Hunton Law

Legal Counsel for Nonprofit & Tax-Exempt Organizations

Legal Counsel for Nonprofits, Foundations & Social Enterprises

Contrasting the Flexible Purpose Corporation

Like the benefit corporation, the flexible purpose corporation is a new subtype of stock corporation available in California as of January 1, 2012.  In an earlier blog post I discussed the key features of the benefit corporation.  I turn now to discuss the flexible purpose corporation and a key feature that distinguishes the new subtypes.

Both the benefit corporation and the flexible purpose corporation pursue social and economic objectives.  What’s different about the two forms is how they go about pursuing these dual purpose-profit goals.  A look at the language describing directors’ fiduciary duties to the corporation helps illustrate this difference.  

The directors of a flexible purpose corporation must perform their duties in accordance with the fiduciary duties of care and loyalty, as in a traditional corporation.  In addition, the directors of a flexible purpose corporation may consider and give weight to those factors that they deem relevant, including the purposes of the corporation as stated in its articles of incorporation, the short-term and long-term prospects of the corporation, and the best interests of the corporation and its shareholders.  (See CA Corporations Code section 2700.)

The directors of a benefit corporation must also perform their duties in accordance with the regular fiduciary duties of care and loyalty.  In contrast to the permissive language used in the flexible purpose corporation law, the benefit corporation law requires directors to consider the impacts of any action or proposed action upon all of the following: shareholders; employees and workforce; customers; community and societal considerations; local and global environment; short-term and long-term interests of the benefit corporation; and ability of the benefit corporation to accomplish its general, and any specific, public benefit purpose. (See CA Corporations Code section 14620.)

The mandatory language used in the benefit corporation law and the permissive language used in the flexible purpose law could be viewed as an advantage or a disadvantage, depending on the viewer and the circumstances.  One might see an advantage to using the benefit corporation form because the mandatory language requires directors to take into account a range of factors.  Alternatively, one might see an advantage to using the flexible purpose corporation form because the permissive language provides directors with discretion to consider a range of factors in their decision-making. 

We have yet to see how courts will interpret the fiduciary duties for the new corporate forms, but in the meantime, directors of benefit and flexible purpose corporations have more robust statutory support to pursue social mission and benefit.