North Carolina Commentary

This revision of the North Carolina Business Corporation Act is based upon the Revised Model Business Corporation Act (1984) (hereinafter “the Model Act”). To maintain uniformity, the numbering of the sections corresponds to that of the Model Act, except that the General Statutes Chapter 55 number has been added to each section and the Model Act chapters have been changed to articles.

Two types of comments appear. Under the designation “Official Comment” is the Official Comment of the Section of Corporation, Banking and Business Law of the American Bar Association for that section. Under the designation “North Carolina Comment” are the comments of the drafters who adapted the Model Act for enactment in North Carolina. The North Carolina comments are designed to note (1) deviations from the Model Act and (2) some significant changes from the former law. Some sections therefore do not have a North Carolina Comment.

Editor’s Note.

Session Laws 1989, ch. 265, s. 1, effective July 1, 1990, rewrote Chapter 55 and entitled it the North Carolina Business Corporation Act, to replace former Chapter 55, entitled the Business Corporation Act, which had been adopted by Session Laws 1955, c. 1371, s. 1.

Section 2 of Session Laws 1989, c. 265 provided: “The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Comments to the 1984 Revised Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

The Official Comments appearing under individual sections in this Chapter have been printed by the publisher as received, without editorial change, and relate to the Chapter as originally enacted. However, not all sections in this Chapter may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Chapter and, therefore, may not reflect all changes to the sections under which they appear.

Where they appear in this Chapter, “Amended Comment” usually means that an error in the original comment has been corrected by a subsequent amendment, and “Supplemental Comment” pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

Where appropriate, the historical citations to sections of former Chapter 55 have been added to corresponding sections in current Chapter 55.

Some of the case notes appearing under the sections of this Chapter were decided under former Chapter 55 or under prior law.

For tables of corresponding sections of former and current Chapter 55, see the tables at the end of this Chapter.

Legal Periodicals.

For article, “The Corporate Identity Theory Dilemma: North Carolina and the Need for Constructionist Corporate Law Reform,” see 94 N.C.L. Rev. 686 (2016).

Article 1. General Provisions.

Part 1. Short Title and Reservation of Power.

§ 55-1-01. Short title.

This Chapter shall be known and may be cited as the “North Carolina Business Corporation Act.”

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

The short title provided by section 1.01 creates a convenient name for the state’s business corporation act.

See the Introduction for a general description of the development of the Model Act, the purposes it is intended to serve, the principles under which the 1984 Revised Model Business Corporation Act was prepared, and the roles of the Cross-References and Official Comments.

Cross References.

For constitutional provisions regarding corporations, see N.C. Const., Art. VIII.

As to executions, see G.S. 1-324.1 et seq.

As to jurisdiction of the superior court division over proceedings under this Chapter, see G.S. 7A-249.

As to provisions relating to nonprofit corporations, see G.S. 55A-1 to 55A-89.1.

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Legal Periodicals.

For article giving comments of draftsmen of the Business Corporation Act adopted in 1955, see 33 N.C.L. Rev. 26 (1954).

For case law survey on business associations, see 41 N.C.L. Rev. 415 (1963).

For article reevaluating the Business Corporation Act adopted in 1955, see 43 N.C.L. Rev. 768 (1965).

For article surveying case law as to corporations, see 44 N.C.L. Rev. 950 (1966).

For note on the liability of directors and officers for negligent management, see 45 N.C.L. Rev. 748 (1967).

For comment on tax and corporate aspects of professional incorporation in North Carolina, see 48 N.C.L. Rev. 573 (1970).

For note, “Glenn v. Wagner: Instrumentality Rule versus the Balancing Test in Piercing the Corporate Veil,” see 64 N.C.L. Rev. 1265 (1986).

For article, “The Corporate Fox and the Shareholders’ Hen House: Reflections on Alford v. Shaw,” see 65 N.C.L. Rev. 569 (1987).

For article, “The Uncertain Case Against the Double Taxation of Corporate Income,” see 68 N.C.L. Rev. (1990).

For business symposium, “Management Buyouts: Strategies, Ethics and Other Considerations,” see 25 Wake Forest Law Rev. 1 (1990).

For article discussing changes in theories of the corporation over the last 150 years, see “Theories of the Corporation,” 1990 Duke L.J. 201.

For article, “The Corporate Persona, Contract (and Market) Failure, and Moral Values,” see 69 N.C.L. Rev. 273 (1991).

For article, “Discrimination, Managerial Discretion and the Corporate Contract,” see 26 Wake Forest L. Rev. 541 (1991).

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For a comment on the acquisition, abandonment, and preservation of rail corridors in North Carolina, see 75 N.C.L. Rev. 1989 (1997).

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

For article, “Corporate Governance and Climate Change: Empirical Study: The Doctrine of Defective Incorporation and its Tenuous Coexistence with the Model Business Corporation Act,” see 44 Wake Forest L. Rev. 833 (2009).

For article, “Overcoming the Rippy Effect: Why the North Carolina Business Corporations Act Should Allow Permissive Officer Exculpation,” see 94 N.C.L. Rev. 2155 (2016).

For article, “Shareholder Voting and the Symbolic Politics of Corporation as Contract,” see 53 Wake Forest L. Rev. 512 (2018).

For article, “The Extended Corporate Mind: When Corporations Use AI to Break the Law,” see 98 N. C.L. Rev. 893 (2020).

§ 55-1-02. Reservation of power to amend or repeal.

The General Assembly has power to amend or repeal all or part of this Chapter at any time and all domestic and foreign corporations subject to this Chapter are governed by the amendment or repeal.

History. 1901, c. 2, s. 7; Rev., s. 1136; C.S., s. 1135; G.S., s. 55-36; 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Provisions similar to section 1.02 have their genesis in Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat) 518 (1819), which held that the United States Constitution prohibited the application of newly enacted statutes to existing corporations while suggesting the efficacy of a reservation of power similar to section 1.02. The purpose of section 1.02 is to avoid any possible argument that a corporation has contractual or vested rights in any specific statutory provision and to ensure that the state may in the future modify its corporation statutes as it deems appropriate and require existing corporations to comply with the statutes as modified.

All articles of incorporation or certificates of authority granted under the Model Act are subject to the reservation of power set forth in section 1.02. Further, corporations “governed” by this Act—which includes all corporations formed or qualified under earlier, general incorporation statutes that contain a reservation of power—are also subject to the reservation of power of section 1.02 and bound by subsequent amendments to the Act.

Many states have constitutional provisions mandating the reservation of power to amend or modify corporate statutes and charters. In these states section 1.02 is also supported by specific constitutional authorization.

North Carolina Commentary

This section is substantially the same, in effect, as former G.S. 55-174.

This reserved power also appears in the North Carolina Constitution. See N.C. Const. Art. VIII, § 1; The Yadkin River Power Co. v. Whitney Co. , 150 N.C. 31, 63 S.E. 820 (1906).

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

§§ 55-1-03 through 55-1-19.

Reserved for future codification purposes.

Part 2. Filing Documents.

§ 55-1-20. Filing requirements.

  1. A document required or permitted by this Chapter to be filed by the Secretary of State must be filed under Chapter 55D of the General Statutes.
  2. A document submitted on behalf of a domestic or foreign corporation must be executed:
    1. By the chair of its board of directors, by its president, or by another of its officers;
    2. If directors have not been selected or the corporation has not been formed, by an incorporator; or
    3. If the corporation is in the hands of a receiver, trustee, or other court-appointed fiduciary, by that fiduciary.
  3. through (i). Reserved.
  4. Repealed by Session Laws 2002-159, s. 15 effective October 11, 2002.

History. 1955, c. 1371, s. 1; 1967, c. 13, s. 1; c. 823, s. 16; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.1(a); 1991, c. 645, s. 15; 1999-369, s. 1.1; 2001-358, ss. 3(a), 6(a); 2001-387, ss. 1, 155, 173; 2001-413, s. 6; 2002-159, s. 15.

Editor’s Note.

Session Laws 2001-358, s. 52, authorizes the Revisor of Statutes to transfer, as historical annotations, the Official Comments and the North Carolina Comments to those portions of Chapter 55 of the General Statutes that are recodified by that act to the corresponding locations in Chapter 55D of the General Statutes, as the Revisor deems appropriate. Pursuant to this authority, the Official Comments and the North Carolina Commentary formerly located at this section have been transferred to G.S. 55D-10.

This section was amended by Session Laws 2001-358, ss. 3(a) and 6(a) in the coded bill drafting format provided by G.S. 120-20.1. The act, in s. 3(a), recodified subsections (a) through (e) and (g) through (i) as new G.S. 55D-10. The act, in s. 6(a) rewrote the section, treating subsection (j) as also having been recodified by s. 3(a). Subsection (j) has been set out above and subsections (c) through (i) have been set out as “Reserved” at the direction of the Revisor of Statutes.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Session Laws 2001-387, s. 1, amended this section. However, s. 155 of c. 387 repealed s. 1, contingent upon the enactment of Session Laws 2001-358. Session Laws 2001-358 was enacted on August 10, 2001.

Effect of Amendments.

Session Laws 2001-358, ss. 3(a) and 6(a), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, recodified former subsections (a) to (e) and (g) to (i) as G.S. 55D-10, and rewrote former (f) of this section as new subsections (a) and (b).

Legal Periodicals.

For article, “Revolving Funds: In the Vanguard of the Preservation Movement,” see 11 N.C. Cent. L.J. 256 (1980).

For “Legislative Survey: Business & Banking,” see 22 Campbell L. Rev. 253 (2000).

§ 55-1-21. Forms.

  1. The Secretary of State may promulgate and furnish on request forms for the following:
    1. An application for a certificate of existence.
    2. A foreign corporation’s application for a certificate of authority to transact business in this State.
    3. A foreign corporation’s application for a certificate of withdrawal.
    4. Repealed by Session Laws 1997-475, s. 6.2, effective January 1, 1998.
  2. The Secretary of State may promulgate and furnish on request forms for other documents required or permitted to be filed by this Chapter but their use is not mandatory.

If the Secretary of State so requires, use of these forms is mandatory.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1997-475, s. 6.2.

Official Comment

As described in the Official Comment to section 1.20, documents are entitled to filing under the Model Act if they meet the substantive and formal requirements of the Act; they may also contain additional information if the person submitting the document so elects. See the Official Comments to sections 1.20 and 1.25. In these circumstances it is not appropriate to vest the secretary of state with general authority to establish mandatory forms for use under the Model Act. Certain types of reports and requests for documents may be processed efficiently only if uniform forms are prescribed by the secretary of state. Certificates of existence, for example, should require specific information located at specific places on the form; similarly, processing of large-volume, largely routine filings is expedited if standardized forms are required. Also, the disclosure requirements of the annual report may be administered on a systematic basis if a standardized form is mandated. Section 1.21(a) recognizes that these considerations may exist in limited cases, and expressly enumerates those forms for which the secretary of state is authorized to establish mandatory forms.

Section 1.21(b) authorizes (but does not require) the secretary of state to prepare forms suitable for use for other documents required or permitted to be filed under the Act. However, the use of these forms is permissive and cannot be required by the secretary of state.

North Carolina Commentary

The Model Act was modified by changing “prescribe” to “promulgate,” because “prescribe” is inconsistent with the idea of optional forms.

§ 55-1-22. Filing, service, and copying fees.

  1. The Secretary of State shall collect a fee of ten dollars ($10.00) each time process is served on the Secretary under this Chapter. The party to a proceeding causing service of process is entitled to recover this fee as costs if the party prevails in the proceeding.
  2. The Secretary of State shall collect the following fees for copying, comparing, and certifying a copy of any filed document relating to a domestic or foreign corporation:
    1. One dollar ($1.00) a page for copying or comparing a copy to the original.
    2. Fifteen dollars ($15.00) for a paper certificate.
    3. Ten dollars ($10.00) for an electronic certificate.
  3. The fee for the annual report in subdivision (23) of this section is nonrefundable.

The Secretary of State shall collect the following fees when the documents described in this subsection are delivered to the Secretary for filing:

Document Fee (1) Articles of incorporation $125.00 (2) Application for reserved name 30.00 (3) Notice of transfer of reserved name 10.00 (4) Application for registered name 10.00 (5) Application for renewal of registered name 10.00 (6) Corporation’s statement of change of registered agent or registered office or both 5.00 (7) Agent’s statement of change of registered office for each affected corporation 5.00 (8) Agent’s statement of resignation No fee (9) Designation of registered agent or registered office or both 5.00 (10) Amendment of articles of incorporation 50.00 (11) Restated articles of incorporation 10.00 with amendment of articles 50.00 (12) Articles of merger or share exchange 50.00 (12a) Articles of conversion (other than articles of conversion included as part of another document) 50.00 (13) Articles of dissolution 30.00 (14) Articles of revocation of dissolution 10.00 (15) Certificate of administrative dissolution No fee (16) Application for reinstatement following administrative dissolution 100.00 (17) Certificate of reinstatement No fee (18) Certificate of judicial dissolution No fee (19) Application for certificate of authority 250.00 (20) Application for amended certificate of authority 75.00 (21) Application for certificate of withdrawal 25.00 (22) Certificate of revocation of authority to transact business No fee (23) Annual report (paper) 25.00 (23a) Annual report (electronic) 18.00 (24) Articles of correction 10.00 (25) Application for certificate of existence or authorization (paper) 15.00 (25a) Application for certificate of existence or authorization (electronic) 10.00 (26) Any other document required or permitted to be filed by this Chapter 10.00 (27) Repealed by Session Laws , effective January 1, 2002. 2001-358, s. 6(b) (28) Articles of validation 150.00

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History. 1957, c. 1180; 1967, c. 823, s. 20; 1969, c. 751, ss. 42, 43, 45; c. 797, ss. 4, 5; 1975, 2nd Sess., c. 981, s. 1; 1983, c. 713, ss. 32-38; 1989, c. 265, s. 1; c. 714; 1989 (Reg. Sess., 1990), c. 1057; 1991, c. 574, s. 1; 1997-456, s. 55.3; 1997-475, s. 5.1; 1997-485, s. 10; 2001-358, s. 6(b); 2001-387, ss. 2, 173; 2001-413, s. 6; 2002-126, ss. 29A.25, 29A.26; 2003-349, s. 7; 2007-323, s. 30.6(a); 2018-45, s. 1.

Official Comment

Section 1.22 establishes in a single section the filing fees for all documents that may be filed under the Model Act. The dollar amounts for each document should be inserted by each state as it adopts the Act.

The list of documents in section 1.22 includes all documents that are authorized to be filed with the secretary of state under the Model Act. The catch-all in subdivision (26) will apply to any document for which a state does not establish a specific filing fee plus any document that later amendments to the statute may authorize or direct be filed with the secretary of state without establishing a specific filing fee.

Subdivision (9) states that no fee is applicable to filing the resignation of a registered agent. This provision permits a person who is named as a registered agent without his consent, or who agrees to serve as registered agent for a fee and the fee is not paid, to eliminate any reference to himself in the records of the secretary of state without expense.

Subdivision (8) contains a maximum fee for filing a change of address of a registered agent. Since corporation service companies serve as registered agents for thousands of corporations in many jurisdictions, their change of address may require a very large number of filings. Hence, the fee is broadly based on the number of corporations affected but a maximum fee is specified to reflect that as the number of changes increases the cost per change should decrease.

Sections 11.07, 15.20, and 15.31 require the secretary of state to serve process on foreign corporations under the circumstances there specified. The fee for this service is set forth in section 1.22(b).

Section 1.22(c) establishes standard fees for coping filed documents and certifying that copies are true copies under section 1.27.

North Carolina Commentary

This section contains a new fee schedule covering documents required or permitted to be filed under this Act, and the fees shown here combine the fees and taxes that were separately covered in former G.S. 55-155 and former G.S. 55-156. In some cases the fees are higher than the fees and taxes under the prior law. The sliding scale that applied in some cases under the prior law is eliminated in favor of a flat fee in all cases. The format was adopted from the Model Act.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Session Laws 2001-387, s. 154(b), provides that “Nothing in the act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.”

Session Laws 2008-194, s. 2(a)-(f), provides: “(a) The following definitions apply in this section:

“(1) Department. — The Department of the Secretary of State.

“(2) Filer. — An individual, entity, or corporation that files a single notice pursuant to this section for more than 20,000 entities on file with the Department.

“(3) Notice. — A bulk filing which includes the information required in G.S. 55D-31(a)(2) through (6) and a certification that the filer has complied with the entity notification requirements of G.S. 55D-31(b). For a notice intended to update information for unincorporated nonprofit associations, ‘notice’ shall also mean a filing which includes the information required by G.S. 59B-11(b)(4). Any notice filed must be in an electronic form acceptable to the Department and include a written statement that the notice is filed pursuant to this section.

“(b) Upon receipt and filing by the Department, a notice pursuant to this section shall be sufficient as a matter of law under G.S. 55D-31 and G.S. 59B-11 to update registered office and registered agent information for each entity on file with the Department for which the filer is listed on the records of the Department as the registered office, the registered agent, or both.

“(c) The requirements of G.S. 55D-13(a) and (b), 55D-10(b)(8), 55-1-22(a), 55A-1-22(a), 57C-1-22(a) (repealed by Session Laws 2013-157, s.1), 59-35.2(a), 59-1106(a), and 59B-11(f) shall not apply to notices filed pursuant to this section.

“(d) This section shall only apply to one notice for each filer.

“(e) Unless otherwise specified, the change of address shall become effective on the 45th day following the Department’s receipt of a notice filed pursuant to this section. A filer may specify in the notice a later effective date for the change of address, but not an earlier effective date.

“(f) A notice filed pursuant to this section shall be delivered to the Department no later than one year after the effective date of this section.”

Effect of Amendments.

Session Laws 2007-323, s. 30.6(a), effective September 1, 2007, and applicable to annual reports filed on or after that date, in subsection (a), in subdivision (a)(23), inserted “(paper)” and substituted “25.00” for “20.00”; and added subdivision (a)(23a).

Session Laws 2018-45, s. 1, effective October 1, 2018, added subdivision (a)(28).

Legal Periodicals.

For 1997 legislative survey, see 20 Campbell L. Rev. 389.

§§ 55-1-22.1 through 55-1-27. [Transferred]

Transferred to §§ 55D-11 through 55D-17 by Session Laws 2001-358, s. 3(b).

§ 55-1-28. Certificate of existence.

  1. Anyone may apply to the Secretary of State to furnish a certificate of existence for a domestic corporation or a certificate of authorization for a foreign corporation.
  2. A certificate of existence or authorization sets forth:
    1. The domestic corporation’s corporate name or the foreign corporation’s corporate name used in this State;
    2. That (i) the domestic corporation is duly incorporated under the law of this State, the date of its incorporation, and the period of its duration if less than perpetual; or (ii) that the foreign corporation is authorized to transact business in this State;
    3. That the articles of incorporation of a domestic corporation or the certificate of authority of a foreign corporation has not been suspended for failure to comply with the Revenue Act of this State and that the corporation has not been administratively dissolved for failure to comply with the provisions of this Chapter;
    4. That its most recent annual report required by G.S. 55-16-22 either has been delivered to the Secretary of State or is not delinquent;
    5. That articles of dissolution have not been filed; and
    6. Other facts of record in the office of the Secretary of State that may be requested by the applicant.
  3. Subject to any qualification stated in the certificate, a certificate of existence or authorization issued by the Secretary of State may be relied upon as conclusive evidence that the domestic or foreign corporation is in existence or is authorized to transact business in this State.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1991, c. 645, s. 1; 1997-475, s. 6.3.

Official Comment

Section 1.28 establishes a procedure by which anyone may obtain a conclusive certificate from the secretary of state that a particular domestic or foreign corporation is in existence or is authorized to transact business in the state. The certificate will probably be a standardized form. The secretary of state is to make the judgment whether or not the corporation is in existence or is authorized to transact business from public records only and is not expected to make a more extensive investigation. In appropriate cases, the secretary of state may issue a certificate subject to specified qualifications.

Section 1.28(b)(5) refers only to taxes, fees, or penalties collected by the secretary of state or collected by other agencies and reported to the secretary of state. In some states the secretary of state may ascertain from other agencies that franchise or other taxes have been paid and include this information in the certificate. In states where this procedure does not unduly delay the issuance of certificates, section 1.28 may be revised appropriately. Section 1.28(b)(5) relates only to taxes, fees, or penalties to the extent their nonpayment affects the existence or authorization to transact business of the corporation.

A certificate of existence or authorization that may be relied on as binding and conclusive is of material assistance to attorneys who may be required to give formal legal opinions in connection with corporate transactions.

North Carolina Commentary

Although it has no express counterpart in prior law, this section codifies the practice of the Secretary of State of issuing “certificates of good standing.” Although subdivision (b)(3) refers only to taxes, fees and penalties collected by the Secretary of State, it is expected that the North Carolina Department of Revenue will continue the practice of giving letters confirming the payment of fees and taxes and penalties collectible by the Department.

§ 55-1-29. [Transferred]

Transferred to § 55D-18 by Session Laws 2001-358, s. 3(b).

Part 3. Secretary of State.

§ 55-1-30. Powers.

The Secretary of State has the power reasonably necessary to perform the duties required of him by this Chapter.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Section 1.30 is intended to grant the secretary of state the authority necessary for his efficient performance of the filing and other duties imposed on him by the Act but is not intended to give him general authority to establish public policy. The most important aspects of a modern corporation statute relate to the creation and maintenance of relationships among persons interested in or involved with a corporation; these relationships basically should be a matter of concern to the parties involved and not subject to regulation or interpretation by the secretary of state. Further, even in situations where it is claimed that the corporation has been formed or is being operated for purposes that may violate the public policies of the state, the secretary of state generally should not be the governmental official that determines the scope of public policy through administration of his filing responsibilities under the Act. Rather, the attorney general may seek to enjoin the illegal conduct or to dissolve involuntarily the offending corporation.

Section 1.30 is more narrowly drafted than earlier versions of the Model Act and the statutes of many states.

North Carolina Commentary

This section is substantially the same as former G.S. 55-168.

§ 55-1-31. Interrogatories by Secretary of State.

The Secretary of State may propound to any corporation, domestic or foreign which he has reason to believe is subject to the provisions of this Chapter, and to any officer or director thereof, such written interrogatories as may be reasonably necessary and proper to enable him to ascertain whether such corporation is subject to the provisions of this Chapter or has complied with all the provisions of this Chapter applicable to it. Subject to applicable jurisdictional requirements, such interrogatories shall be answered within 30 days after the mailing therefor, or within such additional time as shall be fixed by the Secretary of State, and the answers thereto shall be full and complete and shall be made in writing and under oath. If such interrogatories be directed to an individual they shall be answered by him, and if directed to a corporation they shall be answered by the president, vice-president, secretary or assistant secretary thereof. The Secretary of State shall certify to the Attorney General, for such action as the Attorney General may deem appropriate, all interrogatories and answers thereto which disclose a violation of any of the provisions of this Chapter, requiring or permitting action by the Attorney General.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

North Carolina Commentary

This section brings forward former G.S. 55-165 with minor modifications to provide the Secretary of State a formal mechanism for obtaining information necessary for him to carry out his duties. It does not appear in the Model Act.

§ 55-1-32. Penalties imposed upon corporations, officers, and directors for failure to answer interrogatories.

  1. The knowing failure or refusal of a domestic or foreign corporation to answer truthfully and fully within the time prescribed in this Chapter interrogatories propounded by the Secretary of State in accordance with the provisions of this Chapter shall constitute grounds for administrative dissolution under G.S. 55-14-20 or for revocation under G.S. 55-15-30, as the case may be.
  2. Each officer and director of a domestic or foreign corporation who knowingly fails or refuses within the time prescribed by this Chapter to answer truthfully and fully interrogatories propounded to him by the Secretary of State in accordance with the provisions of this Chapter shall be guilty of a Class 1 misdemeanor.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1993, c. 539, s. 440; c. 552, s. 3; 1994, Ex. Sess., c. 24, s. 14(c).

North Carolina Commentary

This section brings forward former G.S. 55-166 with two exceptions. First, a violation of this section by a corporation is not a misdemeanor; instead, the Secretary of State is empowered to suspend the offending corporation’s articles of incorporation or certificate of authority to do business. Natural persons who violate the section are guilty of a misdemeanor. Second, the provisions relating to signing false documents were omitted and are covered by G.S. 55-1-29.

§ 55-1-33. Information disclosed by interrogatories.

Interrogatories propounded by the Secretary of State and the answers thereto shall not be open to public inspection nor shall the Secretary of State disclose any facts or information obtained therefrom except insofar as his official duty may require the same to be made public or in the event such interrogatories or the answers thereto are required for evidence in any criminal proceedings or in any other action or proceedings by this State.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

North Carolina Commentary

This section brings forward former G.S. 55-167.

§§ 55-1-34 through 55-1-39.

Reserved for future codification purposes.

Part 4. Definitions.

§ 55-1-40. Chapter definitions.

In this Chapter unless otherwise specifically provided:

  1. “Articles of incorporation” include amended and restated articles of incorporation and articles of merger.
  2. “Authorized shares” means the shares of all classes a domestic or foreign corporation is authorized to issue.
  3. “Business entity,” as used in G.S. 55-11-10 and Article 11A of this Chapter, means a domestic corporation (including a professional corporation as defined in G.S. 55B-2), a foreign corporation, a domestic or foreign nonprofit corporation, a domestic or foreign limited liability company, a domestic or foreign limited partnership, a registered limited liability partnership or foreign limited liability partnership as defined in G.S. 59-32, or any other partnership as defined in G.S. 59-36 whether or not formed under the laws of this State.
  4. “Conspicuous” means so written that a reasonable person against whom the writing is to operate should have noticed it. For example, printing in italics or boldface or contrasting color, or typing in capitals or underlined, is conspicuous.
  5. “Corporation” or “domestic corporation” means a corporation for profit or a corporation having capital stock that is incorporated under or subject to the provisions of this Chapter and that is not a foreign corporation except that in G.S. 55-9-01 and G.S. 55-15-21 “corporation” includes domestic and foreign corporations.
  6. “Deliver” includes mail.
  7. “Distribution” means a direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedness by a corporation to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a declaration or payment of a dividend; a purchase, redemption, or other acquisition of shares; a distribution of indebtedness; or otherwise.
  8. “Dividend credit” as used in G.S. 55-6-01(d)(5) means the aggregate of all yearly dividend credits. “Yearly dividend credit” means with respect to noncumulative preferred shares, the amount by which the full dividend preference of such a share, to the extent that such preference is earned by the corporation with respect to such a share in a particular fiscal year, exceeds the dividends paid on said share for that year; provided, that no dividend credit shall accrue unless, and only to the extent that, there exists an earned surplus at the end of such fiscal year. Computations of earnings allocable to classes of shares made in good faith by the board of directors in accordance with generally accepted accounting principles shall be conclusive. For the purpose of this definition, a dividend is deemed paid if it has been declared and funds for its payment have been set aside.
  9. “Domestic limited liability company” has the same meaning as the term “LLC” in G.S. 57D-1-03.
  10. “Domestic limited partnership” has the same meaning as in G.S. 59-102.
  11. “Domestic nonprofit corporation” means a corporation as defined in G.S. 55A-1-40.
  12. “Effective date of notice” is defined in G.S. 55-1-41.
  13. “Electronic” has the same meaning as in G.S. 66-312.
  14. “Electronic record” has the same meaning as in G.S. 66-312.
  15. “Electronic signature” has the same meaning as in G.S. 66-312.
  16. “Entity” includes (without limiting the meaning of such term in Article 9 of this Chapter):
    1. Any domestic or foreign:
      1. Corporation; nonprofit corporation; professional corporation;
      2. Limited liability company;
      3. Profit and nonprofit unincorporated association; and
      4. Business trust, estate, partnership, trust;
    2. Two or more persons having a joint or common economic interest; and
    3. The United States, and any state and foreign government.
  17. “Foreign corporation” means a corporation for profit incorporated under a law other than the law of this State.
  18. “Foreign limited liability company” has the same meaning as the term “foreign LLC” in G.S. 57D-1-03.
  19. “Foreign limited partnership” has the same meaning as in G.S. 59-102.
  20. “Foreign nonprofit corporation” means a foreign corporation as defined in G.S. 55A-1-40.
  21. “Governmental subdivision” includes authority, county, district, and municipality.
  22. “Includes” means a partial definition.
  23. “Individual” denotes a natural person legally competent to act and also includes the estate of an incompetent or deceased individual.
  24. “Mail,” when used as a verb, means to deposit in the United States mail with postage thereon prepaid and correctly addressed. When a corporation mails an item to a shareholder, “correctly addressed” means addressed to the shareholder’s address as shown in the corporation’s current record of shareholders.
  25. “Means” denotes an exhaustive definition.
  26. “Merger” as used in Article 9 includes a “share exchange” as used in Article 11.
  27. “Notice” includes demand and is defined in G.S. 55-1-41.
  28. “Person” includes individual and entity.
  29. “Principal office” means the office (in or out of this State) where the principal executive offices of a domestic or foreign corporation are located, as designated in its most recent annual report filed with the Secretary of State or, in the case of a domestic or foreign corporation that has not yet filed an annual report, in its articles of incorporation or application for a certificate of authority, respectively.
  30. “Proceeding” includes civil suit and criminal, administrative, and investigatory action.
  31. “Public corporation” means any corporation that has a class of shares registered under Section 12 of the Securities Exchange Act of 1934, as amended (15 U.S.C. § 78l ).
  32. “Record date” means the date established under Article 6 or 7 on which a corporation determines the identity of its shareholders for purposes of this Chapter.
  33. “Secretary” means the corporate officer to whom the board of directors has delegated responsibility under G.S. 55-8-40(c) for custody of the minutes of the meetings of the board of directors and of the shareholders and for authenticating records of the corporation.
  34. “Service-disabled veteran” means a veteran with a disability that was incurred or aggravated during the veteran’s service in the Armed Forces of the United States.
  35. “Service-disabled veteran-owned small business” means a business that satisfies both of the following requirements:
    1. The business’s net annual receipts do not exceed one million dollars ($1,000,000).
    2. One or more service-disabled veterans own more than fifty percent (50%) of the business.
  36. “Shares” means the units into which the proprietary interests in a corporation are divided.
  37. “Shareholder” means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation.
  38. “State”, when referring to a part of the United States, includes a state and commonwealth (and their agencies and governmental subdivisions) and a territory and insular possession (and their agencies and governmental subdivisions) of the United States.
  39. “Subscriber” means a person who subscribes for shares in a corporation, whether before or after incorporation.
  40. “Unincorporated entity” means a domestic or foreign limited liability company, a domestic or foreign limited partnership, a registered limited liability partnership or foreign limited liability partnership as defined in G.S. 59-32, or any other partnership as defined in G.S. 59-36, whether or not formed under the laws of this State.
  41. “United States” includes district, authority, bureau, commission, department, and any other agency of the United States.
  42. “Veteran” means an individual entitled to any benefits or rights under the laws of the United States by reason of service in the Armed Forces of the United States.
  43. “Veteran-owned small business” means a business that satisfies both of the following requirements:
    1. The business’s net annual receipts do not exceed one million dollars ($1,000,000).
    2. One or more veterans own more than fifty percent (50%) of the business.
  44. “Voting group” means all shares of one or more classes or series that under the articles of incorporation or this Chapter are entitled to vote and be counted together collectively on a matter at a meeting of shareholders. All shares entitled by the articles of incorporation or this Chapter to vote generally on the matter are for that purpose a single voting group.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 1; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.4; 1993, c. 552, s. 4; 1999-369, ss. 1.2, 1.3; 1999-456, s. 3; 2001-358, s. 5(a); 2001-387, ss. 3, 4, 5, 173, 175(a); 2001-413, s. 6; 2001-487, s. 62(a); 2013-157, s. 3; 2017-90, s. 1(a); 2017-102, s. 14.2(a); 2018-45, s. 33.1.

Official Comment

Section 1.40 collects in a single section definitions of terms used throughout the Model Act. Subchapters and sections of the Act in a few instances contain specialized definitions applicable only to those subchapters or sections.

Most of the definitions of section 1.40 are drawn directly from earlier versions of the Model Act and are reasonably self-explanatory. A number of definitions, however, are new or deserve further explanation.

  1. Conspicuous
  2. Corporation, domestic corporation, and foreign corporation
  3. Distribution
  4. Entity
  5. Principal office
  6. Shareholder
  7. Secretary
  8. Person
  9. Voting group
    1. For the sake of uniformity with other states, this Act does not use the term “charter,” but instead defines “articles of incorporation” to include all amendments.
    2. This section does not contain general definitions of the terms “assets,” “dominant shareholder,” “liabilities,” “net assets,” or “preferred share,” as did prior law, because such terms have no special significance in the Model Act.
    3. The definition of “dividend credit” was brought forward with minor modifications from prior law.
    4. The Model Act’s definition of “employee” was deleted as unnecessary and undesirable.
    5. The Model Act’s definition of “entity” was expanded to include professional corporations.
    6. “Means” was substituted for “denotes” in the definition of “includes.”
    7. The definition of “individual” was expanded.
    8. Definitions were included for “mail” and “merger” to clarify possible confusion in the use of those terms.
    9. “Notice” was defined to include “demand.”
    10. A definition of “public corporation” was added for ease of reference in those provisions of the Act that are applicable only to corporations having a class of shares registered under the Securities Exchange Act of 1934.

“Conspicuous” is defined in section 1.40(3) basically as defined in section 1-201(10) of the UNIFORM COMMERCIAL CODE. Even though the definition indicates some of the methods by which a provision may be made attention-calling, the test is whether attention can reasonably be expected to be called to it.

“Corporation,” “domestic corporation,” and “foreign corporation” are defined in sections 1.40(4) and (10). The word “corporation,” when used alone, refers only to domestic corporations. In a few instances, the phrase “domestic corporation” has been used in order to contrast it with a foreign corporation.

The term “distribution” defined in section 1.40(6) is a fundamental element of the financial provisions of the Model Act as amended in 1980. Section 6.40 sets forth a single, unitary test for the validity of any “distribution.” Section 1.40(6) in turn defines “distribution” to include all transfers of money or other property made by a corporation to any shareholder in respect of the corporation’s shares, except mere changes in the unit of interest such as share dividends and share splits. Thus, a “distribution” includes the declaration or payment of a dividend, a purchase by a corporation of its own shares, a distribution of evidences of indebtedness or promissory notes of the corporation, and a distribution in voluntary or involuntary liquidation. If a corporation incurs indebtedness in connection with a distribution (as in the case of a distribution of a debt instrument or an installment purchase of shares), the creation, incurrence, or distribution of the indebtedness is the event which constitutes the distribution rather than the subsequent payment of the debt by the corporation.

The term “indirect” in the definition of “distribution” is intended to include transactions like the repurchase of parent company shares by a subsidiary whose actions are controlled by the parent. It also is intended to include any other transaction in which the substance is clearly the same as a typical dividend or share repurchase, no matter how structured or labeled.

The term “entity,” defined in section 1.40(9), appears in the definition of “person” in section 1.40(16) and is included to cover all types of artificial persons. See also the definitions of “governmental subdivision,” in section 1.40(11), “state,” in section 1.40(23), and “United States,” in section 1.40(25).

Section 1.40(17) defines the principal office of a corporation to be the office, within or without the state, where the principal executive office of the corporation is located. Many corporations maintain numerous offices, but there if usually one office, sometimes colloquially referred to as the home office, headquarters, or executive suite, where the principal corporate officers are located. The corporation must designate its principal office address in the annual report required by section 16.22. In case of doubt as to which corporate office is the principal office, the designation by the corporation in its annual report should be accepted as establishing the principal office of the corporation.

The definition of “shareholder” in section 1.40(22) includes a beneficial owner of shares named in a nominee certificate under section 7.23, but only to the extent of the rights granted the beneficial owner in the certificate — for example, the right to receive notice of, and vote at, shareholders’ meeting. Various substantive sections of the Model Act also permit holders of voting trust certificates or beneficial owners of shares (not subject to a nominee certificate under section 7.23) to exercise some of the rights of a “shareholder.” See, for example, section 7.40 (derivative proceedings).

The term “secretary” is defined in section 1.40(20) since the Model Act does not require the corporation to maintain any specific or titled officers. See section 8.40. However, some corporate officer, however titled, must perform the functions described in this definition, and that officer is referred to as the “secretary” in various sections of the Act that impose a duty on him.

The term “person” is defined in section 1.40(16) to include an individual or an entity. In the case of an individual the Model Act assumes that the person is competent to act in the matter under general state law independent of the corporation statute.

Section 1.40(26) defines “voting group” for purposes of the Act as a matter of convenient reference. A “voting group” consists of all shares of one or more classes or series that under the articles of incorporation or the revised Model Act are entitled to vote and be counted together collectively on a matter. Shares entitled to vote “generally” on a matter under the articles of incorporation or this Act are for that purpose a single voting group. The word “generally” signifies all shares entitled to vote on the matter by the articles of incorporation or this Act that do not expressly have the right to be counted or tabulated separately. “Voting groups” are thus the basic units of collective voting at a shareholders’ meeting, and voting by voting groups may provide essential protection to one or more classes or series of shares against actions that are detrimental to the rights or interests of that class or series.

The determination of which shares form part of a single voting group must be made from the provisions of the articles of incorporation and of this Act. In a few instances under the Model Act, the board of directors may establish the right to vote by voting groups. On most matters coming before shareholders’ meetings, only a single voting group, consisting of a class of voting or common shares, will be involved, and action on such a matter is effective when approved by that voting group pursuant to section 7.25. See section 7.26(a). If a second class of shares is also entitled to vote on the matter, then a further determination must be made as to whether that class is to vote as a separate voting group or whether it is to vote along with the other voting shares as part of a single voting group.

Members of the board of directors are usually elected by the single voting group of shares entitled to vote generally; in some circumstances, however, some members of the board may be selected by one voting group and other members by one or more different voting groups. See section 8.03.

The definition of a voting group permits the establishment by statute of quorum and voting requirements for a variety of matters considered at shareholders’ meetings in corporations with multiple classes of shares. See sections 7.25 and 7.26. Depending on the circumstances, two classes or series of shares may vote together collectively on a matter as a single voting group, they may be entitled to vote on the matter separately as two voting groups, or one or both of them may not be entitled to vote on the matter at all.

Amended North Carolina Commentary

This section defines more terms than were defined in former G.S. 55-2 and in some cases the definitions are different. The following differences should be noted:

This section differs from the Model Act in certain respects:

(i) The phrase “unless otherwise specifically provided” was added to the introduction to allow for different definitions in Article 9.

(ii) Except for the final clause thereof, the definition of “corporation” was brought forward with minor modifications from prior law. The final clause, relating to the use of the term “corporation” in G.S. 55-9-01, was considered necessary because that section, which was brought forward from prior law, uses the term “corporation” in certain cases to refer to any corporation, foreign or domestic. In the remainder of Article 9, the term “corporation” refers to domestic corporations only.

The Model Act uses the term “not-for-profit corporation” rather than the term “nonprofit corporation,” which is used in this Act. The terms “not-for-profit corporation” and “nonprofit corporation” are interchangeable in Chapter 55A. “Non-profit corporation” and “nonprofit association” were therefore used throughout this Act.

Cross References.

