California Lawyers Association
CLA ESG COMMITTEE GUIDE & TEMPLATE: A CALIFORNIA BENEFIT CORPORATION’S ANNUAL BENEFIT REPORT
Current as of:
October 27, 2023
Overview
California benefit corporations are obligated to issue to every shareholder an “Annual Benefit Report” following the close of the entity’s fiscal year. The Annual Benefit Report serves as a transparency mechanism, illustrating accountability to its shareholders, stakeholders, regulatory authorities, and the public. Benefit corporations often overlook this compliance step.
General Remarks from the California Lawyers Association (“CLA”)
As the applicable statutory authority does not define nor provide guidance on the precise form that the Annual Benefit Report must take, this guide and template are meant to provide counsel with a starting point in their research, client advisement, and eventual production or review of an Annual Benefit Report for their California benefit corporation clients. This resource is provided as a courtesy to CLA members only and is not otherwise to be disseminated, copied, or otherwise used without the express written consent of the CLA. The CLA reserves all right in and to this resource.
This resource has been prepared and is current as of the date listed above. Counsel should be cognizant of any statutory amendments to those referenced herein, as well as any other new law applicable or relevant to Annual Benefit Reports. CLA encourages you to contact the ESG Committee with any supplemental guidance, helpful information, and/or suggested amendments to this resource for the committee’s consideration. This guide and template are not and should not be considered legal advice. Counsel should not solely rely on this resource a complete statement of applicable law.
The CLA would like to extend gratitude to Matthew D. Batista, Esq., Madison Stern, Esq., Suzanne Weakley, Esq., and the ESG Committee of CLA in preparation of this template as a benefit to CLA ESG Committee members.
Statutory Authority
The main statutory authorities concerning Annual Benefit Reports are contained in California Corporations Code §§14621 and 14630, each of which are reproduced in their entirety below:
California Corporations Code §14621
(a) The board of directors of a benefit corporation shall prepare for inclusion in the annual benefit report to shareholders required by Section 14630, a statement indicating whether, in the opinion of the board of directors, the benefit corporation failed to pursue its general, and any specific, public benefit purpose in all material respects during the period covered by the report.
(b) If, in the opinion of the board of directors, the benefit corporation failed to pursue its general, and any specific, public benefit purpose, the statement required by subdivision (a) shall include a description of the ways in which the benefit corporation failed to pursue its general, and any specific, public benefit purpose.
(Added by Stats. 2011, Ch. 728, Sec. 1. (AB 361) Effective January 1, 2012.)
California Corporations Code §14630
(a) A benefit corporation shall deliver to each shareholder an annual benefit report including all of the following:
- (1) A narrative description of all of the following:
- (A) The process and rationale for selecting the third-party standard used to prepare the benefit report.
- (B) The ways in which the benefit corporation pursued a general public benefit during the applicable year and the extent to which that general public benefit was created.
- (C) The ways in which the benefit corporation pursued any specific public benefit that the articles state it is the purpose of the benefit corporation to create and the extent to which that specific public benefit was created.
- (D) Any circumstances that have hindered the creation by the benefit corporation of a general or specific public benefit.
- (2) An assessment of the overall social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard applied consistently with any application of that standard in prior benefit reports or accompanied by an explanation of the reasons for any inconsistent application. The assessment does not need to be audited or certified by a third party.
- (3) The name of each person that owns 5 percent or more of the outstanding shares of the benefit corporation, either beneficially, to the extent known to the benefit corporation without independent investigation, or of record.
- (4) The statement required by Section 14621.
- (5) A statement of any connection between the entity that established the third-party standard, or its directors, officers, or material owners, and the benefit corporation, or its directors, officers, and material owners, including any financial or governance relationship that might materially affect the credibility of the objective assessment of the third-party standard.
(b) The benefit report shall be sent annually to each shareholder within 120 days following the end of the fiscal year of the benefit corporation or at the same time that the benefit corporation delivers any other Annual Benefit Report to its shareholders.
