OREGON’S NEW BENEFIT COMPANY STATUTE Combining Pursuit of Profit with Public Benefit June 25, 2013

1. OREGON’S NEW BENEFIT COMPANY STATUTECombining Pursuit of Profit with Public BenefitJune 25, 2013

2. Background HB 2296, signed into law June 18, 2013 by Governor Kitzhaber Effective January 1, 2014 (codification to be determined) Drafted by a group of Oregon lawyers, with input from Secretary of State Submitted to Legislature by the Secretary of State as an agency bill, sponsored by Reps. Jules Bailey and Tobias Reed 17 other jurisdictions have enacted similar legislation, including Arizona, Arkansas, California, Colorado, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Nevada, New Jersey, New York, Pennsylvania, South Carolina, Vermont, New Jersey, Virginia, and Washington DC 12 jurisdictions have legislation pending, notably including Delaware Terminology: Certified B Corporation is a certification conferred by the nonprofit B Lab. Benefit corporation (or company) is a legal status administered by the state Comparison: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1988556

3. Central Aims of Benefit Company Legislation Public Purpose: To “bake in” to the company’s charter one or more public purposes, including impact on society and the environment, taken as a whole Fiduciary Duty: To specify that directors, officers and managers are obligated to consider the material positive impact of decisions on multiple stakeholders in the balance they deem best Accountability: To report to stakeholders and the interested public annually how the company performed as against an identified independent third-party standard

4. What is a Benefit Company? Eligible Entities—ORS Ch 60 corporations and ORS Ch 63 LLCs, incorporated, organized, formed or created under section 3 of the new Act; also includes PCs under ORS Ch 58 Electing In—inclusion of statement in articles (a) at inception, that the entity is “subject to” the Act or (b) after inception, that the entity “elects to become a benefit company” under section 3 of the Act (see Minimum Status Vote below) Other Means—also may become benefit company by means of conversion, merger, or exchange of entity interests General Public Benefit— in addition to any other purpose, the company must provide “a material positive impact on society and the environment, taken as a whole, from the business and operations of the company”

5. Why Benefit Companies Are Really Needed “Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The ‘Inc.’ after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders … “… Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors’ fiduciary duties under Delaware law.” eBay Domestic Holdings, Inc. v. Craig Newmark and James Buckmaster, and craigslist, Inc. (September 9, 2010, Delaware Court of Chancery)

6. What are the Key Attributes? Minimum Status Vote—required to elect in or out Specific Public Benefits—optional in articles Governors—directors, managers, or members Modified Fiduciary Duty—effect on specified constituencies Third-Party Standard—recognized criteria established by an independent organization Benefit Report—published and delivered annually Enforcement—may compel company, governor, member, officer or manager re duties and public benefit standards Limitations of Liability—otherwise, no claims against governors, directors, managers, members re public benefit

7. Examples of Specific Public Benefits The Model Legislation (prepared in conjunction with B Lab) lists seven non-exhaustive possibilities for specific public benefits, which are: Providing low-income or underserved individuals or communities with beneficial products or services Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business Preserving the environment Improving human health Promoting the arts, sciences, or advancement of knowledge Increasing the flow of capital to entities with a public benefit for purpose The accomplishment of any other particular benefit for society or the environment See Patagonia, Greyston Baking, Mob Rules, and GIIRS materials

8. Minimum Status Vote Election In, Generally: In addition to all other applicable requirements to amend articles under ORS Ch 60 or 63, approval of a majority of interests entitled to vote on the action (most other states have a higher threshold, typically 2/3) Exceptions: Entity governing documents or ORS Ch 60 or 63 require more than a majority vote or vote by voting groups, etc. Entity has shares listed on national securities exchange, etc., each class/series must approve by 2/3 of shares entitled to vote Election Out: Same minimum status vote as required to amend benefit company’s purpose in its articles (see above); also for merger, exchange of interests, conversion, or sale, etc. of substantially all assets outside ordinary course of business Dissenters’ Rights: Not provided unless otherwise triggered

9. Governors and Benefit Governors Governors are: Directors of a corporation Managers in manager-managed LLC Members in member-managed LLC Company must have a “board of governors” and may designate at least one member of the board as a “benefit governor:” In addition to other powers, duties, etc., must meet additional qualifications in organizational documents Shall provide information or statements to other governors concerning their decision-making obligations (see below)

10. Modified Fiduciary Duty Governors must act in the “best interests” of the benefit company (under ORS Ch 60 or 63), considering in addition how decisions will affect: Interests of shareholders or members Employees and workforce of company and of subsidiaries and suppliers Subsidiaries and suppliers Customers Communities (location of offices, facilities, etc.) Local and global environment Short-term and long-term interests Ability to fulfill general and any specific public purposes Unless required in articles, Governors need not give priority to a particular interest over other interests

11. Third-Party Standard Company must assess the extent to which it provides a general public benefit or any specific public benefit in articles against a “third-party standard”: Meaning a recognized standard for defining, reporting or assessing an entity’s social and environmental performance Must establish criteria that apply to all of the interests (see above) Is developed by an organization that is not under the control or the company or its affiliates Information is publicly available concerning the measurement criteria and weighting used, the process by which the standard is developed, and the organization sufficiently discloses any relationships that might compromise its independence No audit or certification report by third party required

12. Benefit Report Company each year must prepare, and deliver within 120 days after fiscal year end (or when other annual report is delivered) to each holder of equity interest, a “benefit report” Benefit report must set out a narrative of: Extent to which company provided general public benefit and (if applicable) specific public benefit, and actions and methods use to provide such benefits Circumstances that hindered provision of benefits Report must also assess the extent to which the company met or exceeded identified third-party standard, in a manner consistent with previous reports (or explain inconsistencies) Also describe process and rationale for selection or change of third-party standard All reports must be posted on publicly available websites (or copies must be provided without charge to any person on request)

13. Enforcement Mechanism and Limitations No proceeding against a benefit company or governors, members, officers or managers, for failure to pursue, create or provide a general or specific public benefit identified in articles or for violation of standard of conduct under the Act, except: The company, a governor, a shareholder or member, or another person identified in articles or bylaws as having a right to commence such a proceeding may… Commence a direct or derivative proceeding to compel company to provide such benefits or require governors, etc., to act in accordance with standard in articles or prescribed under the Act Company is not liable for money damages for failing to provide a general or specific public benefit Governor is not personally liable for money damages as a consequence of taking/not taking an action if duties are discharged under ORS 60.357 or 63.155

14. Questions?