As to the North Carolina Limited Liability Company Act, see G.S. 57D-1-01.

Editor’s Note.

The subdivision added by Session Laws 1999-369, s. 1.3, has been designated as (24a) pursuant to directions from the Revisor of Statutes.

Session Laws 2001-358, s. 53, provided that the act which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Session Laws 2001-387, s. 154(b), provides that “Nothing in the act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.”

Section 57C-1-03, referred to in subdivisions (6b) and (10b), was repealed by Session Laws 2013-157, s. 1, effective January 1, 2014. For present comparable provisions, see G.S. 55D-1.

The preamble to Session Laws 2017-90, provides: “Whereas, over 770,000 veterans reside across all of North Carolina’s one hundred counties; and

“Whereas, North Carolina proudly has one of the largest veteran populations in the country; and

“Whereas, the number of veterans across our State underscores the importance and impact of the State’s current military base populations to our State and how veterans and their families continue to reside in the State after the conclusion of their military service to further contribute to the State’s workforce and economy; Now, therefore,”

Session Laws 2017-90, s. 7, made the repeal of subdivision (1), and the addition of subdivisions (1a), (20a), (20b), (25a), and (25b) by Session Laws 2017-90, s. 1(a), effective January 1, 2018, and applicable to annual reports filed by business entities on or after that date.

Pursuant to the authority of the Revisor of Statutes, subdivision (1a) as added by Session Laws 2017-90, s. 1, was redesignated as subdivision (1), which was its original location.

Session Laws 2017-102, s. 14.2(b), would have repealed the amendment in s. 14.2(a), contingent upon SB 622 becoming law, but SB 622 has not yet become law.

Effect of Amendments.

Session Laws 2001-358, s. 5(a), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, rewrote subdivision (9).

Session Laws 2013-157, s. 3, effective January 1, 2014, substituted “the term ‘LLC’ in G.S. 57D-1-03” for “in G.S. 57C-1-03” in subdivision (6b) and substituted “the term ‘foreign LLC’ in G.S. 57D-1-03” for “in G.S. 57C-1-03” in subdivision (10a).

Session Laws 2017-90, s. 1(a), deleted former subdivision (1); and added subdivisions (1a), (20a), (20b), (25a), and (25b). For effective date and applicability, see editor’s note.

Session Laws 2017-102, s. 14.2(a), effective July 12, 2017, substituted “ ‘Mail,’ when used as a verb, means to deposit” for “An item is ‘mailed’ when it is deposited” in the first sentence of subdivision (13a).

Session Laws 2018-45, s. 33.1, effective October 1, 2018, substituted “‘Mail,’ when used as verb, means to deposit” for “An item is ‘mailed’ when it is deposited” in subdivision (13a).

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For article, “Legislative Survey: Business & Banking,” see 22 Campbell L. Rev. 253 (2000).

For article, “Agency Theory: Still Viable? Proposals for Corporate Governance Reform: Six Decades of Ineptitude and Counting,” see 48 Wake Forest L. Rev. 673 (2013).

For article, “Agency Theory: Still Viable? The Impact of National Culture on Corporate Financial Decisions,” see 48 Wake Forest L. Rev. 697 (2013).

§ 55-1-41. Notice.

  1. Notice under this Chapter shall be in writing unless oral notice is authorized in the corporation’s articles of incorporation or bylaws and written notice is not specifically required by this Chapter.
  2. Notice may be communicated in person; by electronic means; or by mail or private carrier. If these forms of personal notice are impracticable as to one or more persons, notice may be communicated to such persons by publishing notice in a newspaper in the county wherein the corporation has its principal place of business in the State, or if it has no principal place of business in the State, the county wherein it has its registered office; or by radio, television, or other form of public broadcast communication.
  3. Written notice by a domestic or foreign corporation to its shareholder is effective when deposited in the United States mail with postage thereon prepaid and correctly addressed to the shareholder’s address shown in the corporation’s current record of shareholders. To the extent the corporation pursuant to G.S. 55-1-50 and the shareholder have agreed, notice by a domestic corporation to its shareholder in the form of an electronic record sent by electronic means is effective when it is sent as provided in G.S. 66-325. A shareholder may terminate any such agreement at any time on a prospective basis effective upon written notice of termination to the corporation or upon such later date as may be specified in the notice.
  4. Written notice to a domestic or foreign corporation (authorized to transact business in this State) may be addressed to its registered agent at its registered office or to the corporation or its secretary at its principal office shown in its most recent annual report on file in the office of the Secretary of State or, in the case of a domestic or foreign corporation that has not yet filed an annual report, in its articles of incorporation or application for a certificate of authority, respectively.
  5. Except as provided in subsection (c), written notice is effective at the earliest of the following:
    1. When received;
    2. Five days after its deposit in the United States mail, as evidenced by the postmark or otherwise, if mailed with at least first-class postage thereon prepaid and correctly addressed;
    3. On the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee.In the case of notice in the form of an electronic record sent by electronic means, the time of receipt shall be determined as provided in G.S. 66-325.
  6. Oral notice is effective when actually communicated to the person entitled thereto.
  7. If this Chapter prescribes notice requirements for particular circumstances, those requirements govern. If articles of incorporation or bylaws prescribe notice requirements not inconsistent with this section or other provisions of this Chapter, those requirements govern.

History. 1989, c. 265, s. 1; 1993, c. 552, s. 5; 2001-387, s. 6.

Official Comment

Section 1.41 establishes rules for determining how notice may be given and when notice is effective for a variety of purposes under the Model Act.

  1. Notice by a corporation to its shareholders
  2. Notice to the corporation
  3. Miscellaneous provisions
    1. Subsection (a) requires that notice be in writing unless oral notice is authorized by the corporation’s articles of incorporation or bylaws; the Model Act permits oral notice if it is “reasonable under the circumstances.”
    2. Subsection (b) specifically allows notice to be given by facsimile transmission. When the specified modes of communication of notice are impracticable as to one or more persons, subsection (b) is more limited than the Model Act in that it permits dispensing with the specified mode only as to those persons with respect to whom it is impracticable.
    3. Subsections (c) and (f) do not contain the Model Act’s reference to notices being “comprehensible” because this language was deemed unnecessary. Subsection (f) was rewritten to provide that oral notice is effective when actually communicated to the person entitled to it.
    4. Subsections (c) and (e) use “with postage thereon prepaid” instead of “postpaid.”
    5. Subsection (d) permits notice to be mailed to a principal office listed in an annual report only after the report is on file in the Secretary of State’s office; the Model Act apparently permits otherwise.
      1. BUSINESS OR AFFAIRS
      2. CORPORATE POWERS
      3. PAR VALUE
      4. SHAREHOLDER LIABILITY
      5. LIMITATIONS OF DIRECTOR LIABILITY
      6. DIRECTOR IDEMNIFICATION
      7. BUSINESS OPPORTUNITIES

Section 1.41(c) provides that notice by a corporation to its shareholders is effective when mailed if correctly addressed with sufficient postage. The correct address for this purpose is the address shown in the corporation’s records. The effect of this section is to permit the corporation to compute the statutory time periods for notice of shareholders’ meetings and other actions from the date the notice is mailed without regard to where its shareholders are located or the time it takes for the mail to reach them.

Written notice to shareholders by persons other than the corporation is effective as provided in section 1.41(e). Notice by the corporation to its shareholders that is not addressed to the record address of the shareholder is effective when received under section 1.41(e).

Section 1.41(d) provides that notice to a corporation may be addressed to the registered agent of the corporation at its registered office or to the corporation or its secretary at the principal office of the corporation as shown in its most recent public filing. An officer, director, or shareholder of a corporation will normally give written notice to the corporation by delivering or mailing a copy of that notice to the corporation or to the secretary of the corporation at its principal office. Such a notice is effective when it is received. Such notice may be given for a variety of purposes under this Act, e.g., giving notice of intent to dissent (section 13.21), notice of a demand to inspect books and records (section 16.02), and notices of resignation (sections 8.07 and 8.43). This method of giving notice to the corporation, however, is not exclusive, and an officer, director, or shareholder may give notice in other ways as well.

Persons who have no prior relationship with the corporation may give notice either to the registered agent of the corporation, or if they wish, to the corporation or its secretary at its principal office.

Section 1.41 also contains a variety of general provisions dealing with notice. It recognizes, for example, that notice on some occasions may be given orally if that is reasonable under the circumstances. It also deals with situations where notice may be sought to be given to persons for whom no current address is available, or where personal notice is impractical. Notice delivered to the person’s last known address is effective as described in section 1.41(e) even though never actually received by the person. Section 1.41(b) also authorizes notice by publication in some circumstances, including radio, television, or other form of public wire or wireless communication.

Section 1.41(g) recognizes that other sections of the Act prescribe specific notice requirements for particular situations — e.g., service of process on a corporation’s registered agent under section 5.04 — and that these specific requirements, rather than the general requirements of section 1.41, control. Finally, the second sentence of subsection 1.41(g) permits a corporation’s articles of incorporation or bylaws to prescribe the corporation’s own notice requirements, if they are not inconsistent with the general requirements of this section or specific requirements of other sections of the Act.

The rules set forth in section 1.41 permit many other sections of the Model Act to be phrased simply in terms of giving or delivering notice without repeating details with respect to how notice should be given and when it is effective in various circumstances.

North Carolina Commentary

The prior law contained no general definition of “notice.”

The present section differs from the Model Act in the following respects:

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

§ 55-1-42. Number of shareholders.

  1. For purposes of this Chapter, the following identified as a shareholder in a corporation’s current record of shareholders constitutes one shareholder:
    1. All co-owners of the same shares;
    2. A corporation, partnership, trust, estate, or other entity;
    3. The trustees, guardians, custodians, or other fiduciaries of a single trust, estate, or account.
  2. For purposes of this Chapter, shareholdings registered in substantially similar names constitute one shareholder if it is reasonable to believe that the names represent the same person.

History. 1989, c. 265, s. 1.

Official Comment

Section 1.42 provides rules for determining the number of shareholders in a corporation. The Model Act generally avoids provisions that are based on the number of shareholders of a corporation, since these provisions may encourage individual shareholders to divide or combine their holdings for private strategic advantage. But in two instances the number of shareholders is critical: to permit a corporation to dispense with a board of directors as its principal form of corporate governance under section 8.01 and to elect close corporation status under the Model Statutory Close Corporation Supplement. The determination of the precise number of shareholders may also become important in other contexts in the future.

North Carolina Commentary

This section has no counterpart in prior law.

The section is different from the Model Act in that it counts all co-owners as a single shareholder, whereas the Model Act counts as a single shareholder only “three or fewer co-owners.”

§§ 55-1-43 through 55-1-49.

Reserved for future codification purposes.

Part 5. Miscellaneous.

§ 55-1-50. Electronic transactions.

For purposes of applying Article 40 of Chapter 66 of the General Statutes to transactions under this Chapter, a corporation may agree to conduct a transaction by electronic means through provision in its articles of incorporation or bylaws or by action of its board of directors.

History. 2001-387, s. 7.

Editor’s Note.

Session Laws 2001-387, s. 154(b), provides that “Nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.”

§§ 55-1-51 through 55-1-59.

Reserved for future codification purposes.

Part 6. Ratification of Defective Corporate Actions.

§ 55-1-60. Definitions.

In this Part, the following definitions apply:

  1. Corporate action. — Any action taken by or on behalf of the corporation, including any action taken by the incorporator, the board of directors, a committee, a subcommittee, an officer or agent of the corporation, or the shareholders.
  2. Date of the defective corporate action. — The date the defective corporate action was purported to have been taken or, if the exact date is unknown, the approximate date thereof.
  3. Defective corporate action. — Any corporate action purportedly taken that is, and at the time the corporate action was purportedly taken would have been, within the power of the corporation, but is void or voidable due to a failure of authorization. This term includes an overissue. This term does not include a business combination subject to G.S. 55-9-02, unless the business combination was approved by shareholders in accordance with G.S. 55-9-02.
  4. Failure of authorization. — The (i) failure to authorize, approve, or otherwise effect a corporate action in compliance with the provisions of this Chapter, the articles of incorporation or bylaws of the corporation, a corporate resolution, or any plan or agreement to which the corporation is a party, if and to the extent the failure would render the corporate action void or voidable, or (ii) failure of the board of directors or any officer of the corporation to authorize or approve any act or transaction taken by or on behalf of the corporation that would have required for its due authorization the approval of the board of directors or the officer.
  5. Overissue. — The purported issuance of either of the following:
    1. Shares of a class or series in excess of the number of shares of a class or series the corporation has the power to issue under G.S. 55-6-01 at the time of the issuance.
    2. Shares of any class or series that is not then authorized for issuance by the articles of incorporation.
  6. Putative shares. — The shares of any class or series of the corporation, including shares issued upon exercise of rights, options, warrants, or other securities convertible into shares of the corporation, or interests with respect thereto, that were created or issued as a result of a defective corporate action, and that satisfy either of the following conditions:
    1. Would constitute valid shares but for any failure of authorization.
    2. Cannot be determined by the board of directors to be valid shares.
  7. Valid shares. — The shares of any class or series of the corporation that have been duly authorized and validly issued in accordance with this Chapter, including as a result of ratification or validation under this Part.
  8. Validation effective time. — With respect to any defective corporate action ratified under this Part, means the later of (i) the time at which the ratification of the defective corporate action is approved by the shareholders, or if approval of shareholders is not required, the time at which the notice required by G.S. 55-1-64 becomes effective in accordance with G.S. 55-1-41 or (ii) the time at which any articles of validation filed in accordance with G.S. 55-1-66 become effective. The validation effective time shall not be affected by the filing or pendency of a judicial proceeding in accordance with this Chapter or otherwise, unless otherwise ordered by the court.

History. 2018-45, s. 3.

Official Comment to the Model Business Corporation Act, 2016 Revision

The definitions of “corporate action,” “defective corporate action” and “failure of authorization” are intentionally broad so as to permit ratification of any corporate action purportedly taken that would have been within the power granted to a corporation under the Act.

The term “defective corporate action” includes an “overissue” of shares and other defects in share issuances that could cause shares to be treated as void. For purposes of determining which shares are overissued, only those shares issued in excess of the number of shares permitted to be issued under section 6.01 of the Act would be deemed overissued shares. If it cannot be determined from the records of the corporation which shares were issued before others, all shares included in an issuance that is or results in an overissue would be overissued shares.

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Session Laws 2018-45, s. 34, made this Part effective October 1, 2018.

§ 55-1-61. Defective corporate actions.

  1. A defective corporate action is not void or voidable if ratified in accordance with G.S. 55-1-62 or validated in accordance with G.S. 55-1-67.
  2. Ratification under G.S. 55-1-62 or validation under G.S. 55-1-67 is not the exclusive means of ratifying or validating any defective corporate action, and the absence or failure of ratification in accordance with this Part does not, of itself, affect the validity or effectiveness of any corporate action properly ratified under common law or otherwise, nor does it create a presumption that the corporate action is or was a defective corporate action or void or voidable.
  3. In the case of an overissue, putative shares shall be valid shares effective as of the date originally issued or purportedly issued upon either of the following:
    1. The effectiveness under this Part and under Article 10 of this Chapter of an amendment to the articles of incorporation authorizing, designating, or creating the shares.
    2. The effectiveness of any other corporate action under this Part ratifying the authorization, designation, or creation of the shares.

History. 2018-45, s. 3.

Official Comment to the Model Business Corporation Act, 2016 Revision

Subchapter E provides a statutory ratification procedure for corporate actions that may not have been properly authorized and shares that may have been improperly issued. The statutory ratification procedure is designed to supplement common law ratification. Corporate actions ratified under this subchapter remain subject to equitable review.

Examples of defective corporate actions subject to ratification include the failure of the incorporator to validly appoint an initial board of directors, corporate action taken in the absence of board resolutions authorizing the action, the failure to obtain the requisite shareholder approval of a corporate action, issuance of shares in the absence of evidence that consideration payable to the corporation for shares was received, the failure to comply with appraisal requirements and the issuance of shares without complying with preemptive rights. The ratification procedure is intended to be available only where there is objective evidence that a corporate action was defectively implemented. For example, subchapter E would permit ratification of shares previously issued but subsequently determined to have been issued improperly. It would not permit the corporation to issue shares retroactively as of an earlier date, however, where there is no objective evidence that those shares had previously been issued. Objective evidence may include resolutions, issuance of share certificates, subscription or share purchase agreements, entries in a share ledger or other correspondence indicating that shares were issued or intended to have been issued.

Section 1.46(a) does not distinguish between void and voidable actions. Instead it provides that any defective corporate action that is ratified in accordance with section 1.47 or validated under section 1.52 shall not be void or voidable. Section 1.47 is not the exclusive means by which a defective corporate action may be ratified. Thus, the general common law doctrine of ratification, as applied to a board of directors’ adoption of actions taken by officers who may not have had the actual authority to take such actions, continues to be an effective mode of ratification. Section 1.46(b) makes clear that the corporation’s ratification of a defective corporate action that is voidable but not void using common law methods of ratification rather than under section 1.47 will not, standing alone, affect the validity of the action or create a presumption that the action is not valid. In addition, ratification under subchapter E is distinct from correction of an already filed document under section 1.24.

Section 1.46(c) provides that an overissue can be remedied by the adoption of articles of amendment or other corporate action that has the effect of authorizing, designating or creating shares of a series or class, such that the putative shares that resulted in the overissue are deemed to be validly issued from the date of original issuance. This provision enables a corporation to cure an overissue occurring when shares have been duly authorized but are issued before articles of amendment are filed. It also permits a corporation to remedy an overissue even if it cannot specifically identify the putative shares.

§ 55-1-62. Ratification of defective corporate actions.

  1. Except as otherwise provided in subsection (b) of this section, the board of directors shall ratify a defective corporate action by taking action in accordance with G.S. 55-1-63 that states all of the following:
    1. The defective corporate action to be ratified and, if the defective corporate action involved the issuance of putative shares, the number and type of putative shares purportedly issued.
    2. The date of the defective corporate action.
    3. The nature of the failure of authorization with respect to the defective corporate action to be ratified.
    4. That the board of directors approves the ratification of the defective corporate action.
  2. In the event that a defective corporate action to be ratified relates to the election of the initial board of directors of the corporation under G.S. 55-2-05(a)(2), a majority of the persons who, at the time of the ratification, are exercising the powers of directors may take an action that states all of the following:
    1. The name of the person or persons who first took action in the name of the corporation as the initial board of directors of the corporation.
    2. The earlier of the date on which the person or persons identified under subdivision (1) of this subsection first took the action or were purported to have been elected as the initial board of directors.
    3. That the ratification of the election of the person or persons identified under subdivision (1) of this subsection as the initial board of directors is approved.
  3. If any provision of this Chapter, the articles of incorporation or bylaws, any corporate resolution, or any plan or agreement to which the corporation is a party in effect at the time action under subsection (a) of this section is taken, requires shareholder approval or would have required shareholder approval at the date of the occurrence of the defective corporate action, the ratification of the defective corporate action approved in the action taken by the directors under subsection (a) of this section shall be submitted to the shareholders for approval in accordance with G.S. 55-1-63.
  4. Unless otherwise provided in the action taken by the board of directors under subsection (a) of this section, after the action by the board of directors has been taken and, if required, approved by the shareholders, the board of directors may abandon the ratification at any time prior to the validation effective time without further action of the shareholders.

History. 2018-45, s. 3.

Official Comment to the Model Business Corporation Act, 2016 Revision

The information required by section 1.47(a)(1)(a)(1) regarding the listing of putative shares may be satisfied by attaching a table, including a capitalization table, listing the putative shares. Section 1.47(b) permits the ratification of the initial election of the board of directors by the persons who are acting as the current board of directors, recognizing that if the corporation’s initial board of directors was defectively appointed, there may be no effective method of ratification because a duly elected board of directors does not exist.

§ 55-1-63. Action on ratification.

  1. The quorum and voting requirements applicable to a ratifying action by the board of directors under G.S. 55-1-62(a) are the quorum and voting requirements applicable to the corporate action proposed to be ratified at the time the ratifying action is taken.
  2. If the ratification of the defective corporate action requires approval by the shareholders under G.S. 55-1-62(c), and, if the approval is to be given at a meeting, the corporation shall notify each holder of valid and putative shares, whether or not entitled to vote, as of the record date for notice of the meeting and as of the date of the occurrence of the defective corporate action, provided that notice shall not be required to be given to holders of valid or putative shares whose identities or addresses for notice cannot be determined from the records of the corporation. The notice shall state that the purpose, or one of the purposes, of the meeting is to consider ratification of a defective corporate action and shall be accompanied by (i) a copy of the action taken by the board of directors in accordance with G.S. 55-1-62(a) or (ii) the information required by subdivisions (1) through (4) of subsection (a) of G.S. 55-1-62. The notice shall also include a statement that any claim that the ratification of the defective corporate action and any putative shares issued as a result of the defective corporate action should not be effective, or should be effective only on certain conditions, shall be brought within 120 days from the applicable validation effective time.
  3. Except as provided in subsection (d) of this section with respect to the voting requirements to ratify the election of a director, the quorum and voting requirements applicable to the approval by the shareholders required by G.S. 55-1-62(c) are the quorum and voting requirements applicable to the corporate action proposed to be ratified at the time of the shareholder approval.
  4. The approval by shareholders to ratify the election of a director requires that the votes cast within the voting group favoring the ratification of the election exceed the votes cast opposing the ratification of the election at a meeting at which a quorum is present.
  5. Putative shares on the record date for determining the shareholders entitled to vote on any matter submitted to shareholders under G.S. 55-1-62(c), and without giving effect to any ratification of putative shares that becomes effective as a result of the vote, shall neither be entitled to vote nor counted for quorum purposes in any vote to approve the ratification of any defective corporate action.
  6. If the approval under this section of putative shares would result in an overissue, in addition to the approval required by G.S. 55-1-62, approval of an amendment to the articles of incorporation under Article 10 of this Chapter to increase the number of shares of an authorized class or series, or to authorize the creation of a class or series of shares so there would be no overissue, shall also be required.

History. 2018-45, s. 3.

Official Comment to the Model Business Corporation Act, 2016 Revision

Notwithstanding the shareholder notice required by section 1.48(b), only valid shares are entitled to vote on the ratification action or counted for quorum purposes. The retroactive effect of a ratification of putative shares does not invalidate the quorum or voting result of the ratification.

For matters other than the election of directors, the quorum and voting requirements applicable to shareholder approval of ratification are the quorum and voting requirements applicable to the corporate action being ratified at the time of such approval. For example, if the defective corporate action being ratified is an amendment to the articles of incorporation, whether in connection with an overissue or otherwise, the vote required would be governed by section 10.03. If the defective corporate action involves a merger, the vote required would be the vote required by section 11.04.

§ 55-1-64. Notice requirements.

  1. Unless shareholder approval is required under G.S. 55-1-62(c), prompt notice of an action taken under G.S. 55-1-62 shall be given to each holder of valid and putative shares, whether or not entitled to vote, as of (i) the date of the action by the board of directors and (ii) the date of the defective corporate action ratified, provided that notice shall not be required to be given to holders of valid and putative shares whose identities or addresses for notice cannot be determined from the records of the corporation.
  2. The notice required under subsection (a) of this section shall contain (i) a copy of the action taken by the board of directors in accordance with subsection (a) or (b) of G.S. 55-1-62 or (ii) the information required by subdivisions (1) through (4) of subsection (a) of G.S. 55-1-62 or subdivisions (1) through (3) of subsection (b) of G.S. 55-1-62, as applicable. The notice shall also include a statement that any claim that the ratification of the defective corporate action and any putative shares issued as a result of the defective corporate action should not be effective, or should be effective only on certain conditions, shall be brought within 120 days from the applicable validation effective time.
  3. No notice under this section is required with respect to any action required to be submitted to shareholders for approval under G.S. 55-1-62(c) if notice is given in accordance with G.S. 55-1-63(b).
  4. A notice required by this section may be given in any manner permitted by G.S. 55-1-41 and, for any public corporation, may be given by means of a filing or furnishing of the notice with the Securities and Exchange Commission which becomes publicly accessible on the Web site of the Securities and Exchange Commission approximately contemporaneously with the filing or furnishing.

History. 2018-45, s. 3.

§ 55-1-65. Effect of ratification.

Ratification in accordance with this Part shall have the following effects from and after the validation effective time, and without regard to the 120-day period during which a claim may be brought under G.S. 55-1-67:

  1. Each defective corporate action ratified in accordance with G.S. 55-1-62 is not void or voidable as a result of the failure of authorization identified in the action taken under subsection (a) or (b) of G.S. 55-1-62 and is a valid corporate action effective as of the date of the defective corporate action.
  2. The issuance of each putative share or fraction of a putative share purportedly issued pursuant to a defective corporate action identified in the action taken under G.S. 55-1-62 is not void or voidable, and the putative share or fraction of the putative share is an identical share or fraction of a valid share as of the time it was purportedly issued.
  3. Any corporate action taken subsequent to the defective corporate action ratified in accordance with this Part in reliance on the defective corporate action having been validly effected and any subsequent defective corporate action resulting directly or indirectly from the original defective corporate action shall be valid as of the time taken.

History. 2018-45, s. 3.

Official Comment to the Model Business Corporation Act, 2016 Revision

Ratification is effective as of the validation effective time and is not dependent on the expiration of the 120-day time period in which an action challenging the ratification must be brought. The ratification of a defective corporate action has the additional effect of ratifying corporate actions that are defective as a result of the original defective corporate action. For example, an overissue which results in subsequent director elections being invalid calls into question all actions by the invalidly elected board members. The ratification of the overissue, however, would cure any such additional defects.

§ 55-1-66. Filings.

  1. If the defective corporate action ratified under this Part would have required under any other section of this Chapter a filing in accordance with this Chapter, then, whether or not a filing was previously made in respect of the defective corporate action and in lieu of a filing otherwise required by this Chapter, the corporation shall file articles of validation in accordance with this section, and the articles of validation shall serve to amend or substitute for any other filing with respect to the defective corporate action required by this Chapter.
  2. The articles of validation shall set forth all of the following:
    1. The defective corporate action that is the subject of the articles of validation, including, in the case of any defective corporate action involving the issuance of putative shares, the number and type of putative shares issued and the date or dates upon which the putative shares were purported to have been issued.
    2. The date of the defective corporate action.
    3. The nature of the failure of authorization in respect of the defective corporate action.
    4. A statement that the defective corporate action was ratified in accordance with G.S. 55-1-62, including the date on which the board of directors ratified the defective corporate action and the date, if any, on which the shareholders approved the ratification of the defective corporate action.
    5. The information required by subsection (c) of this section.
  3. The articles of validation shall also contain all of the following information that is applicable:
    1. If a filing was previously made in respect of the defective corporate action and no changes to the filing are required to give effect to the ratification of the defective corporate action in accordance with G.S. 55-1-62, the articles of validation shall set forth (i) the name, title, and filing date of the filing previously made and any articles of correction thereto and (ii) a statement that a copy of the filing previously made, together with any articles of correction thereto, is attached as an exhibit to the articles of validation.
    2. If a filing was previously made in respect of the defective corporate action and the filing requires any change to give effect to the ratification of the defective corporate action in accordance with G.S. 55-1-62, the articles of validation shall set forth (i) the name, title, and filing date of the filing previously made and any articles of correction thereto, (ii) a statement that a filing containing all of the information required to be included under the applicable section or sections of this Chapter to give effect to the defective corporate action is attached as an exhibit to the articles of validation, and (iii) the date and time that the filing is deemed to have become effective.
    3. If a filing was not previously made in respect of the defective corporate action and the defective corporate action ratified under G.S. 55-1-62 would have required a filing under any other section of this Chapter, the articles of validation shall set forth (i) a statement that a filing containing all of the information required to be included under the applicable section or sections of this Chapter to give effect to the defective corporate action is attached as an exhibit to the articles of validation and (ii) the date and time that the filing is deemed to have become effective.

History. 2018-45, s. 3.

Official Comment to the Model Business Corporation Act, 2016 Revision

Section 1.51 requires that in the event any filing is or would have been required under the Act to effect the defective corporate action, such filing (if no filing was previously made), such corrected filing (if correction to a previous filing is required), or such original filing (if no correction to a previous filing is required) be attached as an exhibit to the articles of validation. This is intended to provide a clear public record of the actions relating to the ratification.

§ 55-1-67. Judicial proceedings regarding validity of corporate actions.

  1. Upon application to the Superior Court Division of the General Court of Justice by the corporation, any successor entity to the corporation, a director of the corporation, any shareholder, beneficial shareholder, or unrestricted voting trust beneficial owner of the corporation, including any shareholder, beneficial shareholder, or unrestricted voting trust beneficial owner as of the date of the defective corporate action ratified under G.S. 55-1-62, or any other person claiming to be substantially and adversely affected by a ratification under G.S. 55-1-62, the appropriate court of the county where the corporation’s principal office, or, if none, its registered office, in this State is located, or, if the legal action is designated a mandatory complex business case pursuant to G.S. 7A-45.4, the Business Court, may do all of the following:
    1. Determine the validity and effectiveness of any corporate action or defective corporate action.
    2. Determine the validity and effectiveness of any ratification under G.S. 55-1-62.
    3. Determine the validity of any putative shares.
  2. In connection with an action under this section, the court may make findings or orders and take into account any factors or considerations that it deems proper under the circumstances.
  3. Service of process of the application under subsection (a) of this section on the corporation may be made in any manner provided by State law or by rule of the applicable court for service on the corporation, and no other party need be joined in order for the court to adjudicate the matter. In an action filed by the corporation, the court may require that notice of the action be provided to other persons specified by the court and permit the other persons to intervene in the action.
  4. Notwithstanding any other provision of this section or otherwise under applicable law, any action asserting that the ratification of any defective corporate action and any putative shares issued as a result of the defective corporate action should not be effective, or should be effective only on certain conditions, shall be brought within 120 days of the validation effective time.

History. 2018-45, s. 3.

Official Comment to the Model Business Corporation Act, 2016 Revision

Section 1.52 confers plenary jurisdiction on a designated court to hear and determine claims regarding the validity of any corporate action or any shares, rights, options or warrants. The court’s jurisdiction is not limited to reviewing corporate actions ratified or purportedly ratified under section 1.47, and includes the ability of a corporation or other permitted person to obtain a declaration regarding the validity of any corporate actions or shares that are potentially defective. In determining the validity of a corporate action or reviewing a corporate action ratified under section 1.47, the court may consider any factors or considerations it deems proper under the circumstances. These might include whether the person originally taking the defective corporate action believed that the action complied with corporate requirements, whether the corporation and board of directors has treated the defective corporate action as a valid action, whether any person has acted in reliance on the public record that such defective corporate action was valid and whether any person will be or was harmed by the ratification of the defective corporate action or will be harmed by the failure to ratify or validate the defective corporate action.

Article 2. Incorporation.

§ 55-2-01. Incorporators.

One or more persons may act as the incorporator or incorporators of a corporation by delivering articles of incorporation to the Secretary of State for filing.

History. Code, ss. 677, 678, 679, 682; 1885, cc. 19, 190; 1893, c. 318; 1897, c. 204; 1901, c. 2, ss. 8, 9; cc. 6, 41; 1903, c. 453; Rev., ss. 1137, 1139; C.S., s. 1114; 1945, c. 635; G.S., ss. 55-2, 55-3; 1951, c. 265, s. 1; 1955, c. 1371, s. 1; 1969, c. 751, s. 1; 1971, c. 1231, s. 1; 1989, c. 265, s. 1.

Official Comment

The only functions of incorporators under the Model Act are (1) to sign the articles of incorporation, (2) to deliver them for filing with the secretary of state, and (3) to complete the formation of the corporation to the extent set forth in section 2.05. One or more “persons” may serve as incorporator; “person” is defined in section 1.40 to include both individuals and entities; “entity” is also defined in that section to include corporations, unincorporated associations, partnerships, trusts, estates, and governments.

The Model Act also simplifies the formalities of execution and filing. The requirement in earlier versions of the Model Act and in many state statutes that articles be acknowledged or verified has been eliminated. Also, the requirement that “duplicate originals” (each being executed as an original document) be submitted has been replaced with the requirement that a signed original and an “exact or conformed” copy be submitted. See the Official Comment to section 1.20.

North Carolina Commentary

Under former G.S. 55-6, only natural persons could act as incorporators.

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article, “Start-Ups: Why Investors Prefer the Corporate Form to the L.L.C. for Tax Purposes,” see 9 Elon L. Rev. 311 (2017).

For article, “Corporate Disobedience,” see 68 Duke L.J. 710 (2019).

CASE NOTES

Editor’s Note. —

The case below was decided under prior law.

Duties and Obligations of Promoters. —

The promoters of a corporation are held to the duties of trustees and the obligation of directors. They may not take a secret or undisclosed profit in the organization by way of shares therein or otherwise. Goodman v. White, 174 N.C. 399, 93 S.E. 906, 1917 N.C. LEXIS 104 (1917).

§ 55-2-02. Articles of incorporation.

  1. The articles of incorporation must set forth:
    1. A corporate name for the corporation that satisfies the requirements of G.S. 55D-20 and G.S. 55D-21;
    2. The number of shares the corporation is authorized to issue and any other information required by G.S. 55-6-01;
    3. The street address, and the mailing address if different from the street address, of the corporation’s initial registered office, the county in which the initial registered office is located, and the name of the corporation’s initial registered agent at that address;
    4. The street address, and the mailing address if different from the street address, of the corporation’s principal office, if any, and the county in which the principal office, if any, is located; and
    5. The name and address of each incorporator.
  2. The articles of incorporation may set forth any provision that under this Chapter is required or permitted to be set forth in the bylaws, and may also set forth any or all of the following:
    1. The names and addresses of the individuals who are to serve as the initial directors.
    2. Provisions not inconsistent with law regarding (i) the purpose or purposes for which the corporation is organized; (ii) managing the business and regulating the affairs of the corporation; (iii) defining, limiting, and regulating the powers of the corporation, its board of directors, and shareholders; (iv) a par value for authorized shares or classes of shares; (v) the imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions; (vi) any limitation on the duration of the corporation.
    3. A provision limiting or eliminating the personal liability of any director arising out of an action whether by or in the right of the corporation or otherwise for monetary damages for breach of any duty as a director. No such provision shall be effective with respect to (i) acts or omissions that the director at the time of such breach knew or believed were clearly in conflict with the best interests of the corporation, (ii) any liability under G.S. 55-8-33, (iii) any transaction from which the director derived an improper personal benefit, or (iv) acts or omissions occurring prior to the date the provisions became effective. As used herein, the term “improper personal benefit” does not include a director’s reasonable compensation or other reasonable incidental benefit for or on account of his service as a director, officer, employee, independent contractor, attorney, or consultant of the corporation. A provision permitted by this Chapter in the articles of incorporation, bylaws, or a contract or resolution indemnifying or agreeing to indemnify a director against personal liability shall be fully effective whether or not there is a provision in the articles of incorporation limiting or eliminating personal liability.
    4. A provision limiting or eliminating any duty of a director, an officer, or any other person, to offer the corporation the right to have or participate in one or more specific classes or categories of business opportunities, prior to the pursuit or taking of the opportunity by the director, officer, or other person.
  3. The articles of incorporation need not set forth any of the corporate powers enumerated in this Chapter.
  4. Articles of incorporation filed to effect the conversion of another business entity pursuant to Article 11A of this Chapter shall also include the statements required by G.S. 55-11A-03(a).

History. Code, s. 677; 1885, c. 19; 1889, c. 170; 1891, c. 257; 1893, c. 244; 1901, c. 2, s. 8; c. 47; 1903, c. 453; Rev., s. 1137; 1911, c. 213, s. 1; 1913, c. 5, s. 1; C.S., s. 1114; Ex. Sess. 1920, c. 55; 1924, c. 98; 1935, cc. 166, 320; 1939, c. 222; G.S., s. 55-2; 1951, c. 265, s. 1; 1955, c. 1371, s. 1; 1957, c. 979, s. 5; 1959, c. 1316, s. 11/2; 1969, c. 751, s. 2; 1973, c. 469, s. 2; 1987, c. 626, s. 1; 1989, c. 265, s. 1; 1993, c. 552, s. 6; 2001-358, s. 16; 2001-387, ss. 8, 9, 173, 175(a); 2001-413, s. 6; 2018-45, s. 2.

Official Comment to the Model Business Corporation Act, 2016 Revision

  1. Introduction
  2. Required Provisions
  3. Optional Provisions
  4. List of Options in the Act That May Be Elected Only in the Articles of Incorporation
  5. List of Options in the Act That May Be Elected Either in the Articles of Incorporation or in the Bylaws

A corporation will have perpetual duration unless a special provision is included in its articles of incorporation providing for a shorter period. See section 3.02. Similarly, a corporation with articles of incorporation which do not contain a purpose clause will have the purpose of engaging in any lawful business under section 3.01(a). The option of providing a narrower purpose clause is also preserved in sections 2.02(b)(2)(i) and 3.01, with the effect described in the Official Comment to section 3.01.

If a single class of shares is authorized, only the number of shares authorized need be stated; if more than one class of shares is authorized, however, both the number of authorized shares of each class and a description of the rights of each class must be included. See the Official Comment to sections 6.01 and 6.02. It is unnecessary to specify par value, expected minimum capitalization, or contemplated issue price.

The corporation’s initial registered office and agent must be included, and a mailing address alone, such as a post office box, is not sufficient since the registered office is the designated location for service of process. See chapter 5.

No reference need be made to a variety of other matters such as preemptive rights. See section 6.30 and its Official Comment. Generally, no substantive effect should be given tot he absence of a specific reference to such matters in section 2.02. They are referred to in other sections of the Act that usually provide an “opt in” privilege. See particularly the list of optional provisions set forth in parts 4 and 5 of this Official Comment.

Section 2.02(b) allows the articles of incorporation to contain optional provisions deemed sufficiently important to be of public record or subject to amendment only by the processes applicable to amendments of articles of incorporation.

Provisions relating to the business or affairs of the corporation that may be included in the articles may be subdivided into four general classes:

• provisions that under the Act may be elected only by specific inclusion in the articles of incorporation (a list of these provisions is set forth in part 4 of this Official Comment);

• provisions that under the Act may be elected by specific inclusion in either the articles of incorporation or the bylaws, as listed in part 5 of this Official Comment;

• other provisions not referred to in the Act, including any provision that the Act requires or permits to be set forth in the bylaws (see section 2.02(b)(b)(3)); and

• other provisions that are inconsistent with one or more provisions of the Act but are nonetheless permitted by section 7.32 for inclusion in a shareholders’ agreement, if the requirements of that section are met.

Section 2.02(c) makes in unnecessary to set forth any corporate powers in the articles of incorporation in view of the broad grant of power in section 3.02. This grant of power, however, may be overbroad for particular corporations; if so, it may be qualified or narrowed by appropriate provisions in the articles of incorporation.

Although par value is no longer a mandatory statutory concept under the Act, section 2.02(b)(b)(2)(iv) permits optional “par value” provisions with regard to shares. Other than being permitted by section 2.02(b)(b)(2)(iv), however, “par value” is not mentioned in the Act. Special provisions may be included to give effect or meaning to “par value” essentially as a matter of contract between the parties. These provisions, whether appearing in the articles of incorporation or in other documents, have only the effect any permissible contractual provision has in the absence of a prohibition by statute. Provision in the articles of incorporation establishing an optional par value may also be of use to corporations which are to be qualified or registered in foreign jurisdictions that compute franchise or other taxes upon the basis of par value.