(c) A benefit corporation shall post all of its benefit reports on the public portion of its Internet Web site, if any, except that the compensation paid to directors and any financial or proprietary information included in the benefit report may be omitted from the benefit report as posted on the Internet Web site.
(d)
- (1) If a benefit corporation does not have an Internet Web site, the benefit corporation shall provide a copy of its most recent benefit report, without charge, to any person that requests a copy.
- (2) The benefit corporation may omit any proprietary or financial information, including, but not limited to, compensation paid to directors, from the copy of a benefit report that the benefit corporation provides pursuant to paragraph (1).
(Added by Stats. 2011, Ch. 728, Sec. 1. (AB 361) Effective January 1, 2012.)
Drafting Notes & Other Authority[1][2][3][4][5]
Greenwashing & Environmental Claims
As is the case throughout a company’s operations, including marketing, social media engagement, public comments, and elsewhere, any environmental or other ESG related claims or statements made or echoed in the Annual Benefit Report may be subject to scrutiny from a variety of sources. Such claims may be further vetted and actionable by relevant stakeholders and/or authorities. As such, counsel should review a company’s Annual Benefit Report prior to issuance for compliance and should monitor any changes to enacted or proposed legislation concerning Annual Benefit Reports.
Third-Party Standards; Other Reporting; & Other Reporting Frameworks[6][7][8]
In practice, the Annual Benefit Report may not be the only ESG, sustainability, environmental, etc. report that the company will issue, whether mandatorily or voluntarily. In any case, it is generally advisable that the company ensure it takes a consistent approach across all such reporting, of course subject to any particularly relevant authority on point. It may also be advisable to use the same reporting framework and/or methodology across all such reporting and to issue as few reports as possible, thereby limiting the risk of inconsistent reporting and enhancing harmonization. For instance, if this is public company that is also a CA Benefit Corporation, then it may make sense for the company to adopt the framework and methodology promulgated by the Task Force on Climate Related Financial Disclosures (the “TCFD”) as the Company’s third-party standard, given that the SEC’s proposed environmental disclosure rules are largely based on the TCFD framework and would be a mandatory disclosure in its regular SEC filings anyway. Note that as of the date first listed above, the SEC has not yet adopted the environmental disclosure rules as proposed. However, as of October 7, 2023, Governor Newson of California has signed into law SB 253 and SB 261, similar California legislation to that of the SEC’s proposed rules, which also generally require TCFD compliance for covered entities.
Similarly, if the this company is a private entity but has significant interest in becoming a public company or being acquired by a public company, adopting or substantially complying with the tenants of a standard such as the TCFD would reduce legal, business, and practical barriers to such corporate transactions.
Distribution & Disclosure of the Annual Benefit Report[9]
The Annual Benefit Report shall be: (a) sent to the shareholders and (b) posted to the publicly accessible portion of the company’s website within one-hundred and twenty (120) days following the close of the company’s fiscal year or with any other requisite annual reports to the shareholders. If the company does not have a website, then the company must issue the report to anyone who makes a formal request for it. In any release of the Annual Benefit Report on the company’s website or pursuant to a request if the company does not have website (presumably by a non-shareholder), then the company may omit from the report any proprietary or financial information, including compensation paid to directors.
Benefit Enforcements Proceedings[10]
The failure to issue an Annual Benefit Report could potentially lead to the bringing of a benefit enforcement proceeding against the company, the directors, and/or the officers pursuant to Cal. Corp. Code §14623.
[Company logo]
[Company name]
ANNUAL BENEFIT
REPORT
[Issued date]
FISCAL YEAR:
[Fiscal year time frames]
[Company HQ Address]
[General information phone number]
[General information email]
A Letter from the [CEO, Chairperson of the Board, or other company party]
Dear stakeholders,
[Insert letter from the CEO or other party, discussing the general endeavors, goals, thoughts, etc. of the company in relation to or ancillary to its status as a CA Benefit Corporation. Note that pursuant to Cal. Corp. Code § 14621, the Board must include in the Annual Benefit Report a statement indicating whether, in their opinion, the CA Benefit Corporation failed to pursue its general, and any specific, public benefits purpose in all material respects during the period covered and if so, how they failed to pursue such public benefits, so that can be included or referenced here in the CEO statement or as an additional standalone letter from perhaps the Chairperson of the Board].
