social enterprise business, as defined in section 1 of this act, may designate a social enterprise officer who shall have the authority and shall perform the duties in the management of the social enterprise business relating to the purpose of the corporation to create public benefit as set forth in the bylaws, or to the extent not inconsistent with the bylaws, prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the duties of the office.

Sec. 8. (NEW) (Effective January 1, 2013) (a) The duties of directors and officers of a social enterprise business, as defined in section 1 of this act, and the social benefit and specific public benefit purposes of a social enterprise business may be enforced only in a benefit enforcement proceeding and no person may bring such an action or claim against a social enterprise business or its directors or officers except as provided in this section.

(b) A benefit enforcement proceeding may be commenced or maintained only by:

(1) A shareholder who would otherwise be entitled to commence or maintain a proceeding in the right of the social enterprise business on any basis;

(2) A director of the social enterprise business;

(3) A person or group of persons who owns beneficially or of record ten per cent or more of the equity interests in an entity of which the social enterprise business is a subsidiary; or

(4) Such other persons or entities as may be specified in the articles of incorporation of the social enterprise business.

Sec. 9. (NEW) (Effective January 1, 2013) (a) A social enterprise business shall deliver to each shareholder, in a format approved by the directors, an annual benefit report, which shall include:

(1) A statement of the specific goals or outcomes identified by the social enterprise business for creating social benefit and any specific public benefit for the period of the benefit report;

(2) A description of the actions taken by the social enterprise business to attain the identified goals or outcomes and the extent to which the goals or outcomes were attained;

(3) A description of any circumstances that hindered the attainment of the identified goals or outcomes and the creation of social benefit or any specific public benefit;

(4) Specific actions the social enterprise business will take to improve its social and environmental performance and attain the goals or outcomes identified for creating social benefit and any specific public benefit;

(5) An assessment of the social and environmental performance of the social enterprise business prepared in accordance with a third-party standard that has been applied consistently with prior benefit reports or accompanied by an explanation of the reasons for any inconsistent application;

(6) A statement of specific goals or outcomes identified by the social enterprise business and approved by the shareholders for creating social benefit and any specific public benefit for the period of the next benefit report;

(7) The name of each social enterprise director and the social enterprise officer, if any, and the address to which correspondence to each of them may be directed;

(8) A budget and balance sheet, including the accounting method used;

(9) A copy of the compensation plan;

(10) Disclosure of all financial investors;

(11) The compensation paid by the social enterprise business during the year to each director and a list of the one per cent most highly compensated employees;

(12) Code of conduct and conflict of interest policies; and

(13) The name of each person that owns beneficially or of record five per cent or more of the shares of the social enterprise business.

(b) A social enterprise business shall annually deliver and publish via its web site the benefit report to each shareholder within one hundred twenty days of the end of the fiscal year of the social enterprise business or at the same time that the social enterprise business delivers any other annual report to its shareholders.

(c) Concurrently with the delivery of the benefit report to shareholders as provided in subsection (b) of this section, the social enterprise business shall deliver a copy of the benefit report to the office of the Secretary of the State for filing.

(d) Every five years, the social enterprise business shall obtain an independent third party to review the benefit report and conduct an assessment of the social enterprise business's social benefit and specific public benefit to ensure compliance and consistency with the articles of incorporation.

Sec. 10. (NEW) (Effective January 1, 2013) Notwithstanding the provisions of sections 33-880 to 33-900, inclusive, of the general statutes, the assets of a social enterprise business that dissolves pursuant to chapter 601 of the general statutes shall be applied and distributed as follows: (1) All liabilities and other obligations of the social enterprise business shall be paid, satisfied and discharged, or adequate provision shall be made therefor, and (2) assets received and held by the corporation shall be transferred or conveyed to one or more social enterprise businesses or charitable organizations with a similar social benefit as the social enterprise business being dissolved.