For general discussion of capitalization, see the Official Comment to section 6.21.

The basic tenet of corporation law is that shareholders are not liable for the corporation’s liabilities by reason of their status as shareholders. Section 2.02(b)(b)(2)(iv) nevertheless permits a corporation to impose that liability under specified circumstances if that is desirable. If no provision of this type is included, shareholders have no liability for corporate liabilities except to the extent they become liable by reason of their own conduct or acts. See section 6.22(b).

Section 2.02(b)(4) authorizes the inclusion of a provision in the articles of incorporation eliminating or limiting, with certain exceptions, the liability of the directors to the corporation or its shareholders for money damages. This section is optional rather than self-executing and does not apply to equitable relief. Likewise, nothing in section 2.02(b)(4) in any way affects the right of the shareholders to remove directors, under section 8.08(a), with or without cause. The phrase “as a director” emphasizes that section 2.02(b)(4) applies to a director’s actions or failures to take action in the director’s capacity as a director and not in any other capacity, such as officer, employee or controlling shareholder. However, it is not intended to exclude coverage of conduct by individuals, even though they are also officers, employees or controlling shareholders, to the extent they are acting in their capacity as directors.

Shareholders are given considerable latitude in limiting directors’ liability for money damages. The statutory exceptions to permitted limitations of director liability are few and narrow and are discussed below.

Financial Benefit

Corporate law subjects transactions from which a director could benefit personally to special scrutiny. The financial benefits exception is limited to the amount of the benefit actually received. Thus, liability for punitive damages could be eliminated, except in cases of intentional infliction of harm or for violation of criminal law (as described below) where, in a particular case (for example, theft), punitive damages may be available. The benefit must be financial rather than in less easily measured and more conjectural forms, such as business goodwill, personal reputation, or social ingratiation. The phrase “received by a director” is not intended to be a “bright line.” As a director’s conduct moves toward the edge of what may be exculpated, the director should bear the risk of miscalculation. Depending upon the circumstances, a director may be deemed to have received a benefit that the director caused to be directed to another person, for example, a relative, friend, or affiliate.

What constitutes a financial benefit “to which the director is not entitled” is left to judicial development. For example, a director is entitled to reasonable compensation for the performance of services or to an increase in the value of stock or stock options held by the director; on the other hand, a director is not entitled to a bribe, a kick-back, or the profits from a corporate opportunity improperly taken by the director. See section 8.70 as to procedures for disclaiming the corporation’s interest in a business opportunity by action of qualified directors or shareholders. See section 2.02(b)(6) for optional provisions permitted in the articles of incorporation to limit or eliminate, in advance, any duty of directors and others to bring business opportunities to the corporation. If the corporation declines the opportunity after it has been presented to the corporation by the director in accordance with the provisions of section 8.70(a)(1)(i) or (ii), or if a provision under section 2.02(b)(6) limits or eliminates the duty to bring the particular opportunity to the corporation, the corporation will have no right to participate in any financial benefit arising from the opportunity if the director pursues or takes the opportunity.

Intentional Infliction of Harm

There may be situations in which a director intentionally causes harm to the corporation even though the director does not receive any improper benefit. The use of the word “intentional,” rather than a less precise term such as “knowing,” is meant to refer to the specific intent to perform, or fail to perform, the acts with actual knowledge that the director’s action, or failure to act, will cause harm, rather than a general intent to perform the acts which cause the harm.

Unlawful Distributions

Section 8.32(a) indicates a strong policy in favor of liability for unlawful distributions approved by directors who have not complied with the standards of conduct of section 8.30. Accordingly, the exception in section 2.02(b)(4)(iii) prohibits the shareholders from eliminating or limiting the liability of directors for a violation of section 8.32.

Intentional Violation of Criminal Law

Even though a director committing a crime may intend to benefit the corporation, the shareholders should not be permitted to exculpate the director for any harm caused by an intentional violation of criminal law, including, for example, fines and legal expenses of the corporation in defending a criminal prosecution. The use of the word “intentional,” rather than a less precise term such as “knowing,” is meant to refer to the specific intent to perform, or fail to perform, the acts with actual knowledge that the director’s action, or failure to act, constitutes a violation of criminal law.

Section 2.02(b)(5) specifically prohibits provisions for indemnification of director liability arising out of improper financial benefit received by a director, an intentional infliction of harm on the corporation or the shareholders, an unlawful distribution or an intentional violation of criminal law. These excepted liabilities parallel those a corporation is not permitted to limit or eliminate under section 2.02(b)(4). See “E. Limitations of Director Liability” above. Officers are not included in the language of section 2.02(b)(5) because the expansion of indemnification for directors that section permits must be set forth in the articles of incorporation as required by section 8.51(a)(2); section 8.56 allows a similar expansion of indemnification for officers to be set forth also in the bylaws, resolutions or contracts.

Section 2.02(b)(6) authorizes the inclusion of a provision in the articles of incorporation to limit or eliminate, in advance, the duty of a director or other person to bring a business opportunity to the corporation. The limitation or elimination may be blanket in nature and apply to any business opportunities, or it may extend only to one or more specified classes or categories of business opportunities. The adoption of such a provision constitutes a curtailment of the duty of loyalty which includes the doctrine of corporate opportunity. If such a provision is included in the articles, taking advantage of a business opportunity covered by the provision of the articles without offering it to the corporation will not expose the director or other person to whom it is made applicable either to monetary damages or to equitable or any other relief in favor of the corporation upon compliance with the requirements of section 2.02(b)(6).

This provision may be useful, for example, in the context of a private equity investor that wishes to have a nominee on the board but conditions its investment on an advance limitation or elimination of the corporate opportunity doctrine because of the uncertainty over the application of the corporate opportunity doctrine inherent when investments are made in multiple enterprises in specific industries. Another example is a joint venture in corporate form where the participants in the joint venture want to be sure that the corporate opportunity doctrine would not apply to their activities outside the joint venture.

The focus of the advance limitation or elimination is on the duty of the director which extends indirectly to the investor through the application of the related party definition in section 8.60. This provision also permits extension of the limitation or elimination of the duty to any other persons who might be deemed to have a duty to offer business opportunities to the corporation. For example, courts have held that the corporate opportunity doctrine extends to officers of the corporation. Although officers may be included in a provision under this subsection, the limitation or elimination of corporate opportunity obligations of officers must be addressed by the board of directors in specific cases or by the directors’ authorizing provisions in employment agreements or other contractual arrangements with such officers. Accordingly, section 2.02(b)(6) requires that the application of an advance limitation or elimination of the duty to offer a business opportunity to the corporation to any person who is an officer of the corporation or a related person of an officer also requires action by the board of directors acting through qualified directors. This action must be taken subsequent to the inclusion of the provision in the articles of incorporation and may limit the application. This means that if the advance limitation or elimination of the duty of an officer to offer business opportunities to the corporation is included in the articles by an amendment recommended by the directors and approved by the shareholders, that recommendation of the directors does not serve as the required authorization by qualified directors; rather, separate authorization by qualified directors after the amendment is included in the articles is necessary to apply the provision to a particular officer or any related person of that officer. See sections 1.43(a)(1) and 8.60 for the definition of “qualified directors” and “related persons,” respectively.

Whether a provision for advance limitation or elimination of duty in the articles of incorporation should be a broad “blanket” provision or one more tailored to specific categories or classes of transactions deserves careful consideration given the particular circumstances of the corporation.

Limitation or elimination of the duty of a director or officer to present a business opportunity to the corporation does not limit or eliminate the director’s or officer’s duty not to make unauthorized use of corporate property or information or to compete unfairly with the corporation.

A. OPTIONS WITH RESPECT TO DIRECTORS

• Board of directors may be dispensed with entirely, § 7.32, or its functions may be restricted, § 8.01.

• Power to compensate directors may be restricted or eliminated, § 8.11.

• Election of directors by cumulative voting may be authorized, § 7.28.

• Election of directors by greater than plurality vote may be authorized, § 7.28.

• Directors may be elected by classes or series of shares, § 8.04.

• Director’s term may be limited by failure to receive specified vote for election, § 8.05.

• Power to remove directors without cause may be restricted or eliminated, § 8.08.

• Terms of directors may be staggered so that all directors are not elected in the same year, § 8.06.

• Power to fill vacancies may be limited to the shareholders, § 8.10.

• Power to indemnify directors, officers, and employees may be limited, §§ 8.50 through 8.59.

• Prohibition on adoption of bylaw provision under § 10.22.

B. OPTIONS WITH RESPECT TO SHAREHOLDERS

• Action by shareholders may be taken without a meeting, § 7.04.

• Special voting groups of shareholders may be authorized, § 7.25.

• Elimination or restriction of separate voting groups for mergers and share exchanges, § 11.04, and for domestications, § 9.21.

• Quorum for voting groups of shareholders may be increased or reduced, §§ 7.25, 7.26, and 7.27.

• Quorum for voting by voting groups of shareholders may be prescribed, see § 7.26.

• Greater than majority vote may be required for action by voting groups of shareholders, § 7.27.

C. OPTIONS WITH RESPECT TO SHARES

• Shares may be divided into classes and classes into series, §§ 6.01 and 6.02.

• Cumulative voting for directors may be permitted, § 7.28.

• Distributions may be restricted, § 6.40.

• Share dividends may be restricted, § 6.23.

• Voting rights of classes or series of shares may be limited or denied, § 6.01.

• Classes or series of shares may be given more or less than one vote per share, § 7.21.

• Terms of a class or series of shares may vary among holders of the same class or series, so long as such variations are expressly set forth in the articles, § 6.01.

• The board of directors may allocate authorized but unissued shares of a class or series of shares to another class or series without shareholder approval, § 6.02.

• Shares may be redeemed at the option of the corporation or the shareholder, § 6.01.

• Reissue of acquired or redeemed shares may be prohibited, § 6.31.

• Shareholders may be given preemptive rights to acquire unissued shares, § 6.30.

• Redemption preferences may be ignored in determining lawfulness of distributions, § 6.40.

A. OPTIONS WITH RESPECT TO DIRECTORS

• Number of directors may be fixed or changed within limits, § 8.03.

• Qualifications for directors may be prescribed, § 8.02.

• Notice of regular or special meetings of board of directors may be prescribed, § 8.22.

• Power of board of directors to act without meeting may be restricted, § 8.21.

• Quorum for meeting of board of directors may be increased or decreased (down to onethird) from majority, § 8.24.

• Action at meeting of board of directors may require a greater than majority vote, § 8.24.

• Power of directors to participate in meeting without being physically present may be prohibited, § 8.20.

• Board of directors may create board committees and specify their powers, § 8.25.

• Board of directors may create safe harbor for consideration of corporate opportunities, § 8.70.

• Power of board of directors to amend bylaws may be restricted, §§ 10.20 and 10.21.

• Election of directors may be governed by the optional rules under section 10.22.

B. OPTIONS WITH RESPECT TO SHARES

• Shares may be issued without certificates, § 6.26.

• Procedure for treating beneficial owner of street name shares as record owner may be prescribed, § 7.23.

• Transfer of shares may be restricted, § 6.27.

North Carolina Commentary

The Model Act was modified by inserting a cross-reference in subdivision (a)(2) for clarity and by revising subdivision (a)(3) to require more specific information regarding the corporation’s address and registered office.

In addition, the Model Act was modified to add more optional provisions available for articles of incorporation, including a limitation on duration (subdivision (b)(2)(vi)) and a provision limiting or eliminating the personal liability of directors in certain circumstances (subsection (b)(3)), which existed under former G.S. 55-7(2) and (11). The phrase “not made in good faith” in former G.S. 55-7(11)(i) was deleted solely because it was thought to be redundant.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2001-358, s. 16, effective January 1, 2002, and applicable to documents submitted for filing on or after that date, substituted “G.S. 55D-20 and G.S. 55D-21” for “G.S. 55-4-01” in subdivision (a)(1).

Session Laws 2018-45, s. 2, effective October 1, 2018, in subsection (b), added “any or all of the following” at the end of the lead-in language, added subdivision (b)(4), and made minor stylistic changes.

Legal Periodicals.

For article on corporate directors’ accountability, see 66 N.C.L. Rev. 171 (1987).

For article, “Should Corporate Statutes Providing Special Protection for Directors Be Limited to Publicly Traded Corporations?,” see 24 Wake Forest L. Rev. 79 (1989).

For comment, “North Carolina’s Statutory Limitation on Directors’ Liability,” see 24 Wake Forest L. Rev. 117 (1989).

For article, “The Corporate Persona, Contract (and Market) Failure, and Moral Values,” see 69 N.C.L. Rev. 273 (1991).

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For article, “Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law,” see 41 Wake Forest L. Rev. 1131 (2006).

For article, “Duties of the Modern Corporate Executive: Article & Essay: Fiduciary Constraints: Correlating Obligation with Liability,” see 42 Wake Forest L. Rev. 697 (2007).

For article, “Agency Theory: Still Viable? Proposals for Corporate Governance Reform: Six Decades of Ineptitude and Counting,” see 48 Wake Forest L. Rev. 673 (2013).

For article, “Overcoming the Rippy Effect: Why the North Carolina Business Corporations Act Should Allow Permissive Officer Exculpation,” see 94 N.C.L. Rev. 2155 (2016).

CASE NOTES

Editor’s Note. —

Most of the cases below were decided under prior law.

Corporation Held Limited to Objects Stated. —

A charter of incorporation creating a company for the purpose of effecting a communication by a plank-road between designated points, with the privilege of taking tolls, did not authorize the company to establish a stage line upon their road, nor to contract for carrying the United States mail. Wiswell v. Greenville Plank-Road Co., 56 N.C. 183, 1857 N.C. LEXIS 159 (1857).

Use of All Powers Not Required. —

The fact that a corporation avails itself of only one of several privileges granted by its charter does not invalidate the act of incorporation. Wadesboro Cotton Mills Co. v. Burns, 114 N.C. 353, 19 S.E. 238, 1894 N.C. LEXIS 71 (1894).

Limit of Corporate Existence. —

A corporation whose term of existence is fixed and limited in the act which creates it cannot endure beyond the prescribed time, unless its existence is prolonged by the same authority or continued for the purpose of adjusting and closing its business, and no judicial proceedings are required to terminate it. Asheville Div. No. 15 v. Aston, 92 N.C. 578, 1885 N.C. LEXIS 263 (1885).

De Jure and De Facto Existence. —

A corporation de jure is said to exist when persons holding a charter have made substantial compliance with the provisions of the same, looking to its proper organization, while a corporation de facto is one where the parties having a charter or law authorizing it have in good faith made a colorable compliance with such requirements, and have proceeded in the exercise of the corporate powers or a part of them. Wood v. Staton, 174 N.C. 245, 93 S.E. 794 (1917).

Existence of a corporation may be proved by reputation. Existence or nonexistence is a fact and may be proved as other facts. Gulf States Steel Co. v. Ford, 173 N.C. 195, 91 S.E. 844, 1917 N.C. LEXIS 272 (1917).

Proof of Existence by Written Contract. —

Where a written contract entered into between the parties furnishes evidence that the defendant was dealing with the plaintiff as a corporation, and the plaintiff’s existence as a corporation is denied, the contract may properly be introduced upon this disputed fact. Otis Elevator Co. v. Cape Fear Hotel Co., 172 N.C. 319, 90 S.E. 253, 1916 N.C. LEXIS 293 (1916).

Copies of Letters of Incorporation as Proof of Existence. —

Copies of letters of incorporation are admissible to show prima facie the existence of a corporation, and the corporation cannot avoid its liability for debts because in fact it had but an inchoate existence. Marshall v. Macon County Bank, 108 N.C. 639, 13 S.E. 182, 1891 N.C. LEXIS 123 (1891).

Exculpatory Clause. —

Federal Deposit Insurance Corporation-Receiver (FDIC-R) argued only that the evidence suggested that the Director Appellees took actions harmful to the bank, in part by making decisions without adequate information; this was insufficient. The exculpatory clause protected directors from monetary liability unless the directors “knew or believed that their acts or omissions were clearly in conflict” with the bank’s best interests; actions that might have been harmful or decisions that could have been better made did not rise to the level of bad faith in this context, especially in light of the fact that the bank received “CAMELS” scores of “2” from both of its regulators despite the Director Appellees’ actions. FDIC v. Rippy, 799 F.3d 301, 2015 U.S. App. LEXIS 14474 (4th Cir. 2015).

§ 55-2-03. Incorporation.

  1. Corporate existence begins when the articles of incorporation become effective.
  2. The Secretary of State’s filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation except in a proceeding by the State to cancel or revoke the incorporation or involuntarily dissolve the corporation.
  3. No provision in this Chapter or any prior act shall be construed to require that a corporation have more than one shareholder.

History. 1901, c. 2, s. 10; Rev., s. 1140; C.S., s. 1116; G.S., s. 55-4; 1955, c. 1371, s. 1; 1957, c. 550, ss. 2, 3; 1967, c. 13, s. 3; 1989, c. 265, s. 1; 2001-387, s. 10.

Official Comment

Section 2.03(a) provides that the existence of a corporation begins when the articles of incorporation are filed, unless a delayed effective date is specified under section 1.23. Chapter 1 contains detailed rules for the filing and effective dates of documents, all of which are applicable to articles of incorporation and other documents. These filing rules simplify the process of creating a corporation in several respects.

  1. What to file
  2. Nature of filing
  3. Certificate of incorporation eliminated
  4. Precise time of incorporation
  5. Conclusiveness of secretary of state’s action on question of individual liability for corporate actions

Section 1.20 requires that only one executed original and an exact or conformed copy of the articles need be delivered to the secretary of state for filing. This delivery must be accompanied by the applicable filing fee.

Section 1.25 provides that the secretary of state files the articles by stamping them “filed” and recording the date and time of receipt; he then retains the signed original articles of incorporation for his records and returns the exact or conformed copy to the incorporators along with a receipt for the fee. The return of this copy and the fee receipt establishes that the articles have been filed in the form of the copy.

Section 1.25 provides that approval by the secretary of state is in the form of return of the copy of the articles with a fee receipt rather than a certificate of incorporation, as was the older practice still followed in many states. See the Official Comment to section 1.25.

Section 2.03(a) ties the precise time of incorporation to the date and time stamped on the articles. Section 1.23 provides in turn that this is the date and time the articles are received by the secretary of state; in other words, consistent with the practice of many secretaries of state, processing time is ignored and the date and time of receipt of the articles are the date and time of incorporation. The creators of the corporation may, however, specify that the corporation’s existence will begin on a later date than the date of filing, and at a precise time on such a date, to the extent permitted by section 1.23.

Under section 2.03(b) the filing of the articles of incorporation as evidenced by return of the stamped copy of the articles with the fee receipt is conclusive proof that all conditions precedent to incorporation have been met, except in proceedings brought by the state. Thus the filing of the articles of incorporation is conclusive as to the existence of limited liability for persons who enter into transactions on behalf of the corporation. If articles of incorporation have not been filed, section 2.04 generally imposes personal liability on all persons who prematurely act as or on behalf of a “corporation” knowing that articles have not been filed. Section 2.04 may protect some of these persons to a limited extent, however; see the Official Comment to that section.

North Carolina Commentary

Subsection (c) was added to the Model Act’s provisions to bring forward the provisions of former G.S. 55-3.1.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Legal Periodicals.

For article, “Branch Office of the Prosecutor: The New Role of the Corporation in Business Crime Prosecutions,” 89 N.C.L. Rev. 23 (2010).

CASE NOTES

Editor’s Note. —

Most of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Corporation as Alter Ego of Dominant Shareholder. —

The mere fact that one person owns all of the stock of a corporation does not make its acts the acts of the stockholder so as to impose liability therefor upon him. However, when the corporation is so operated that it is a mere instrumentality or alter ego of the sole or dominant shareholder and a shield for his activities in violation of the declared public policy or statute of the State, the corporate entity will be disregarded and the corporation and the shareholder treated as one and the same person, it being immaterial whether the sole or dominant shareholder is an individual or another corporation. Henderson v. Security Mtg. & Fin. Co., 273 N.C. 253, 160 S.E.2d 39, 1968 N.C. LEXIS 585 (1968).

When Corporation Regarded as an Association of Persons. —

When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Henderson v. Security Mtg. & Fin. Co., 273 N.C. 253, 160 S.E.2d 39, 1968 N.C. LEXIS 585 (1968).

Personal liability of stockholder created before the effective date of former G.S. 55-3.1 because corporation did not have three shareholders would not be defeated by virtue of former G.S. 55-3.1. Lester Bros. v. Pope Realty & Ins. Co., 250 N.C. 565, 109 S.E.2d 263, 1959 N.C. LEXIS 469 (1959).

For case decided before the passage of former G.S. 55-3.1 and dealing with the effect of the acquisition of all stock in a corporation by one person, see Park Terrace, Inc. v. Phoenix Indem. Co., 243 N.C. 595, 91 S.E.2d 584, 1956 N.C. LEXIS 579 (1956) (commented on in 34 N.C.L. Rev. 471, 531 (1956)) .

Chattel Mortgage Executed in Name of Corporation by Person Acquiring All Stock as Corporate Act. —

Acquisition of the entire capital stock of a corporation by one person does not affect the corporate entity, and the execution in the name of the corporation by such person of a chattel mortgage is a corporate act and binding, provided the rights of its then existing creditors are not affected. Wall v. Colvard, Inc., 268 N.C. 43, 149 S.E.2d 559, 1966 N.C. LEXIS 1126 (1966).

§ 55-2-04.

Reserved for future codification purposes.

North Carolina Commentary

Section 2.04 of the Model Act, which relates to liability for preincorporation transactions, was omitted because it was thought to be too simplistic to apply to every preincorporation situation. General case law will apply. See generally Smith v. Morgan, 50 N.C. App. 208, 209, 272 S.E.2d 602 (1980). (statement in dictum).

§ 55-2-05. Organization of corporation.

  1. After incorporation:
    1. If initial directors are named in the articles of incorporation, the initial directors shall hold an organizational meeting at the call of a majority of the directors to complete the organization of the corporation by appointing officers, adopting bylaws, and carrying on any other business brought before the meeting;
    2. If initial directors are not named in the articles, the incorporator or incorporators shall hold an organizational meeting at the call of a majority of the incorporators: (i) to elect directors and complete the organization of the corporation; or (ii) to elect a board of directors who shall complete the organization of the corporation.
  2. Action required or permitted by this Chapter to be taken by incorporators at an organizational meeting may be taken without a meeting if the action taken is evidenced by one or more written consents describing the action taken and signed by each incorporator. If the incorporators act at a meeting, the notice and procedural provisions of G.S. 55-8-22, 55-8-23, and 55-8-24 shall apply.
  3. An organizational meeting may be held in or out of this State.

History. Code, s. 665; 1901, c. 2, s. 18; Rev., s. 1142; C.S., s. 1118; G.S., s. 55-6; 1955, c. 1371, s. 1; 1969, c. 751, s. 3; 1989, c. 265, s. 1.

Official Comment

Following incorporation, the organization of new corporation must be completed so that it may engage in business. This usually requires adoption of bylaws, the appointment of officers and agents, the raising of equity capital by the issuance of shares to the participants in the venture, and the election of directors.

Earlier versions of the Model Act required initial directors to be named in the articles and provided that they complete the organization of the corporation. Many states followed this pattern, but others provided that the incorporators organize the corporation or meet to elect a board of directors to organize the corporation. The goal of all these provisions was usually to permit the completion of the organization of the corporation with minimum expense and formality, though in many cases it was felt necessary for business decisions to be made at an early stage by the persons with responsibility for business operation.

Experience in states followed the Model Act pattern revealed that multiple organizational meetings were often necessary, particularly where for reasons of convenience or secrecy both the incorporators and initial directors were “dummies” without any financial interest in the enterprise who were not expected to make any significant business decisions. In this situation, the initial directors formally organized the corporation, including issuing of at least some shares; immediately following this organizational meeting, the new shareholders met to elect a permanent board of directors who were to manage the business. In many instances, the permanent board of directors also had to meet immediately after its selection by the shareholders to consider business questions that must be resolved promptly, such as authorization of employment contracts or the valuation of property or services to be accepted as consideration for shares.

Section 2.05 simplifies the formation process by allowing alternative methods of completing the formation of the corporation.

First, section 2.05(a)(1) contemplates that if the draftsman elects to set forth the names of the initial directors in the articles of incorporation, the persons so named will organize the corporation. It is expected that initial directors will be named only if they will be the permanent board of directors and there is no objection to the disclosure of their identity in the articles of incorporation.

Second, section 2.05(a)(2) provides alternative methods for completing the organization of the corporation if initial directors are not named in the articles of incorporation. The incorporators may themselves complete the organization, or they may simply meet to elect a board of directors who are then to complete the organization. It is contemplated that in routine incorporations, the first alternative will be elected, while in more complex situations when prompt business decisions must be made, the second alternative will be chosen and the completion of the organization will be turned over to the board of directors representing the investment interests in the corporation.

Sections 2.05(b) and (c) are limited to meetings of incorporators since sections 8.21 and 8.22 permit the same actions by the board of directors. If a meeting of shareholders is necessary, sections 7.01 and 7.04 give them the same flexibility that is given incorporators under sections 2.05(b) and (c).

North Carolina Commentary

This section, unlike prior law, permits the incorporator or incorporators to hold the organizational meeting of the corporation under certain circumstances. The last sentence of subsection (b) was added to the Model Act’s provisions for clarification.

Legal Periodicals.

For article, “Agency Theory: Still Viable? The Impact of National Culture on Corporate Financial Decisions,” see 48 Wake Forest L. Rev. 697 (2013).

§ 55-2-06. Bylaws.

  1. The incorporators or board of directors of a corporation shall adopt initial bylaws for the corporation.
  2. The bylaws of a corporation may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation.

History. 1955, c. 1371, s. 1; 1959, c. 1316, ss. 2, 3; 1973, c. 469, s. 4; 1989, c. 265, s. 1.

Official Comment

The responsibility for adopting the original bylaws is placed on the person or persons completing the organization of the corporation.

Section 2.06(b) restates the accepted scope of bylaw provisions. For a list of Model Act provisions that become effective only if specific reference is made to them in the bylaws, see the Official Comment to section 2.02. Provisions set forth in bylaws may additionally be contained in shareholder or board resolutions unless this Act requires them to be set forth in the bylaws.

The power to amend or repeal bylaws, or adopt new bylaws after the formation of the corporation is completed, is addressed in sections 10.20 through 10.22 of the Model Act.

North Carolina Commentary

The Model Act’s use of the word “shall” in subsection (a) requires that a corporation have bylaws, whereas, under prior law, the adoption of bylaws was at least theoretically optional. Use of the word “shall,” however, is not intended to imply that a North Carolina corporation not adopting bylaws is not a valid corporation.

Legal Periodicals.

For note on unanimous approval of corporate bylaws and creation of shareholder agreements, see 1 Campbell L. Rev. 153 (1979).

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Statutory Norms Control Amendments Where Bylaws Fail to Control. —

In the absence of a valid provision in the charter or bylaws controlling amendment, statutory or common-law norms governing amendment apply. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Shareholders’ agreement which is part of the charter or bylaws is subject to amendment as provided therein or, in the absence of an internal provision governing amendments, as provided by statutory norms. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

When parties to a shareholders’ agreement choose to embody it in the charter or bylaws, it must be concluded that they intended for statutory or common-law norms governing amendment to apply absent an expressed intention to deviate from them. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Principle by which a shareholder is bound by a corporate resolution, regularly passed pursuant to charter and bylaws, prevails only in reference to his status and rights as a shareholder, and not where he deals independently with corporation as one of its customers in the line of its business. Cardwell v. Garrison, 179 N.C. 476, 103 S.E. 3, 1920 N.C. LEXIS 271 (1920).

Bylaws as Evidence Against Strangers. —

The bylaws of a corporation are usually not evidence for it against strangers who deal with it, unless they are brought home to their knowledge and assented to by them. Smith & Melton v. N.C.R.R., 68 N.C. 107, 1873 N.C. LEXIS 24 (1873).

§ 55-2-07. Emergency bylaws.

  1. Unless the articles of incorporation provide otherwise, the board of directors of a corporation may adopt bylaws to be effective only in an emergency defined in subsection (d). The emergency bylaws, which are subject to amendment or repeal by the shareholders, may make all provisions necessary for managing the corporation during the emergency, including:
    1. Procedures for calling a meeting of the board of directors;
    2. Quorum requirements for the meeting; and
    3. Designation of additional or substitute directors.
  2. All provisions of the regular bylaws consistent with the emergency bylaws remain effective during the emergency. The emergency bylaws are not effective after the emergency ends.
  3. Corporate action taken in good faith in accordance with the emergency bylaws binds the corporation and the fact that the action was taken by special procedures may not be used to impose liability on a corporate director, officer, employee, or agent.
  4. An emergency exists for purposes of this section if a quorum of the corporation’s directors cannot readily be assembled because of some catastrophic event.

History. 1989, c. 265, s. 1.

Official Comment

Section 2.07 is no longer an optional provision (as was the case with its predecessor in earlier versions of the Model Act) but is unqualifiedly recommended for adoption. The problem it addresses is potentially present in every state and in every corporation, and the widespread acceptance of the earlier provision to date by a number of states argues that it be uniformly adopted.

The adoption of emergency bylaws in advance of an emergency not only clarifies lines of command and responsibility but also tends to ensure continuity of responsibility. The board of directors may be authorized by the emergency bylaws, for example, to designate the officers or other persons, in order of seniority and subject to various conditions, who may be deemed to be directors during the emergency.

The definition of “emergency” adopted by subsection (d) is broader than a nuclear disaster or attack on the United States. It includes any catastrophic event, such as an airplane crash or fire, that makes it difficult or impossible for a quorum of the corporation’s board of directors to be assembled. While there apparently has been no recent illustration of a public corporation facing such a catastrophic event, its possibility should not be ignored. In order to encourage corporations to adopt emergency bylaws, section 2.07(c) broadly validates all corporate actions taken “in good faith” pursuant to them and immunizes all corporate directors, officers, employees, and agents from liability as a result of these actions. The phrase “action taken in good faith in accordance with the emergency bylaws” has been substituted for “willful misconduct,” the language of the earlier Model Act provision. This change is designed to conform the standard for immunity here and elsewhere in the Model Act and represents no substantive change.

A corporation that does not adopt emergency bylaws under this section may nevertheless exercise the powers described in section 3.03 in the event of an emergency as defined in section 2.07(d).

North Carolina Commentary

This section has no equivalent under prior law. The Model Act was rewritten in subsection (c) to clarify that the limitation on liability contained in that subsection is limited to liability arising by reason of action taken by special procedures under emergency bylaws.

Article 3. Purposes and Powers.

§ 55-3-01. Purposes.

  1. Every corporation incorporated under this Chapter has the purpose of engaging in any lawful business unless a more limited purpose is set forth in its articles of incorporation.
  2. A corporation engaging in a business that is subject to regulation under another statute of this State may incorporate under this Chapter only if permitted by, and subject to all limitations of, the other statute.
    1. Special incorporation statutes
    2. Miscellaneous regulatory statutes
    3. Professional corporations
    4. Miscellaneous organizations

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Section 3.01(a) provides that every corporation automatically has the purpose of engaging in any lawful business unless a narrower purpose is described in the articles of incorporation. The specification of an “any lawful business” clause has become so nearly universal in states that permit the clause that no reason exists for treating it otherwise than as the norm for the “standard” corporation.

The option of a narrower purpose clause is most likely to be elected only in situations where one or more participants in the corporation desire to limit or retain a check on the business operations of the corporation. The articles of incorporation may limit lines of business in which the corporation may engage. It should be recognized, however, that the limited scope of the ultra vires concept in litigation between the corporation and outsiders means that a third person entering into a transaction that violates the restrictions in the purpose clause may be able to enforce the transaction in accordance with its terms if he was unaware of the narrow purpose clause when he entered the transaction. See the Official Comment to section 3.04.

Many corporations may also find it desirable to supplement a general purpose clause with an additional statement of business purposes. This may be necessary for licensing or for qualification purposes in some states.

Section 3.01(b) is designed to tie in the limitless lawful purpose corporation permitted by section 3.01(a) with the numerous state statutes that impose regulations or limitations on corporations formed to, or actually engaging in, certain lines of business. These state statutes are of various types.

Some of these statutes, particularly those relating to banking and insurance, establish a separate incorporation process and incorporating agency. These special incorporating states may refer back to or incorporate by reference portions of the general business corporation statute.

Other regulatory statutes may permit incorporation under the general business corporation act if the corporation imposes restrictions or limitations in its articles of incorporation; these restrictions may relate to the business in which the corporation may engage, its manner of internal governance, or the persons who may or may not be shareholders and participate in the venture. The language of section 3.01(b) is designed to cover all these multiple variations and is a substitute for the narrower language “except for the purpose of banking or insurance” that appeared in earlier versions of the Model Act and the statutes of many states.

Traditionally, incorporation was not permitted at all for the purpose of practicing the learned professions—e.g., law, medicine, and dentistry—primarily because of the personal skills and confidential relationships between lawyer and client or physician and patient. In the early 1960s, however, a significant movement toward incorporation of professionals surfaced as part of an effort by professionals to obtain employee federal tax benefits. Professionals hoped to form corporations to conduct their practice as employees of the corporation rather than as independent entrepreneurs. Early efforts by professionals to form entities to conduct their practice (despite the lack of state statutory authority to incorporate) met with opposition from the Internal Revenue Service. In 1960 the I.R.S. issued the “Kintner” regulations, which in effect provided that federal tax status would be determined on the basis of the organization’s characterization under state law. TREAS. REGS. § 301.7701-2 (1960). In response, a number of states passed legislation specifically authorizing professionals to incorporate. Recognition of the corporate tax status of professional corporations was eventually conceded. REV. RUL. 70-101, 1970-1 C.B. 278. All jurisdictions now have statutes providing for incorporation for the purpose of practicing a profession, and in 1977 a Professional Corporation Supplement to the Model Act was approved. For further consideration of professional corporation acts, see the Annotations to the Model Professional Corporation Supplement.

Other types of corporations, such as nonprofit corporations, cooperatives, and unions, usually may not incorporate under the business corporation act. Many states have enacted special statutes for these classes entities: a Model Nonprofit Corporation Act was approved in 1952 and has been periodically revised since then.

Section 3.01(b) is designed to preserve all statutory requirements applicable to all of these various classes of specialized and nonbusiness corporations.

North Carolina Commentary

This section is substantially the same as former G.S. 55-5.

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article, “Duties of Nonprofit Corporate Directors - Emphasizing Oversight Responsibilities,” see 90 N.C. L. Rev. 1845 (2012).

§ 55-3-02. General powers.

  1. Unless its articles of incorporation or this Chapter provide otherwise, every corporation has perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including without limitation power:
    1. To sue and be sued, complain and defend in its corporate name;
    2. To have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other manner reproducing it;
    3. To make and amend bylaws, not inconsistent with its articles of incorporation or with the laws of this State, for managing the business and regulating the affairs of the corporation;
    4. To purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property, wherever located;
    5. To sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property;
    6. To purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity;
    7. To make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations (which may be convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income;
    8. To lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment;
    9. To be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;
    10. To conduct its business, locate offices, and exercise the powers granted by this act within or without this State;
    11. To elect or appoint directors, officers, employees, and agents of the corporation, define their duties, fix their compensation, and lend them money and credit;
    12. To pay pensions and establish pension plans, pension trusts, profit sharing plans, stock bonus plans, stock option plans, and other benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents;
    13. To make donations for the public welfare or for charitable, religious, cultural, scientific, or educational purposes;
    14. To transact any lawful business that will aid governmental policy;
    15. To make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation; and
    16. To provide insurance for its benefit on the life or physical or mental ability of any of its directors, officers or employees or on the life or physical or mental ability of any security holder for the purpose of acquiring at his death or disability its securities owned by such security holder, and for these purposes the corporation is deemed to have an insurable interest in its directors, officers, employees, or security holders; and to provide insurance for its benefit on the life or physical or mental ability of any other person in whom it has an insurable interest.
  2. It shall not be necessary to set forth in the articles of incorporation any of the powers enumerated in this section.

History. Code, ss. 663, 666, 691, 692, 693; 1893, c. 159; 1901, c. 2, s. 1; Rev., s. 1128; 1909, c. 507, s. 1; C.S., s. 1126; 1925, cc. 235, 298; 1929, c. 269; 1939, c. 279; 1945, c. 775; G.S., s. 55-26; 1951, c. 1240, s. 1; 1955, c. 1371, s. 1; 1959, c. 1316, ss. 4, 5; 1969, c. 751, ss. 7, 8; 1989, c. 265, s. 1.

Official Comment

The law of corporations has always proceeded on the fundamental assumption that corporations are creations with limited power; such an assumption was articulated by the United States Supreme Court as early as 1804, Head & Armory v. Providence Insurance Co., 6 U.S. (2 Cranch) 127, 169 (1804), and appears never to have been seriously questioned as a judicial matter.

It is clear that narrow and limited powers clauses are undesirable: they encourage litigation by bringing into question reasonable transactions that further the business and interests of the corporation and to the extent transactions are unauthorized, may defeat valid and reasonable expectations. The history of the Model Act and of many state statutes in this area is largely one ensuring that corporate powers are broad enough to cover all reasonable business transactions.

In developing section 3.02, serious consideration was given to whether there was a continued need for a long list of corporate powers or whether a general provision granting every corporation power to act to the same extent as an individual might be substituted. Because of the long history of these powers, however, it was feared that no matter how broadly phrased a general provision might be, a court might conclude that some power might not exist because no specific reference to it was made in the statute. It was also feared that cautious attorneys might begin to restore power clauses to articles of incorporation out of concern that a general clause of the type in question might not be interpreted literally. Hence, the present language, which is similar to that included in the statutes of California and other states, was adopted. The general clause granting the corporation essentially the same powers as an individual is coupled with a nonexclusive listing of powers, including the traditional power clauses that appear in many state statutes.

The general philosophy of section 3.02 is thus that corporations formed under the Model Act provisions should be automatically authorized to engage in all acts and have all powers that an individual may have. Because broad grants of power of this nature may not be desired in some corporations, section 3.02 generally authorizes articles of incorporation to deny or limit specific powers to a specific corporation if that is felt desirable. This power to exclude specific powers does not reflect a substantive change from earlier versions of the Model Act (which did not contain an express provision to this effect) but simply makes explicit what was always implicit. Illustrative of the powers that may be appropriate for limitation in specific corporations are the powers (discussed below) to make political contributions to the extent permitted by law or to make expenditures to influence elections affecting the corporate business to the extent permitted by law.

