First Regular Session Sixty-eighth General Assembly STATE OF COLORADO INTRODUCED LLS NO. 11-0254.01 Bart Miller SENATE BILL 11-005 SENATE SPONSORSHIP Bacon, HOUSE SPONSORSHIP Massey, Senate Committees House Committees Business, Labor and Technology A BILL FOR AN ACT Concerning benefit corporations. Bill Summary (Note: This summary applies to this bill as introduced and does not reflect any amendments that may be subsequently adopted. If this bill passes third reading in the house of introduction, a bill summary that applies to the reengrossed version of this bill will be available at http://www.leg.state.co.us/billsummaries.) Section 1 of the bill enacts the "Colorado Benefit Corporation Act". The bill establishes general requirements for corporations to elect to be considered benefit corporations under Colorado law, including: The election and termination of benefit status; The promotion of public benefit as a purpose of the corporation; Standards of accountability for the conduct of directors and officers of a benefit corporation; Designation of benefit directors; Rights of action in benefit proceedings; and The filing and public availability of annual benefit reports and other information with the secretary of state. Be it enacted by the General Assembly of the State of Colorado: SECTION 1. Title 7, Colorado Revised Statutes, is amended BY THE ADDITION OF A NEW ARTICLE to read: ARTICLE 138 Benefit Corporations PART 1 GENERAL PROVISIONS 7-138-101. Short title. This article shall be known and may be cited as the "Colorado Benefit Corporation Act". 7-138-102. Definitions. As used in this article, unless the context otherwise requires: (1) "Benefit corporation" means a corporation that has elected to become subject to this article and the status of which, as a benefit corporation, has not been terminated under section 7-138-108. (2) "Benefit director" means the director designated under section 7-138-302. (3) "Benefit enforcement proceeding" means any claim or action brought directly by a benefit corporation, or derivatively on behalf of a benefit corporation, against a director or officer for: (a) Failure to pursue the general public benefit purpose of the benefit corporation or any specific public benefit purpose set forth in its articles; or (b) Violation of a duty or standard of conduct under this article. (4) "General public benefit" means a material, positive impact on society and the environment, taken as a whole, as measured by a third-party standard, from the business and operations of a benefit corporation. (5) (a) "Independent" means having no material relationship with a benefit corporation or subsidiary of the benefit corporation. (b) For the purpose of this definition, a percentage of ownership in an entity is calculated as if all outstanding rights to acquire equity interests in the entity had been exercised. A material relationship between a person and a benefit corporation or any of its subsidiaries will be conclusively presumed to exist if any of the following apply: (I) The person is, or has been within the last three years, an employee of the benefit corporation or of a subsidiary of the benefit corporation; (II) An immediate family member of the person is, or has been within the last three years, an executive officer of the benefit corporation or its subsidiary; or (III) There is beneficial or record ownership of five percent or more of the outstanding shares of the benefit corporation by: (A) The person; or (B) An entity of which the person is a director, officer, or manager or of which the person has a beneficial or record ownership of five percent or more of the outstanding equity interests. (6) "Minimum status vote" means, in addition to any other approval or vote required by this title, the articles of incorporation, or a bylaw adopted by the shareholders, the approval of a corporate action by an affirmative vote of at least two-thirds of the shareholders of each class or series entitled to cast votes on the action. (7) "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 the environment; (d) Improving human health; (e) Promoting the arts, sciences, or the advancement of knowledge; (f) Increasing the flow of capital to entities with a public benefit purpose; and (g) Conferring any other particular benefit on society or the environment. (8) "Subsidiary" means, in relation to a person, an entity in which the person owns, beneficially or of record, fifty percent or more of the outstanding equity interests. For the purpose of this definition, a percentage of ownership in an entity is calculated as if all outstanding rights to acquire equity interests in the entity had been exercised. (9) "Third-party standard" means a standard for defining, reporting, and assessing corporate social and environmental performance that: (a) Is developed by a person that is independent of the benefit corporation; and (b) Is transparent because the following information about the standard is publicly available: (I) The factors considered when measuring the performance of a business; (II) The relative weighting 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. 