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Client Alert: Recent Amendments to the North Carolina Business Corporation Act

Banking & Financial Institutions Client Alerts Emerging Companies

Introduction

Effective October 1, 2018, the North Carolina Business Corporation Act (the “NCBCA”)[1] was amended by Session Law 2018-45 (the “Act”).[2]

The scope of the Act is broad and it impacts a number of areas of corporate law within the NCBCA, including mergers, appraisal rights, shareholder rights, and the rights and protections available for boards of directors.

The following Client Alert flags some of the Act’s more substantive changes affecting boards of directors and shareholders’ rights.

Rights and Protections for Boards of Directors


Directors and Officers may be Excused from Corporate Opportunity Doctrine

The NCBCA, as amended, now permits North Carolina corporations to limit or eliminate the duty of officers or directors to present business opportunities to the corporation with specific provisions contained in the articles of incorporation.[3]  Newly incorporated North Carolina corporations may include such limitations at the time of formation.

Existing corporations may take advantage of the Act’s protections by amending their current articles of incorporation, but should keep two points in mind when doing so.  First, any amendment to a corporation’s articles of incorporation that limits or eliminates the corporate opportunity doctrine is generally effective only for future matters and would not be given retroactive effect.  Second, any amendment to a corporation’s articles of incorporation must be approved by that corporation’s board and shareholders; it cannot be changed by the board alone.

Even if these duties are not specifically eliminated or limited, Sections 10 and 12 of the Act provide additional safe harbors from liability for directors and officers, respectively, so long as there was compliance with the corporation’s existing policies and procedures regarding business opportunities.[4]

Presumption of Fairness in Challenges to Board Compensation

Section 55-8-11 of the NCBCA has been amended by the Act[5] to shift the burden of proof regarding the fairness of director compensation from the corporation to the claimant.  This rule now automatically applies to public companies incorporated under North Carolina law; however, the rule only applies to a non-public company if its articles of incorporation contain a provision that specifically invokes it.  Many North Carolina corporations may consider amendments to their articles of incorporation as a result, so that director compensation set by the board of directors will be presumed by the courts to be fair unless and until proven otherwise.

Shareholders’ Rights


Shareholders’ Agreements

Under the pre-amendment NCBCA, two or more shareholders of a corporation could enter into a separate agreement between themselves even if the rest of the corporation’s shareholders were not party to the agreement (so long as it did not otherwise conflict with the default rules under the NCBCA).  As amended, the NCBCA now (1) spells out specific formalities to ensure shareholders’ agreements will be enforceable and (2) clarifies the parties against whom a shareholders’ agreement may be enforced.[6]  For example, if all shareholders in a private corporation sign an agreement in writing that is referenced in the corporation’s articles of incorporation at the time of agreement (and if the scope of the agreement is limited to certain enunciated areas of permissible subject matter under the statute)[7] then the agreement may be enforced against later investors or subsequent purchasers even if they have not signed the shareholders’ agreement.

The Act also eliminated the 10-year statutory limitation on the term of a shareholders’ agreement under North Carolina corporate law.

Voting Trusts

A voting trust is a legal instrument whereby shareholders can transfer the voting rights associated with their shares to a trustee.  As was the case with shareholders’ agreements, the prior version of the NCBCA imposed an automatic 10-year sunset clause on voting trusts and they would expire if not renewed.

Section 5 of the Act eliminates this mandatory 10-year term restriction.[8]  Voting trusts formed after October 1, 2018 are no longer subject to the 10-year renewal period, and voting trusts formed prior to this date may also continue indefinitely so long as they are amended to establish a perpetual term.

Voting Requirements for Classes of Shareholders on Equal Footing

It is common for corporations to have an authorized capitalization that includes different classes or series of shares, with common stock and preferred stock being perhaps the simplest example.  While there may be different rights, privileges and preferences (and economic implications) distinguishing the various classes of a corporation’s outstanding securities, they may still be affected in essentially the same way in certain types of transactions – such as mergers, conversions or reorganizations.  Section 4 of the Act amended the NCBCA so that it now requires that a holder of two or more series of a class of a corporation’s securities vote all such shares together as a single voting group.[9]

Conclusion

This Client Alert is intended to provide a high-level overview of selected provisions of the Act and is not exhaustive.  The Act has fairly extensive implications for corporate governance, the functions of boards of directors, shareholders’ rights, and the mechanics of mergers and acquisitions involving North Carolina corporations; however, the extent to which the Act affects any particular North Carolina corporation will depend on specific facts and circumstances.  Further reading and analysis from the Business Corporations Committee of the Business Law Section of the North Carolina Bar Association is available here.

If you have questions about this Client Alert or other matters involving North Carolina corporate law, please do not hesitate to relay them to your Wyrick Robbins contact.

 

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[1] The NCBCA is codified in Chapter 55 of the North Carolina General Statutes and can be found here:  North Carolina Business Corporations Act.

[2] The full text of the Act can be found here: Senate Bill 622 (Session Law 2018-45).

[3] See id. at Section 2.  (Amending Section 55-2-02 of the NCBCA to mirror the similar statutory provision under the Delaware General Corporate Law codified at Section 122(17)).

[4] See the Act at Sections 10, 12.

[5] See id. at Section 7.

[6] See id. at Section 6.

[7] It should be noted that the enunciated areas are areas usually addressed by a corporation’s articles of incorporation such as (1) eliminating a corporation’s board or restricting the board’s discretion/powers; (2) distributions of corporate profits; (3) boards of directors; (4) voting; (5) transfers of property or provisions of services by officers/shareholders to the corporation; (6) authority to run the business; and (7) dissolution.  There is also a limited “catch-all” that allows shareholders’ agreements to address subject matter “otherwise govern[ing] the exercise of corporate powers or the management of the business and affairs of the corporation or the relationship between or among the shareholders, the directors, and the corporation, and is not contrary to public policy.”  See the Act at Section 6.

[8] See id. at Section 5.

[9] See id. at Section 4.

 

Todd H. Eveson is a corporate partner and practice group leader for the banking & financial institutions practice group at Wyrick Robbins Yates & Ponton.  His practice is focused on corporate law, securities law, banking and mergers and acquisitions.

Sean Planchard is an attorney at Wyrick Robbins Yates & Ponton.  He is the former Student Government President of the University of Chicago Law School, a Fulbright Grantee to Madrid, and a Teach For America alumnus.  Using his training from the Booth School of Business and the Law School at the University of Chicago, Sean’s legal practice focuses on all aspects of corporate law, advising clients at all stages of development, from organization to exit.

The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon, as legal advice.