The powers listed in section 3.02 were broadened in several significant respects:

  1. All limitations on loans to directors have been eliminated. The wisdom and propriety of these loans should be evaluated on the basis of general fiduciary standards and the benefits to the corporation. See sections 8.30, 8.31, and 8.32. Section 3.02(11) thus rejects the conceptual argument that because certain transactions are subject to abuse, all such transactions should be prohibited.
  2. It is made clear in section 3.02(12) that former as well as present directors, officers, employees, and agents may participate in pension, option, and similar benefit plans.
  3. Section 3.02(15) permits payments or donations or other acts “that further the business and affairs of the corporation.” This clause, which is in addition to and independent of the power to make charitable and similar donations under section 3.02(13), permits contributions for purposes that may not be charitable, such as for political purposes or to influence elections. This power exists only to the extent consistent with law other than the Model Act. It is the purpose of this section to authorize all corporate actions that are lawful or not against public policy.

(2) It is made clear in section 3.02(12) that former as well as present directors, officers, employees, and agents may participate in pension, option, and similar benefit plans.

(3) Section 3.02(15) permits payments or donations or other acts “that further the business and affairs of the corporation.” This clause, which is in addition to and independent of the power to make charitable and similar donations under section 3.02(13), permits contributions for purposes that may not be charitable, such as for political purposes or to influence elections. This power exists only to the extent consistent with law other than the Model Act. It is the purpose of this section to authorize all corporate actions that are lawful or not against public policy.

The powers of a corporation under the Model Act exist independently of whether a corporation has a broad or narrow purpose clause. A corporation with a narrow purpose clause nevertheless has the same powers as an individual to do all things necessary or convenient to carry out its business. Many actions are therefore intra vires even though they do not directly affect the limited purpose for which the corporation is formed. For example, a corporation may generally make charitable contributions without regard to the purpose for which the charity will use the funds or may invest money in shares of other corporations without regard to whether the corporate purpose of the other corporation is broader or narrower than the limited purpose clause of the investing corporation. In some instances, however, a limited or narrow purpose clause may be considered to be a restriction on corporate powers as well as a restriction on purposes. Since the same ultra vires rule is applicable to corporations that exceed their purposes or powers (see the Official Comment to section 3.04), it is not necessary to determine whether a narrow purpose clause also limits the powers of the corporation but simply whether the purpose of the transaction in question is consistent with the purpose clause. Of course, these issues cannot arise in corporations with an “any lawful business” purpose clause.

North Carolina Commentary

This section contains essentially all of the powers enumerated in former G.S. 55-17, but it avoids the distinction that the prior law made between unconditional powers and those exercisable by a corporation “only in connection with the purposes stated in its charter,” and lists all powers in a single sequence. The words “or this act” were added to the Model Act’s introductory language in subsection (a) to emphasize that there may be limiting provisions elsewhere in Chapter 55. Subdivision (a)(11) was modified to incorporate language from former G.S. 55-17(a)(4) that was believed to be less restrictive than the Model Act’s language, and subdivision (12) was modified by changing the Model Act’s reference to “share” bonus and “share” option plans to the more commonly used terms, “stock” bonus and “stock” option plans. Subdivision (13) was modified to add donations for religious and cultural purposes, which were permitted under former G.S. 55-17(a)(6). Subdivision (16) brings forward former G.S. 55-17(b) (4), and is more specific than the Model Act in authorizing insurance on the corporation’s directors, officers, employees and security holders.

In addition, former G.S. 55-17(c) was added to this section as subsection (b) to avoid any negative inference by its omission. It does not appear in the Model Act.

Legal Periodicals.

For note, “Glenn v. Wagner: Instrumentality Rule versus the Balancing Test in Piercing the Corporate Veil,” see 64 N.C.L. Rev. 1265 (1986).

CASE NOTES

Analysis

I.In General

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Implied Powers Necessary to Exercise of Express Powers. —

Corporations possess by legal implication such powers as are essential to the exercise of the powers expressly conferred and necessary to attain the main objects for which they were formed. Barcello v. Hapgood, 118 N.C. 712, 24 S.E. 124, 1896 N.C. LEXIS 122 (1896).

Corporation may transact business anywhere, unless prohibited by its charter or excluded by local laws. Garrett v. Bear, 144 N.C. 23, 56 S.E. 479, 1907 N.C. LEXIS 99 (1907).

Ratification of and Liability for Pre-Incorporation Contract. —

Although a corporation may not technically ratify a contract made on its behalf prior to its incorporation, since it could not at that time have authorized such action on its behalf, it may, after it comes into existence, adopt such contract by its corporate action, which adoption may be express or implied, and thereby become liable for its performance. Smith v. Ford Motor Co., 289 N.C. 71, 221 S.E.2d 282, 1976 N.C. LEXIS 1221 (1976).

II.Suits by and Against Corporations

Same Liability as Natural Person. —

A corporation is now held liable to civil and criminal actions under the same conditions and circumstances as natural persons are. Reddit v. Singer Mfg. Co., 124 N.C. 100, 32 S.E. 392, 1899 N.C. LEXIS 22 (1899).

Liability for Slander. —

A corporation may be held liable for slander when the defamatory words are uttered by express authority of the company or by one of its officers or agents in the course of his employment, and authority for such utterances may be fairly and reasonably inferred under relevant and sufficient circumstances. Cotton v. Fisheries Prods. Co., 177 N.C. 56, 97 S.E. 712, 1919 N.C. LEXIS 72 (1919).

Ejectment and Trespass Will Lie Against Corporation. —

Corporations, in contemplation of the law, are capable of having actual possession of the land, and whatever may have been supposed to the contrary in the distant past, the actions of ejectment and trespass lie against them. Young v. Barden, 90 N.C. 424, 1884 N.C. LEXIS 247 (1884).

Personal Liability of Corporate Officer for Pre-Incorporation Note Executed in Another State. —

In an action to recover on a promissory note executed in Georgia and payable in Georgia, Georgia law applied, so that defendant could be held personally liable on the note which he executed as president of a corporation which had not yet been formed, but which was subsequently incorporated and which made payments on the note until default. Smith v. Morgan, 50 N.C. App. 208, 272 S.E.2d 602, 1980 N.C. App. LEXIS 3476 (1980).

Suits Must Be in Corporate Name. —

A suit against a corporation must be brought against it in its corporate name, and not against its officers or agents. Britain v. Newland, 19 N.C. 363, 1837 N.C. LEXIS 41 (1837); Young v. Barden, 90 N.C. 424, 1884 N.C. LEXIS 247 (1884).

Unless Corporation Is Insolvent. —

In case of insolvency, where a receiver has been appointed, he may sue either in his own name or in that of the corporation. Davis v. Industrial Mfg. Co., 114 N.C. 321, 19 S.E. 371, 1894 N.C. LEXIS 67 (1894); Smathers v. Western Carolina Bank, 135 N.C. 410, 47 S.E. 893, 1904 N.C. LEXIS 47 (1904).

Misnomer Immaterial. —

A misnomer does not vitiate, provided the identity of the corporation with that intended by the parties is apparent, whether it is in a deed, or in a judgment, or in a criminal proceeding. McCrea v. Starr, 5 N.C. 252, 1809 N.C. LEXIS 8 (1809); Asheville Div. No. 15 v. Aston, 92 N.C. 579 (1885); Gordon v. Pintsch Gas Co., 178 N.C. 435, 100 S.E. 878, 1919 N.C. LEXIS 478 (1919).

III.Rights as to Property

Property of a corporation belongs to it, not to the stockholders. They only have an interest in such property through their relation to the company, and in this respect the State is like any other stockholder. Marshall v. Western N.C.R.R., 92 N.C. 322, 1885 N.C. LEXIS 214 (1885).

Where the State is a stockholder in a railroad company, it is bound by the provisions of the charter in the same manner as an individual. It has no advantage as a stockholder on account of its sovereignty, for, by becoming such, it lays aside its character as a sovereign and places itself on a footing of equality with the individual stockholders. Marshall v. Western N.C.R.R., 92 N.C. 322, 1885 N.C. LEXIS 214 (1885).

Corporation May Hold Estates in Fee. —

Although the existence of a corporation be limited to a certain number of years, yet the corporation is capable of holding estates in fee. Asheville Div. No. 15 v. Aston, 92 N.C. 578, 1885 N.C. LEXIS 263 (1885).

Effect of Conveyance for Use Beyond Corporate Powers. —

Where a corporation takes a conveyance of lands for use beyond its charter powers, the deed is not void, but only voidable upon the objection of the State. Cross v. Seaboard Air Line Ry., 172 N.C. 119, 90 S.E. 14, 1916 N.C. LEXIS 247 (1916).

Private corporation may dispose of its property without express authority of the legislature. Benbow v. Cook, 115 N.C. 324, 20 S.E. 453, 1894 N.C. LEXIS 237 (1894).

A strictly private corporation can lawfully sell any of its property, real or personal, just as an individual can. Barcello v. Hapgood, 118 N.C. 712, 24 S.E. 124, 1896 N.C. LEXIS 122 (1896).

A corporation chartered for the purpose of mining and milling ores has the right, by implication of law, to buy and sell real estate essential to the successful prosecution of its business. Barcello v. Hapgood, 118 N.C. 712, 24 S.E. 124, 1896 N.C. LEXIS 122 (1896).

Necessity for Authorization by Directors to Sell Corporate Property. —

Corporate directors are trustees of the corporation’s property, and usually a corporation may sell, transfer, and convey its corporate real estate only when authorized to do so by its board of directors. And statutory provisions may be supplemented by stipulation in the corporation’s bylaws. Tuttle v. Junior Bldg. Corp., 228 N.C. 507, 46 S.E.2d 313, 1948 N.C. LEXIS 265 (1948).

In the absence of charter provisions or bylaws to the contrary, the president of a corporation is the general manager of its corporate affairs, and his contracts made in the name of the corporation in the general course of business and within the apparent scope of his authority are ordinarily enforceable, but ordinarily he has no power to sell or contract to sell the real or personal property of the corporation without authority from its board of directors. Tuttle v. Junior Bldg. Corp., 228 N.C. 507, 46 S.E.2d 313, 1948 N.C. LEXIS 265 (1948).

Right to Mortgage Property. —

Corporations other than railroad companies have a general power to mortgage their property, unless prohibited by some provision in the charter, the right to mortgage being a natural result of the right to incur an indebtedness. Antietam Paper Co. v. Chronical Publishing Co., 115 N.C. 143, 20 S.E. 366, 1894 N.C. LEXIS 198 (1894).

Corporation may acquire land by showing sufficient adverse possession for the statutory period. Cross v. Seaboard Air Line Ry., 172 N.C. 119, 90 S.E. 14, 1916 N.C. LEXIS 247 (1916).

IV.Corporate Seal

Power to have a common seal and to alter or renew the same at will is frequently conferred on corporations by statute, but such power is one of the incidental and implied powers of every corporation when not expressly conferred. Bailey v. Hassell, 184 N.C. 450, 115 S.E. 166, 1922 N.C. LEXIS 106 (1922).

As a general rule, a corporation may use or adopt any seal. Security Nat'l Bank v. Educators Mut. Life Ins. Co., 265 N.C. 86, 143 S.E.2d 270, 1965 N.C. LEXIS 944 (1965).

Corporation May Adopt Seal for Special Occasion. —

If a corporation adopts a seal different from its corporate seal for a special occasion, or if it has no corporate seal, the seal adopted is the corporate seal for the time and the occasion. Security Nat'l Bank v. Educators Mut. Life Ins. Co., 265 N.C. 86, 143 S.E.2d 270, 1965 N.C. LEXIS 944 (1965).

Any Device May Be Used for Seal. —

Any device used for the corporate seal will be sufficient, provided it was intended for and used as the seal of the corporation, and had been adopted by proper action of the corporation for that purpose. Bailey v. Hassell, 184 N.C. 450, 115 S.E. 166, 1922 N.C. LEXIS 106 (1922).

A corporate seal may consist of anything found upon a paper and which appears to have been put there by due authority or to have been adopted and used by such authority as and for the seal of the corporation. Security Nat'l Bank v. Educators Mut. Life Ins. Co., 265 N.C. 86, 143 S.E.2d 270, 1965 N.C. LEXIS 944 (1965).

The simple word “seal” with a scroll adopted as the seal of a corporation and used by it on a deed to its lands according to resolutions of the stockholders and directors thereof at separate meetings held for the purpose, when all were present, is sufficient. Bailey v. Hassell, 184 N.C. 450, 115 S.E. 166, 1922 N.C. LEXIS 106 (1922).

Burden of Proof as to Seal on Contract and Statute of Limitations. —

The burden was upon plaintiffs to prove that the action accrued within the time limited by G.S. 1-47, by showing that the company adopted the seal appearing on the contract for the special occasion or for all similar occasions, or that such seal became the seal of the corporation by reason of some other rule of law, or that the regular corporate seal was impressed or attached to the original of the contract, or that there were facts and circumstances which excluded the operation of the 3-year statute, G.S. 1-52, other than the matter of a seal. Security Nat'l Bank v. Educators Mut. Life Ins. Co., 265 N.C. 86, 143 S.E.2d 270, 1965 N.C. LEXIS 944 (1965).

§ 55-3-03. Emergency powers.

  1. In anticipation of or during an emergency defined in subsection (d), the board of directors of a corporation may:
    1. Modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent; and
    2. Relocate the principal office, designate alternative principal offices or regional offices, or authorize the officers to do so.
  2. During an emergency defined in subsection (d), unless emergency bylaws provide otherwise:
    1. Notice of a meeting of the board of directors need be given only to those directors whom it is practicable to reach and may be given in any practicable manner, including by publication and radio; and
    2. One or more officers of the corporation present at a meeting of the board of directors may be deemed to be directors for the meeting, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum.
  3. Corporate action taken in good faith during an emergency under this section to further the ordinary business affairs of the corporation binds the corporation and the fact that said action is taken by special procedures may not be used to impose liability on a corporate director, officer, employee, or agent.
  4. An emergency exists for purposes of this section if a quorum of the corporation’s directors cannot readily be assembled because of some catastrophic event.

History. 1989, c. 265, s. 1.

Official Comment

Section 3.03 should be read in conjunction with section 2.07, which authorizes a corporation to adopt emergency or standby bylaws. Section 3.03 grants every corporation limited powers to act in an emergency even though it has failed to enact emergency bylaws under section 2.07.

An “emergency” for purposes of section 3.03 is defined in subsection (d) as any catastrophic event that makes it difficult or impossible to assemble a quorum of directors. In this situation, section 3.03(b) dispenses with or relaxes notice requirements and permits corporate officers to serve as directors in order to achieve a quorum. The section also authorizes the board of directors, either before or during an emergency, to modify lines of succession and relocate the principal business office of the corporation. These actions may be taken only by the board of directors at a meeting at which a quorum is present after giving effect, if necessary, to section 3.03(b).

These minimal provisions, it is believed, should permit a corporation to continue to function in the face of an emergency even if no emergency bylaws have been adopted under section 2.07.

North Carolina Commentary

This section has no counterpart in prior law. The Model Act was rewritten in subsection (c) to conform to changes made to G.S. 55-2-07(c)(2).

§ 55-3-04. Ultra vires.

  1. Except as provided in subsection (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act.
  2. A corporation’s power to act may be challenged:
    1. In a proceeding by a shareholder against the corporation to enjoin the act;
    2. In a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, against an incumbent or former director, officer, employee, or agent of the corporation; or
    3. In a proceeding by the Attorney General under G.S. 55-14-30.
  3. In a shareholder’s proceeding under subsection (b)(1) to enjoin an unauthorized corporate act, the court may enjoin or set aside the act, if equitable and if all affected persons are parties to the proceeding, and may award damages for loss (other than anticipated profits) suffered by the corporation or another party because of enjoining the unauthorized act.

History. Code, ss. 607, 686; 1901, c. 2, s. 107; Rev., s. 1197; C.S., s. 1143; G.S., 55-47; 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

The basic purpose of section 3.04 — as has been the purpose of all similar statutes during the 20th century — is to eliminate all vestiges of the doctrine of inherent incapacity of corporations. See Campbell, “The Model Business Corporation Act,” 11-4 BUS. LAW. 98, 102 (1956). Under this section it is unnecessary for persons dealing with a corporation to inquire into limitations on its purposes or powers that may appear in its articles of incorporation. A person who is unaware of these limitations when dealing with the corporation is not bound by them. The phrase in section 3.04(a) that the “validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act” applies equally to the use of the doctrine as a sword or as a shield: a third person may no more avoid an undesired contract with a corporation on the ground the corporation was without authority to make the contract than a corporation may defend a suit on a contract on the ground that the contract is ultra vires.

The language of section 3.04 extends beyond contracts and conveyances of property; “corporate action” of any kind cannot be challenged on the ground of ultra vires. For this reason it makes no difference whether a limitation in articles of incorporation is considered to be a limitation on a purpose or a limitation on a power; both are equally subject to section 3.04. Corporate action also includes inaction or refusal to act. The common law of ultra vires distinguished between executory contracts, partially executed contracts, and fully executed ones; section 3.04 treats all corporate action the same — except to the extent described in section 3.04(b) — and the same rules apply to all contracts no matter at what stage of performance.

Section 3.04, however, does not validate corporate conduct that is made illegal or unlawful by statute or common law decision. This conduct is subject to whatever sanction, criminal or civil, that is provided by the statute or decision. Whether or not illegal corporate conduct is voidable or rescindable depends on the applicable statute or substantive law and is not affected by section 3.04.

Section 3.04 also does not address the validity of essentially intra vires conduct that is not approved by appropriate corporate action. It does not deal, for example, with the enforceability of an executory contract to sell substantially all the assets of a corporation not in the ordinary course of business that was not approved by the shareholders as required by section 12.02. This type of transaction is not beyond the purposes or powers of the corporation; it simply has not been approved by the corporate authorities as required by law. Similarly, section 3.04 does not deal with whether a corporation is bound by the action of a corporate agent if the action requires, but has not received, approval by the board of directors. Whether or not the corporation is bound by this action depends on the law of agency, particularly the scope of apparent authority and whether the third person knew or should have known of the defect in the corporate approval process. These actions may be ultra vires with respect to the agent’s authority but they are not ultra vires with respect to the corporation and are not controlled by section 3.04.

Similarly, corporate action is not ultra vires under section 3.04 merely because it constitutes a breach of fiduciary duty. For example, a misuse of corporate assets for personal purposes by an officer or director is a breach of fiduciary duty and may be enjoined. Similarly, in some circumstances a lien on corporate assets and a contract entered into by the corporation may be cancelled or enjoined if they constitute breaches of fiduciary duty and the third person is charged with knowledge that they were improper. These transactions, however, are not ultra vires with respect to the corporation, and cannot be attacked under section 3.04. They may be enjoined because of breach of the fiduciary duty, not because the transaction exceeds the powers or purposes of the corporation.

Section 3.04(b), like the prior Model Act provisions, permits challenges to the corporation’s lack of power in three limited classes of cases:

  1. In suits by the attorney general under section 14.30. This provision does not answer the question whether or not a corporation may be dissolved or enjoined by the attorney general for committing an ultra vires act; it simply preserves the power of the state to assert that certain corporate action was ultra vires.
  2. In a suit by the corporation, either directly or through a legal representative, against incumbent or former officers or directors for authorizing or causing the corporation to engage in an ultra vires act. Again, this section does not address whether or not there is liability for causing the corporation to enter into an ultra vires act; it simply preserves the power of the corporation to assert that certain corporate action was ultra vires.
  3. In a suit by a shareholder against the corporation to enjoin an ultra vires act. This suit, however, is subject to the requirements of section 3.04(c). Under this subsection an ultra vires act may be enjoyed only if all “affected parties” are parties to the suit. The requirement that the action be “equitable” generally means that only third persons dealing with a corporation while specifically aware that the corporation’s action was ultra vires will be enjoined. The general phrase “if equitable” was retained because of the possibility that other circumstances may exist in which it may be equitable to refuse to enforce an ultra vires contract. Further, if enforcement of the contract is enjoined, either the third person or the corporation may in the discretion of the court be awarded damages from the other for loss (excluding anticipated profits).

(2) In a suit by the corporation, either directly or through a legal representative, against incumbent or former officers or directors for authorizing or causing the corporation to engage in an ultra vires act. Again, this section does not address whether or not there is liability for causing the corporation to enter into an ultra vires act; it simply preserves the power of the corporation to assert that certain corporate action was ultra vires.

(3) In a suit by a shareholder against the corporation to enjoin an ultra vires act. This suit, however, is subject to the requirements of section 3.04(c). Under this subsection an ultra vires act may be enjoyed only if all “affected parties” are parties to the suit. The requirement that the action be “equitable” generally means that only third persons dealing with a corporation while specifically aware that the corporation’s action was ultra vires will be enjoined. The general phrase “if equitable” was retained because of the possibility that other circumstances may exist in which it may be equitable to refuse to enforce an ultra vires contract. Further, if enforcement of the contract is enjoined, either the third person or the corporation may in the discretion of the court be awarded damages from the other for loss (excluding anticipated profits).

Section 3.04(c) thus authorizes a court to enjoin or set aside an ultra vires act or grant other relief that may be necessary to protect the interests of all affected persons, including the interests of third persons who deal with the corporation.

North Carolina Commentary

This section contains no change of substance from former G.S. 55-18 except that the new section applies only to North Carolina corporations whereas the prior statute purported to apply to foreign corporations as well.

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Doctrine of ultra vires has been very much modified, and many contracts made in the course of business, especially when executed and benefits are received or liabilities are incurred, will be upheld and enforced which were once declared absolutely void. Hutchins v. Bank, 128 N.C. 72, 38 S.E. 252, 1901 N.C. LEXIS 335 (1901).

The doctrine of ultra vires has been curtailed to a considerable degree. Piedmont Aviation, Inc. v. S & W Motor Lines, Inc., 262 N.C. 135, 136 S.E.2d 658, 1964 N.C. LEXIS 633 (1964).

Question whether acts are ultra vires is a conclusion of law to be drawn from the facts stated. Spencer v. Seaboard Air Line R.R., 137 N.C. 107, 49 S.E. 96 (1904).

State May Enjoin Threatened Ultra Vires Act. —

Modification of the doctrine does not involve the right in an appropriate case of the State to enjoin a threatened ultra vires act. Victor v. Louise Cotton Mills, 148 N.C. 107, 61 S.E. 648, 1908 N.C. LEXIS 164 (1908).

Stockholder May Bring Action. —

If an act of a corporation is ultra vires, any one or more stockholders may by some appropriate method call it in question, and, unless barred by having consented to or acquiesced in it, have relief. Victor v. Louise Cotton Mills, 148 N.C. 107, 61 S.E. 648, 1908 N.C. LEXIS 164 (1908); Lutterloh v. City of Fayetteville, 149 N.C. 65, 62 S.E. 758, 1908 N.C. LEXIS 299 (1908).

§ 55-3-05. Exercise of corporate franchises not granted.

The Attorney General may upon his own information or upon complaint of a private party bring an action in the name of the State to restrain any person from exercising corporate franchises not granted.

History. Code, ss. 607, 686; 1901, c. 2, s. 107; Rev., s. 1197; C.S., s. 1143; G.S., s. 55-47(2); 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

North Carolina Commentary

This section brings forward former G.S. 55-10.

Article 4. Name. [Repealed]

§§ 55-4-01 through 55-4-05. [Transferred]

Transferred to G.S. 55D-20 through 55D-27 by Session Laws 2001-358, ss. 14(a) and 14(b).

Article 5. Office and Agent.

§ 55-5-01. Registered office and registered agent.

Each corporation must maintain a registered office and registered agent as required by Article 4 of Chapter 55D of the General Statutes and is subject to service on the Secretary of State under that Article.

History. 1901, c. 5; Rev., s. 1243; C.S., s. 1137; 1937, c. 133, ss. 1-3; G.S., ss. 55-38, 55-39; 1955, c. 1371, s. 1; 1957, c. 979, s. 17; 1989, c. 265, s. 1; 2000-140, s. 101(a); 2001-358, ss. 44, 47(a); 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Editor’s Note.

Session Laws 2001-358, s. 52, authorizes the Revisor of Statutes to transfer, as historical annotations, the Official Comments and the North Carolina Comments to those portions of Chapter 55 of the General Statutes that are recodified by this act to the corresponding locations in Chapter 55D of the General Statutes, as the Revisor deems appropriate. Pursuant to this authority, the Official Comments and the North Carolina Commentary formerly located at this section have been transferred to G.S. 55D-30.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, s. 47(a), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, rewrote the section.

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

CASE NOTES

Editor’s Note. —

The case below was decided under the Business Corporation Act adopted in 1955.

The listing of an agent for corporate service of process is not a voluntary action, subject to the discretion of the corporation. This listing is legislatively mandated. South Carolina Ins. Co. v. Hallmark Enters., Inc., 88 N.C. App. 642, 364 S.E.2d 678, 1988 N.C. App. LEXIS 213 (1988), (decided under prior law).

Failure to Notify Insurer of Suit Where Corporation Without Agent Received No Notice Thereof. —

Corporation could not rely on its violation of former G.S. 55-13 to justify its failure to receive notice of suit. Consequently, it did not give notice of suit to its insurer at the time it was reasonably expected to receive actual notice thereof, thus failing to notify insurer as soon as practicable. South Carolina Ins. Co. v. Hallmark Enters., Inc., 88 N.C. App. 642, 364 S.E.2d 678, 1988 N.C. App. LEXIS 213 (1988), (decided under prior law).

§§ 55-5-02 through 55-5-04. [Transferred]

Transferred to G.S. 55D-31 through 55D-33 by Session Laws 2001-358, s. 44.

Article 6. Shares and Distribution.

Part 1. Shares.

§ 55-6-01. Authorized shares.

  1. The articles of incorporation must prescribe the classes of shares and the number of shares of each class that the corporation is authorized to issue. If more than one class of shares is authorized, the articles of incorporation must prescribe a distinguishing designation for each class, and, prior to the issuance of shares of a class, the preferences, limitations, and relative rights of that class must be described in the articles of incorporation. All shares of a class must have preferences, limitations, and relative rights identical with those of other shares of the same class unless the articles of incorporation divide a class into series. If a class is divided into series, all the shares of any one series must have preferences, limitations, and relative rights identical with those of other shares of the same series. The requirement of identical rights within a class shall not be construed to conflict with any special voting rights specified elsewhere in this Chapter.
  2. Each series of a class must be given a distinguishing designation.
  3. The articles of incorporation must authorize:
    1. One or more classes of shares that together have unlimited voting rights, provided, however, that this subdivision shall not apply to articles of incorporation of not-for-profit corporations formed for religious, charitable, nonprofit, social, or literary purposes prior to July 1, 1989, and
    2. One or more classes of shares (which may be the same class or classes as those with voting rights) that together are entitled to receive the net assets of the corporation upon dissolution.
  4. The articles of incorporation may authorize one or more classes or series within a class of shares that:
    1. Have special, conditional, or limited voting rights, or no right to vote, except to the extent prohibited by this Chapter;
    2. Are redeemable or convertible as specified in the articles of incorporation (i) at the option of the corporation, the shareholder, or another person or upon the occurrence of a designated event; (ii) for cash, indebtedness, securities, or other property; (iii) in a designated amount or in an amount determined in accordance with a designated formula or by reference to extrinsic data or events;
    3. Entitle the holders to distributions calculated in any manner, including dividends that may be cumulative, noncumulative, or partially cumulative;
    4. Have preference over any other class or series within a class of shares with respect to distributions, including dividends and distributions upon the dissolution of the corporation.
    5. Notwithstanding the provisions of (d)(3) and (4) of this section, noncumulative preferred shares of a class or series within a class out of which shares were initially issued after June 30, 1957, and before October 1, 1969, shall be entitled to a dividend credit, as defined in this Chapter, and until such dividend credit is fully discharged no dividend shall be paid to any shares that are subordinate to such preferred shares as to dividends.
  5. The description of the designations, preferences, limitations, and relative rights in subsection (d) is not exhaustive.

History. 1901, c. 2, s. 19; 1903, c. 660, ss. 2, 3; Rev., s. 1159; C.S., s. 1156; 1921, c. 116, s. 1; 1923, c. 155; C.S., s. 1167(a); 1925, c. 118, ss. 2, 2a; c. 262, s. 1; 1939, c. 199; 1949, c. 929; G.S., ss. 55-61, 55-73; 1953, c. 822, ss. 1, 3; 1955, c. 1371, s. 1; 1969, c. 751, ss. 15-17; 1985, c. 117, s. 1; 1989, c. 265, s. 1; 2021-162, s. 4.

Official Comment

Section 6.01 adopts a new terminology from that traditionally used in corporation statutes to describe classes of shares that may be created, but makes only limited substantive changes from earlier versions of the Model Act. Traditional corporation statutes work from a perceived inheritance of concepts of “common shares” and “preferred shares” that at one time may have had considerable meaning but that today often do not involve significant distinctions. It is possible under modern corporation statutes to create classes of “common” shares that have important preferential rights and classes of “preferred” shares that are subordinate in all important economic aspects or that are indistinguishable from common shares in either voting rights or entitlement to participate in the assets of the corporation upon dissolution. The revised Model Act breaks away from the inherited concepts of “common” and “preferred” shares and develops more general language to reflect the actual flexibility in the creation of classes of shares that exists in modern corporate practice. The words “common shares” or “preferred shares” are no longer used in the revised Model Act, though the words appear in a few instances in examples appearing in the Official Comment.

  1. Section 6.01(a)
  2. Section 6.01(b)
  3. Section 6.01(c)
    1. In general
    2. Voting of shares
    3. Redemption of shares
    4. Convertibility of shares

Section 6.01(a) requires that the articles of incorporation prescribe the classes of shares and the number of shares of each class that the corporation is authorized to issue. If the articles authorize the issue of only one class of shares, no designation or description of the shares is required, it being understood that these shares have both the power to vote and the power to receive the net assets of the corporation upon dissolution. See section 6.01(b). Shares with both of these characteristics are usually referred to as “common shares” or “common stock,” but no specific designation is required by the Model Act.

If more than one class of shares is authorized, the preferences, limitations, and relative rights of each class of shares must be described in the articles of incorporation before any shares of that class are issued, or the board of directors may be given authority to establish them under section 6.02. These descriptions constitute the “contract” of the holders of those classes of shares with respect to their interest in the corporation and must be set forth in sufficient detail reasonably to define their interest. The designations, preferences, limitations, and relative rights of shares with one or more special or preferential rights which may be authorized are further described in section 6.01(c).

If more than one class is authorized (or if only one class is originally authorized but at some future time one or more other classes of shares are added by amendment), the preferences, limitations, and relative rights of each class or classes of shares, including the class or classes that possess the fundamental characteristics of voting and residual equity financial interests, must be described before shares of those classes are issued. If both fundamental characteristics are placed exclusively in a single class of shares, that class may be described simply as “common shares” or by statements such as the “shares have general distribution and voting rights,” the “shares have all the rights of common shares,” or the “shares have all rights not granted to the class A shares.”

If the articles of incorporation create classes of shares that divide these fundamental rights among two or more classes of shares, it is necessary that the rights be clearly allocated among the classes. Specificity is required only to the extent necessary to differentiate the relative rights of the respective classes. For example, where one class has a liquidation preference over another, it is necessary to specify only the preferential liquidation right of that class; in the absence of a contrary provision in the articles, the remaining class would be entitled to receive the net assets remaining after the liquidation preference has been satisfied.

More than one class of shares may be designated as “common shares;” however, each must have a “distinguishing designation” under section 6.01(a), e.g., “nonvoting common shares” or “class A common shares,” and the rights of the classes must be described. For example, if a corporation authorizes two classes of shares with equal rights to share in all distributions and with identical voting rights except that one class is entitled exclusively to elect one director and the second class is entitled exclusively to elect a second director, the two classes may be designated, e.g., as “Class A common” and “Class B common,” and described, e.g., as “a class of common shares with the right to elect one director.” What is required is language that makes the location of these rights clear.

Rather than describing the terms of each class of shares in the articles of incorporation, the corporation may delegate to the board of directors under section 6.02 the power to establish the terms of a class of shares (or of a series within a class of shares (if no shares of that class (or series) have previously been issued. Those terms, however, must be set forth in an amendment to the articles of incorporation before the shares are issued.

Section 6.01(b) requires that every corporation authorize one or more classes of shares that have the two fundamental characteristics of having unlimited voting rights and the right to receive the net assets of the corporation upon its dissolution. These two fundamental characteristics need not be placed in a single class of shares but may be divided as desired. It is nevertheless essential that the corporation always have authorized shares with these two characteristics, and section 6.03 requires that shares having in the aggregate these characteristics always be outstanding.

Section 6.01(b) ensures that there is always in existence one or more classes of shareholders who share in the ultimate residual interest in the corporation and who are entitled to elect a board of directors and make other fundamental decisions with respect to the corporation.

Section 6.01(c) lists the principal features that are customarily incorporated into classes of shares. Section 6.01(d) makes clear that this listing is not exhaustive.

Section 6.01(c) authorizes creation of classes of shares with limited or residual rights without significant limitation. In earlier versions of the Model Act and in the statutes of many states, certain types of rights or privileges are not permitted. Many such statutes, for example, prohibit the creation of a class of voting shares without preferential financial rights that is callable at the discretion of the corporation (“callable common shares”). Another common prohibition is against shares that have the power to be converted at the option of the shareholder into other classes of shares that have preferential financial rights, or into debt securities of the corporation (“upstream” conversion privileges). For the reasons set forth below, these restrictions are not preserved in the revised Model Act.

Any class of shares may be granted multiple or fractional votes per share without limitation. See section 7.21. Shares of any class may also be made nonvoting “except to the extent prohibited by this Act.” This “except” clause refers to the provisions in the Model Act that permit shares that are designated to be nonvoting to vote as separate voting groups on amendments to articles of incorporation and other organic changes in the corporation that directly affect that class (sections 7.26 and 10.04). In addition, shares may be given voting rights that are limited or conditional (e.g., on the passing of a specified number of dividends). Section 6.01(b), however, requires that there always be one or more classes of shares that together have unlimited voting rights.

Section 6.01(c)(2) permits classes of shares to be made redeemable on the terms set forth in the articles of incorporation. Under this section, shares may be made “redeemable” at the option of the holder, the corporation, or another person; shares redeemable at the option of the corporation are sometimes called “callable shares,” while shares redeemable at the option of the shareholder are sometimes described as involving a “put.” The Model Act permits either type of redemption for any class of shares and thereby permits the creation of redeemable or callable shares without limitation (subject only to the provisos that the class or classes of shares described in section 6.01(b) must always exist and that at least one share of each class with those rights or powers must be outstanding under section 6.03).

Earlier versions of the Model Act and the statutes of many states contain a direct or indirect prohibition against callable voting shares or callable common shares. Even where such a prohibition exists, however, the same effect can be obtained by the use of consensual share transfer restrictions (see section 6.27). If it is possible to create what is essentially a callable voting share by agreement, there is no reason why such provisions should not be built directly and publicly into the capital structure of the corporation if that is desired.

The recognition of a redemption that is a “put” exercisable by the holders of the shares (or a third person such as holders of other classes of shares) is also new to the Model Act and is not permitted in many states. However, consensual share transfer restrictions may create a right that is indistinguishable from such a right of redemption, and a right of redemption is expressly recognized by many states in connection with certain specialized classes of corporations such as open-end investment companies. As described below, if a right of redemption is recognized, prohibitions in earlier versions of the Model Act and many state statutes against “upstream” conversions serve no purpose.

The amount to be paid upon the redemption of shares under section 6.01(c)(2) may be fixed in the articles of incorporation or “determined in accordance with a designated formula or by reference to extrinsic data or events.” The reference to “extrinsic data or events” is intended to permit the redemption price to be established on the basis of matters external to the corporation, such as the purchase price of other shares, the level of the prime rate, the effective interest rate at which the corporation may obtain short- or long-term financing, the consumer price index or a designated currency ratio. While a designated price formula or references must be set out in the articles of incorporation, the board of directors may be given limited authority to implement the provisions.

All redemptions of shares are subject to the restrictions on distributions set forth in section 6.40. See section 6.03(b).

Section 6.01(c)(2) also permits shares of any class to be made convertible into shares of any other class or into cash, indebtedness, securities, or other property of the corporation or another person.

As described above, earlier versions of the Model Act and the statutes of many states prohibit so-called “upstream” conversions, that is, shares convertible into debt securities or into a class of shares having prior or superior preference rights. See, e.g., N.Y. BUS. CORP. LAW ANN. § 519(a)(1) (McKinney 1963). This restriction was eliminated from the Model Act since it was recognized that the power to make shares redeemable at the option of the shareholder for cash (see section 6.01(c)(2)(ii)) should logically permit the shares to be redeemable or convertible at the option of the shareholder into other shares with senior preferential rights. Creditors of the corporation and holders of shares with preferential rights are less seriously affected by a conversion of shares into debt or into shares with preferential rights than they would be by the redemption of the shares for money, which is permitted by the revised Model Act, subject to the limitations of section 6.40. Shares made “redeemable” for debt under section 6.01(c)(2)(ii), achieve the same effect as a right to “convert” shares into debt securities.

4. Examples of classes of shares permitted by section 6.01

Section 6.01 authorizes the creation of new or innovative classes of shares without limitation or restriction. The section is basically enabling rather than restrictive since corporations often find it necessary to create new and innovative classes of shares for a variety of reasons, and with the disclosure of the terms of the new classes in the articles of incorporation that are a matter of public record there is no reason to restrict the power to create these classes. Innovative classes of shares may be created in connection with raising debt or equity capital. Securities with novel provisions are often created to meet perceived corporate needs in specific circumstances or because of financial problems generated by market conditions for capital. Novel classes of shares may also be created in order to effectuate desired control relationships among the participants in a venture. Classes of shares are likely to be used for this purpose in closely held corporations, whether or not statutory close corporation status is elected, but may also be used for this purpose by publicly held corporations.

Examples of innovative classes of shares are the following:

  1. Shares of one class may be authorized to elect a specified number of directors while shares of a second class may be authorized to elect the same or a different number of directors.
  2. Shares of one class may be entitled to vote as a separate voting group on certain transactions, but shares of two or more classes may be only entitled to vote together as a single voting group on the election of directors and other matters.
  3. Shares of one class may be nonvoting or may be given multiple or fractional votes per share.
  4. Shares of one class may be entitled to different dividend rights or rights on dissolution than shares of another class.

(2) Shares of one class may be entitled to vote as a separate voting group on certain transactions, but shares of two or more classes may be only entitled to vote together as a single voting group on the election of directors and other matters.

(3) Shares of one class may be nonvoting or may be given multiple or fractional votes per share.

(4) Shares of one class may be entitled to different dividend rights or rights on dissolution than shares of another class.

These examples are intended to be illustrative only and not to exhaust the variations permissible under the Model Act.

A corporation has power to issue debt securities under section 3.02(7). Although section 6.01 authorizes the creation of interests that usually will be classed as “equity” rather than “debt,” it is permissible to create classes of securities under section 6.01 that have some of the characteristics of debt securities. These securities are often referred to as “hybrid securities.” Section 6.01 of the Model Act does not limit the development of hybrid securities, and equity securities may be created under the Model Act that embody any characteristics of debt that may be desired. Unlike some state statutes, however, the Model Act restricts the power to vote to securities classed as “shares” in the articles of incorporation.