7-138-103. Reservation of power to amend or repeal. The general assembly has the power to amend or repeal all or part of this article at any time, and all domestic and foreign corporations subject to this article are governed by the amendment or repeal. 7-138-104. Application and effect of article. (1) This article applies to all benefit corporations. (2) The existence of a provision of this article does not of itself create an implication that a contrary or different rule of law is applicable to a corporation that is not a benefit corporation. This article does not affect a statute or rule of law that applies to a corporation that is not a benefit corporation. (3) This article supersedes any conflicting provision of the articles of incorporation or bylaws of a benefit corporation. 7-138-105. Application of "Colorado Business Corporation Act". (1) The "Colorado Business Corporation Act", articles 101 to 117 of this title, applies to all benefit corporations, except that this article supersedes any conflicting provision of the "Colorado Business Corporation Act". (2) The definitions in sections 7-90-102 and 7-101-401 apply to this article. 7-138-106. Formation of benefit corporation. A benefit corporation must be formed in accordance with the "Colorado Business Corporation Act", articles 101 to 117 of this title, but its articles of incorporation must also state that it is a benefit corporation. 7-138-107. Election of status. (1) An existing business corporation may become a benefit corporation under this article by amending its articles of incorporation to include, in addition to the requirements of sections 7-110-101 to 7-110-109, a statement that the corporation is a benefit corporation. In order to be effective, the amendment must be adopted by the minimum status vote. (2) This section applies to a merger or share exchange if both of the following apply: (a) A corporation that is not a benefit corporation is: (I) A party to the merger; or (II) The exchanging corporation in the share exchange; and (b) The surviving corporation in the merger or share exchange is a benefit corporation. (3) To be effective, a plan of merger or share exchange subject to this section must be adopted by the minimum status vote. 7-138-108. Termination of status. (1) A benefit corporation may terminate its status as such and cease to be subject to this article by amending its articles of incorporation to delete the provision required by section 7-138-106. To be effective, the amendment must be adopted by the minimum status vote. (2) If a plan of merger, conversion, or share exchange providing for the merger or conversion of a benefit corporation into, or the exchange of a benefit corporation's shares for, shares or owner's interests in an entity that is not a benefit corporation would have the effect of terminating the status of the corporation as a benefit corporation, in order to be effective, the plan of merger conversion or share exchange must be adopted by the minimum status vote. PART 2 CORPORATE PURPOSE 7-138-201. Corporate purpose. (1) A benefit corporation must have the purpose of promoting general public benefit, in addition to the purposes described in section 7-103-101. (2) The articles of incorporation of a benefit corporation may identify one or more specific public benefits that the benefit corporation intends to promote in addition to its purpose to promote general public benefit pursuant to subsection (1) of this section. The identification of a specific public benefit under this subsection (2) does not limit the obligation of a benefit corporation under subsection (1) of this section. (3) The promotion of general and specific public benefits under subsections (1) and (2) of this section is in the best interests of the benefit corporation. (4) A benefit corporation may amend its articles to add, modify, or delete the identification of a specific public benefit that the benefit corporation intends to promote. To be effective, the amendment must be adopted by the minimum status vote. PART 3 ACCOUNTABILITY 7-138-301. Standard of conduct for directors. (1) In discharging the duties of their respective positions and in considering the best interests of the benefit corporation, the board of directors, committees of the board, and individual directors of a benefit corporation: (a) Shall consider the effects of any action, or decision not to act, on: (I) The shareholders of the benefit corporation; (II) The employees and work force of the benefit corporation, its subsidiaries, and suppliers; (III) The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation; (IV) Community and societal considerations, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or suppliers are located; (V) The local and global environment; (VI) The short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation; and (VII) The ability of the benefit corporation to accomplish its general, and any specific, public benefit