Statement of Legislative Commissioners:

In section 1(1), "a for-profit organization formed in accordance with sections 33-635, 33-636, 33-637 and 33-639" was replaced with "a corporation, as defined in section 33-602" for statutory consistency; in section 1(4), "person" was changed to "social enterprise business" for internal consistency; in section 1(5) "for purposes of third parties in relationship to the social enterprise business," was added for clarity; section 1(8) was moved from section 8 for internal consistency; section 3(c) was deleted for internal and statutory consistency; and in section 10, a reference to section 33-1176 of the general statutes was changed to a reference to sections 33-880 to 33-900, inclusive, of the general statutes and a reference to chapter 602 was changed to a reference to chapter 601 for accuracy.

The following Fiscal Impact Statement and Bill Analysis are prepared for the benefit of the members of the General Assembly, solely for purposes of information, summarization and explanation and do not represent the intent of the General Assembly or either chamber thereof for any purpose. In general, fiscal impacts are based upon a variety of informational sources, including the analyst's professional knowledge. Whenever applicable, agency data is consulted as part of the analysis, however final products do not necessarily reflect an assessment from any specific department.

OFA Fiscal Note

State Impact:

Note: GF=General Fund

Municipal Impact: None

Explanation

The bill establishes Social Business Enterprises as a type of for-profit corporation. There is a cost to the Secretary of the State estimated to be $62,000 associated with programming a new business entity into the CONCORD commercial records database.

The bill is expected to have a neutral impact on revenue, as it is anticipated that most social business enterprises created will be reclassified registered businesses.

The Out Years

The bill presents a one-time cost in FY 13 and has no impact on the out years.

OLR Bill Analysis

sHB 5466

AN ACT CONCERNING SOCIAL ENTERPRISE BUSINESSES

SUMMARY:

This bill establishes a social enterprise business (SEB) as a type of for profit corporation. SEBs are formed primarily to create a social benefit, one that has a material positive impact on society or the environment. Under the bill, they must do so by engaging in one or more specified activities ranging from providing benefits to low-income people to furthering charitable, cultural, scientific, literary, or educational purposes (i.e., “specific public benefits”). SEBs must also distribute at least 20% of their distributed profits to charitable organizations serving the same specific public purpose.

The bill specifies how businesses formed and operating under the business corporation laws can become SEBs. A business can become a SEB by (1) amending its articles of incorporation to specify a specific public benefit as its primary purpose or (2) merging with another business that will become a SEB. Both actions must be approved by the shareholders as the bill specifies and comply with the statutes governing articles of incorporation and business mergers.

The bill specifies the duties and obligations of SEB directors and officers and protects them from liability for decisions made in specified contexts. It limits their fiduciary duty to shareholders, the SEB's directors, and certain owners.

These parties are the only ones who may bring a “benefit enforcement proceeding” against the directors and officers to fulfill their respective duties and against the SEB to fulfill its social benefit and specified public benefit. They can use the proceedings to bring a claim or action against a director or officer for failing to pursue a social benefit specified in the SEB's articles of incorporation or violating the bill's standards of conduct.

The SEB must report annually to its shareholders on the extent to which it achieved its social benefit goals and have an independent third party review its performance every five years.

Lastly, the bill specifies how the SEB must distribute its assets if it dissolves.

EFFECTIVE DATE: January 1, 2013

§§ 1 & 4 — CRITERIA

The bill allows corporations formed under the statutes to establish themselves as SEBs and specifies the criteria for doing so. To become a SEB, the corporation must adopt as its primary purpose to create a material positive impact on society or the environment through one or more of the following specific public benefits:

1. provide beneficial products and services to low-income people and underserved individuals;

2. promote economic opportunities for people and communities beyond creating jobs in everyday business;

3. preserve or improve the environment;

4. improve human health;

5. promote the arts and sciences or advances in knowledge;

6. increase capital flows to entities serving a social purpose;

7. benefit society or the environment in other identifiable ways; or

8. significantly further one or more charitable, cultural, scientific, literary, or educational purposes, as defined in the federal Internal Revenue Code (IRC).

To meet the last criterion, the corporation must operate exclusively for religious, charitable, scientific, literary, or educational purposes; foster national or international amateur sports competition; or prevent cruelty to children and animals (IRC, § 170 (c)(2)(B)).