North Carolina Commentary

The Model Act was modified in this section to deal only with the kind of shares that are authorized and, in G.S. 55-6-02, to deal only with blank shares where the board of directors fixes or determines the terms of a series within a class of shares. The Model Act blends these provisions by providing the authority to issue a series within a class in section 6.02 instead of section 6.01. Subsection (a) of this section incorporates subsection (b) of section 6.02 of the Model Act, slightly modified for clarity, while subsection (c) of section 6.02 was incorporated as subsection (b) of this section.

The last sentence of subsection (a) was added to dispel any possible conflict between this section and Article 9.

Former G.S. 55-40(c), relating to dividend credits, was brought forward as subdivision (d)(5), to continue providing for the permanent grandfathering of dividend credits.

Other minor modifications to the Model Act’s language were made for clarification.

Cross References.

As to rights of holders of debt securities, see G.S. 55-7-21.1.

Editor’s Note.

The colon at the end of the introductory language of subsection (c) has been added at the direction of the Revisor of Statutes.

Session Laws 2021-162, s. 6, made the proviso in subdivision (c)(1) of this section, as added by Session Laws 2021-162, s. 4, effective September 20, 2021, and applicable to not-for-profit corporations formed prior to July 1, 1989, existing as of the effective date of this act [September 20, 2021].

Session Laws 2021-162, s. 5, is severability clause.

Effect of Amendments.

Session Laws 2021-162, s. 4, effective September 20, 2021, added the proviso in subdivision (c)(1).

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For article, “The Power to Issue Stock,” see 46 Wake Forest L. Rev. 701 (2011).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under prior law.

Preferred stock forms a part of the capital stock of the corporation, entitling the holders to all rights of the stockholder subject to the terms and conditions on which their stock was issued. Kistler v. Caldwell Cotton Mills Co., 205 N.C. 809, 172 S.E. 373, 1934 N.C. LEXIS 79 (1934).

Preferred stockholder is not a creditor of the corporation, and must be confined to his rights as a stockholder. Weaver Power Co. v. Elk Mt. Mill Co., 154 N.C. 76, 69 S.E. 747, 1910 N.C. LEXIS 162 (1910).

Priorities of preferred stock are always subject to the rights of creditors. So an attempt of the corporation to give the preferred stockholders a lien upon its realty in the nature of a mortgage or deed of trust under the provisions of its charter is ineffectual as to the prior rights of creditors. Ellington v. Raleigh Bldg. Supply Co., 196 N.C. 784, 147 S.E. 307, 1929 N.C. LEXIS 109 (1929).

Voting Rights Not to Be Restricted. —

When a corporation through its articles has authorized only one class of stock, any provision in the articles of incorporation that serves to restrict the voting rights of its shareholders is void as violative of subsection (c). Byrd v. Raleigh Golf Ass'n, 123 N.C. App. 272, 472 S.E.2d 395, 1996 N.C. App. LEXIS 686 (1996).

Provisions in defendant’s articles of incorporation were void to the extent that they purported to condition each shareholder’s right to vote upon the payment of annual dues. Byrd v. Raleigh Golf Ass'n, 123 N.C. App. 272, 472 S.E.2d 395, 1996 N.C. App. LEXIS 686 (1996).

§ 55-6-02. Terms of class or series determined by board of directors.

  1. If the articles of incorporation so provide, the board of directors may determine, in whole or part, the preferences, limitations, and relative rights (within the limits set forth in G.S. 55-6-01) of (1) any class of shares before the issuance of any shares of that class or (2) one or more series within a class before the issuance of any shares of that series.
  2. Before issuing any shares of a class or series created under this section, the corporation must deliver to the Secretary of State for filing articles of amendment, which are effective without shareholder action, that set forth:
    1. The name of the corporation;
    2. The text of the amendment determining the terms of the class or series of shares;
    3. The date it was adopted; and
    4. A statement that the amendment was duly adopted by the board of directors.

History. 1901, c. 2, s. 19; 1903, c. 660, ss. 2, 3; Rev., s. 1159; C.S., s. 1156; 1923, c. 155; 1925, c. 118, ss. 2, 2a; 1939, c. 199; G.S., s. 55-61; 1953, c. 822, s. 1; 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Section 6.02 permits the board of directors, if authority to do so is contained in the articles, to fix the terms of a class of shares to meet corporate needs, including current requirements of the securities market or the exigencies of negotiations for acquisition of other corporations or properties, without the necessity of holding a shareholders’ meeting to amend the articles. This section therefore permits prompt action and gives desirable flexibility. The articles of incorporation may also create “series” of shares within a class (rather than designating that “series” as a separate class) if that is deemed desirable.

The board of directors may create new series within a class or set the terms of a class or series only if there are no outstanding shares of that class or series. This section recognizes that in some contexts there is no substantive difference between a “class” and a “series within a class,” and that the labels are often a matter of convenience. In appropriate circumstances, a series may be treated as a class of shares that has one or both of the fundamental characteristics described in section 6.01(b).

Shares of stock to be issued in different classes or series that vary in terms to be set by the board of directors are sometimes referred to as “blank stock.” The granting of the power to vary the terms gives the board of directors broad power to affect the capital structure of the corporation. Exercise of this power may in some circumstances dilute the interest of existing shareholders. But on balance it is desirable to permit this flexibility.

The power to vary the terms of “blank stock” for series of the same class extends to all the permitted variables set forth in section 6.01(c).

Subsection (e) requires a simple official filing to amend the articles so there will be a public record of the class or series the corporation intends to issue. The amendment may be made without shareholder action. See section 10.02.

North Carolina Commentary

Subsection (a) is identical to the Model Act’s subsection 6.02(a), and subsection (b) is the same as the Model Act’s subsection 6.02(d). As explained in the North Carolina Comment to G.S. 55-6-01, subsections (b) and (c) of the Model Act’s section 6.02 were incorporated into G.S. 55-6-01 rather than this section.

§ 55-6-03. Issued and outstanding shares.

  1. A corporation may issue the number of shares of each class or series authorized by the articles of incorporation. Shares that are issued are outstanding shares until they are reacquired, redeemed, converted, or cancelled.
  2. The reacquisition, redemption, or conversion of outstanding shares is subject to the limitations of subsection (c) of this section and to G.S. 55-6-40.
  3. At all times that shares of the corporation are outstanding, there must be outstanding one or more shares that together have unlimited voting rights and one or more shares that together are entitled to receive the net assets of the corporation upon dissolution.

History. 1901, c. 2, s. 19; 1903, c. 660, ss. 2, 3; Rev., s. 1159; C.S., s. 1156; 1921, c. 116, s. 1; 1923, c. 155; C.S., s. 1167(a); 1925, c. 118, ss. 2, 2a; c. 262, s. 1; 1939, c. 199; 1949, c. 929; G.S., ss. 55-61, 55-73; 1953, c. 822, ss. 1, 3; 1955, c. 1371, s. 1; 1969, c. 751, ss. 15-17; 1985, c. 117, s. 1; 1989, c. 265, s. 1.

Official Comment

Section 6.03 permits the corporation to issue shares up to the number of shares authorized in the articles of incorporation and provides that shares that are issued are outstanding shares for purposes of this Act until they are reacquired, redeemed, converted, or cancelled. The determination of the number of shares to be issued is usually made by the board of directors but may be reserved by the articles of incorporation to the shareholders. The only requirements are that no class of shares be overissued and that one or more shares of a class or classes that together have unlimited voting power and one or more shares of a class or classes that together are entitled to the net assets of the corporation upon dissolution at all times must be outstanding.

Shares of any class that are outstanding may be made subject to share transfer restrictions that may result in contractual obligations by the corporation to reacquire shares. The validity of such share transfer restriction is today not open to serious question. See section 6.27. The corporation may also acquire outstanding shares of any class pursuant to a voluntary transaction between the shareholder and the corporation. All contractual or voluntary reacquisitions are subject to the restrictions set forth in subsection (c) of this section and to section 6.40. The corporation may also reacquire shares pursuant to a right of redemption (or an obligation to redeem) established in the articles of incorporation. See section 6.01(c)(2). All such redemptions of shares are also subject to the restrictions of subsection (c) of this section and to section 6.40. Shares of the class or classes described in section 6.01(b) may be reacquired or redeemed by the corporation in any of the foregoing ways to the same extent as shares of any other class, subject, however, to the overriding requirement of section 6.03(c) that at all times at least shares that meet the requirements of section 6.01(b) be outstanding.

The provisions of the revised Model Act are consistent with the specialized class of corporation known as the open-end investment company, which permits unlimited redemptions of shares at net asset value at the request of shareholders. Sections 6.01 and 6.03 permit the classes of shares with voting and dissolution rights to be made redeemable without limitation. The requirement of section 6.03(c) that at least one share be outstanding is also consistent with an unlimited right of redemption since that section only applies while there are shares of stock outstanding. If an open-end investment company or any other corporation should redeem all of its outstanding shares, it should file articles of dissolution under chapter 14 at or before the time the last share is redeemed.

North Carolina Commentary

A minor stylistic change from the Model Act was made in subsection (c).

§ 55-6-04. Fractional shares.

  1. A corporation may:
    1. Issue fractions of a share or pay in money the value of fractions of a share;
    2. Arrange for disposition of fractional shares by the shareholders;
    3. Issue scrip in registered or bearer form entitling the holder to receive a full share upon surrendering enough scrip to equal a full share.
  2. Each certificate representing scrip must be conspicuously labeled “scrip” and must contain the information required by G.S. 55-6-25(b).
  3. The holder of a fractional share is entitled to exercise the rights of a shareholder, including the right to vote, to receive dividends, and to participate in the assets of the corporation upon liquidation. The holder of scrip is not entitled to any of these rights unless the scrip provides for them.
  4. The board of directors may authorize the issuance of scrip subject to any condition considered desirable, including:
    1. That the scrip will become void if not exchanged for full shares before a specified date; and
    2. That the shares for which the scrip is exchangeable may be sold and the proceeds paid to the scripholders.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 20; 1989, c. 265, s. 1.

Official Comment

Fractional shares may arise from a share dividend that, as applied to a particular holder, does not produce an even multiple of shares; they may also result from fractional stock splits, from reverse splits, and from reclassifications and mergers. Although corporations are authorized to issue fractional shares, which are vested proportionately with the same rights as full shares, the creation of fractional shares often creates administrative difficulties, particularly for voting and dividend purposes.

Section 6.04 authorizes handling fractional shares in various ways, including:

  1. The corporation may issue scrip instead of fractional shares. Scrip confers none of the substantive rights of shareholders, but only authorizes holders to combine scrip certificates in amounts aggregating a full share and then to exchange them for a full share. This aggregation must occur within the time and subject to the conditions set initially by the board of directors and stated in the scrip certificate. Scrip that is not combined and exchanged becomes void. To protect shareholders against forfeiture of their interest, however, it is usually provided that the shares represented by scrip certificates not exchanged by the expiration date are to be sold and the proceeds held, either indefinitely or for a stated period, for the benefit of the scripholders and paid to them on surrender of their scrip certificate.
  2. The corporation may authorize the immediate sale of all fractional share interests, thereby avoiding the expense and delay of scrip and the inconvenience of recognizing fractional shares. While this procedure denies shareholders the benefit of any subsequent rise in the market, it protects them against any subsequent decline and ensures them of recognition based on market values contemporaneous with the transaction. Since these transactions necessarily involve less than one full share for each shareholder, the amount involved in subsequent price changes is usually modest.

Scrip has been widely used in lieu of fractional shares. The New York Stock Exchange, while not requiring the use of any particular method for the settlement of fractional share interests, has established a policy relating to the minimum rights and privileges that scrip issued by registered companies must provide. N.Y.S.E. LISTED COMPANY MANUAL § 703.02(B).

One variation of “going private” transactions to eliminate public shareholders in a corporation largely owned by management interests involves a reverse share split at a ratio that reduces all public shareholders’ interest to a fractional share, followed by the reduction of the fractional interests to cash under this section. See “Guidelines on Going Private,” 37 BUS. LAW. 313 (1981).

Under this section fractional shares may be certificated or uncertificated. There is no difference in treatment of certificated or uncertificated shares for this purpose. See sections 6.25 and 6.26.

§§ 55-6-05 through 55-6-19.

Reserved for future codification purposes.

Part 2. Issuance of Shares.

§ 55-6-20. Subscription for shares before incorporation.

  1. A subscription for shares entered into before incorporation is irrevocable for six months unless the subscription agreement provides a longer or shorter period or all the subscribers agree to revocation.
  2. The board of directors may determine the payment terms of subscriptions for shares that were entered into before incorporation, unless the subscription agreement specifies them. A call for payment by the board of directors must be uniform so far as practicable as to all shares of the same class or series, unless the subscription agreement specifies otherwise.
  3. Shares issued pursuant to subscriptions entered into before incorporation are fully paid and nonassessable when the corporation receives the consideration specified in the subscription agreement.
  4. If a subscriber defaults in payment of money or property under a subscription agreement entered into before incorporation, the corporation may collect the amount owed as any other debt. Alternatively, unless the subscription agreement provides otherwise, the corporation may rescind the agreement and may sell the shares if the debt remains unpaid more than 20 days after the corporation sends written demand for payment to the subscriber.
  5. A subscription agreement entered into after incorporation is a contract between the subscriber and the corporation subject to G.S. 55-6-21.

History. 1901, c. 2, ss. 23, 24, 25; Rev., ss. 1169, 1170, 1171; C.S., s. 1165; G.S., s. 55-70; 1955, c. 1371, s. 1; 1969, c. 751, s. 18; 1985, c. 117, s. 2; 1989, c. 265, s. 1.

Official Comment

Agreements for the purchase of shares to be issued by a corporation are typically referred to as “subscriptions” or “subscription agreements.” Section 6.20 deals exclusively with preincorporation subscriptions, that is, subscriptions entered into before the corporation was formed. Preincorporation subscriptions have often been considered to be revocable offers rather than binding contracts. Since the corporation is not in existence, it cannot be a party to the agreement and the consideration established for the shares is not determined by the board of directors. While preincorporation subscriptions entered into simultaneously by several subscribers may be considered a binding contract between or among the subscribers, not all factual situations lend themselves to contractual analysis. Because of the uncertainty of the legal enforceability of these transactions, section 6.20 provides a simple set of legal rules applicable to the enforcement of preincorporation subscriptions by the corporation after its formation. It does not address the extent to which preincorporation subscriptions may constitute a contract between or among subscribers, and other subscribers may enforce whatever contract rights they have without regard to section 6.20.

Section 6.20(a) provides that preincorporation subscriptions are irrevocable for six months unless the subscription agreement provides that they are revocable or that they are irrevocable for some other period. Nevertheless, all the subscribers to shares may agree at any time that a subscriber may withdraw in part from his commitment to subscribe for shares, that a subscriber may revoke his subscription entirely, or that the period of irrevocability may continue for an additional stated period. If the corporation accepts the subscription during the period of irrevocability, the subscription becomes a contract binding on both the subscribers and the corporation. The terms of this contract are set forth in sections 6.20(b) and (d).

Section 6.20(b) provides that after incorporation the board of directors may determine the payment terms of subscriptions but these calls must be uniform so far as practicable as to all shares of the same class or series unless the subscriptions provide otherwise. Section 6.20(d) provides alternative methods of enforcement of preincorporation subscriptions by the corporation. If the consideration for the subscription involves the payment of money or conveyance of property, the corporation may, in the event of nonpayment, collect the amount due as any other debt. Alternatively, unless the subscription agreement provides otherwise, the corporation may rescind the agreement and may resell the shares after 20 days’ notice to the subscriber.

Section 6.20(c) provides that shares issued pursuant to preincorporation subscriptions are fully paid and nonassessable when the corporation receives the subscription price. The liability of the subscriber to pay the purchase price is addressed in section 6.22. Section 6.20 does not address the liability of transferees of shares which may be issued before the subscription price is paid for the power of the corporation to cancel for nonpayment shares that have been issued before payment for the full subscription price. Issued shares represented by unpaid subscriptions are subject to cancellation for nonpayment to the same extent as shares issued for promissory notes or shares issued before the consideration therefor is paid. See the Official Comment to sections 6.21 and 6.22.

Post-incorporation subscriptions are contracts between the corporation and the investor by which the corporation agrees to issue shares for a stated consideration and the investor agrees to purchase the shares for that consideration. Post-incorporation subscriptions are simple contracts subject to the power of the board of directors and they may contain any mutually acceptable provisions subject to section 6.21. Section 6.20(e) states, for completeness, that post-incorporation subscriptions are contracts between the corporation and the subscriber subject to section 6.21.

North Carolina Commentary

The liquidated damages provision of former G.S. 55-43(i) was not brought forward. Under that provision, it was more disadvantageous for a subscriber to pay some money than to pay no money for shares under a subscription agreement, and the drafters concluded that this result was undesirable.

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Purpose. —

The purpose of any statute of frauds type of provision, such as former G.S. 55-43, is to prevent fraud by requiring certain important transactions to be evidenced by a writing. Penley v. Penley, 65 N.C. App. 711, 310 S.E.2d 360, 1984 N.C. App. LEXIS 2782 (1984), rev'd, 314 N.C. 1, 332 S.E.2d 51, 1985 N.C. LEXIS 1706 (1985).

Physician Held Not an Equitable Stockholder in Professional Association. —

Assuming, arguendo, that professional association and physician entered into a binding post-incorporation subscription agreement, under the facts, where physician neither tendered payment within a reasonable time nor demonstrated circumstances excusing such tender, he was not an equitable stockholder in the professional association. Buchele v. Pinehurst Surgical Clinic, 80 N.C. App. 256, 341 S.E.2d 772, 1986 N.C. App. LEXIS 2169, aff'd, 318 N.C. 503, 349 S.E.2d 579, 1986 N.C. LEXIS 2669 (1986).

Former Section Held Inapplicable. —

Former G.S. 55-43 did not apply in an action by a former husband against his former wife and her incorporated fast food restaurant franchise for a declaration that he was entitled to an ownership interest. This was not an action in which a defendant was trying to enforce a plaintiff ’s promise to take shares in a corporation, but an action in which the plaintiff attempted to enforce the defendant’s promise or contract to issue shares to the plaintiff, the number of shares to represent a certain percentage of ownership within the corporation being formed. Penley v. Penley, 314 N.C. 1, 332 S.E.2d 51, 1985 N.C. LEXIS 1706 (1985).

Conditional Subscription. —

A subscription to stock of a corporation may be made on condition that there shall be no liability until the corporation has received actual subscriptions to its capital stock to a specified amount. Alexander v. North Carolina Sav. Bank & Trust Co., 155 N.C. 124, 71 S.E. 69, 1911 N.C. LEXIS 362 (1911). See Penniman v. Alexander, 111 N.C. 427, 16 S.E. 408, 1892 N.C. LEXIS 199 (1892); Kelly v. Oliver, 113 N.C. 442, 18 S.E. 698, 1893 N.C. LEXIS 100 (1893); Queen City Printing & Paper Co. v. McAden, 131 N.C. 178, 42 S.E. 575, 1902 N.C. LEXIS 264 (1902).

§ 55-6-21. Issuance of shares.

  1. The powers granted in this section to the board of directors may be reserved to the shareholders by the articles of incorporation. Unless the articles of incorporation or bylaws provide otherwise, the powers granted in this section to the board of directors may be delegated, within limits prescribed by the board of directors, to one or more officers of the corporation who are designated by the board of directors.
  2. The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation.
  3. Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate. The determination by the board of directors as to the adequacy of consideration is conclusive as to whether the shares are validly issued, fully paid, and nonassessable.
  4. When the corporation receives the consideration for which the board of directors authorized the issuance of shares, the shares issued therefor are fully paid and nonassessable.
  5. The corporation may place in escrow shares issued for a contract for future services or benefits or for a promissory note, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the note is paid, or the benefit received. If the services are not performed, the note is not paid, or the benefits are not received, the shares escrowed or restricted and the distributions credited may be cancelled in whole or part.

History. 1901, c. 2, ss. 19, 53, 54; 1903, c. 660, ss. 2, 3; Rev. ss. 1159, 1160, 1161; C.S., ss. 1157, 1158; G.S., ss. 55-62, 55-63; 1955, c. 1371, s. 1; 1957, s. 1039; 1959, c. 1316, ss. 10, 13, 14; 1969, c. 751, s. 20; 1973, c. 469, ss. 15, 45.2; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.7; 2013-153, s. 1.

Official Comment

The financial provisions of the Model Act reflect a modernization of the concepts underlying the capital structure and limitations on distributions of corporations. This process of modernization began with amendments in 1980 to the 1969 Model Act that eliminated the concepts of “par value” and “stated capital,” and further modernization occurred in connection with the development of the revised Act in 1984. Practitioners and legal scholars have long recognized that the statutory structure embodying “par value” and “legal capital” concepts is not only complex and confusing but also fails to serve the original purpose of protecting creditors and senior security holders from payments to junior security holders. Indeed, to the extent security holders are led to believe that it provides this protection, these provisions may be affirmatively misleading. The Model Act has therefore eliminated these concepts entirely and substituted a simpler and more flexible structure that provides more realistic protection to these interests. Major aspects of this new structure are:

  1. the provisions relating to the issuance of shares set forth in this and the following sections;
  2. the provisions limiting distributions by corporations set forth in section 6.40 and discussed in the Official Comment to that section; and
  3. the elimination of the concept of treasury shares described in the Official Comment to section 6.31.

Section 6.21 incorporates not only the elimination of the concepts of par value and stated capital from the Model Act in 1980 but also eliminates the earlier rule declaring certain kinds of property ineligible as consideration for shares. The caption of the section, “Issuance of Shares by the Board of Directors,” reflects the change in emphasis from imposing restrictions on the issuance of shares to establishing general principles for their issuance. The section replaces two sections captioned, respectively, “Consideration for Shares” (section 18) and “Payment for Shares” (section 19) in the 1969 Model Act.

(2) the provisions limiting distributions by corporations set forth in section 6.40 and discussed in the Official Comment to that section; and

(3) the elimination of the concept of treasury shares described in the Official Comment to section 6.31.

Section 6.21 incorporates not only the elimination of the concepts of par value and stated capital from the Model Act in 1980 but also eliminates the earlier rule declaring certain kinds of property ineligible as consideration for shares. The caption of the section, “Issuance of Shares by the Board of Directors,” reflects the change in emphasis from imposing restrictions on the issuance of shares to establishing general principles for their issuance. The section replaces two sections captioned, respectively, “Consideration for Shares” (section 18) and “Payment for Shares” (section 19) in the 1969 Model Act.

Since shares need not have a par value, under section 6.21 there is no minimum price at which specific shares must be issued and therefore there can be no “watered stock” liability for issuing shares below an arbitrarily fixed price. The price at which shares are issued is primarily a matter of concern to other shareholders whose interests may be diluted if shares are issued at unreasonably low prices or for overvalued property. This problem of equality of treatment essentially involves honest and fair judgments by directors and cannot be effectively addressed by an arbitrary doctrine establishing a minimum price for shares such as “par value” provided under older statutes.

Section 6.21(b) specifically validates contracts for future services (including promoters’ services), promissory notes, or “any tangible or intangible property or benefit to the corporation,” as consideration for the present issue of shares. The term “benefit” should be broadly construed to include, for example, a reduction of a liability, a release of a claim, or benefits obtained by a corporation by contribution of its shares to a charitable organization or as a prize in a promotion. In the realities of commercial life, there is sometimes a need for the issuance of shares for contract rights or such intangible property or benefits. And, as a matter of business economics, contracts for future services, promissory notes, and intangible property or benefits often have value that is as real as the value of tangible property or past services, the only types of property that many older statutes permit as consideration for shares. Thus, only business judgment should determine what kind of property should be obtained for shares, and a determination by the directors meeting the requirements of section 8.30 to accept a specific kind of valuable property for shares should be accepted and not circumscribed by artificial or arbitrary rules.

The issuance of some shares for cash and other shares for promissory notes, contracts for past or future services, or for tangible or intangible property or benefits, like the issuance of shares for an inadequate consideration, opens the possibility of dilution of the interests of other shareholders. For example, persons acquiring shares for cash may be unfairly treated if optimistic values are placed on past or future services or intangible benefits being provided by other persons. The problem is particularly acute if the persons providing services, promissory notes, or property or benefits of debatable value are themselves connected with the promoters of the corporation or with its directors. Protection of shareholders against abuse of the power granted to the board of directors to determine that shares should be issued for intangible property or benefits is provided in part by the requirement that the board must act in accordance with the requirements of section 8.30, and, if applicable, section 8.31, in determining that the consideration received for shares is adequate, and in part by the requirement of section 16.21 that the corporation must inform all shareholders annually of all shares issued during the previous year for promissory notes or promises of future services.

Accounting principles are not specified in the Model Act, and the board of directors is not required by the statute to determine the “value” of noncash consideration received by the corporation (as was the case in earlier versions of the Model Act). In many instances, property or benefit received by the corporation will be of uncertain value; if the board of directors determines that the issuance of shares for the property or benefit is an appropriate transaction that protects the shareholders from dilution, that is sufficient under section 6.21. The board of directors does not have to make an explicit “adequacy” determination by formal resolution; that determination may be inferred from a determination to authorize the issuance of shares for a specified consideration.

Section 6.21 also does not require that the board of directors determine the value of the consideration to be entered on the books of the corporation, though the board of directors may do so if it wishes. Of course, a specific value must be placed on the consideration received for the shares for bookkeeping purposes, but bookkeeping details are not the statutory responsibility of the board of directors. The statute also does not require the board of directors to determine the corresponding entry on the right-hand side of the balance sheet under owner’s equity to be designated as “stated capital” or be allocated among “stated capital” and other surplus accounts. The corporation, however, may determine that the shareholders’ equity accounts should be divided into these traditional categories if it wishes.

The second sentence of section 6.21(c) describes the effect of the determination by the board of directors that consideration is adequacy for the issuance of shares. That determination, without more, is conclusive to the extent that adequacy is relevant to the question whether the shares are validly issued, fully paid, and nonassessable. Section 6.21(c) provides that shares are fully paid and nonassessable when the corporation receives the consideration for which the board of directors authorized their issuance. Whether shares are validly issued may depend on compliance with corporate procedural requirements, such as issuance within the amount authorized in the articles of incorporation or holding a directors’ meeting upon proper notice and with a quorum present. The Model Act does not address the remedies that may be available for issuances that are subject to challenge. This somewhat more elaborate clause replaces the provision in earlier versions of the Model Act and many state statutes that the determination by the board of directors of consideration for the issuance of shares was “conclusive in the absence of fraud in the transaction.”

Shares issued pursuant to preincorporation subscriptions are governed by section 6.20 and not this section.

The revised Model Act does not address the question whether validly issued shares may thereafter be cancelled on the grounds of fraud or bad faith if the shares are in the hands of the original shareholder or other persons who were aware of the circumstances under which they were issued when they acquired the shares. It also leaves to the Uniform Commercial Code other questions relating to the rights of persons other than the person acquiring the shares from the corporation. See the Official Commercial to section 6.22.

Section 6.21(e) permits the board of directors to determine that shares issued for promissory notes or for contracts for future services or benefits be placed in escrow or their transfer otherwise restricted until the services are performed, the benefits received, or the notes are paid. The section also defines the rights of the corporation with respect to these shares. If the shares are issued without being restricted as provided in this subsection, they are validly issued insofar as the adequacy of consideration is concerned. See section 6.22 and its Official Comment.

Section 6.21(a) provides that the powers granted to the board of directors by this section may be reserved to the shareholders by the articles of incorporation. No negative inference should be drawn from section 6.21(a) with respect to the efficacy of similar provisions under other sections of the Model Act.

North Carolina Commentary

Except for a minor stylistic change, this section is identical to section 6.21 of the Model Act. It differs in three main respects from former G.S. 55-46. First, the provisions of this section do not tie the minimum amount of consideration that must be received upon the issuance of the shares to their par or stated value. Second, the form that such consideration may take has been expanded to include future services and promissory notes, which were prohibited by former G.S. 55-46(b). Third, the board of directors is no longer required to state its determination of the fair value to the corporation of noncash consideration paid for shares; it is required only to determine that the noncash consideration is adequate.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2013-153, s. 1, effective January 1, 2014, added the second sentence in subsection (a).

Legal Periodicals.

For article, “The Power to Issue Stock,” see 46 Wake Forest L. Rev. 701 (2011).

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Purpose Is to Prevent Fraud. —

Former G.S. 55-62 was passed in order that stock subscriptions should be protected in their integrity and not become a means of deceiving those who dealt with the corporation. Goodman v. White, 174 N.C. 399, 93 S.E. 906, 1917 N.C. LEXIS 104 (1917).

Effect of Charter Provision That Stock Be Issued as Fully Paid. —

A provision in the charter of an incorporated company that the capital stock “shall be issued as full-paid stock” does not permit shares of stock to be issued to stockholders without payment in money or its equivalent in property at an honest valuation. Clayton v. Ore Knob Co., 109 N.C. 385, 14 S.E. 36, 1891 N.C. LEXIS 232 (1891).

Cash Payment Unnecessary. —

It is not essential to a bona fide subscription to stock in a corporation that there be a present payment in cash by the subscriber, or that he be solvent; a subscription is considered bona fide whenever made by one who subscribes in good faith, with reasonable expectation and apparent prospect of being able to pay assessments on his stock as they may thereafter be called for. Boushall v. Myatt, 167 N.C. 328, 83 S.E. 352, 1914 N.C. LEXIS 117 (1914).

Burden of Proof as to Value of Property. —

The burden of proving that property was taken in payment at its true value, and, further, that such value was approved by a board of directors acting independently in the interest of the corporation, is upon the person who alleges payment. Goodman v. White, 174 N.C. 399, 93 S.E. 906, 1917 N.C. LEXIS 104 (1917).

Proceedings Where Property Fraudulently Overvalued. —

Although a margin may be allowed for an honest difference of opinion as to value, a valuation grossly excessive, knowingly made, while its acceptance may bind the corporation, is a fraud on creditors, and they may proceed against the stockholders who sell the property individually, as for an unpaid subscription. Hobgood v. Ehlen, 141 N.C. 344, 53 S.E. 857, 1906 N.C. LEXIS 110 (1906); Goodman v. White, 174 N.C. 399, 93 S.E. 906, 1917 N.C. LEXIS 104 (1917).

Evidence of Fraud. —

In an action by the receivers of an insolvent corporation to compel the payment of a subscription to stock issued for property acquired by the corporation for the conduct of the business, evidence tending to show a grossly excessive valuation of the property by the directors, knowingly made, is strong evidence of fraud, and may be conclusive thereof. Whitlock v. Alexander, 160 N.C. 465, 76 S.E. 538, 1912 N.C. LEXIS 192 (1912).

Nonsuit Properly Granted Absent Fraud. —

The judgment of the board of directors, in fixing the value of property to be accepted in lieu of money, is conclusive in the absence of fraud; and in a suit to recover on a stock subscription, where there is no evidence of fraud, a judgment as of nonsuit is properly granted. Gover v. Malever, 187 N.C. 774, 122 S.E. 841, 1924 N.C. LEXIS 398 (1924).

Illegal Transaction by Promoter. —

A transaction whereby a promoter borrowed a certain sum and bought a half interest in a company, and let the company that he was promoting take it over as soon as it was incorporated, and pay his note, and also issue to him stock as the consideration, was illegal. Goodman v. White, 174 N.C. 399, 93 S.E. 906, 1917 N.C. LEXIS 104 (1917).

The word “rendered” in former statute indicated that the services had to be performed prior to the issuance of the shares; so the requirement that the shares be taken for an agreed price has been satisfied by previous years of work in the business. Penley v. Penley, 65 N.C. App. 711, 310 S.E.2d 360, 1984 N.C. App. LEXIS 2782 (1984), rev'd, 314 N.C. 1, 332 S.E.2d 51, 1985 N.C. LEXIS 1706 (1985).

Cancellation of Officer’s Shares for Nonpayment of Consideration. —

Where the trial court specifically found as fact that officer and director paid no consideration for stock and caused a dilution of the shares of the other shareholders, the trial court properly cancelled his shares. Stone v. Martin, 85 N.C. App. 410, 355 S.E.2d 255, 1987 N.C. App. LEXIS 2622 (1987).

§ 55-6-22. Liability of shareholders.

  1. A purchaser from a corporation of its own shares is not liable to the corporation or its creditors with respect to the shares except to pay the consideration for which the shares were authorized to be issued (G.S. 55-6-21) or specified in the subscription agreement (G.S. 55-6-20).
  2. Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.

History. 1893, c. 471; 1901, c. 2, s. 22; Rev., s. 1162; C.S., s. 1160; G.S., s. 55-65; 1955, c. 1371, s. 1; 1969, c. 751, s. 28; 1989, c. 265, s. 1.

Official Comment

With the elimination of the concepts of par value and watered stock in 1980, the sole obligation of a purchaser of shares from the corporation, as set forth in section 6.22(a), is to pay the consideration established by the board of directors (or the consideration specified in the subscription, in the case of pre-incorporation subscriptions). The consideration for the shares may consist of promissory notes, contracts for future services, or tangible or intangible property or benefits, and, if the board of directors so decide, the delivery of the notes, contracts, or accrual of the benefits constitutes full payment for the shares. See the Official Comment to section 6.21. Upon the transfer to the corporation of the consideration so determined or specified, the shareholder has no further responsibility to the corporation or its creditors “with respect to the shares,” though the shareholder may have continuing obligations under a contract or promissory note entered into in connection with the acquisition of shares.

Section 6.22(a) deals only with the responsibility for payment by the purchaser of shares from the corporation. The revised Model Act leaves to the Uniform Commercial Code questions with respect to the rights of subsequent purchasers of shares and the power of the corporation to cancel shares if the consideration is not paid when due. See sections 8-202 and 8-301 of the UNIFORM COMMERCIAL CODE.

Section 6.22(b) sets forth the basic rule of nonliability of shareholders for corporate acts or debts that underlies modern corporation law. Unless such liability is provided for in the articles of incorporation, see section 2.02(b)(v), shareholders are not liable for corporate obligations, though the last clause recognizes that such liability may be assumed voluntarily or by other conduct.

North Carolina Commentary

Former G.S. 55-53, a unique North Carolina provision dealing with “watered shares,” has not been brought forward. Its provisions were deemed unnecessary in light of the provisions of G.S. 55-6-21. Former G.S. 55-53 basically codified fundamental legal principles of fiduciary duty that have not been changed by this Act.

Legal Periodicals.

For note on close corporations and personal liability from execution of shareholder agreements, see 16 Wake Forest L. Rev. 975 (1980).

For note discussing the liability of members of a professional corporation, in light of Nelson v. Patrick, 73 N.C. App. 1, 326 S.E.2d 45 (1985), see 64 N.C.L. Rev. 1216 (1986).

For article, “Defining the Scope of Controlling Shareholders’ Fiduciary Responsibilities,” see 22 Wake Forest L. Rev. 9 (1987).

For article, “Close Corporation Shareholder Reasonable Expectations: The Larger Context,” see 22 Wake Forest L. Rev. 41 (1987).

For article, “The Statutory Protection Of Minority Shareholders In The United Kingdom,” see 22 Wake Forest L. Rev. 81 (1987).

For article, “Using Alternative Dispute Resolution Techniques To Settle Conflicts Among Shareholders Of Closely Held Corporations,” see 22 Wake Forest L. Rev. 105 (1987).

For comment, “North Carolina’s Limited Liability Company Act: A Legislative Mandate for Professional Limited Liability,” see 29 Wake Forest L. Rev. 857 (1994).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Stockholders of an insolvent corporation are liable pro rata for their unpaid subscriptions to an amount necessary to liquidate the corporate debts. McIver v. Young Hdwe. Co., 144 N.C. 478, 57 S.E. 169, 1907 N.C. LEXIS 172 (1907); Whitlock v. Alexander, 160 N.C. 465, 76 S.E. 538, 1912 N.C. LEXIS 192 (1912); Claypoole v. McIntosh, 182 N.C. 109, 108 S.E. 433, 1921 N.C. LEXIS 189 (1921).

Unpaid Balances to Be Collected. —

As the capital stock, paid or unpaid, of a corporation is a trust fund for the benefit of creditors, it is the duty of the courts, at the suit of creditors, to require unpaid subscriptions to be collected at least to the extent necessary to pay the unpaid debts of the corporation. Wilson Cotton Mills v. Randleman Cotton Mills, 115 N.C. 475, 20 S.E. 770, 1894 N.C. LEXIS 259 (1894).

And Used to Settle Outstanding Claims. —

In case of insolvency any unpaid balance may, by proper proceedings, be made available to the extent required for the settlement of outstanding claims. Whitlock v. Alexander, 160 N.C. 465, 76 S.E. 538, 1912 N.C. LEXIS 192 (1912).

As to action by corporation to recover amount spent to purchase stock from shareholders, see Park Terrace, Inc. v. Burge, 249 N.C. 308, 106 S.E.2d 478, 1959 N.C. LEXIS 449 (1959) (discussing right of creditors to require payment of purchase price) .

Agreement for Release Ineffective Against Creditors. —

No agreement or arrangement between a corporation and its stockholders, whereby the latter are to be released from indebtedness on their subscriptions, will be valid or of any force as against creditors. Marshall Foundry Co. v. Killian, 99 N.C. 501, 6 S.E. 680, 1888 N.C. LEXIS 325 (1888); Heggie v. People's Bldg. & Loan Ass'n, 107 N.C. 581, 12 S.E. 275, 1890 N.C. LEXIS 111 (1890). See also Gilmore v. Smathers, 167 N.C. 440, 83 S.E. 823, 1914 N.C. LEXIS 144 (1914).

Suspension of Corporate Enterprise Does Not Excuse Subscriber. —

The mere fact that a proposed corporate enterprise has been suspended affords a subscriber to the capital stock no excuse for not paying his subscription according to his agreement. Raleigh Imp. Co. v. Andrews, 176 N.C. 280, 96 S.E. 1032, 1918 N.C. LEXIS 237 (1918).

No Defense That Corporation Not Legally Organized. —

Where a person has agreed to become a stockholder in a corporation and has enjoyed the benefits and privileges of membership, he cannot, in a suit by the corporation to recover his unpaid subscription, set up as a defense that the corporation was not legally organized. Tar River Nav. Co. v. Neal, 10 N.C. 520, 1825 N.C. LEXIS 48 (1825); Elizabeth City Academy v. Lindsey, 28 N.C. 476, 1846 N.C. LEXIS 86 (1846); Wilmington, C.R.R.R. v. Thompson, 52 N.C. 387, 1860 N.C. LEXIS 55 (1860); Marshall Foundry Co. v. Killian, 99 N.C. 501, 6 S.E. 680, 1888 N.C. LEXIS 325 (1888); Wadesboro Cotton Mills Co. v. Burns, 114 N.C. 353, 19 S.E. 238, 1894 N.C. LEXIS 71 (1894).

Setoffs Against Unpaid Subscriptions. —

In a receiver’s action to collect unpaid stock subscriptions, a subscriber cannot set off a debt due him by the corporation, nor can he credit himself with amounts he paid on another subscription. Vaughan-Robertson Drug Co. v. Grimes-Mills Drug Co., 173 N.C. 502, 92 S.E. 376, 1917 N.C. LEXIS 334 (1917).