purpose; and (b) May consider: (I) The resources, intent, and past, stated, and potential conduct of any person seeking to acquire control of the benefit corporation; and (II) Other pertinent factors or the interests of any other group that they deem appropriate. (c) Need not give priority to the interests of any particular person or group referred to in paragraph (a) or (b) of this subsection (1) over the interests of any other person or group unless the benefit corporation has stated its intention to give priority to interests related to a specific public benefit purpose identified in its articles of incorporation; and (d) Are not subject to a different or higher standard when an action or inaction might affect control of the benefit corporation. (2) The consideration of interests and factors in the manner described in subsection (1) of this section do not constitute a violation of section 7-108-401, which section also applies to the extent consistent with this section. (3) A director is not liable to the benefit corporation or any person entitled to bring a benefit enforcement proceeding under section 7-138-305 for any action the director takes or does not take as a director if, in connection with the action or omission, the director performed the duties of the position in compliance with section 7-108-401 and this section. (4) A director of a benefit corporation, in the performance of duties in that capacity, does not have a fiduciary duty to a person that is a beneficiary of the public benefit purposes of the benefit corporation under section 7-138-201 arising only from the person's status as a beneficiary. 7-138-302. Benefit director. (1) The board of directors of a benefit corporation must include one director who: (a) Is designated the benefit director; and (b) Has, in addition to the powers, duties, rights, and immunities of the other directors of the benefit corporation, the powers, duties, rights, and immunities provided in this section. (2) The benefit director must be elected, and may be removed, in the manner provided by article 108 of this title, and must be an individual who is independent, as defined in section 7-138-102 (5). The articles of incorporation or bylaws of a benefit corporation may prescribe additional qualifications of the benefit director consistent with this subsection (2). (3) The benefit director shall prepare, and the benefit corporation shall include in the annual benefit report to shareholders required by section 7-138-401, the opinion of the benefit director on all of the following: (a) Whether the benefit corporation acted in accordance with its general, and any specific, public benefit purpose in all material respects during the period covered by the report; (b) Whether the directors and officers complied with sections 7-138-301 and 7-138-303; and (c) If, in the opinion of the benefit director, the benefit corporation or its directors or officers failed to comply with sections 7-138-301 and 7-138-303, a description of the ways in which the benefit corporation or its directors or officers failed to comply. (4) The acts or omissions of an individual in the capacity of a benefit director constitute for all purposes acts or omissions of that individual in the capacity of a director of the benefit corporation. (5) Regardless of whether the bylaws of a benefit corporation include a provision eliminating or limiting the personal liability of directors authorized by section 7-108-402, a benefit director is not personally liable for an act or omission in the capacity of a benefit director unless the act or omission: (a) Constitutes a breach of the benefit director's duty of loyalty to the benefit corporation or to its shareholders; (b) Is an act or omission that was not made in good faith or that involved intentional misconduct or a knowing violation of law; (c) Is an act specified in section 7-108-403; or (d) Constitutes a transaction from which the director directly or indirectly derived an improper personal benefit. 7-138-303. Standard of conduct for officers. (1) Each officer of a benefit corporation shall consider the interests and factors described in section 7-138-301 (1) (a) when: (a) The officer has discretion to act with respect to the matter; and (b) It reasonably appears to the officer that the matter may have a material effect on the promotion of a general or a specific public benefit by the benefit corporation. (2) The consideration of interests and factors in the manner described in subsection (1) of this section does not constitute a violation of section 7-108-401. (3) An officer is not personally liable for: (a) Action taken as an officer if the officer performed the duties of the position in compliance with section 7-108-401 and this section; or (b) Failure of the benefit corporation to promote a general or a specific public benefit. 