Very respectfully,
[Name]
[Title]
Overview of [Company Name]’s benefit corporation status
Overview
[Insert a high-level overview of the company and its operations, including any general statements regarding the company’s general public benefit and statements regarding the company’s specific public benefits, to the extent any specific public benefits are adopted by the company].
General Public Benefit[11]
In voluntarily adopting to become a California benefit corporation, [company name] is mandated to pursue a general public benefit, meaning a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of [company name].
Specific Public Benefits[12]
Additionally, California benefit corporations may adopt specific public benefits, which may generally be any benefit upon society and/or the environment. [company name] has adopted the following specific public benefits: (a) [specific public benefit]; (b) [specific public benefit]; and (c) [specific public benefit].
Third-Party Standard[13][14][15]
As a transparency mechanism, [company name] is required to adopt a third-party standard by which to measure the company’s performance in pursuit of its general [and specific] public benefit[s].
After considerable deliberation, the company has chosen to use [chosen third-party standard] as the standard for which to assess our progress. In choosing [chosen third-party standard], the company considered the following [insert the process and rationale that the Board considered in whether to adopt the chosen third-party standard. Possible rationales may be cost, availability, resources provided by the framework, applicability to a particular industry, ease of use, or any number of other similar bases].
Other than the company’s use of the [chosen third-party standard], there are no material connections between the [chosen third-party standard], its directors, officers, or material owners and the company or its directors, officers, and material owners.
[chosen third-party standard] Results
[Insert the actual results of the third-party standard assessment here, in reproduced or adapted form, or simply refer to attachments and attach the final results. The company may also consider adding in the results from the immediately or other previous years for easy assessment and comparison of results over time.]
Overview of Results[16]
[Insert a narrative as to the overall social and environmental performance and interpretation of the third-party standard results as listed above, both as standalone results and perhaps as a comparison across years. Note that if there is any reason for why the third-party standard was not consistently applied across the past fiscal year, include a narrative section as to why. Also note that it may be appropriate to combine this section with the General Public Benefit section below if circumstances dictate.]
General Public Benefit Assessment
Pursuits[17]
Over the course of the last the year, the company took the following actions in our efforts to create a general public benefit: [insert sub-sections and narratives as to the actions the company pursued and in summation, the extent to which a general public benefit was actually created].
Key Successes
[Insert a narrative as to key lessons, takeaways, successes that illustrates successes or building blocks for future years. Note that this section can be combined with the above if that makes sense under the circumstances].
Key Challenges[18]
[Insert a narrative as to key challenges, processes to be avoided, market conditions, information issues, and any other legal or practical issues that made the general public benefit pursuit a challenge].
Specific Public Benefits Assessment
Pursuits[19]
Over the course of the last the year, the company made the following efforts to pursue each of our adopted specific public benefits: [insert sub-sections and narratives as to each of the specific public benefit pursuits the company pursued and in summation, the extent to which each specific public benefit was actually created. Also consider isolating out each specific public benefit, along with the below sections on successes and challenges as standalone sections in this part of the Annual Benefit Report].
Key Successes
[Insert a narrative as to key lessons, takeaways, successes that illustrates successes or building blocks for future years. Note that this section can be combined with the above if that makes sense under the circumstances].
Key Challenges[20]
[Insert a narrative as to key challenges, processes to be avoided, market conditions, information issues, and any other legal or practical issues that made the general public benefit pursuit a challenge].
Material Shareholders[21]
As of the close of the company’s fiscal year, [date], the following shareholders of record own at least five percent (5%) of the company’s outstanding equity:
Shareholder | Total Shares | Percentage of Outstanding Shares |
[1] See generally Cal. Bus. & Prof. Code §17000-17101 regarding unfair trade practices. See also Cal. Bus. & Prof. Code §§ 17580; 17580.5; and 17581 for California laws regarding environmental advertising and representations. See also Cal. Pub. Resource Code §42355.51 for compliance with CA recycling criteria if making recyclability claims.