Personal Liability. —

Corporation’s appeal of the denial of its motion for summary judgment, which argued that the North Carolina Workers’ Compensation Act precluded an administratrix’s negligence claims against it, was dismissed because it could not be determined whether the corporation’s liability was inseparable from that of the owner of the asphalt plant where a decedent’s died; the administratrix did not allege that the corporation controlled and directed the actions of the owner or the limited liability company (LLC) that was the sole member-manager of the owner and did not make the same claims against the owner or the LLC as she did against the corporation but alleged that the corporation acted negligently out of its own interests, not in its management or conduct of the owner’s business, and as sole shareholder in the LLC, the corporation was shielded from liability for the acts of the LLC but not from liability for its own negligent acts or conduct under G.S. 55-6-22(b). Van Dyke v. CMI Terex Corp., 201 N.C. App. 437, 689 S.E.2d 459, 2009 N.C. App. LEXIS 2230 (2009).

Shareholders Not Personally Liable for Corporation’s Acts. —

Third-party plaintiff developer’s indemnity complaint against third-party defendant shareholders concerning actions taken by their corporation in arranging for the excavation of a certain ditch failed because, pursuant to G.S. 55-6-22(b), and absent the application of certain exceptions that did not apply to the facts, the shareholders could not be personally liable for the corporation’s acts. BNT Co. v. Baker Precythe Dev. Co., 151 N.C. App. 52, 564 S.E.2d 891, 2002 N.C. App. LEXIS 677 (2002).

Shareholders in a corporation are insulated from personal liability for acts of the corporation pursuant to G.S. 55-6-22(b). Ron Medlin Constr. v. Harris, 364 N.C. 577, 704 S.E.2d 486, 2010 N.C. LEXIS 1079 (2010).

§ 55-6-23. Share dividends.

  1. Unless the articles of incorporation provide otherwise, shares may be issued pro rata and without consideration to the corporation’s shareholders or to the shareholders of one or more classes or series. An issuance of shares under this subsection is a share dividend.
  2. Shares of one class or series may not be issued as a share dividend in respect of shares of another class or series unless:
    1. The articles of incorporation so authorize,
    2. There are no outstanding shares of the class or series to be issued, or
    3. A majority of the votes entitled to be cast by the class or series to be issued approve the issuance of not more than a stated number of shares within a period of not more than one year after such approval.
  3. If the board of directors does not fix the record date for determining shareholders entitled to a share dividend, it is the date the board of directors authorizes the share dividend.

History. 1955, c. 1371, s. 1; 1959, c. 1316, ss. 17, 18; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.8.

Official Comment

A share dividend is solely a paper transaction: No assets are received by the corporation for the shares and any “dividend” paid in shares does not involve the distribution of property by the corporation to its shareholders. Section 6.23 therefore recognizes that such a transaction involves the issuance of shares “without consideration,” and section 1.40(6) excludes it from the definition of a “distribution.” Such transactions were treated in a fictional way under the old “par value” and “stated capital” statutes, which treated a share dividend as involving transfers from a surplus account to stated capital and assumed that par value shares could be issued without receiving any consideration by reason of that transfer of surplus.

The par value statutory treatment of share dividend transactions distinguished a share “split” from a dividend. In a share “split” the par value of the former shares was divided among the new shares and there was no transfer of surplus into the stated capital account as in the case of a share “dividend.” Since the Model Act has eliminated the concept of par value, the distinction between a “split” and a “dividend” has not been retained and both types of transactions are referred to simply as “share dividends.” A distinction between “share dividends” and “share splits,” however, continues to exist in other contexts—for example, in connection with transactions by publicly held corporations, see N.Y.S.E. LISTED COMPANY MANUAL § 703.02(a), or corporations that have optionally retained par value for their shares. The change made in the Model Act is not intended to affect the manner in which transactions by these corporations are handled or described but simply reflects the elimination of artificial legal distinctions based on the par value statutes.

A “reversed stock split” is not a share dividend under this section of the Model Act. A reverse split involves an amendment to the articles of incorporation reducing the number of authorized shares, not the issuance of additional shares.

Share dividends may create problems when a corporation has more than a single class of shares. The requirement that a share dividend be “pro rata” only applies to shares of the same class or series; if there are two or more classes entitled to receive a share dividend in different proportions, the dividend will have to be allocated appropriately.

The distribution of shares of one class to holders of another class may dilute the equity of the holders of the first class. Therefore, subsection (b) permits the distribution of shares of one class to the holders of another class only if one or more of the following conditions are met: (1) the articles of incorporation expressly authorize the transaction, (2) the holders of the class being distributed consent to the distribution, or (3) there are no holders of the class being distributed.

North Carolina Commentary

This section was clarified by rewriting subsection (b) to provide for a more specific authorization and to limit the effectiveness of the authorization to one year, whenever shares of one class or series are to be distributed to the holder of another class or series. This modification to the Model Act carries forward the limitations of former G.S. 55-51(b)(2).

As used in this section and throughout this Act, share dividends and share splits are equivalent.

§ 55-6-24. Rights, options, and warrants.

  1. A corporation may issue rights, options, or warrants for the purchase of shares of the corporation. The board of directors, or officers of the corporation who are designated by the board of directors pursuant to G.S. 55-6-21(a), shall determine the terms upon which the rights, options, or warrants are issued, their form and content, and the consideration for which the shares are to be issued.
  2. In the case of a public corporation, the terms and conditions of such rights, options or warrants may include, without limitation, restrictions or conditions that preclude or limit the exercise, transfer or receipt of such rights, options or warrants by the holder or holders or beneficial owner or owners of a specified number or percentage of the outstanding voting shares of such public corporation or by any transferee of any such holder or owner, or that invalidate or void such rights, options or warrants held by any such holder or owner or by such transferee. Determinations by the board of directors whether to impose, enforce, waive or otherwise render ineffective any such restrictions or conditions may be judicially reviewed in an appropriate proceeding.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 11; 1989, c. 265, s. 1; 2013-153, s. 2.

Official Comment

A specific provision authorizing the creation of share options and share rights appears in many states statutes. Even though corporations doubtless have the inherent power to issue share options and share rights, specific authorization is desirable because of the economic importance of options and rights, and because of the need to establish the primacy of the board of directors in determining the consideration received by the corporation for rights and options. The creation of incentive compensation plans for directors, officers, agents, and employees is basically a matter of business judgment and the good faith determination by the board of directors should therefore be conclusive. This is as true for incentive plans that involve the issuance of share options or rights as for those that involve the payment of cash. In appropriate cases incentive plans may involve the granting of options at prices below the current market prices of the shares.

Section 6.24 does not require shareholder approval of share options or rights as incentive plans. Of course, prior shareholder approval may be required as a discretionary matter, in order to comply with the requirements of national security exchanges for the listing of securities, see N.Y.S.E. LISTED COMPANY MANUAL § 309.00, or to acquire the benefits of federal law conditioned upon shareholder approval of such plans, see S.E.C. Rule 16b-3(a), 17 C.F.R. § 240.16b-3(a).

The reference to the “form” of a right, option, or warrant in section 6.24 permits the board of directors to designate the interest issued under section 6.24 as options, warrants, rights, or by some other name, and to evidence these interests by certificates, contracts, letter agreements, or in other forms that are appropriate under the circumstances. Rights, options, or warrants may be issued together with or independently of the corporation’s issue and sale of its shares or other securities.

Some publicly held corporations have delegated administration of programs involving incentive compensation in the form of share rights or options to compensation committees composed of nonmanagement directors, subject to the general authority of the board of directors.

North Carolina Commentary

Subsection (a) is identical to section 6.24 of the Model Act and is intended to be very broad in authorizing the creation and issuance of options, convertible securities and rights to acquire shares and other kinds of securities and property. The Model Act’s catchline for the section was changed to reflect this broad scope. Unlike former G.S. 55-45(a), the statute itself does not require shareholder approval of any options granted thereunder; but, as noted in the Official Comment, such approval may be required by other rules or regulations.

Subsection (b) contains special provisions that do not appear in either the prior law or the Model Act and are designed to eliminate uncertainty as to the validity of certain rights plans created by companies with a class of securities registered under the Securities Exchange Act of 1934. Such plans usually contain features that might otherwise be held to violate the letter or intent of the corporate statute as a whole. Specifically, the rights plans typically used as defenses to hostile takeovers (called “poison pills”) create purchase or conversion rights that are not exercisable in the hands of a hostile bidder. Without explicit statutory language to the contrary, for example, such a discriminatory feature might be held to violate the requirement of G.S. 55-6-01 that all shares of the same class have the same rights, or the requirement of G.S. 55-6-23(a) that share dividends be issued pro rata. The drafters were of that view that rights plans should not be generally prohibited. Several states, including New York, Pennsylvania, Ohio, Wisconsin and Hawaii, have adopted explicit validating language similar to that included in this section.

The last sentence of subsection (b) was included to make it clear that the broad enabling language of the subsection was not intended to eliminate or limit the directors’ duty, under G.S. 55-8-30(a) and otherwise, to act in good faith, with due care and in the best interests of the corporation. Thus, their action in creating and using a “poison pill” as a defensive device would be subject to judicial review in an appropriate proceeding in which the court may formulate or apply appropriate standards to insure that the directors’ actions are in the best long-term interests and short-term interests of the corporation and its shareholders considering, without limitation, the prospects for potential growth, development, productivity and profitability of the corporation.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2013-153, s. 2, effective January 1, 2014, added “, or officers of the corporation who are designated by the board of directors pursuant to G.S. 55-6-21(a),” in the second sentence of subsection (a).

Legal Periodicals.

For article, “Competing Interests in the Corporate Opportunity Doctrine,” see 67 N.C.L. Rev. 435 (1989).

§ 55-6-25. Form and content of certificates.

  1. Shares may but need not be represented by certificates. Unless this act or another statute expressly provides otherwise, the rights and obligations of shareholders are identical whether or not their shares are represented by certificates.
  2. At a minimum each share certificate must state on its face:
    1. The name of the issuing corporation and that it is organized under the law of North Carolina;
    2. The name of the person to whom issued; and
    3. The number and class of shares and the designation of the series, if any, the certificate represents.
  3. If the issuing corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information in writing and without charge.
  4. Each share certificate (1) must be signed (either manually or in facsimile) by two officers designated in the bylaws or by the board of directors and (2) may bear the corporate seal or its facsimile.
  5. If the person who signed in any capacity (either manually or in facsimile) a share certificate no longer holds office when the certificate is issued, the certificate is nevertheless valid.

History. 1885, c. 265; 1901, c. 2, s. 94; Rev., ss. 1165, 1166; C.S., s. 1162; 1927, c. 173; 1949, c. 809; G.S., s. 55-67; 1955, c. 1371, s. 1; 1979, c. 91; 1989, c. 265, s. 1.

Official Comment

This section sets forth the minimum requirements for share certificates. A corporation whose shares are not publicly traded will normally issue certificates that meet these minimum requirements and little more. Securities that are publicly traded, on the other hand, must contain reasonable safeguards against fraudulent duplication; for this reason, regulations by exchanges contain technical requirements relating to design, workmanship, engraving, and printing. Also, exchange requirements may require signatures of a transfer agent and registrar as well as designated corporate officers. All these requirements are in addition to the minimum requirements of the Model Act.

Certificateless shares are permitted under section 6.25(a) upon compliance with section 6.26. Section 6.25(a) makes it clear that there are no differences in the rights and obligations of shareholders, whether or not their shares are represented by certificates, other than mechanical differences, such as the means by which instructions for transfer are communicated to the issuer, necessitated by the use or nonuse of certificates. If share transfer restrictions are imposed, conspicuous references must appear on the certificate if they are to be binding on third persons without knowledge of the restrictions. See section 6.27.

Under section 6.25 all signatures on a share certificate may be facsimiles. This change, which has been adopted recently in several states, gives recognition to the fact that a purchaser of publicly traded shares will hardly ever be in a position to determine whether a manual signature on a stock certificate is in fact the authorized signature of an officer or the transfer agent or registrar. From the standpoint of the issuing corporation of publicly traded securities, if a share certificate requiring a manual signature is stolen and the signature thereafter forged, the corporation may defend on lack of genuineness under section 8-202(3) of the UNIFORM COMMERCIAL CODE. But this defense is not effective against a bona fide purchaser when the forged signature has been placed on the certificate by an employee of the issuer or registrar or transfer agent entrusted with handling the certificates (UCC § 8-205). It is likely that a corporation would therefore follow the same security precautions for blank certificates requiring manual signatures as for those not requiring them. At the same time, the time and expense required for manual signatures has been eliminated.

North Carolina Commentary

This section and G.S. 55-6-26 authorize the issuance of uncertificated shares, which is a major change from the former law. Except for the addition of the words “in any capacity” to subsection (e) to make it clear that transfer agents and registrars are covered by the section, the section is identical to section 6.25 of the Model Act. Article 8 of the North Carolina UCC has been amended to add provisions dealing with uncertificated shares.

Cross References.

As to replacement certificates, see G.S. 25-8-405.

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under prior law.

Nature of Stock Certificate. —

A certificate of stock is simply a written acknowledgment by a corporation of the interest of the holder in its property and franchises. It has no value except that derived from the company issuing it, and its legal status is in the nature of a chose in action. Person v. Board of State Tax Comm'rs, 184 N.C. 499, 115 S.E. 336, 1922 N.C. LEXIS 120 (1922).

Evidence of Ownership of Stock. —

A certificate for shares is not the stock itself, but constitutes only prima facie evidence of the ownership of that number of shares. Misenheimer v. Alexander, 162 N.C. 226, 78 S.E. 161, 1913 N.C. LEXIS 336 (1913).

Issuance of stock certificates is unnecessary to existence of the corporation. Powell Bros. v. McMullan Lumber Co., 153 N.C. 52, 68 S.E. 926, 1910 N.C. LEXIS 17 (1910).

Or to confer title to the stockholder. Powell Bros. v. McMullan Lumber Co., 153 N.C. 52, 68 S.E. 926, 1910 N.C. LEXIS 17 (1910).

Whether Stock Actually Issued in Consideration for Covenant-Not-To-Compete and Other Agreements. —

In a business dispute involving asserted allegations of breach of a covenant-not-to-compete and other claims, a trial court erred by granting defendants summary judgment on the issue of whether there was consideration offered to defendants in exchange for signing the covenant-not-to-compete, confidentiality and non-solicitation agreement, and shareholders’ agreement, as a genuine issue of material fact remained as to whether plaintiff actually issued stock shares promised to defendants, such that they constituted valuable consideration to make the covenant-not-to-compete and confidentiality and non-solicitation agreement valid and enforceable. Kinesis Adver., Inc. v. Hill, 187 N.C. App. 1, 652 S.E.2d 284, 2007 N.C. App. LEXIS 2251 (2007).

Shareholders Without Certificates Could Not Prevail in Action Against Corporation. —

Alleged shareholders’ claims against a corporation and their stepmother for the sale of corporate property were properly subject to summary judgment. The shareholders could not prevail because they were unable to provide any evidence that certificates were issued to them in compliance with G.S. 55-6-25. Collier v. Collier, 204 N.C. App. 160, 693 S.E.2d 250, 2010 N.C. App. LEXIS 796 (2010).

§ 55-6-26. Shares without certificate.

  1. Unless the articles of incorporation or bylaws provide otherwise, the board of directors of a corporation may authorize the issue of some or all of the shares of any or all of its classes or series without certificates. The authorization does not affect shares already represented by certificates until they are surrendered to the corporation.
  2. Within a reasonable time after the issue or transfer of shares without certificates, the corporation shall send the shareholder a written statement of the information required on certificates by G.S. 55-6-25(b) and (c), and if applicable, G.S. 55-6-27.

History. 1989, c. 265, s. 1.

Official Comment

Section 6.26(a) authorizes the creation of uncertificated shares either by original issue or in substitution for shares previously represented by certificates. This subsection gives the board of directors the widest discretion so that a particular class and series of shares might be entirely represented by certificates, entirely uncertificated, or represented partly by each. The second sentence ensures that a corporation may not treat as uncertificated, and accordingly transferable on its books without due presentation of a certificate, any shares for which a certificate is outstanding.

The statement required by section 6.26(b) ensures that holders of uncertificated shares will receive from the corporation the same information that the holders of certificates receive when certificates are issued. There is no requirement that this information be delivered to purchasers of uncertificated shares before purchase.

Detailed rules with respect to the issuance, transfer, and registration of both certificated and uncertificated shares appear in article 8 of the UNIFORM COMMERCIAL CODE. In general terms there are no differences between certificated and uncertificated securities except in matters such as their manner of transfer. See the Official Comment to section 6.25.

CASE NOTES

Whether Stock Actually Issued in Consideration for Covenant-Not-To-Compete and Other Agreements. —

In a business dispute involving asserted allegations of breach of a covenant-not-to-compete and other claims, a trial court erred by granting defendants summary judgment on the issue of whether there was consideration offered to defendants in exchange for signing the covenant-not-to-compete, confidentiality and non-solicitation agreement, and shareholders’ agreement, as a genuine issue of material fact remained as to whether plaintiff actually issued stock shares promised to defendants, such that they constituted valuable consideration to make the covenant-not-to-compete and confidentiality and non-solicitation agreement valid and enforceable. Kinesis Adver., Inc. v. Hill, 187 N.C. App. 1, 652 S.E.2d 284, 2007 N.C. App. LEXIS 2251 (2007).

§ 55-6-27. Restriction on transfer of shares and other securities.

  1. The articles of incorporation, bylaws, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer or registration of transfer of shares of the corporation. A restriction does not affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the restriction.
  2. A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section, it is not unconscionable under the circumstances, and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement required by G.S. 55-6-26(b). Unless so noted, a restriction is not enforceable except against a person who receives actual written notice of the restrictions.
  3. A restriction on the transfer or registration of transfer of shares is authorized:
    1. To maintain the corporation’s status when it is dependent on the number or identity of its shareholders;
    2. To preserve exemptions under federal or state securities law;
    3. For any other reasonable purpose.
  4. A restriction authorized by G.S. 55-6-27(c) may:
    1. Obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares;
    2. Obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares;
    3. Require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable;
    4. Prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable;
    5. Contain any other provision reasonably related to an authorized purpose.
  5. For purposes of this section, “shares” includes a security convertible into or carrying a right to subscribe for or acquire shares.

History. 1989, c. 265, s. 1.

Official Comment

Share transfer restrictions are widely used by both publicly held and closely held corporations for a variety of appropriate purposes. Although most courts have upheld reasonable share transfer restrictions, a few have rigidly followed the common law rule that they constituted restraints on alienation and should be strictly construed. As a result, some cases have invalidated restrictions outright or construed them narrowly so as not to cover specific transfers. By prescribing reasonable rules to govern the use of transfer restrictions, section 6.27 should guide practitioners in their use and encourage a more uniform and favorable judicial reception.

Examples of the uses of share transfer restrictions include:

  1. a close corporation may impose share transfer restrictions to qualify for the close corporation election under the Model Statutory Close Corporation Supplement;
  2. a corporation with relatively few shareholders may impose share transfer restrictions to ensure that current shareholders will be able to control who may participate in the corporation’s business;
  3. a corporation with relatively few shareholders may impose share transfer restrictions to ensure that shareholders who wish to retire will be able to liquidate their investment without disrupting corporate affairs;
  4. a corporation with few shareholders may impose share transfer restrictions in an effort to ensure that estates of deceased shareholders will be able to liquidate the closely held shares and that the Internal Revenue Service will accept the liquidated value of the shares as their value for estate tax purposes;
  5. a professional corporation may impose share transfer restrictions to ensure that its treatment of retiring or deceased shareholders is consistent with the canons of ethics applicable to the profession in question;
  6. a corporation may impose share transfer restrictions to ensure that its election of subchapter S treatment under the Internal Revenue Code will not be unexpectedly terminated; and
  7. a publicly held or closely held corporation issuing securities pursuant to an exemption from federal or state securities act registration may impose share transfer restrictions to ensure that subsequent transfers of shares will not result in the loss of the exemption being relied upon.

This listing, while not exhaustive, illustrates the flexibility of share transfer restrictions, their widespread use, and the importance of having a statute dealing with them.

(2) a corporation with relatively few shareholders may impose share transfer restrictions to ensure that current shareholders will be able to control who may participate in the corporation’s business;

(3) a corporation with relatively few shareholders may impose share transfer restrictions to ensure that shareholders who wish to retire will be able to liquidate their investment without disrupting corporate affairs;

(4) a corporation with few shareholders may impose share transfer restrictions in an effort to ensure that estates of deceased shareholders will be able to liquidate the closely held shares and that the Internal Revenue Service will accept the liquidated value of the shares as their value for estate tax purposes;

(5) a professional corporation may impose share transfer restrictions to ensure that its treatment of retiring or deceased shareholders is consistent with the canons of ethics applicable to the profession in question;

(6) a corporation may impose share transfer restrictions to ensure that its election of subchapter S treatment under the Internal Revenue Code will not be unexpectedly terminated; and

(7) a publicly held or closely held corporation issuing securities pursuant to an exemption from federal or state securities act registration may impose share transfer restrictions to ensure that subsequent transfers of shares will not result in the loss of the exemption being relied upon.

This listing, while not exhaustive, illustrates the flexibility of share transfer restrictions, their widespread use, and the importance of having a statute dealing with them.

Section 6.27(a) generally authorizes the imposition of transfer restrictions on “shares,” although the caption of the section refers to “shares and other securities.” Section 6.27(e) defines “shares” for purposes of section 6.27 to include securities “convertible into or carrying a right to subscribe for or acquire shares;” the phrase “other securities” in the title thus describes the broader scope of this section resulting from the definition in section 6.27(e).

Share transfer restrictions are usually created by provisions in the bylaws or articles of incorporation but may also be created by contract between the corporation and some or all the shareholders or between or among the shareholders themselves. However, if shares are originally issued free of restriction, they may not thereafter be subjected to a transfer restriction without the consent of the holder, evidenced by a vote in favor of the amendment to the articles or bylaws creating the restriction, or by being a party to the contract creating the restriction.

The terms of a restriction on transfer do not need to be set forth in full or summarized in detail on a certificate or information statement required by section 6.26(b) for uncertificated securities. Rather, section 6.27(b) provides that in the case of a certificated security, the existence of the restriction must be conspicuously set forth on the front or back of the certificate; in the case of an uncertificated security, the existence of the restriction must be noted in the information statement. There is no requirement that the notation on an information statement be conspicuous.

If a transferee knows of the restriction he is bound by it even though the restriction is not noted on the certificate or information statement.

Section 6.27(c) describes the purposes for which restrictions may be imposed while section 6.27(d) describes the types of restrictions that may be imposed.

Section 6.27(c) enumerates certain purposes for which share transfer restrictions may be imposed, but does not limit the purposes since section 6.27(c)(3) permits restrictions “for any other reasonable purpose.” Examples of the “status” referred to in section 6.27(c)(1) are the election of close corporation status under the Model Statutory Close Corporation Supplement, the subchapter S election under the Internal Revenue Code, and entitlement to a program or eligibility for a privilege administered by governmental agencies or national securities exchanges. Specific references in section 6.27 to subchapter S and other statutes were not made because of the possibility that the Internal Revenue Code or other statute may be amended or recodified after the adoption of the Model Act.

Section 6.27(c)(2) permits restrictions on transfers of shares to ensure availability of exemptions under state or federal securities acts. Share transfer restrictions for other purposes are permitted by section 6.23(c)(3) so long as the purpose is reasonable. It is unnecessary to inquire into the reasonableness of the purposes specifically enumerated in section 6.27(c)(1) and (2).

The types of restrictions referred to in section 6.27(d)(1) (buy-sell agreements) and (2) (option agreements) are imposed as a matter of contractual negotiation and do not prohibit the outright transfer of shares. Rather, they designate to whom shares or other securities must be offered at a price established in the agreement or by a formula or method agreed to in advance. By contrast, the restrictions described in sections 6.27(d)(3) and (4) may permanently limit the market for shares by disqualifying all or some potential purchasers. As a result the restrictions imposed by these two provisions must not be “manifestly unreasonable.”

North Carolina Commentary

The Model Act was modified in subsection (b) by inserting the language “it is not unconscionable under the circumstances.” This modification addressed a concern that the Model Act’s section 6.27 may allow the enforcement of unconscionable restrictions. The drafters noted that the Model Act’s language in section 6.27 may not allow judicial discretion in a situation where there was initially a reasonable purpose in imposing a restriction but over time the effect of the restriction had become unreasonable because of a change in circumstances. Judicial discretion would allow a court in such a situation to judge the restriction at the time its validity and enforceability are questioned. The amendment does not represent an attempt to change the prior law in North Carolina with respect to unconscionable agreements, but rather to preserve expressly the equitable power of the courts to deny enforcement of agreements that are unconscionable under the circumstances.

Subsection (b) was also modified so that a restriction on transfer not noted on the certificate or in the information statement is enforceable only against a person who received actual written notice of the restriction.

The introductory language of subsection (d) was modified for clarity. Subdivision (d)(5) was added to clarify that subdivisions (1) through (4) are not exclusive. The use of the word “reasonably” in this subsection was not thought to conflict with the “unconscionable” language in subsection (b), because the two subsections have different purposes.

CASE NOTES

Stock Restriction Upheld. —

When considering the enforcement of a stock restriction agreement pursuant to this section, a trial court may decline to specifically enforce the agreement if there has been a change of circumstances since its execution, such that its enforcement would be unconscionable; and found that where defendant, an employee at will, was terminated prior to the full vesting of his stock but for a justifiable business purpose, where the parties had discussed but rejected a “buy-out” formula based on fair market value, and where defendant entered freely into an agreement based on adjusted book value, no change of circumstances existed rendering the arm’s length agreement unconscionable and unenforceable. Crowder Constr. Co. v. Kiser, 134 N.C. App. 190, 517 S.E.2d 178, 1999 N.C. App. LEXIS 752 (1999).

§ 55-6-28. Expense of issue.

A corporation may pay the expenses of selling or underwriting its shares, and of organizing or reorganizing the corporation, from the consideration received for shares.

History. 1989, c. 265, s. 1.

Official Comment

The original purpose of this section was to deal with the problems created by the concepts of “par value” and “stated capital;” it permitted the corporation to expend its capital for “the reasonable charges and expenses of ” organization without fear of making the shares not fully paid or assessable because the assets were reduced below the aggregate par value of the issued shares.

Under the modern capitalization principles set forth in the Model Act (see the Official Comment to section 6.21), there is no basis for the fear that shares issued properly under section 6.21 can be made assessable because of the subsequent use of the proceeds. While section 6.28 thus may be technically unnecessary, it was believed to be desirable to retain in the Model Act a general authorization to the corporation to pay its expenses of formation and raising capital out of its original capitalization. The reference to “reasonable” charges and expenses was deleted on the theory that the test for these expenses should be no different from the test for expenses of any other type.

The concluding language in the original Model Act, “without rendering the shares not fully paid or assessable,” was also deleted as unnecessary and confusing in the context of the revisions to the financial provisions of the Model Act.

This section has been rarely cited or referred to in court decisions even though it appears in a large number of state statutes.

§ 55-6-29.

Reserved for future codification purposes.

Part 3. Subsequent Acquisition of Shares by Shareholders and Corporation.

§ 55-6-30. Shareholders’ preemptive rights.

  1. The shareholders of a corporation do not have a preemptive right to acquire the corporation’s unissued shares except to the extent the articles of incorporation or subsection (d) of this section so provide.
  2. A statement included in the articles of incorporation that “the corporation elects to have preemptive rights” (or words of similar import) means that the following principles apply except to the extent the articles of incorporation expressly provide otherwise:
    1. The shareholders of the corporation have a preemptive right, granted on uniform terms and conditions prescribed by the board of directors, to provide a fair and reasonable opportunity to exercise the right, to acquire proportional amounts of the corporation’s unissued shares upon the decision of the board of directors to issue them.
    2. A shareholder may waive his preemptive right. A waiver evidenced by a writing is irrevocable even though it is not supported by consideration.
    3. There is no preemptive right with respect to (i) shares issued as compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affiliates; (ii) shares issued to satisfy conversion or option rights created to provide compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affiliates; (iii) shares authorized in articles of incorporation that are issued within six months from the effective date of incorporation; (iv) shares issued for considerations, other than money, deemed by the board of directors in good faith to be advantageous to the corporation’s business.
    4. Holders of a share of any class have no preemptive rights with respect to shares of any other class.
    5. Reserved for future codification purposes.
    6. Shares subject to preemptive rights that are not acquired by shareholders may be issued to any person during a period of one year after being offered to shareholders at a consideration set by the board of directors that is not lower than the consideration set for the exercise of preemptive rights. An offer at a lower consideration or after the expiration of one year is subject to the shareholders’ preemptive rights.
  3. For purposes of this section, “shares” includes a security convertible into or carrying a right to subscribe for or acquire shares.
  4. Notwithstanding the foregoing provision of this section, shareholders of a corporation incorporated before July 1, 1990, other than a public corporation, shall have a preemptive right to acquire the unissued shares of the corporation, to the extent provided in (and subject to the limitations of) subdivisions (b)(1)-(6) and subsection (c) of this section, except to the extent the articles of incorporation expressly provide otherwise.

History. 1955, c. 1371, s. 1; 1969, c. 751, ss. 29-32; 1979, c. 508, s. 2; 1989, c. 265, s. 1; 1993, c. 552, s. 8.

Official Comment

Section 6.30(a) adopts an “opt in” provision for preemptive rights: Unless an affirmative reference to these rights appears in the articles of incorporation, no preemptive rights exist. Whether or not preemptive rights are elected, however, the directors’ fiduciary duties extend to the issuance of shares. Issuance of shares at favorable prices to directors (but excluding other shareholders) or the issuance of shares on a nonproportional basis for the purpose of affecting control rather than raising capital may violate that duty. These duties, it is believed, form a more rational structure of regulation than the technical principles of traditional preemptive rights.

Section 6.30(b) provides a standard model for preemptive rights if the corporation desires to exercise the “opt in” alternative of section 6.30(a). The simple phrase, “the corporation elects to have preemptive rights,” or words of similar import, results in the rest of subsection (b) becoming applicable to the corporation. But a corporation may qualify or limit any of the rules set forth in subsection (b) by express provisions in the articles of incorporation if the rules are felt to be undesirable or inappropriate for the specific corporation. The purposes of this standard model for preemptive rights are (1) to simplify drafting articles of incorporation and (2) to provide a simple checklist of business considerations for the benefit of attorneys who are considering the inclusion of preemptive rights in articles of incorporation.

The provisions of sections 6.30(b) establish rules for most of the problems involving preemptive rights. Thus subsection (b)(1) defines the general scope of the preemptive right giving appropriate recognition to the discretion of the board of directors in establishing the terms and conditions for exercise of that right. Subsection (b)(2) creates rules with respect to the waiver of these rights. Subsection (b)(3) lists the principal exceptions to preemptive rights, including a six-month period during which initial capital can be raised by a newly formed corporation without regard to the preemptive rights of persons who have previously acquired shares. Subsections (b)(4) and (b)(5) provide rules for the often-difficult problems created when preemptive rights are recognized in corporations with more than a single class of shares. These problems are discussed further below. Subsection (b)(6) defines the status of preemptive rights after a shareholder has elected not to exercise a proffered preemptive right: for a period of one year thereafter the corporation may dispose of the shares at the same or a higher price. A corporation deciding to offer shares at a lower price must reoffer the shares preemptively to the shareholders before selling them to third persons.

As indicated above, any portion of section 6.30(b) that is felt not to be appropriate for a specific corporation may be amended or deleted by appropriate provision in the articles of incorporation.

The model provision dealing with preemptive rights in section 6.30(b) is primarily designed to protect voting power within the corporation from dilution. For this reason, section 6.30(c) contains a special definition of “shares” to ensure that the preemptive rights of shareholders, if these rights are granted, apply to all securities that are convertible into or carry a right to acquire voting shares.

On the other hand, preemptive rights also may serve in part the function of protecting the equity participation of shareholders. This combination of functions creates no problem in a corporation that has authorized only a single class of shares but may occasionally create problems in corporations with more complex capital structures. In many multiple-class corporate financial structures, the issuance of additional shares of one class does not adversely affect other classes. For example, the issuance of additional general voting shares without preferential rights normally does not affect either the limited voting power or equity participation of holders of shares with preferential rights; holders of shares with preferential equity participation rights but without general voting rights should therefore have no preemptive rights with respect to general voting shares without preferential rights. See subsections (b)(4) and (b)(5). Classes of shares that may give rise to possible conflict between the protection of voting interests and equity participation when the board of directors desires to issue additional shares include classes of nonvoting shares without preferential rights and classes of shares with both preferential rights to distributions and general voting rights. Attorneys who draft articles of incorporation with classes of shares that may give rise to these conflicts should consider the precise application of section 6.30(b) with respect to preemptive rights for these classes and define more carefully the scope of the preemptive rights desired.

North Carolina Commentary

For corporations incorporated on or after July 1, 1990, this section adopts an “opt in” election for preemptive rights. In contrast to the prior law, unless an affirmative reference to these rights appears in the articles of incorporation, no preemptive rights exist. Former G.S. 55-56 provided for preemptive rights unless limited or denied by the articles of incorporation. Subsection (d) grants preemptive rights under this section to shareholders of corporations incorporated before July 1, 1990, except to the extent the articles of incorporation expressly provide otherwise.

The Model Act was modified in subdivision (b)(3)(iv) to require that the issuance of shares for consideration other than money be advantageous to the corporation’s business.

The drafters concluded that subdivisions 6.30(b)(4) and (5) of the Model Act are unclear. They omitted subdivision (b)(5) and rewrote subdivision (b)(4) to make it clear that holders of one class of shares do not have any preemptive rights with respect to shares of another class.

§ 55-6-31. Corporation’s acquisition of its own shares.

  1. A corporation may acquire its own shares and shares so acquired constitute authorized but unissued shares.
  2. If the articles of incorporation prohibit the reissue of the acquired shares, the number of authorized shares is reduced by the number of shares acquired, effective upon amendment of the articles of incorporation.
  3. Repealed by Session Laws 2005-268, s. 1, effective October 1, 2005.

History. 1955, c. 1371, s. 1; 1957, c. 1039; 1959, c. 1316, s. 19; 1963, c. 666; 1967, c. 1163; 1969, c. 751, ss. 23-27, 45; 1973, c. 1067; 1985, c. 117, s. 3; 1989, c. 265, s. 1; 2005-268, s. 1.

Official Comment

The elimination of the concepts of “par value” and “stated capital” in the 1980 amendments to the Model Act (see the Official Comment to section 6.21) permitted the simplification of a number of other sections of the Act and the elimination of several historical concepts that primarily served the purpose of ameliorating problems created by retention of the concepts of “par value” and “stated capital.”

One concept eliminated by the 1980 amendments was that of treasury shares. The status of once-issued but reacquired shares was an uneasy one under the traditional statutes. It was universally recognized that a corporation’s shares in its own hands are not an asset any more than authorized but unissued shares. As an economic matter payments made by a corporation to repurchase its own shares must be viewed as a distribution of corporate assets by the corporation rather than as an acquisition of an asset. Further, conventional statutes gave treasury shares an intermediate status between issued and unissued: they were treated as outstanding shares for some purposes, and they could be resold or disposed of by the corporation (presumably) without regard to restrictions that might be imposed on the original issuance of shares by the corporation. Finally, the accounting treatment for treasury shares was complex, confusing, and to some extent unrealistic since the capital accounts often did not reflect transactions in treasury shares.

Under the 1980 revisions of the financial provisions in the Model Act the concept of treasury shares is unnecessary. Authorized but unissued shares of the corporation may be issued on the same basis and with the same freedom as treasury shares under earlier statutes. Attorneys’ opinions on the legality of the issuance of shares under the revised Model Act will therefore be unaffected by the elimination of the technical distinction between original shares and treasury shares. A possible exception to these statements is that the concept of treasury shares may have permitted listed companies to save modestly on stock exchange listing fees in some cases that may not be available under the revised Model Act provisions.

Section 6.31(a) restates the fundamental power of a corporation to reacquire its own shares. Such a transaction constitutes a “distribution” by the corporation (see the definition of that term in section 1.40) and is subject to the limitations of section 6.40.

Shares that are reacquired by the corporation become authorized but unissued shares under section 6.31(b) unless the articles prohibit reissue, in which event they are cancelled. Section 6.31(c) requires a simplified official filing to reflect the reduction of authorized shares. This provision is included in order that there be a public record of the number of authorized shares that a corporation may issue. The amendment may be made without shareholder action. See section 10.02.

Until the amendment referred to in section 6.31(c) is effective, the corporation has power to reissue the reacquired shares despite a prohibition in the articles of incorporation. In such a case, the action of the directors in issuing the shares may be challengeable but the shares so issued would be fully paid and nonassessable if issued in conformity with section 6.21.

North Carolina Commentary

The concept of treasury shares is eliminated in this section.

The Model Act was modified in subsection (c) to provide that, when a corporation is prohibited from reissuing acquired shares, it must amend its articles of incorporation to reduce the number of authorized shares by the number of acquired shares. Such reduction is effective upon the filing of articles of amendment with the Secretary of State.

Supplemental North Carolina Commentary (2005)

The provision for amending articles of incorporation to reflect a reduction in authorized shares when the corporation is prohibited from reissuing acquired shares referred to in the Official Comment is relocated to G.S. 55-10-02 effective October 1, 2005.

Effect of Amendments.

Session Laws 2005-268, s. 1, effective October 1, 2005, repealed subsection (c), regarding adoption of the Articles of Amendment required by subsection (b) by the board of directors without shareholder action.

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

CASE NOTES

Editor’s Note. —

The cases below were decided under prior law.

Former Law. —

Under former law, a corporation, unless restrained by some provision of its organic law, could purchase its own stock from holders thereof, and the latter were entitled to all rights of other creditors of the corporation for the protection and enforcement of their demand for payment. Blalock v. Kernersville Mfg. Co., 110 N.C. 99, 14 S.E. 501, 1892 N.C. LEXIS 19 (1892).

Purpose of 1985 Amendment to Former G.S. 55-52. —

The 1985 amendment to former G.S. 55-52 was established to enable corporations to enter into written agreements with shareholders at the outset of the relationship for the issuance of stock redeemable at the shareholder’s option. The statute was not designed to simply allow the corporation to enter into a written agreement with a shareholder to redeem stock out of and as an impairment to stated capital, which stock was already being held by the shareholder as common stock; rather, the purpose was to provide a new method for North Carolina corporations to raise needed capital by readily available cash infusions from shareholders in exchange for stock redeemable at their request. In re N.W. Oxygen, Inc., 99 B.R. 703, 1989 Bankr. LEXIS 1591 (Bankr. M.D.N.C. 1989).

Agreement Entered into Prior to Amendment. —

Where former shareholder had a note in exchange for the redemption of his shares in corporation, the note was unenforceable under former G.S. 55-52, as subdivision (c)(3), rather than subdivision (b)(4) thereof, applied. First, subdivision (b)(4) was an amendment to the original provision and was effective in 1985, while the agreement between former shareholder and debtor corporation was executed before the amendment was in effect; second, subdivision (b)(4) was established to enable corporations to enter agreements with shareholders for the issuance of stocks. In the instant case former shareholder and debtor entered into a written agreement some ten years after the issuance of the shares for the sale of the common stock which former shareholder owned. In re N.W. Oxygen, Inc., 99 B.R. 703, 1989 Bankr. LEXIS 1591 (Bankr. M.D.N.C. 1989).