7-138-304. Rights of action. (1) The duties of directors and officers under this article, and the general and any specific public benefit purposes of a benefit corporation, may be enforced only in a benefit enforcement proceeding. No person may bring an action or assert a claim against a benefit corporation or its directors or officers with respect to the duties of directors and officers under this article and the general and any specific public benefit purpose of the benefit corporation except in a benefit enforcement proceeding. (2) A benefit enforcement proceeding may be commenced or maintained only: (a) Directly by the benefit corporation; or (b) Derivatively by: (I) A shareholder; (II) A director; (III) A person or group of persons that owns, beneficially or of record, five percent or more of the equity interests in an entity of which the benefit corporation is a subsidiary; or (IV) Other persons as specified in the articles of incorporation or bylaws of the benefit corporation. (3) A benefit enforcement proceeding brought by a shareholder must satisfy the requirements of section 7-107-402. PART 4 TRANSPARENCY 7-138-401. Annual benefit report. (1) A benefit corporation shall prepare an annual benefit report that includes: (a) A narrative description of all of the following: (I) The ways in which the benefit corporation pursued general public benefit during the year and the extent to which general public benefit was promoted; (II) The ways in which the benefit corporation pursued a specific public benefit that the articles of incorporation state is the purpose of the benefit corporation to promote; (III) The extent to which that specific public benefit was promoted; and (IV) Any circumstances that have hindered the promotion by the benefit corporation of general or specific public benefit. (b) An assessment of the social and environmental performance of the benefit corporation. The assessment must be prepared in accordance with a third-party standard: (I) Applied consistently with any application of that standard in prior benefit reports; or (II) Accompanied by an explanation of the reasons for any inconsistent application. (c) The name of the benefit director and the address to which correspondence to the benefit director may be directed. (d) The compensation paid by the benefit corporation during the year to each director in the capacity of a director. (e) The name of each person that owns five percent or more of the outstanding shares of the benefit corporation either: (I) Beneficially, to the extent known to the benefit corporation without independent investigation; or (II) Of record. (f) The statement of the benefit director described in section 7-138-302 (3). (2) The benefit corporation shall send the benefit report annually to each shareholder: (a) Within one hundred twenty days after the end of the fiscal year of the benefit corporation; or (b) At the same time that the benefit corporation delivers any other annual report to its shareholders. (3) A benefit corporation shall post its most recent benefit report on the public portion of its web site, if any, but the compensation paid to directors and financial or proprietary information included in the benefit report may be omitted from the benefit report as posted. 7-138-402. Annual report filed with secretary of state. The annual report that a benefit corporation is required to deliver to the secretary of state pursuant to section 7-90-501 (1) must include as an attachment the most recent benefit report delivered to shareholders pursuant to section 7-138-401; except that the compensation paid to directors and officers and any financial or proprietary information included in the benefit report may be omitted from the benefit report as delivered to the secretary of state under section 7-90-501 (1). SECTION 2. 7-111-103 (5), Colorado Revised Statutes, is amended to read: 7-111-103. Action on plan. (5) Unless articles 101 to 117 or article 138 of this title, including the provisions of section 7-117-101 (8), the articles of incorporation, bylaws adopted by the shareholders, or the board of directors acting pursuant to subsection (3) of this section require a greater vote, the plan of conversion, plan of merger, or plan of share exchange shall be approved by each voting group entitled to vote separately on the plan by a majority of all the votes entitled to be cast on the plan by that voting group. SECTION 3. Act subject to petition - effective date - applicability. (1) This act shall take effect at 12:01 a.m. on the day following the expiration of the ninety-day period after final adjournment of the general assembly (August 10, 2011, if adjournment sine die is on May 11, 2011); except that, if a referendum petition is filed pursuant to section 1 (3) of article V of the state constitution against this act or an item, section, or part of this act within such period, then the act, item, section, or part shall not take effect unless approved by the people at the general election to be held in November 2012 and shall take effect on the date of the official declaration of the vote thereon by the governor. (2) The provisions of this act shall apply to benefit corporations on or after the applicable effective date of this act.