Besides creating a specific public benefit, the corporation must distribute at least 20% of any distributed profits to a charitable organization serving the same specific public benefit.

§§ 2 & 3 — PROCEDURE FOR BECOMING A SEB

Method

Under the bill, a corporation can establish itself as a SEB or become part of another corporation that will.

A corporation can establish itself as a SEB by specifying in its articles of incorporation at least one specific public benefit it intends to create. The number of benefits does not limit its obligation to create one. But it cannot adopt a specific public benefit that requires influencing legislation or participating or intervening in campaigns for public office, as specified in IRC, § 170 (c)(2)(D).

Alternatively, the corporation can become a SEB by merging or exchanging shares with another corporation that will become a SEB.

Procedure

Regardless of the method the corporation chooses, it must comply with the statutes for amending articles of incorporation or effecting a merger. Those statutes require shareholders to be notified about the meeting where they must vote on the amendment or merger plan. Under the bill, the corporation's board of directors must state in the notice why it is proposing the action and how it will affect the shareholders.

The action is approved based on the higher of two outcomes: (1) the number of votes required by the corporation's bylaws to approve the action or (2) two-thirds of the votes cast by the outstanding shares. If the bylaws allow a class of shares to vote as a group, then a two-thirds vote of each class is required. If the shareholders approve the action, a shareholder who voted against it may require the corporation to purchase his or her shares for cash at their fair market value.

The corporation can subsequently add, amend, or delete specific public benefits from its articles of incorporation, but the articles must specify at least one such benefit if the corporation intends to remain a SEB. These changes must also be made according to the statutory procedure for changing articles of incorporation.

Maintaining and Enforcing a Code of Conduct and Conflict of Interest Policy

Besides requiring adopting a specific public benefit in its articles of incorporation, the corporation must maintain and enforce an ethical code of conduct and a conflict of interest policy consistent with the highest and best practices for its industry.

§ 5 — SEB DIRECTORS

Fiduciary Duty

Under the bill, SEB directors have a fiduciary duty only to the people entitled to bring a benefit enforcement action against the SEB (see below). They have no such duty with respect to the people who directly benefit from the SEB's specific public benefits.

Decision Making

The bill specifies the factors SEB directors must consider when determining if an action serves the SEB's best interest. A director must consider how an action or inaction affects:

1. the SEB's shareholders, employees, workforce, subsidiaries, and suppliers;

2. the interests of customers who benefit from the SEB's specific social benefits;

3. community and social considerations, including those of any community where the SEB's offices or facilities or those of its subsidiaries or suppliers are located;

4. local and global environment; and

5. the SEB's short- and long-term interests, including whether the SEB's continued independence would best serve them.

Protections

Under the bill, directors who consider these interests and factors do not violate the standards of good conduct the statutes impose on corporate directors.

The bill also protects directors from liability for specified actions. Directors are not liable if the SEB fails to create a social benefit. Nor are they liable to anyone entitled to bring a benefit enforcement action for acting or failing to act while performing their duties if they did so in compliance with the bill and statutory standards for good conduct.

Lastly, the bill prohibits the SEB from imposing specific conditions or requirements on its directors. The SEB cannot require them to place the interests of any person or group above those of any other person or group unless doing so serves any of the SEB's specific public benefits. Nor can the SEB subject the directors to a different or higher standard of care regarding actions or inactions affecting control of the SEB.

§§ 6 & 7 — SEB OFFICERS

Fiduciary Duty

Like the directors, the SEB's officers have a fiduciary duty only to the people entitled to bring a benefit enforcement proceeding against the SEB. That duty does not extend to people who benefit from any of the SEB's specific public benefits.

Decision Making

SEB officers must consider the same interests and factors that directors must consider when determining if an action or inaction serves the SEB's best interest. An officer must do so with respect to issues over which he or she has discretion. The officer must also consider the interests and factors when it reasonably appears to him or her that a matter could materially affects them or the creation of a social benefit. In these instances, the officer does not violate his or her fiduciary duty to the SEB.