Solvency Test for Each Payment Under Former G.S. 55-52(c). —

Since former G.S. 55-52 specifically included the words “and pay for” in subsection (c), a solvency test for surplus had to occur each time a corporation made a payment on the indebtedness out of the assets of the corporation. In re N.W. Oxygen, Inc., 99 B.R. 703, 1989 Bankr. LEXIS 1591 (Bankr. M.D.N.C. 1989).

Redemption Agreement Held Unenforceable. —

Promissory note to a former shareholder in exchange for the redemption of his shares in corporation and underlying security interest were rendered unenforceable due to the corporation’s subsequent insolvency and inability to make payment on the obligation out of sufficient surplus of corporate assets. In re N.W. Oxygen, Inc., 99 B.R. 703, 1989 Bankr. LEXIS 1591 (Bankr. M.D.N.C. 1989).

§§ 55-6-32 through 55-6-39.

Reserved for future codification purposes.

Part 4. Distributions.

§ 55-6-40. Distributions to shareholders.

  1. A board of directors may authorize and the corporation may make distributions to its shareholders subject to restriction by the articles of incorporation and the limitation in subsection (c).
  2. If the board of directors does not fix the record date for determining shareholders entitled to a distribution (other than one involving a purchase, redemption, or other acquisition of the corporation’s shares), it is the date the board of directors authorizes the distribution.
  3. No distribution may be made if, after giving it effect:
    1. The corporation would not be able to pay its debts as they become due in the usual course of business; or
    2. The corporation’s total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.
  4. The board of directors may base a determination that a distribution is not prohibited under subsection (c) on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances, and may determine asset values either on book values or on a fair valuation or other method that is reasonable in the circumstances.
  5. Except as provided in subsection (g), the effect of a distribution under subsection (c) is measured:
    1. In the case of distribution by purchase, redemption, or other acquisition of the corporation’s shares, as of the earlier of (i) the date money or other property is transferred or debt incurred by the corporation or (ii) the date the shareholder ceases to be a shareholder with respect to the acquired shares;
    2. In the case of any other distribution of indebtedness, as of the date the indebtedness is distributed;
    3. In all other cases, as of (i) the date the distribution is authorized if the payment occurs within 120 days after the date of authorization or (ii) the date the payment is made if it occurs more than 120 days after the date of authorization.
  6. A corporation’s indebtedness to a shareholder incurred by reason of a distribution made in accordance with this section is at parity with the corporation’s indebtedness to its general, unsecured creditors except to the extent otherwise provided by agreement.
  7. Indebtedness of a corporation, including indebtedness issued as a distribution, is not considered a liability for purposes of determinations under subsection (c) if its terms provide that payment of principal and interest are made only if and to the extent that payment of a distribution to shareholders could then be made under this section. If an indebtedness with such terms is issued as a distribution, each payment of principal or interest is treated as a distribution the effect of which is measured on the date the payment is actually made.
  8. Any action by a shareholder to compel the payment of dividends may be brought against the directors, or against the corporation with or without joining the directors as parties. The shareholder bringing such action shall be entitled, in the event that the court orders the payment of a dividend, to recover from the corporation all reasonable expenses, including attorney’s fees, incurred in maintaining such action. If a court orders the payment of a dividend, the amount ordered to be paid shall be a debt of the corporation.
  9. As used in this subsection, net profits shall mean such net profits as can lawfully be paid in dividends to a particular class of shares after making allowance for the prior claims of shares, if any, entitled to preference in the payment of dividends. If during its immediately preceding fiscal period a corporation having less than 25 shareholders on the final day of said period has not paid to any class of shares dividends in cash or property amounting to at least one-third of the net profits of said period allocable to that class, the holder or holders of twenty percent (20%) or more of the shares of that class may, within four months after the close of said period, make written demand upon the corporation for the payment of additional dividends for that period. After a corporation has received such a demand, the directors shall, during the then current fiscal period or within three months after the close thereof, either (i) cause dividends in cash or property to be paid to the shareholders of that class in an amount equal to the difference between the dividends paid in said preceding fiscal period to shareholders of that class and one-third of the net profits of said period allocable to that class, or in such lesser amount as may be demanded, or (ii) give notice pursuant to subsection ( j) of this section to all shareholders making such demand. Such corporation shall not, however, be required to pay dividends pursuant to such demand insofar as (i) such payment would exceed fifty percent (50%) of the net profits of the current fiscal period in which such demand is made, or (ii) the net profits are being retained to eliminate a deficit, or (iii) the payment of dividends would be a breach of a bona fide agreement between the corporation and its creditors restricting the payment of dividends, or (iv) the directors of the corporation can show that its earnings are being retained to meet the reasonably anticipated needs of the business and that such retention of earnings is not inequitable in light of all the circumstances. Upon receipt of such a demand a corporation may elect to treat any dividend previously paid in the current fiscal period as having been paid in the preceding fiscal period, in which event the corporation shall so notify all shareholders. If a dividend is paid in satisfaction of a demand made in accordance with this subsection it shall be deemed to have been paid in the period for which it was demanded, and all shareholders shall be so informed concurrently with such payment.
  10. Upon receipt of a demand from the holders of twenty percent (20%) or more of the shares of any class of shares pursuant to subsection (i) of this section, the corporation receiving such demand may, during the then fiscal period or within three months after the close thereof, give written notice to each shareholder making such written demand that the corporation elects to redeem all shares held by such shareholder in lieu of the payment of dividends as provided in subsection (i) of this section and shall pay to such shareholder the fair value of his shares as of the day preceding the mailing or otherwise reasonably dispatching of the notice. A shareholder receiving such notice shall thereafter be entitled to withdraw his dividend demand by giving written notice of such withdrawal to the corporation within 10 days after receipt of the redemption notice of the corporation or, if no such withdrawal is made, to receive the fair value of his shares, subject only to the surrender by him of the certificate or certificates representing his shares and to the provisions of G.S. 55-6-31, which value shall be determined and paid as follows:
    1. If within 30 days after the date upon which a shareholder becomes entitled to payment for his shares under this subsection, the value of the shares is agreed upon between the shareholder and the corporation, payment therefor shall be made within 60 days after the agreement, upon surrender of the certificate representing the shares, whereupon the shareholder shall cease to have any interest in such shares or in the corporation.
    2. If within the such 30-day period the shareholder and the corporation do not agree as to the value of the shares, the shareholder may, within 60 days after the expiration of the 30-day period, file a petition in the superior court of the county of the registered office of the corporation asking for the appointment by the clerk of three qualified and disinterested appraisers to appraise the fair value of the shares. A summons as in other cases of special proceedings, together with a copy of the petition, shall be served on the corporation at least 10 days prior to the hearing of the petition by the court. The award of appraisers, or a majority of them, if no exceptions be filed thereto within 10 days after the award shall have been filed in court, shall be confirmed by the court, and when confirmed shall be final and conclusive, and the shareholder upon depositing the proper share certificates in court, shall be entitled to judgment against the corporation for the appraised value thereof as of the date prescribed in this section, together with interest thereon to the date of such confirmation. If either party files exceptions to such award within 10 days after the award shall have been filed in court, the case shall be transferred to the civil issue docket of the superior court for trial during term and shall be there tried in the same manner, as near as may be practicable, as is provided in Chapter 40A for the trial of cases under the eminent domain law of this State, and with the same right of appeal as is permitted in said Chapter. The court shall assess the cost of said proceedings as it shall deem equitable. Upon payment of the judgment, the shareholder shall cease to have any interest in the shares or in the corporation and the corporation shall be entitled to have said share certificates surrendered to it by the clerk of court for cancellation. Unless the shareholder shall file such petition within the time herein prescribed, he and all persons claiming under him shall have no right of payment hereunder but in that event nothing herein shall impair his status as shareholder.
  11. Nothing in this section shall impair any rights which a shareholder may have on general principles of equity to compel the payment of dividends.

History. Code, s. 681; 1901, c. 2, ss. 33, 52; Rev., ss. 1191, 1192; C.S., ss. 1178, 1179; 1927, c. 121; 1933, c. 354, s. 1; G.S., ss. 55-115, 55-116; 1955, c. 1371, s. 1; 1957, c. 1039; 1959, c. 1316, ss. 16, 19, 35; 1963, c. 666; 1965, c. 726; 1967, c. 1163; 1969, c. 751, ss. 21-27, 45; 1973, c. 469, ss. 17-20; c. 683; c. 1067; c. 1087, ss. 3-5; 1975, c. 19, s. 17; c. 304; 1985, c. 117, s. 3; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.9; 1991, c. 645, s. 4.

Official Comment

The reformulation of the statutory standards governing distributions is another important change made by the 1980 revisions to the financial provisions of the Model Act. It has long been recognized that the traditional “par value” and “stated capital” statutes do not provide significant protection against distributions of capital to shareholders. While most of these statutes contained elaborate provisions establishing “stated capital,” “capital surplus,” and “earned surplus” (and often other types of surplus as well), the net effect of most statutes was to permit the distribution to shareholders of most or all of the corporation’s net assets — its capital along with its earnings — if the shareholders wished this to be done. However, statutes also generally imposed an equity insolvency test on distributions that prohibited distributions of assets if the corporation was insolvent or if the distribution had the effect of making the corporation insolvent or unable to meet its obligations as they were projected to arise.

The financial provisions of the revised Model Act, which are based on the 1980 amendments, sweep away all the distinctions among the various types of surplus but retain restrictions on distributions built around both the traditional equity insolvency and balance sheet tests of earlier statutes.

  1. The scope of section 6.40
  2. Equity insolvency test
  3. Relationship to the federal bankruptcy act and other fraudulent conveyance statutes
  4. Balance sheet test
    1. Generally accepted accounting principles
    2. Other principles
    3. Priority of debt distributed directly or incurred in connection with a redemption

Section 1.40 defines “distribution” to include virtually all transfers of money, indebtedness of the corporation or other property to a shareholder in respect of the corporation’s shares. It thus includes cash or property dividends, payments by a corporation to purchase its own shares, distributions of promissory notes or indebtedness, and distributions in partial or complete liquidation or voluntary or involuntary dissolution. Section 1.40 excludes from the definition of “distribution” transactions by the corporation in which only its own shares are distributed to its shareholders. These transactions are called “share dividends” in the revised Model Business Corporation Act. See section 6.23.

Section 6.40 imposes a single, uniform test on all distributions. Many of the old “par value” and “stated capital” statutes provided tests that varied with the type of distribution under consideration or did not cover certain types of distributions at all.

As noted above, older statutes prohibited payment of dividends if the corporation was, or as a result of the payment would be, insolvent in the equity sense. This test is retained, appearing in section 6.40(c)(1).

For an on-going business enterprise the equity insolvency test requires that decisions be based on a cash flow analysis that is itself based on a business forecast and budget for a sufficient period of time to permit a conclusion that known obligations of the corporation can reasonably be expected to be satisfied over the period of time that they will mature. It is not sufficient simply to measure current assets against current liabilities, or determine that the present estimated “liquidation” value of the corporation’s assets would produce sufficient funds to satisfy the corporation’s existing liabilities.

In determining whether a corporation is, or as a result of a proposed distribution would be rendered, insolvent, the board of directors may rely on information supplied by the officers of the corporation. It is not necessary for them to know of the details of the cash flow analysis if the proposed distribution involves no significant risk of equity insolvency. Judgments, further, must of necessity be made on the basis of information in the hands of the board of directors when a distribution is authorized. See section 8.30.

The revised Model Business Corporation Act establishes the validity of distributions from the corporate law standpoint under section 6.40 and determines the potential liability of directors for improper distributions under sections 8.30 and 8.33. The federal Bankruptcy Act and state fraudulent conveyance statutes, on the other hand, are designed to enable the trustee or other representative to recapture for the benefit of creditors funds distributed to others in some circumstances. In light of these diverse purposes, it was not thought necessary to make the tests of section 6.40 identical with the tests for insolvency under these various statutes.

Section 6.40(c)(2) requires that, after giving effect to any distribution, the corporation’s assets equal or exceed its liabilities plus (with some exceptions) the dissolution preferences of senior equity securities. Section 6.40(d) authorizes asset and liability determinations to be made for this purpose on the basis of either (1) financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or (2) a fair valuation or other method that is reasonable in the circumstances. The determination of a corporation’s assets and liabilities and the choice of the permissible basis on which to do so are left to the judgment of its board of directors. In making a judgment under section 6.40(d), the board may rely under section 8.30 upon opinions, reports, or statements, including financial statements and other financial data prepared or presented by public accountants or others.

Section 6.40 does not incorporate technical accounting terminology and specific accounting concepts. Accounting terminology and concepts are constantly under review and subject to revision by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission, and others. In making determinations under this section, the board of directors may make judgments about accounting matters, taking into account its right to rely upon professional or expert opinion and its obligation to be reasonably informed as to pertinent standards of importance that bear upon the subject at issue.

In a corporation with subsidiaries, the board of directors may rely on unconsolidated statements prepared on the basis of the equity method of accounting (see American Institute of Certified Public Accountants, APB Opinion No. 18 (1971)) as to the corporation’s investee corporations, including corporate joint ventures and subsidiaries, although other evidence would be relevant in the total determination.

The directors will normally be entitled to use generally accepted accounting principles and to give presumptive weight to the advice of professional accountants with respect to their application. But section 6.40 only requires the use of accounting practices and principles that are reasonable in the circumstances, and does not constitute a statutory enactment of generally accepted accounting principles. The widespread controversy concerning various accounting principles, and their continuous reevaluation, suggest that a statutory standard of reasonableness, rather than of generally accepted accounting principles, is appropriate. The Model Act does not reject generally accepted accounting principles; on the contrary, it is expected that their use will be the basic rule in most cases. The statutory language does, however, require informed business judgment applying particular accounting principles to the entire circumstances that exist at the time.

If a corporation’s financial statements are not presented in accordance with generally accepted accounting principles, a board of directors should normally consider the extent to which the assets may not be fairly stated or the liabilities may be understated in determining the aggregate amount of assets and liabilities.

Section 6.40(d) specifically permits determinations to be made under section 6.40(c)(2) on the basis of a fair valuation or other method that is reasonable in the circumstances. Thus the statute authorizes departures from historical cost accounting and sanctions the use of appraisal methods to determine the funds available for distributions. No particular method of valuation is prescribed in the statute, since different methods may have validity depending upon the circumstances, including the type of enterprise and the purpose for which the determination is made. For example, it is inappropriate to apply a “quick-sale liquidation” value to an enterprise in most cases, particularly with respect to the payment of normal dividends. On the other hand, a “quick-sale valuation” might be appropriate in certain circumstances for an enterprise in the course of liquidation or of reducing its asset or business base by a material degree. In most cases, a fair valuation method or a going-concern basis would be appropriate if it is believed that the enterprise will continue as a going concern.

In determining the value of assets, all of the assets of a corporation, whether or not reflected in the financial statements (e.g., a valuable executory contract), should be considered. Ordinarily a corporation should not selectively revalue assets. Likewise, all of a corporation’s obligations and commitments should be considered and quantified to the extent appropriate and possible. In any event, section 6.40(d) imposes upon the board of directors the responsibility of applying under section 6.40(c)(2) a method of determining the aggregate amounts of assets and liabilities that is reasonable in the circumstances.

Section 6.40(d) also refers to some “other method that is reasonable in the circumstances.” This phrase is inserted to comprehend within section 6.40(c)(2) the wide variety of possibilities that might not be considered to fall under a “fair valuation” but might be reasonable in the circumstances of a particular case.

5. Preferential dissolution rights and the balance sheet test

Section 6.40(c)(2) provides that a distribution may not be made unless the total assets of the corporation exceed its liabilities plus the amount that would be needed to satisfy any shareholders’ superior preferential rights upon dissolution if the corporation were to be dissolved at the time of the distribution. This requirement in effect treats preferential dissolution rights of classes or series of shares for distribution purposes as equivalent to liabilities rather than as equity interests, and carries forward analogous treatment of shares having preferential dissolution rights from earlier versions of the Model Act. In making the calculation of the amount that must be added to the liabilities of the corporation to reflect the preferential dissolution rights, the assumption should be made that the preferential dissolution rights are to be established pursuant to the articles of incorporation (or resolution creating a series having preferential dissolution rights) as of the date of the distribution or proposed distribution. The amount so determined must include arrearages in preferential dividends if the articles of incorporation or resolution require that they be paid upon the dissolution of the corporation. In the case of shares having both a preferential right upon dissolution and additional nonpreferential rights, only the preferential portion of the rights should be taken into account. The treatment of preferential dissolution rights of classes of shares set forth in section 6.40(c)(2) is applicable only to the balance sheet test and is not applicable to the equity insolvency test of section 6.40(c)(1). The treatment of preferential rights mandated by this section may always be eliminated by an appropriate provision in the articles of incorporation.

6. Time of measurement

Section 6.40(e)(3) provides that the time for measuring the effect of a distribution for compliance with the insolvency and balance sheet tests for all distributions not involving the reacquisition of shares of the distribution of indebtedness is the date of authorization, if the payment occurs within 120 days following the authorization; if the payment occurs more than 120 days after the authorization, however, the date of payment must be used. If the corporation elects to make a distribution in the form of its own indebtedness under section 6.40(e)(2), the validity of that distribution must be measured as of the time of distribution.

Section 6.40(e)(1) provides a different rule for the time of measurement when the distribution involves a reacquisition of shares. See part 8a. below.

7. Record date

Section 6.40(b) fixes the record date (if the board of directors does not otherwise fix it) for distributions other than those involving a repurchase or reacquisition of shares as the date the board of directors authorizes the distribution. No record date is necessary for a repurchase or reacquisition of shares from one or more specific shareholders. The board of directors has discretion to set a record date for a repurchase or reacquisition if it is to be pro rata and to be offered to all shareholders as of a specified date.

8. Application to repurchases or redemption of shares

The application of the equity insolvency and balance sheet tests to distributions that involve the purchase or redemption of shares creates unique problems; section 6.40 provides specific rules for the resolution of these problems as described below.

a. Time of measurement

Section 6.40(e)(1) provides that the time for measuring the effect of a distribution under section 6.40(c), if shares of the corporation are reacquired, is the earlier of (i) the payment date, or (ii) the date the shareholder ceased to be a shareholder with respect to the shares.

b. When tests are applied to redemption-related debt

In an acquisition of its shares, a corporation may transfer property or incur debt to the former holder of the shares. The case law on the status of this debt is conflicting. However, share repurchase agreements involving payment for shares over a period of time are of special importance in closely held corporate enterprises. Section 6.40(e) provides a clear rule for this situation: the legality of the distribution must be measured at the time of the issuance or incurrence of the debt, not at a later date when the debt is actually paid. Of course, this does not preclude a later challenge of a payment on account of redemption-related debt by a bankruptcy trustee on the ground that it constitutes a preferential payment to a creditor.

Section 6.40(f) provides that indebtedness created to purchase shares or issued as a distribution is on a parity with the indebtedness of the corporation to its general, unsecured creditors, except to the extent subordinated by agreement. General creditors are better off in these situations than they would have been if cash or other property had been paid out for the shares or distributed (which is proper under the statute), and no worse off than if cash had been paid out to the shareholders, which was then lent back to the corporation, making the shareholders creditors. The parity created by section 6.40(f) therefore is logically consistent with the rule established by section 6.40(e) that these transactions should be judged at the time of the issuance of the debt.

Amended North Carolina Commentary

This section introduces significant changes from prior law in the criteria used to determine a corporation’s legal capacity to pay dividends and reacquire its shares. The former surplus tests no longer apply. In addition, the provisions of former G.S. 55-52, which limited the circumstances under which a corporation could reacquire its shares, were not brought forward. All distributions to shareholders, whether by dividends or repurchases of shares, are determined by that distribution’s impact on the corporation’s solvency and the relationship between its assets and liabilities.

The Model Act was modified in subsection (d) to make it clear that for purposes of determining asset values under the equity insolvency and balance sheet tests of subsection (c), the board of directors may use either book values or a current valuation if it is reasonable under the circumstances. For purposes of determining liabilities and assets that are not revalued, the board of directors may rely on financial statements prepared in accordance with reasonable accounting practices and principles.

The Model Act was modified in subsection (f) to clarify that a corporation may agree to secure its indebtedness to a shareholder by granting a deed of trust or other security interest. The shareholder may also agree to subordinate the indebtedness, in whole or in part, to the corporation’s indebtedness to its general, unsecured creditors. Absent an agreement either to secure or to subordinate a corporation’s indebtedness to a shareholder, such indebtedness will be at parity with the corporation’s indebtedness to its general, unsecured creditors.

Subsection (g) was added to the Model Act’s provisions to address the question of how to treat a liability that by its own terms cannot be paid if its payment would violate this section. This change required the cross-reference added to subsection (e).

“Nimble dividends” (dividends paid out of current earnings) were expressly authorized under former G.S. 55-50(a)(2). That provision was not brought forward.

Subsections (h), (i), and (j) bring forward the provisions of former G.S. 55-50(k) through (m).

CASE NOTES

Editor’s Note. —

Most of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Former G.S. 55-50 allowed suit for improper withholding of dividend payments against corporation, directors, majority shareholders and officers of the corporation. Wilson v. Wilson-Cook Medical, Inc., 720 F. Supp. 533, 1989 U.S. Dist. LEXIS 16730 (M.D.N.C. 1989).

Joinder of Suit for Failure to Declare Dividends with Cause of Action for Liquidation. —

A stockholder in a corporation may sue the corporation, and join its directors as defendants, for failure to declare adequate dividends from the corporation’s earnings; and may join therewith a second cause of action for liquidation and involuntary dissolution of the corporation based upon bad faith management in suppressing dividends and in deflating the value of the corporation’s assets, thus precluding the plaintiff stockholder from obtaining either a fair dividend or a fair market value for his stock. Dowd v. Charlotte Pipe & Foundry Co., 263 N.C. 101, 139 S.E.2d 10, 1964 N.C. LEXIS 781 (1964).

Failure to State a Cause of Action. —

Claim against director of dissolved corporation did not state a cause of action where plaintiff only alleged that director was officer when corporation dissolved and where there was no allegation that corporation’s assets were distributed by officers without providing for known or reasonably ascertainable liabilities. Heather Hills Home Owners Ass'n v. Carolina Custom Dev. Co., 100 N.C. App. 263, 395 S.E.2d 154, 1990 N.C. App. LEXIS 918, cert. denied, 327 N.C. 634, 399 S.E.2d 327, 1990 N.C. LEXIS 1011 (1990) (decided under former G.S. 55-32).

Shareholder Held Entitled to Attorneys’ Fees. —

Plaintiff who brought action as the record owner of 42,748 shares of Preferred A stock of defendant corporation to recover a dividend was entitled to recover attorneys’ fees under subsection (h) of former G.S. 55-50. McGladrey, Hendrickson & Pullen v. Syntek Fin. Corp., 98 N.C. App. 151, 389 S.E.2d 636, 1990 N.C. App. LEXIS 308 (1990), aff'd, 330 N.C. 602, 411 S.E.2d 585, 1992 N.C. LEXIS 4 (1992).

Disregard of Corporate Entity Upheld. —

Trial court was justified in disregarding the corporate entity and holding defendant personally liable to the extent of plaintiff ’s damages under the contract where defendant, who was president and sole shareholder of company, received substantial compensation from the sale of the corporation’s assets without informing plaintiff of the sale or making provision for contractual debt to plaintiff. Hudson v. Jim Simmons Pontiac-Buick, Inc., 94 N.C. App. 563, 380 S.E.2d 612, 1989 N.C. App. LEXIS 561 (1989) (decided under the former Business Corporation Act).

As to suits in equity to compel declaration and payment of dividends, see Gaines v. Long Mfg. Co., 234 N.C. 331, 67 S.E.2d 355, 1951 N.C. LEXIS 480 (1951).

Creditors Lacked Standing. —

Plaintiffs lacked standing to assert claims (1) that the joinder agreements executed by two defendants were fraudulent transfers in violation of G.S. 39-23.1 and unlawful distributions in violation of G.S. 55-8-33 and G.S. 55-6-40, for which all defendants were liable, or alternatively, (2) for unauthorized execution, because such claims could have been brought by any of the corporation’s creditors who, like plaintiffs, were denied timely payment of the corporation’s debts when execution of the joinder agreements led to its insolvency. Angell v. Kelly, 336 F. Supp. 2d 540, 2004 U.S. Dist. LEXIS 19003 (M.D.N.C. 2004).

Bankruptcy Trustee Had Standing. —

There is no case law in North Carolina delineating who has standing to sue a shareholder under G.S. 55-6-40; however, dividends are transfers of corporate property. Since the statute declares such distributions to be “invalid,” it would appear that the bankruptcy trustee would have standing to sue, under two alternate grounds: (1) as an effort to recover property under 11 U.S.C.S. § 541, if the transfer is legally void, or (2) if it had legal effect, as a transfer avoidance under 11 U.S.C.S. § 544. Mitchell v. Greenberg, 2003 Bankr. LEXIS 2468 (Bankr. W.D.N.C. May 27, 2003).

Article 7. Shareholders.

Part 1. Meetings.

§ 55-7-01. Annual meeting.

  1. A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws.
  2. Unless the board of directors determines to hold the meeting solely by means of remote communication in accordance with G.S. 55-7-09(c), annual shareholders’ meetings may be held (i) in or out of this State at the place stated in or fixed in accordance with the bylaws, or (ii) if no place is stated in or fixed in accordance with the bylaws, at the corporation’s principal office.
  3. The failure to hold an annual meeting at the time stated in or fixed in accordance with a corporation’s bylaws does not affect the validity of any corporate action. Upon such failure, whether from lack of quorum or otherwise, a substitute annual meeting may be called in accordance with the provisions of G.S. 55-7-02 and any meeting so called may be designated as the annual meeting.
  4. Any matter relating to the affairs of a corporation that is appropriate for shareholder action is a proper subject for action at an annual meeting of shareholders, and unless required by some provision of this Chapter, the matter need not be specifically stated in the notice of meeting.

History. 1901, c. 2, ss. 46, 49, 51; Rev., ss. 1179, 1188, 1190; C.S., ss. 1168, 1169, 1176; G.S., ss. 55-105, 55-106, 55-113; 1955, c. 1371, s. 1; 1959, c. 1316, ss. 21, 22; 1985 (Reg. Sess., 1986), c. 801, s. 44; 1989, c. 265, s. 1; 2021-162, s. 1(a).

Official Comment

Section 7.01(a) requires every corporation to hold an annual meeting each year of shareholders entitled to participate in the election of directors and to consider other matters coming before the meeting of shareholders. In most instances, the meeting will involve only the holders of a single class of voting shares. The principal action to be taken at the annual meeting is the election of directors pursuant to section 8.03, but the purposes of an annual meeting are not limited and all matters appropriate for shareholder action may also be considered at that meeting. An annual meeting is also the appropriate forum for a shareholder to raise any relevant question about the corporation’s operations.

The requirement of section 7.01(a) that an annual meeting be held is phrased in mandatory terms to ensure that every shareholder entitled to participate in the meeting has the unqualified rights (1) to demand that the annual meeting be held and (2) to compel the holding of the meeting under section 7.03 if the corporation does not promptly hold the meeting. Many corporations, such as non-public subsidiaries and closely held corporations, do not regularly hold annual meetings, and if no shareholder objects, that practice creates no problem under section 7.01, since section 7.01(c) provides that failure to hold an annual meeting does not affect the validity of any corporate action. Rather than holding an annual meeting, the shareholders may elect directors and take other appropriate action by unanimous written consent under section 7.04. And, even if the shareholders fail to elect directors, the directors currently in office continue in office under section 8.05 beyond the expiration of their terms.

The time and place of the annual meeting may be “stated in or fixed in accordance with the bylaws.” If the bylaws do not themselves fix a time and place for the annual meeting, authority to fix them may be delegated to the board of directors or to a specified corporate officer. This section thus gives corporations the flexibility to hold annual meetings in varying places at varying times as convenience may dictate.

The annual meeting may be held either inside or outside the state or in a foreign country, but if the bylaws do not fix, or state the method of fixing, the place of the meeting, the meeting must be held at the “principal office” of the corporation. The principal office is defined in section 1.40 as the location of the principal executive office of the corporation and may or may not be its registered or official office under section 5.01. Section 16.22 requires that the address of the principal office be specified in the corporation’s annual report.

If the annual meeting is not held either within 6 months of the close of the corporation’s fiscal year or within 15 months of the last annual meeting, a shareholder may compel an annual meeting to be held under section 7.03. In the absence of a demand for a meeting, a corporation can operate indefinitely without actually holding an annual meeting. The shareholders may act by unanimous consent under section 7.04, and in any event directors, once duly elected, remain in office until their successors are qualified. See section 8.05.

Authority granted to the board of directors or some individual to fix the time and place of the annual meeting must be exercised in good faith. See Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971).

North Carolina Commentary

The second sentence of subsection (c) was added to the Model Act’s provisions to bring forward the provisions of former G.S. 55-61(b) regarding the holding of a substitute annual meeting. Subsection (d), which brings forward former G.S. 55-61(d), was added to make it clear that any matter appropriate for shareholder action is a proper subject for action at an annual meeting of shareholders.

Editor’s Note.

Session Laws 2021-162, s. 6, provides, in part: “This act is effective when it becomes law [September 20, 2021]. Sections 1, 2, and 3 of this act apply to meetings noticed on or after that date. Remote shareholder, policyholder, and member meetings noticed before the effective date of this act as a result of the state of emergency declared by Executive Order No. 116 on March 10, 2020, and complying with any subsequent executive orders authorizing remote shareholder, policy holder, or member meetings shall be deemed in compliance with this act. ....”

Session Laws 2021-162, s. 5, is severability clause.

Effect of Amendments.

Session Laws 2021-162, s. 1(a), rewrote subsection (b). For effective date and applicability, see editor’s note.

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article, “Understanding the (Ir)Relevance of Shareholder Votes on M&A Deals,” see 69 Duke L.J. 503 (2019).

§ 55-7-02. Special meeting.

  1. A corporation shall hold a special meeting of shareholders if either of the following applies:
    1. On call of its board of directors or the person or persons authorized to do so by the articles of incorporation or the bylaws.
    2. In the case of a corporation that is not a public corporation, within 30 days after the holders of at least ten percent (10%) of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the corporation’s secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held. The written demand shall cease to be effective on the sixty-first day after the date of signature appearing on the demand unless prior to the sixty-first day the corporation has received effective written demands from holders sufficient to call the special meeting.
  2. If not otherwise fixed under G.S. 55-7-03 or G.S. 55-7-07, the record date for determining shareholders entitled to demand a special meeting is the date the first shareholder signs the demand.
  3. Unless the board of directors determines to hold the meeting solely by means of remote communication in accordance with G.S. 55-7-09(c), special shareholders’ meetings may be held (i) in or out of this State at the place stated in or fixed in accordance with the bylaws or (ii) if no place is stated or fixed in accordance with the bylaws, at the corporation’s principal office.
  4. Only business within the purpose or purposes described in the meeting notice required by G.S. 55-7-05(c) may be conducted at a special shareholders’ meeting.

History. 1901, c. 2, ss. 46, 49, 51; Rev., ss. 1179, 1188, 1190; C.S., ss. 1168, 1169, 1176; G.S., ss. 55-105, 55-106, 55-113; 1955, c. 1371, s. 1; 1959, c. 1316, ss. 21, 22; 1985 (Reg. Sess., 1986), c. 801, s. 44; 1989, c. 265, s. 1; 1991, c. 645, s. 17(a); 2001-201, s. 15; 2002-58, s. 1; 2021-162, s. 1(b).

Official Comment

  1. Any meeting other than an annual meeting is a special meeting under section 7.02. The principal formal differences between an annual and a special meeting are that at an annual meeting directors are elected and, subject to the special notice requirements of section 7.05(b), any relevant issue pertaining to the corporation may be considered, while a special meeting must be called for specific purposes and may only consider matters within those purposes.
  2. Discretion as to calls of special meeting
  3. The business that may be conducted at a special meeting

A special meeting may be called under section 7.02(a) by the board of directors or the person or persons authorized to do so by the articles of incorporation or bylaws. Typically, the person or persons holding certain designated offices within the corporation, e.g., the president, chairman of the board of directors, or chief executive officer, are given authority to call special meetings of the shareholders. In addition, the holders of at least 10 percent of the votes entitled to be cast on a proposed issue at the special meeting may require the corporation to hold a special meeting by signing, dating, and delivering one or more writings that demand a special meeting and set forth the purpose or purposes of the desired meeting. Shareholders demanding a special meeting do not have to sign a single piece of paper, but the writings signed must all describe essentially the same purpose or purposes. Upon receipt of writings evidencing a demand by holders of 10 percent of the votes, the corporation (through an appropriate officer) must call the special meeting at a reasonable time and place. The shareholders’ demand may suggest a time and place but the final decision on such matters is the corporation’s. If no meeting is held within the time periods specified in section 7.03, the shareholders may obtain a summary court order under that section requiring that the meeting be held.

Section 7.02(b) fixes a record date for determining the shareholders entitled to sign a demand for a special shareholders’ meeting. Unless a record date is otherwise fixed for this purpose, the record date is the date the first shareholder signs the demand. If a shareholder initially signs a demand but later seeks to withdraw his demand, the corporation may permit the shareholder to do so.

Under section 7.02(a)(2) it is possible that more than one faction of shareholders may demand meetings at roughly the same time or that a single (or changing) faction of shareholders may request consecutive, overlapping, or repetitive meetings. The responsible corporate officers have some discretion as to the call and purposes of a meeting, and where demands are repetitious or overlapping, they may refuse to call a meeting for a purpose identical or similar to a purpose for which a previous special meeting was held in the recent past. Similarly, they may decline to call a special meeting when an annual meeting will be held in the near future. This limited discretion of the corporation to deny repetitive or overlapping demands may ultimately be tested under section 7.03, which itself gives the court discretion whether or not to compel the holding of a special meeting under these circumstances. See the Official Comment to section 7.03.

Section 7.05(c) provides that a notice of a special meeting must include a “description of the purpose or purposes for which the meeting is called.” Section 7.02(d) states that only business that is within that purpose or those purposes may be conducted at the special meeting. The word “within” was chosen, rather than a broader phrase like “reasonably related to,” to describe the relationship between the notice and the authorized business to assure a shareholder who does not attend a special meeting that new or unexpected matters will not be considered in his absence.

North Carolina Commentary

The provision following the semicolon in subdivision (a)(2) was added to the Model Act’s provisions to bring forward former G.S. 55-61(c), modified to change the threshold test from companies listed on a national securities exchange or held of record by more than 2000 shareholders to all public corporations (as defined in G.S. 55-1-40(18a)). This modification was designed to provide a clearer, “bright line” test, which has been employed throughout this Act.

Editor’s Note.

Session Laws 2021-162, s. 6, provides, in part: “This act is effective when it becomes law [September 20, 2021]. Sections 1, 2, and 3 of this act apply to meetings noticed on or after that date. Remote shareholder, policyholder, and member meetings noticed before the effective date of this act as a result of the state of emergency declared by Executive Order No. 116 on March 10, 2020, and complying with any subsequent executive orders authorizing remote shareholder, policy holder, or member meetings shall be deemed in compliance with this act. ....”

Session Laws 2021-162, s. 5, is severability clause.

Effect of Amendments.

Session Laws 2021-162, s. 1(b), substituted “shareholders if either of the following applies” for “shareholders” in subsection (a) in the introductory language; substituted “bylaws” for “bylaws; or” in subdivision (a)(1); rewrote subsection (c); and made a minor punctuation change. For effective date and applicability, see editor’s note.

Legal Periodicals.

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

§ 55-7-03. Court-ordered meeting.

  1. The superior court of the county where a corporation’s principal office (or, if none in this State, its registered office) is located may, after notice is given to the corporation, summarily order a meeting to be held:
    1. On application of any shareholder if an annual meeting of the shareholders was not held within 15 months after the corporation’s last annual meeting; or
    2. On application of a shareholder who signed a demand for a special meeting valid under G.S. 55-7-02, if the corporation does not proceed to hold the meeting as required by that section.
  2. The court may fix the time and place of the meeting, determine the shares entitled to participate in the meeting, specify a record date for determining shareholders entitled to notice of and to vote at the meeting, prescribe the form and content of the meeting notice, fix the quorum required for specific matters to be considered at the meeting (or direct that the votes represented at the meeting constitute a quorum for action on those matters), enter other orders necessary to accomplish the purpose or purposes of the meeting, and award such reasonable expenses, including attorneys’ fees, as it deems appropriate.

History. 1901, c. 2, ss. 46, 49, 51; Rev., ss. 1179, 1188, 1190; C.S., ss. 1168, 1169, 1176; G.S., ss. 55-105, 55-106, 55-113; 1955, c. 1371, s. 1; 1959, c. 1316, ss. 21, 22; 1985 (Reg. Sess., 1986), c. 801, s. 44; 1989, c. 265, s. 1; 1991, c. 645, s. 17(b).

Official Comment

Section 7.03 provides the remedy for shareholders if the corporation refuses or fails to hold a shareholders’ meeting as required by section 7.01 or 7.02. A shareholder entitled to participate in a meeting may apply for a summary court order to command the holding of a meeting if (1) an annual meeting is not held within 6 months after the end of the corporation’s fiscal year or 15 months after its last annual meeting, or (2) a special meeting is not properly noticed within 30 days after a valid demand is delivered to the secretary of the corporation or, if properly noticed, is not held in accordance with the notice. Since a meeting must be held within 60 days of the notice date under section 7.05, the maximum delay between the demand for a special meeting and the right to petition a court for a summary order is 90 days.

  1. The court with jurisdiction to administer section 7.03
  2. The discretion of the court
  3. Burden of proof
  4. Notice, time, place, and quorum requirements
  5. Status as annual meeting

The identity of the specific court with jurisdiction to order a shareholder’s meeting under section 7.03(a) must be supplied by each state when enacting this section. It is intended that this should be a court of general civil jurisdiction. Generally, all matters relating to a corporation should be addressed to the court in the county where the corporation’s principal office is located in the state or, if the corporation does not have a principal office in the state, to the court in the county in which its registered office is located.

The court has discretion under section 7.03 since the language of the statute is that the court “may summarily order” that a meeting be held. A court, for example, may refuse to order a special meeting if the specified purpose is repetitive of the purpose of a special meeting held in the recent past. See the Official Comment to section 7.02. Alternatively, the court may view the demand as a good faith request for reconsideration of an action taken in the recent past and may order a meeting to be held. Similarly, even though a demand for an annual meeting is not a formal prerequisite for an application for a summary order under this section, the court may withhold setting a time and date for the annual meeting for a reasonably short period in order to permit the corporation to do so.

In any event, a shareholder applying for a summary order to hold a meeting has the burden of showing that he is entitled to the order. In the case of a special meeting, he has the burden of showing that the demand was executed by the holders of at least 10 percent of the votes entitled to be cast on the record date and that the demand was duly delivered to the corporation’s secretary.