[2] See California Assembly Bill 1305 (2023-2024) regarding voluntary carbon market disclosures, a new law approved by the California Governor as of October 7, 2023 relevantly requiring that an entity purchasing voluntary carbon credits and making associated “net-zero” style claims to disclose on the entity’s website all information documenting how, if at all, a claim was determined to be accurate or actually accomplished, how interim progress toward that goal is being measured, and whether there is independent third-party verification of the company data and claims listed relating to the voluntary carbon offset credits.
[3] See 16 C.F.R. Part 260 regarding the Federal Trade Commission’s “Green Guides,” which are meant to serve as a guide for avoiding liability when making environmental marketing claims in an effort to comply with Section 5 of the Federal Trade Commission Act, as codified in 15 U.S.C. 45.
[4] See e.g. United States v. Walmart, Inc., No. 1:22-cv-00965 (D.D.C. 2022). (FTC ordered Walmart to pay millions of dollars in civil penalties for continuous false marketing of textile goods and deceptive environmental claims.)
[5] See e.g. Engineered Plastic Systems, LLC, FTC Docket No. C-4485 (Aug. 20, 2014) (consent order), https://www.ftc.gov/system/files/documents/cases/1408epsdo.pdf. (FTC approved final order in a 5-0 vote settling charges that the company made deceptive environmental claims about its plastic lumber products in violation of Section 5(a).)
[6] See 87 F.R. 21334, the proposed “The Enhancement and Standardization of Climate-Related Disclosures for Investors” environmental disclosure rule from the SEC, which is anticipated to be finalized and issued in April of 2023.
[7] See California Senate Bill No. 253 (2023-2024), the “Climate Corporate Data Accountability Act.”
[8] See California Senate Bill No. 261 (2023-2024), the “Greenhouse gases: climate-related financial risk.”
[9] See Cal. Corp. §14630(b)-(d).
[10] See Cal. Corp. Code §14623 for more information on benefit enforcement proceedings.
[11] See Cal. Corp. Code §14601(c) for definition of “general public benefit.”
[12] See Cal. Corp. Code §14601(e) for the definition of “specific public benefit.” Note that any specific public benefits must also be listed in the benefit corporation’s articles of incorporation per Cal. Corp. Code §14602. Omit this section (and any other corresponding sections of the Annual Benefit Report) if the CA Benefit Corporation has indicated no such specific public benefits.
[13] See Cal. Corp. Code §14601(g) for the definition of “third-party standard” and the requisite standards for a qualifying third-party standard. Counsel should confirm that clients are using a compliant third-party standard prior to issuance by the clients.
[14] To comply with Cal. Corp. Code §14630(a)(1)(A).
[15] To comply with Cal. Corp. Code §14630(a)(5). But note, counsel should inquire with the client as to whether there are any such connections and if so, that information should be disclosed in the Annual Benefit Report, along with a narrative as to why the objectivity of the results as assessed against the third-party standard may be objectively limited or a narrative as to why the results will not be objectively limited.
[16] To comply with Cal. Corp. Code §14630(a)(2). Also note that the narratives in this section nor the results listed above need to be audited or verified by any other entity or governmental agency.
[17] To comply with Cal. Corp. Code §14630(a)(1)(B).
[18] To comply with Cal. Corp. Code §14630(a)(1)(D).
[19] To comply with Cal. Corp. Code §14630(a)(1)(C).
[20] To comply with Cal. Corp. Code §14630(a)(1)(D).
[21] To comply with Cal. Corp. Code §14630(a)(3). But note that under Cal. Corp. Code §§14630(c)-(d), certain financial and proprietary information may be omitted from the public disclosure version of the Annual Benefit Report. A general survey of publicly available Annual Benefit Reports indicates that most CA Benefit Corporations omit this Material Shareholder section from the public version of their Annual Benefit Reports.