January 2010
by Nina Schuyler
When faced with a choice—to maximize shareholder profit or do an environmental or social good—a public company really has no choice. Its fiduciary duty is to make money—end of discussion.
But a group of California lawyers is working to change that: As they envision it, a California H-Corporation—a hybrid nonprofit/for-profit entity—would specify in its articles of incorporation that management and its board of directors can work for social or environmental objectives as well as pursue the company's financial goals.
"The H-Corp. creates a safe harbor for management and the board so environmental factors can be promoted, even at the expense of economic value," says Susan Mac Cormac, a partner at Morrison & Foerster. In addition, only H-Corp. shareholders would have the right to sue for breach of duty.
To offset management's expanded powers, an H-Corp. would have heightened disclosure requirements, such as informing shareholders of progress regarding environmental or social goals. "The required transparency will rein in the directors," says Derrick Britt, a partner at Palo Alto–based Doty Barlow Britt & Thomas.
Currently, if a California corporation wants to pursue social or environmental objectives, it must rely on the "business-judgment rule," which is a rebuttable presumption in favor of management and the board that they are acting in both the corporation's and the shareholders' best interest. Or a business can incorporate as a limited liability company, or LLC, which permits more leeway than a traditional C-Corp. in negotiating obligations between shareholders and management. But establishing an H-Corp. would make it even easier for a corporation to pursue interests other than profits.
Mac Cormac, Britt, R. Todd Johnson (a partner at Jones Day in Palo Alto), and seven other California-based lawyers have been designing the H-Corp. since 2008, working closely with a larger group of attorneys, professors, and businesses. State Sen. Mark Leno (D-San Francisco) says he's interested in introducing a bill—perhaps as early as next month—to get the group's prospective 280-page section added to the California Corporations Code.
With such a broad coalition, the H-Corp. team hopes that if the bill is enacted, it will help attract sustainable and clean-tech companies to California. And because becoming an H-Corp. would be optional, the team does not foresee much opposition to the bill. Governor Schwarzenegger did veto a similar bill from Senator Leno in 2008, but that bill was broader and included less accountability for directors.
If the H-Corp. bill passes, corporate lawyers will need to understand the new form to determine how best to advise their corporate clients about its use. The working groups plan to draft a practice guide for that purpose.
"The H-Corp. fundamentally changes the way corporations operate," says Mac Cormac. "Corporate lawyers are calling from around the country to find out what we are doing. My 20-year vision is that every state will have this form in [its] corporations code."