Protections from Liability

The bill protects the officers from liability for specified actions. They are not liable for any action taken in good faith business judgment if they believe it is consistent with:

1. any of the SEB's specific public benefits, as specified in the bylaws or articles of incorporation, and

2. any recognized standard for defining, reporting, or assessing a SEB's corporate and environmental performance (i.e., third party standard).

The standards must have been developed by an organization independent of the SEB. Further, the standards must be easily understood because the public can obtain the factors needed to measure the SEBs performance, their relative weights, and the identity of the people who develop and control changes to the standards and the process for changing them.

The bill also protects officers from liability from a benefit enforcement proceeding for acting or failing to act while performing their duties in compliance with the SEB's bylaws, as the law requires.

Social Enterprise Officer

The bill allows SEBs to designate social enterprise officers to perform those duties related to the SEB's public benefit, as specified in the bylaws or prescribed by the board of directors or a supervising officer. But any prescribed duties must be consistent with the bylaws.

§ 8 — BENEFIT ENFORCEMENT PROCEEDING

The bill allows specified groups to bring a benefit enforcement proceeding against the (1) directors and officers to fulfill their respective duties and (2) SEB to fulfill its social benefit and specified public benefit. The proceeding can be brought only by:

1. shareholders otherwise entitled to start or maintain a proceeding on any basis with regard to the right of the SEB;

2. SEB directors;

3. people who own beneficially or of record at least 10% equity interest in an entity of which the SEB is a subsidiary; or

4. other people or entities the SEB's articles of incorporation specify.

§ 9 — ANNUAL BENEFIT REPORT

Content

SEBs must submit annual benefit reports to shareholders in a format approved by their boards of directors. A report must describe the SEB's goals or outcomes for creating social benefits or any specific public benefit. It must:

1. specify the goals or outcomes;

2. describe the actions the SEB took to achieve them and the extent to which it succeeded;

3. describe any obstacles that prevented the SEB from attaining the goals or outcomes or creating the social benefit or any specific public benefit; and

4. specify the shareholder-approved goals or outcomes for the next report period.

The report must (1) assess the SEB's social and environmental performance based on third-party standards and (2) specify how it will improve its performance and attain the goals and outcomes for creating social benefits. The third-party standards must be the same ones that were used to assess social and environmental performance in other reports. If the current report does not use these standards to assess this performance, it must explain why.

The report must provide information on the SEB's finances, including a copy of the SEB's compensation plan, budget, and balance sheet. It must also identify the accounting method used to prepare these documents and list:

1. the 1% of the SEB's most highly compensated employees,

2. the SEB's financial investors, and

3. each person who owns beneficially or of record at least 5% of the SEB's shares.

Lastly, the report must provide a copy of the SEB's code of conduct and conflict of interest policies and list each director and officer, his or her mailing address, and, with respect to the directors, how much each was compensated during the year.

Distribution

The SEB must annually deliver the benefit report to each shareholder within one 120 days after the SEB's fiscal year ends or at the same time it delivers any other annual report to its shareholders. It must also publish the report on its website. When it delivers and publishes the report, the SEB must also deliver a copy to the secretary of the state.

Five-Year Independent Third Party Reviews

Every five years, the SEB must obtain an independent third party to review its annual benefit report and assess its social benefit and specific public benefit for consistency with the SEB's articles of incorporation.

§ 10 — DISSOLUTION

The bill specifies how a SEB must apply and distribute its assets if it dissolves. The SEB must pay, satisfy, and discharge all of its liabilities and other obligations or adequately provide for this to happen. It must also transfer or convey the assets it received or held to one or more SEBs or charitable organizations with a similar social benefit.

BACKGROUND

Related Bill

sSB 403, which the Commerce Committee reported favorably on March 27, allows individuals and institutions to form “low-profit limited liability companies,” for profit businesses formed to attract private investment and philanthropic capital to provide social benefits. The bill specifies the criteria a limited liability company (LLC) must meet to qualify as a low-profit LLC and makes conforming changes in the LLC statutes.

COMMITTEE ACTION

Commerce Committee

Joint Favorable Substitute