If the court orders that a meeting be held, it may fix the time and place of the meeting, determine the voting groups entitled to participate in the meeting, set the record date, order notice to be given as required by section 7.05, and enter such other orders as may be appropriate for the holding of the meeting. The court may also establish the quorum requirements for specific matters to be considered at the meeting or direct that the votes represented at the meeting automatically constitute a quorum for the taking of any action without regard to section 7.25 or any provision to the contrary in the corporation’s articles of incorporation or bylaws. The latter alternative prevents a holder of the majority of the votes (who may not desire that a meeting be held) from frustrating the court-ordered meeting by not attending to prevent the existence of a quorum. In order to prevent misunderstanding about a special quorum requirement, if one is imposed, it is appropriate for the court to order that the notice of the meeting state specifically and conspicuously that a special quorum requirement is applicable to the court-ordered meeting.

The court may provide that a meeting it has ordered is to be the annual meeting. If so provided, the meeting should be viewed as compliance with section 7.01, precluding all other shareholder requests for an annual meeting for that year.

North Carolina Commentary

The language of the Model Act in the introductory clause of subsection (a) was modified to clarify that notice must be given to a corporation before a shareholders’ meeting can be summarily ordered.

The Model Act was modified in subdivision (a)(1) to allow any shareholder, not just those entitled to participate in the meeting, to apply for a court-ordered annual meeting of shareholders if the meeting is not held within 15 months after the corporation’s last annual meeting. The change reflects the principle that all shareholders have an interest in the corporation’s holding shareholders’ meetings. In addition, the Model Act permits a shareholder to petition for a court-ordered meeting if no annual meeting is held within the earlier of six months after the close of the corporation’s fiscal year or 15 months after the last annual meeting. The drafters concluded that the six months’ limitation was undesirably restrictive and effectively mandated meetings during a particular part of the year. This provision was therefore omitted.

The Model Act was modified in subdivision (a)(2) to clarify that a demand must actually be received by the corporation’s secretary.

The Model Act was modified in subsection (b) to allow reasonable expenses, including attorneys’ fees, to be awarded to an applying shareholder in the discretion of the court.

§ 55-7-04. Action without meeting.

  1. Action required or permitted by this Chapter to be taken at a shareholders’ meeting may be taken without a meeting and without prior notice except as required by subsection (d) of this section, if the action is taken by all the shareholders entitled to vote on the action or, subject to subsection (a1) of this section, if so provided in the articles of incorporation of a corporation that is not a public corporation at the time the action is taken, by shareholders having not less than the minimum number of votes that would be necessary to take the action at a meeting at which all shareholders entitled to vote were present and voted. The action must be evidenced by one or more unrevoked written consents bearing the date of signature and signed by shareholders sufficient to take the action without a meeting, before or after such action, describing the action taken and delivered to the corporation for inclusion in the minutes or filing with the corporate records. To the extent the corporation has agreed pursuant to G.S. 55-1-50, a shareholder’s consent to action taken without meeting or revocation thereof may be in electronic form and delivered by electronic means.
  2. Notwithstanding subsection (a) of this section, the following actions may be taken without a meeting only by all the shareholders entitled to vote on the action:
    1. If cumulative voting is not authorized, the election of directors at the annual meeting; or
    2. If cumulative voting is authorized, the election of directors and the removal of a director unless the entire board of directors is to be removed, and if G.S. 55-7-28(e) applies to the corporation, an amendment to the articles of incorporation to deny or limit the right of shareholders to vote cumulatively and an amendment to the articles of incorporation or bylaws to decrease the number of directors.
  3. A shareholder’s written consent to action to be taken without a meeting shall cease to be effective on the sixty-first day after the date of signature appearing on the consent unless prior to the sixty-first day the corporation has received unrevoked written consents sufficient under subsection (a) of this section to take the action without meeting. If not otherwise fixed under G.S. 55-7-03 or G.S. 55-7-07, the record date for determining shareholders entitled to take action without a meeting is the earliest date of signature appearing on any consent that is to be counted in satisfying the requirements of subsection (a) of this section. A shareholder may only revoke a written consent if such shareholder delivers to the corporation a written revocation prior to the corporation’s receipt of unrevoked written consents sufficient under subsection (a) of this section to take the action.
  4. A consent signed under this section has the effect of a meeting vote and may be described as such in any document.
  5. Unless the articles of incorporation otherwise provide, if shareholder approval is required by this Chapter for (i) an amendment to the articles of incorporation pursuant to Article 10 of this Chapter, (ii) a plan of merger or share exchange pursuant to Article 11 of this Chapter, (iii) a plan of conversion pursuant to Part 2 of Article 11A of this Chapter, (iv) the sale, lease, exchange, or other disposition of all, or substantially all, of the corporation’s property pursuant to Article 12 of this Chapter, or (v) a proposal for dissolution pursuant to Article 14 of this Chapter, and the approval is to be obtained through action without meeting, the corporation must give its shareholders, other than shareholders who consent to the action, written notice of the proposed action at least 10 days before the action is taken. The notice shall contain or be accompanied by the same material that, under this Chapter, would have been required to be sent to shareholders not entitled to vote on the action in a notice of meeting at which the proposed action would have been submitted to shareholders for action.
  6. If action is taken without a meeting by fewer than all shareholders entitled to vote on the action, the corporation shall give written notice to all shareholders who have not consented to the action and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting with the same record date as the action taken without a meeting, within 10 days after the action is taken. The notice shall describe the action and indicate that the action has been taken without a meeting of shareholders. Failure to comply with the requirements of this subsection shall not invalidate any action taken that otherwise complies with this section.

History. 1955, c. 1371, s. 1; 1969, c. 751, s. 33; 1989, c. 265, s. 1; 2001-387, s. 11; 2001-487, ss. 62(b), 62(c); 2005-268, ss. 2, 3.

Official Comment

Section 7.04 provides that all the shareholders entitled to vote on an issue may validly act by unanimous written consent without a meeting. Unanimous written consent is obtainable, as a practical matter, only on matters on which there are only a relatively few shareholders entitled to vote.

Section 7.04 is based on the fundamental premise that if all the voting shareholders desire some action to be taken, no purpose is served by requiring the formality of holding a meeting of shareholders. Action by unanimous written consent has the same effect as a meeting vote and may be described as such in any document, including documents delivered to the secretary of state for filing. Section 7.04 is applicable to any shareholder action, including, without limitation, election of directors, approval of mergers or sales of substantially all the corporate property not in the ordinary course of business, amendments of articles of incorporation, and dissolution.

  1. Form of written consent
  2. Revocation of consent
  3. Consent to fundamental corporate changes

To be effective, consents must be in writing, signed by all the shareholders entitled to vote, and delivered to the secretary of the corporation. The phrase “one or more written consents” is included in section 7.04(a) to make it clear that all shareholders do not need to sign the same piece of paper. The record date for determining who is entitled to vote, if not otherwise fixed by or in accordance with the bylaws, is the date the first shareholder signs the consent.

Action by unanimous written consent is effective only when the last shareholder has signed the appropriate written consent and all consents have been delivered to the secretary of the corporation. Before that time, any shareholder may withdraw his consent simply by advising the secretary of that fact. Cf. Calumet Industries, Inc. v. McClure, 464 F. Supp. 19 (N.D. Ill. 1978). The withdrawal of a single consent, of course, destroys the unanimous written consent required by this section. If a shareholder seeks to withdraw his consent after all shareholders have signed written consents and filed them with the secretary of the corporation, the corporation may treat the attempted withdrawal as too late or give it effect, thereby requiring the matter to be presented at a shareholders’ meeting.

Section 7.04 is applicable to all shareholder actions, including the approval of fundamental corporate changes described in chapters 10, 11, 12, and 14. If these actions were taken at an annual or special meeting, shareholders who were not entitled to vote on the matter would nevertheless be entitled to receive notice of the meeting, including a description of the transaction proposed to be considered at the meeting. See, e.g., sections 10.03 (notice of proposed amendment), 11.03 (notice of proposed merger). In order to ensure that nonvoting shareholders have essentially the same right if action is taken by consent rather than at a meeting, section 7.04(d) provides that all nonvoting shareholders must be given at least 10 days’ written notice of the fundamental corporate changes that are proposed for approval by consent.

North Carolina Commentary

The Model Act was modified in subsection (a) to incorporate the provisions of former G.S. 55-63, which provided that unanimous written consent to action without a meeting can be given either before or after the date of the action.

SUPPLEMENTAL NORTH CAROLINA COMMENTARY (2001)

Effective January 1, 2002, this section was amended to permit less than unanimous shareholder action without meeting for corporations other than public corporations. Subsection (b) was amended to add a requirement that written consents to an action must be obtained from shareholders within a period of 60 days. Subsection (d) was amended to require advance notice of proposed shareholder action on certain fundamental corporate changes to all shareholders (other than shareholders who consent to the action) rather than only to holders of nonvoting shares. Advance notice is not required if the articles of incorporation so provided. Subsection (e) was added to provide that if action is taken by less than unanimous written consent, notice of the action must be given within 10 days after the action is taken to all shareholders who have not consented to the action and who would have been entitled to notice of the proposed action if the action had been taken at a meeting.

Editor’s Note.

Session Laws 2001-387, s. 154(a) authorizes the Revisor of Statutes to cause to be printed all explanatory comments of the drafters of the act as the Revisor deems appropriate.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Effective October 1, 2005, this section is amended to add a provision recognizing that a shareholder may revoke in writing the shareholder’s written consent to action before the corporation has received consents sufficient to take the action. The Official Comment indicates that this was the case even before this amendment. However, the Official Comment also indicates that a corporation may elect to give effect to a revocation received after the corporation has received consents sufficient to take the action. In keeping with changes in the Model Business Corporation Act made since the Official Comment was written, this section as amended provides that the revocation must be received by the corporation before the corporation has received consents sufficient to take the action.

Effect of Amendments.

Session Laws 2005-268, ss. 2 and 3, effective October 1, 2005, in subsection (a), deleted “the number” following “signature and signed by” and inserted “unrevoked” preceding “written consents” in the second sentence, and inserted “or revocation thereof” following “taken without meeting” in the last sentence; and in subsection (b), inserted “unrevoked” following “corporation has received” in the first sentence, added the last sentence and made a minor stylistic change.

Legal Periodicals.

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

§ 55-7-05. Notice of meeting.

  1. A corporation shall notify shareholders of the date, time, and place, if any, of each annual and special shareholders’ meeting no fewer than 10 nor more than 60 days before the meeting date. If the board of directors has authorized participation by means of remote communication pursuant to G.S. 55-7-09 for any class or series of shareholders, the notice to such class or series of shareholders shall describe the means of remote communication to be used. Unless this Chapter or the articles of incorporation require otherwise, the corporation is required to give notice only to shareholders entitled to vote at the meeting.
  2. Unless this Chapter or the articles of incorporation require otherwise, notice of an annual meeting need not include a description of the purpose or purposes for which the meeting is called.
  3. Notice of a special meeting must include a description of the purpose or purposes for which the meeting is called.
  4. If not otherwise fixed under G.S. 55-7-03 or G.S. 55-7-07, the record date for determining shareholders entitled to notice of and to vote at an annual or special shareholders’ meeting is the close of business on the day before the first notice is delivered to shareholders.
  5. Unless the bylaws require otherwise, if an annual or special shareholders’ meeting is adjourned to a different date, time, or place, if any, notice need not be given of the new date, time, or place, if any, if the following are announced at the meeting before adjournment:
    1. The new date, time, or place, if any.
    2. If the meeting is to be continued solely by means of remote communication, a description of the means of remote communication.If a new record date for the adjourned meeting is or must be fixed under G.S. 55-7-07, however, notice of the adjourned meeting must be given under this section to persons who are shareholders as of the new record date.
  6. After a public corporation has notified shareholders of the date, time, and place of an annual or special shareholders’ meeting in accordance with subsection (a) of this section, further notification in accordance with subsection (a) of this section is not required if all of the following apply:
    1. A governmental order restricting travel or group gatherings applicable to the place of the shareholders’ meeting or public corporation’s principal office is in effect and is anticipated in good faith by the board of directors to be in effect at the date and time set forth in the initial notification, including by an anticipated extension of an existing order.
    2. The public corporation’s board of directors determines that the shareholders’ meeting is instead to be held solely by means of remote communication in accordance with G.S. 55-7-09(c) at the same date and time set forth in the initial notification or at a different date and time.
    3. The public corporation (i) promptly issues a press release for national dissemination announcing the determination of its board of directors that the shareholders’ meeting is to be held solely by means of remote communication and describing the means of remote communication to be used and providing the date and time of the shareholders’ meeting to be held solely by means of remote communication and (ii) files the press release with the Securities and Exchange Commission as close to the time the press release is issued as practicable and approximately contemporaneously posts such press release to its corporate website.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2013-153, s. 3; 2021-162, s. 1(c).

Official Comment

Shareholders entitled to notice must be given notice of annual and special meetings pursuant to section 7.05 unless the notice is waived pursuant to section 7.06. Notice must be given at least 10 but not more than 60 days before the meeting date.

  1. Shareholders entitled to notice
  2. Statement of matters to be considered at an annual meeting
  3. Record date
  4. Notice of adjourned meetings

Generally, only shareholders who are entitled to vote at a meeting are entitled to notice. Thus, notice usually needs to be sent only to holders of shares entitled to vote for an election of directors or generally on other matters (in the case of an annual meeting), and on matters within the specified purposes set forth in the notice (in the case of a special meeting), and only to holders of shares of those classes or series of shares on the record date. The last sentence of section 7.05(a), however, recognizes that other sections of the Act require that notice of meetings at which certain types of fundamental corporate changes are to be considered must be sent to all shareholders, including holders of shares who are not entitled to vote on any matter at the meeting. See sections 10.03, 11.03, 12.02, and 14.02. In addition, the articles of incorporation may require that notice of meetings be given to all or specified voting groups of shareholders who are not entitled to vote on the matters considered at those meetings.

Notice of all special meetings must include a description of the purpose or purposes for which the meeting is called and the matters acted upon at the meeting are limited to those within the notice of meeting. By contrast, the notice of an annual meeting usually need not refer to any specific purpose or purposes, and any matter appropriate for shareholder action may be considered. As recognized in subsection (b), however, other provisions of the revised Model Act provide that certain types of fundamental corporate changes may be considered at an annual meeting only if specific reference to the proposed action appears in the notice of meeting. See sections 10.03, 11.03, 12.02, and 14.02. In addition, if the board of directors chooses, a notice of an annual meeting may contain references to purposes or proposals not required by statute. In either event, if a notice of an annual meeting refers specifically to one or more purposes, the meeting is not limited to those purposes.

Section 7.05(d) is a catch-all record date provision for both annual and special meetings. If the record date for notice and for voting entitlement is not otherwise fixed pursuant to sections 7.03 or 7.07, the record date for purposes of determining who is entitled to notice and to vote at the meeting is the close of business on the day before the notice is mailed to the voting groups of shareholders. If notice is mailed to shareholders over a period of more than one day, the day before the notice is delivered to the first shareholders is the record date.

The selection of the close of business on the day before the notice is mailed as the catch-all record date is intended to permit the corporation to mail notices to shareholders on a given day without regard to any requests for transfer that may have been received during that day. For this reason, this section is not inconsistent with the general principle set forth in the last sentence of section 7.07(a) that the board of directors may not fix a retroactive record date.

Section 7.05(e) provides rules for adjourned meetings and determines whether new notice must be given to shareholders. Under this subsection a meeting may be adjourned to a different date, time, or place without additional notice to the shareholders (unless the bylaws require otherwise) if the new date, time, or place is announced before adjournment. But new notice is required if a new record date is or must be fixed under section 7.07(c). If a new record date is or must be fixed, the 10-to-60-day notice requirement and all other requirements of section 7.05 must be complied with as notice is given to the persons who are shareholders as of the new record date. A new quorum for the adjourned meeting must also be established. See section 7.25.

Section 7.25 provides that if a quorum exists for a meeting, it is deemed to continue to exist automatically for an adjourned meeting unless a new record date is or must be set for the adjourned meeting.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Session Laws 2021-162, s. 6, provides, in part: “This act is effective when it becomes law [September 20, 2021]. Sections 1, 2, and 3 of this act apply to meetings noticed on or after that date. Remote shareholder, policyholder, and member meetings noticed before the effective date of this act as a result of the state of emergency declared by Executive Order No. 116 on March 10, 2020, and complying with any subsequent executive orders authorizing remote shareholder, policy holder, or member meetings shall be deemed in compliance with this act. ....”

Session Laws 2021-162, s. 5, is severability clause.

Effect of Amendments.

Session Laws 2013-153, s. 3, effective January 1, 2014, added the second sentence in subsection (a).

Session Laws 2021-162, s. 1(c), substituted “place, if any” for “place” in subsection (a); rewrote subsection (e); added subsection (f); and made a minor punctuation change. For effective date and applicability, see editor’s note.

§ 55-7-06. Waiver of notice.

  1. A shareholder may waive any notice required by this Chapter, the articles of incorporation, or bylaws before or after the date and time stated in the notice. The waiver must be in writing, be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion in the minutes or filing with the corporate records.
  2. A shareholder’s attendance at a meeting:
    1. Waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting;
    2. Waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter before it is voted upon.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Section 7.06(a) permits any shareholder to waive any notice required by section 7.05 by a written waiver, signed by the shareholder and delivered to the corporation. A waiver is effective even though it is signed at or after the time set for the meeting.

  1. Informal waiver of notice
  2. Waiver of notice where fundamental corporate actions are considered

A notice of shareholder meetings serves two principal purposes: (1) it advises shareholders of the date, time, and place of the annual or special meeting, and (2) in the case of a special meeting (or an annual meeting at which fundamental changes may be made), it advises shareholders of the purposes of the meeting. If a shareholder attends a meeting, he has probably received some form of notice of the date, time, and place of the meeting whether from the corporation or from another source. As a result, section 7.06(b)(1) provides that attendance at a meeting constitutes waiver of any failure to receive the notice or defects in the statement of the date, time, and place of any meeting. Defects waived by attendance for this purpose include a failure to send the notice altogether, delivery to the wrong address, a misstatement of the date, time, or place of the meeting, and a failure to notice the meeting within the time periods specified in section 7.05(a). If a shareholder believes that the defect in or failure of notice was in some way prejudicial, he may preserve his objection by stating at the beginning of the meeting that he objects to holding the meeting or transacting any business. If this objection is made, the corporation may correct the defect by sending proper notice to the shareholders for a subsequent meeting or by obtaining written waivers of notice from all shareholders who did not receive the notice required by section 7.05.

For purposes of this section, “attendance” at a meeting involves the presence of the shareholder in person or by proxy. A shareholder who attends a meeting solely for the purpose of objecting to the notice may be counted as present for purposes of determining whether a quorum is present. See the Official Comment to section 7.25.

In the case of special meetings, or annual meetings at which fundamental corporate changes are considered, a second purpose of the notice is to tell shareholders what is to be considered at the meeting. An objection that a particular matter is not within the stated purposes of the meeting obviously cannot be raised until the matter is presented. Thus section 7.06(b)(2) provides that a shareholder waives this kind of objection if he fails to object promptly after the matter is first presented. If this objection is made, the corporation may correct the defect by sending proper notice to the shareholders for a subsequent meeting or obtaining written waivers of notice from all shareholders. Of course, whether or not a specific matter is within a stated purpose of a meeting is ultimately a matter for judicial determination, typically in a suit to invalidate action taken at the meeting brought by a shareholder who was not present at the meeting or who was present at the meeting and preserved his objection under section 7.06(b).

The purpose of both waiver rules in section 7.06(b) is to require shareholders with technical objections to holding the meeting or considering a specific matter to raise them at the outset and not reserve them to be raised only if they are unhappy with the outcome of the meeting. The rules set forth in this section differ in some respects from the waiver rules for directors set forth in section 8.23 where a waiver is inferred if the director acquiesces in the action taken at a meeting even if he raised a technical objection to the notice of a meeting at the outset.

Other sections of the Model Act require that shareholders who are not entitled to vote are entitled to notice of meetings at which certain fundamental corporate changes are to be considered. See sections 10.03, 11.03, 12.02, and 14.02. In order to obtain an effective waiver of notice for these meetings under this section, waivers must be obtained from the nonvoting shareholders who are entitled to notice as well as from the voting shareholders.

North Carolina Commentary

At the end of subdivision (b)(2), the more specific words “before it is voted upon” were substituted for the Model Act’s language “when it is presented.”

§ 55-7-07. Record date.

  1. The bylaws may fix or provide the manner of fixing the record date for one or more voting groups in order to determine the shareholders entitled to notice of a shareholders’ meeting, to demand a special meeting, to vote, or to take any other action. If the bylaws do not fix or provide for fixing a record date, the board of directors of the corporation may fix a future date as the record date.
  2. A record date fixed under this section may not be more than 70 days before the meeting or action requiring a determination of shareholders.
  3. A determination of shareholders entitled to notice of or to vote at a shareholders’ meeting is effective for any adjournment of the meeting unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.
  4. If a court orders a meeting adjourned to a date more than 120 days after the date fixed for the original meeting, it may provide that the original record date continues in effect or it may fix a new record date.

History. 1955, c. 1371, s. 1; 1973, c. 469, s. 45.1; 1989, c. 265, s. 1.

Official Comment

Section 7.07 authorizes the board of directors to fix record dates for any action unless the bylaws themselves fix or provide for the fixing of a record date. A separate record date may be established for each voting group entitled to vote separately on a matter at a meeting, or a single record date may be established for all voting groups entitled to participate in the meeting. If neither the bylaws nor the board of directors fix a record date for a specific action, the section of this Act that deals with that action itself fixes the record date. For example, section 7.05(d), relating to giving notice of a meeting, provides that the record date for determining who is entitled to notice of a meeting (if not fixed by the directors or the bylaws) is the close of business on the day before the date the corporation first gives notice to shareholders of the meeting.

A record date may not be fixed more than 70 days before the meeting or action in question and may not be fixed retroactively. Once set, the same record date may be utilized for an adjournment of the meeting that reconvenes within 120 days after the date fixed for the original meeting or the board of directors may fix a new record date. If the adjourned meeting takes place more than 120 days after the date fixed for the original meeting, section 7.07(c) requires that a new record date be fixed. But if an adjournment is ordered by a court, section 7.07(d) allows the court to provide that the original record date continues to be applicable or to fix a different date. In any event, if a different record date is or must be fixed under this section, section 7.05 requires that new notice be given to the persons who are shareholders as of the new record date, and section 7.25 requires that a quorum be reestablished for that meeting.

§ 55-7-08. [Repealed]

Repealed by Session Laws 2013-153, s. 4, effective January 1, 2014.

History. 2001-387, s. 12; repealed by 2013-513, s. 4, effective January 1, 2014.

Editor’s Note.

Former G.S. 55-7-08 pertained to electronic or other means of remote attendance at meeting of shareholders. For present provisions pertaining to remote participation in shareholder meetings, see G.S. 55-7-09.

§ 55-7-09. Remote participation in meetings; meetings held solely by remote participation.

  1. To the extent authorized by a corporation’s board of directors, shareholders of any class or series designated by the board of directors may participate in any meeting of shareholders by means of remote communication. Participation by means of remote communication shall be subject to such guidelines and procedures as the board of directors adopts and shall be in conformity with subsection (b) of this section.
  2. Shareholders participating in a shareholders’ meeting by means of remote communication are deemed present and may vote at the meeting if the corporation has implemented reasonable measures to do all of the following:
    1. Verify that each person participating remotely is a shareholder.
    2. Provide each shareholder participating remotely a reasonable opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including an opportunity to communicate and read or hear the proceedings of the meeting, substantially concurrently with such proceedings.
  3. Unless shareholders’ meetings held solely by means of remote communication are prohibited by the articles of incorporation or the bylaws, the board of directors may, in its sole discretion, determine that any meeting of shareholders shall not be held at any place and shall instead be held solely by means of remote communication, but only if the corporation implements the measures specified in subsection (b) of this section.

History. 2013-153, s. 5; 2021-162, s. 1(d).

OFFICIAL COMMENTS (2013)

Section 7.09 permits shareholders to participate in annual and special shareholder meetings by means of remote communication, such as over the Internet or through telephone conference calls, subject to the conditions set forth in section 7.09(b) and any other guidelines and procedures that the board of directors adopts. This would include the use of electronic ballots to the extent authorized by the board of directors. This authorization extends as well to anyone to whom such shareholder has granted a proxy. Section 7.09 does not eliminate the requirement that corporations hold meetings at a physical location. See sections 7.01 and 7.02. Section 7.09 expressly provides that participation by remote means is permitted only if it is authorized by the board of directors. This limitation is meant to ensure that the board of directors has the sole discretion to determine whether to allow shareholders to participate by means of remote communication. Thus, a corporation may not be compelled to allow such participation either through amendments to the bylaws, shareholder resolutions, or otherwise.

Section 7.09 allows the board of director s to limit participation by means of remote communication to all share holders of a particular class or series, but does not permit the board of directors to limit such participation to particular shareholders within a class or series.

Section 7.09 requires the board of directors to implement certain procedures when allowing shareholder participation by means of remote communication. First, the board of directors must create reasonable measures for verifying those entitled to vote. Second, the board of directors must institute reasonable measures to ensure that all shareholders and their proxies within the authorized class or series have the opportunity to participate in the meeting, including measures that provide them with an opportunity to communicate with management and other shareholders present at the meeting, and to read or hear the proceedings. While this provision is aimed at approximating as much as possible shareholder participation in person or by proxy, including interacting with management during the meeting, it does not require that all can so participate and interact. In addition, Section 7.09 is not intended to expand the rights to participate in meetings or otherwise alter the ability of the board of directors or the chair to conduct meetings pursuant to section 7.08 in a manner that is fair and orderly. For example, many corporations limit or cut-off shareholder comments and, if such practice is fair to shareholders consistent with section 7.08, such practice is not changed by section 7.09. The two requirements under section 7.09(b) reflect the minimum deemed necessary to safeguard the integrity of the shareholders’ meeting. Section 7.09 specifically gives the board of directors the flexibility and discretion to adopt additional guidelines and procedures for allowing shareholders to participate in a meeting by means of remote communication.

In order to give corporations the flexibility to choose the most efficient means of remote communication, the board may require that shareholders communicate their desire to participate by a certain date and condition the provision of remote communication or the form of communication to be used on the affirmative response of a certain number or proportion of shareholders eligible to participate. If the board of directors authorizes shareholder participation by means of remote communication pursuant to this section, such authorization and the process for participating by remote means of communication, must be included in the meeting notice required by section 7.05.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Session Laws 2021-162, s. 6, provides, in part: “This act is effective when it becomes law [September 20, 2021]. Sections 1, 2, and 3 of this act apply to meetings noticed on or after that date. Remote shareholder, policyholder, and member meetings noticed before the effective date of this act as a result of the state of emergency declared by Executive Order No. 116 on March 10, 2020, and complying with any subsequent executive orders authorizing remote shareholder, policy holder, or member meetings shall be deemed in compliance with this act. ....”

Session Laws 2021-162, s. 5, is severability clause.

Effect of Amendments.

Session Laws 2021-162, s. 1(d), added “meeting held solely by remote participation” in the section heading; in subsection (b), substituted “are” for “shall be” and “the meeting” for “such a meeting”; and added subsection (c). For effective date and applicability, see editor’s note.

§§ 55-7-10 through 55-7-19.

Reserved for future codification purposes.

Part 2. Voting.

§ 55-7-20. Shareholders’ list for meeting.

  1. After fixing a record date for a meeting, a corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of a shareholders’ meeting. The list shall be arranged by voting group, by class or series of shares within each voting group, and shall show the address of and number of shares held by each shareholder.
  2. The shareholders’ list shall be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, (i) at the corporation’s principal office or at a place identified in the meeting notice in the city where the meeting will be held or (ii) on a reasonably accessible electronic network, provided that the information required to gain access to the list is provided with the notice of the meeting. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that the information is available only to shareholders of the corporation. A shareholder, personally or by or with the shareholder’s representative, is entitled on written demand to inspect and, subject to the requirements of G.S. 55-16-02(c), to copy the list, during regular business hours and at the shareholder’s expense, during the period it is available for inspection.
  3. If the meeting is to be held at a place, the corporation shall make the shareholders’ list available at the meeting, and any shareholder, personally or by or with the shareholder’s representative, is entitled to inspect the list at any time during the meeting or any adjournment. If the meeting is to be held at a place, the corporation is not required to make the list available through electronic or other means of remote communication to a shareholder or proxy attending the meeting by remote communication pursuant to G.S. 55-7-09. If the meeting is to be held solely by means of remote communication, then the list shall also be open to inspection during the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting.
  4. If the corporation refuses to allow a shareholder or the shareholder’s representative to inspect the shareholders’ list before or at the meeting, or copy the list as permitted by subsection (b) [of this section], the superior court of the county where a corporation’s principal office is located, or, if the corporation has no principal office in this State, the superior court of the county where the corporation’s registered office is located, on application of the shareholder, after notice is given to the corporation, may summarily order the inspection or copying at the corporation’s expense and may postpone the meeting for which the list was prepared until the inspection or copying is complete.
  5. Refusal or failure to prepare or make available the shareholders’ list does not affect the validity of action taken at the meeting.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1993, c. 552, s. 9; 2001-387, s. 13; 2013-153, s. 6; 2021-162, s. 1(e).

Official Comment

Section 7.20 requires the preparation of a list of shareholders entitled to notice of a meeting and requires that this list be made available on request to shareholders within two business days after the meeting notice is given.

The list of shareholders is often referred to as the “voting list” and usually the list will include only the names of those shareholders entitled to vote at the meeting. The list, however, must also include the names and shareholdings of shareholders of nonvoting shares if they are entitled to notice of the meeting by reason of the nature of the actions proposed to be taken at the meeting. See section 7.05 and its Official Comment.

Making the list of shareholders available before the meeting marks a change from the 1969 version of the Model Act. Through this device, a shareholder may learn the identity of the owners of substantial blocks of shares or the owners of shares similarly situated and communicate with them to see if his concerns are shared and should be pursued.

  1. When the list must be available
  2. Where the list must be maintained
  3. The form in which the list is maintained
  4. Consequences of failing to prepare the list or refusal to make it available
  5. The right to obtain a copy of the list
  6. Relationship to right to inspect corporate records generally

The list must generally be available for inspection two business days after notice of the meeting is given and continuously thereafter until the meeting occurs. If, however, notice of the meeting is waived by all the shareholders, the list need be available only at the meeting itself under section 7.20(c) unless one or more waivers are conditioned upon receipt of the list.

Section 7.20(b) permits the list to be maintained either at the corporation’s principal office or at another location in the city in which the meeting is to be held, the precise location to be designated in the notice of meeting. If the corporation changes the location of its annual meeting, it thus may correspondingly change the location of the list of shareholders pursuant to this subsection.

Section 7.20(c) also requires a copy of the shareholders’ list to be available at the meeting itself for inspection. This list may be used to determine attendance, the presence or absence of a quorum, and the right to vote.

Section 7.20 does not require the list of shareholders to be in any particular form. It may be maintained, for example, in electronic form. If the list is maintained in other than written form, however, suitable equipment must be provided so that a comprehensible list may be inspected by a shareholder as permitted by this section.

Section 7.20 creates a corporate obligation rather than an obligation imposed upon a corporate officer. If the corporation fails to prepare the list or refuses to permit a shareholder to inspect it, either before the meeting as required by section 7.20(b) or at the meeting itself as required by section 7.20(c), a shareholder may apply to the appropriate court under section 7.20(d) for a summary order permitting inspection of the list; the court may further order the meeting to be postponed for a reasonable time. If the court orders a copy of the list to be provided to the shareholders, the copying is at the corporation’s expense; if the corporation produces the list voluntarily pursuant to section 7.20(b) or (c), any inspection and copying are at the shareholder’s expense.

This judicial remedy is the only sanction for violation of section 7.20 since section 7.20(e) provides that the failure to prepare, maintain, or produce the list does not affect the validity of any action taken at the meeting.

Section 7.20(b) permits shareholders to “inspect” the list without limitation, but permits the shareholder to “copy” the list only if the shareholder complies with the requirement of section 16.02(c), that the demand be “made in good faith and for a proper purpose.” The right to copy the list includes, if reasonable, the right to receive a copy of the list upon payment of a reasonable charge. See sections 16.03(b) and (c). The distinction between “inspection” and “copying” set forth in section 7.20(b) reflects an accommodation between competing considerations of permitting shareholders access to the list before a meeting and possible misuse of the list.

Section 7.20 creates a right of shareholders to inspect a list of shareholders in advance of and at a meeting that is independent of the rights of shareholders to inspect corporate records under chapter 16A. A shareholder may obtain the right to inspect the list of shareholders as provided in chapter 16A without regard to the provisions relating to the pendency of a meeting in section 7.20, and similarly the limitations of chapter 16A are not applicable to the right of inspection created by section 7.20 except to the extent the shareholder seeks to copy the list in advance of the meeting.

The right to inspect under chapter 16A is also broader in the sense that in some circumstances the shareholder may be entitled to receive copies of the documents he may inspect. See section 16.03.

North Carolina Commentary

An “or” was inserted in the second sentence of subsection (b) following the word “shareholders” in order to clarify that the disjunctive is either the shareholder or his agent or attorney. Subsection (d) was modified from the Model Act to make it clear that notice must be given to the corporation before a court enters a summary order.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Section 55-7-08, referred to in subsection (c), was repealed by Session Laws 2013-153, s. 4, effective January 1, 2014. For present provisions pertaining to remote participation in shareholder meetings, see G.S. 55-7-09.

Session Laws 2021-162, s. 6, provides, in part: “This act is effective when it becomes law [September 20, 2021]. Sections 1, 2, and 3 of this act apply to meetings noticed on or after that date. Remote shareholder, policyholder, and member meetings noticed before the effective date of this act as a result of the state of emergency declared by Executive Order No. 116 on March 10, 2020, and complying with any subsequent executive orders authorizing remote shareholder, policy holder, or member meetings shall be deemed in compliance with this act. ....”

Session Laws 2021-162, s. 5, is severability clause.

Effect of Amendments.

Session Laws 2013-153, s. 6, effective January 1, 2014, substituted “G.S. 55-7-09” for “G.S. 55-7-08” at the end of subsection (c).

Session Laws 2021-162, s. 1(e), rewrote the section. For effective date and applicability, see editor’s note.

CASE NOTES

Editor’s Note. —

The case below was decided under the Business Corporation Act adopted in 1955.

As to applicability of former section relating to shareholders’ voting list to building and loan associations, see White v. Smith, 256 N.C. 218, 123 S.E.2d 628, 1962 N.C. LEXIS 435 (1962).

§ 55-7-21. Voting entitlement of shares.

  1. Except as provided in subsections (b) and (c) of this section or unless the articles of incorporation provide otherwise, each outstanding share, regardless of class, is entitled to one vote on each matter voted on at a shareholders’ meeting.
  2. Absent special circumstances, the shares of a corporation are not entitled to vote if they are owned by or otherwise belong to the corporation, directly or indirectly, through an entity of which a majority of the voting power is held directly or indirectly by the corporation or which is otherwise controlled by the corporation.
  3. Subsection (b) of this section does not limit the power of a corporation to vote any shares, including its own shares, held, directly or indirectly, in a fiduciary capacity, unless they are held for the benefit of, or otherwise belong to, the corporation, directly or indirectly, through an entity of which a majority of the voting power is held directly or indirectly by the corporation or which is otherwise controlled by the corporation.
  4. Redeemable shares are not entitled to vote after notice of redemption is given to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares.
  5. For purposes of this section, “voting power” means the current power to vote in the election of directors of a corporation or to elect, select, or appoint managers, managing members, or other members of the governing body of another entity.

History. Rev., ss. 1183, 1184; 1907, c. 457, s. 1; 1909, c. 827, s. 1; C.S., s. 1173; 1945, c. 635; G.S., s. 55-110; 1951, c. 265, s. 2; 1953, c. 722; 1955, c. 1371, s. 1; 1959, c. 768; c. 1316, s. 23; 1963, c. 1065; 1969, c. 751, ss. 34, 35; 1985, c. 419; 1985 (Reg. Sess., 1986), c. 801, s. 45; 1989, c. 265, s. 1; 2021-106, s. 1(a).

Official Comment to the Model Business Corporation Act, 2016 Revision

  1. Voting power of shares
  2. Voting power of nonshareholders
  3. Circular holdings
  4. Redeemable Shares

Section 7.21(a) provides that each outstanding share, regardless of class or series, is entitled to one vote per share unless otherwise provided in the articles of incorporation. The articles of incorporation may provide for multiple or fractional votes per share and may provide that some classes or series of shares are nonvoting on some or all matters, or that some classes or series have a single vote per share or different multiple or fractional votes per share, or that some classes or series constitute one or more separate voting groups and are entitled to vote separately on the matter. To reflect the possibility that shares may have multiple or fractional votes per share, the provisions relating to quorums, voting, and similar matters in the Act are phrased in terms of votes represented by shares.

Under the last sentence of section 7.21(a), the power to vote may only be vested in shares. For example, bondholders may not be given the direct power to vote under the Act. They may, however, be given the power to vote by issuing them special classes or series of shares. See the Official Comment to section 7.22.

The purpose of the prohibition in section 7.21(b) is to prevent a board of directors or management from using a corporate investment to perpetuate itself in power. While shares acquired by a corporation cease to be outstanding under section 6.31, except as provided in that section, and therefore are not entitled to vote, other arrangements may be devised seeking to obtain the benefits of ownership without actually acquiring the shares at all or not acquiring the shares at the time the right to vote is determined. The concept of shares that “otherwise belong to” is included in addition to “owned by” to ensure that courts will have the flexibility to apply public policy considerations to arrangements under which shares are not technically “owned,” or under which shares may or will be owned at a later time, but which have a similar effect. For example, if the corporation or a controlled entity has entered into a forward purchase contract for shares with the right to vote or direct the vote of the shares, a court could find that the shares belong to the corporation and are not entitled to be voted under section 7.21. Similarly, if the voting power is exercised by someone acting on behalf of the corporation or by a member of management of the corporation, a court could find that the shares otherwise belong to the corporation, and are not entitled to vote under section 7.21. Section 7.21(c), however, makes the prohibition of section 7.21(b) against voting of shares inapplicable to shares held in a fiduciary capacity where the beneficiaries are persons other than the corporation directly or through an entity controlled by the corporation.

Redeemable shares are often redeemed in connection with a transaction such as a merger or the issuance of a new senior class or series of shares that requires shareholder approval. Section 7.21(d) avoids subjecting a transaction to approval by a class or series of redeemable shares that will be redeemed as a result of the transaction if adequate provision has been made to ensure that the holders of the redeemable shares will in fact receive the amount payable to them on redemption.

Revised North Carolina Commentary (2021)

The last sentence of subsection 7.21(a) of the Model Act, which specifies that only shares are entitled to vote, was omitted because G.S. 55-7-21.1 permits a corporation to provide to holders of debt securities the right to vote in certain circumstances.

Editor’s Note.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2021-106, s. 1(a), effective October 1, 2021, deleted “of this section” following “and (c)” in subsection (a); substituted “owned by or otherwise belong to the corporation, directly or indirectly, through an entity of which a majority of the voting power is held directly or indirectly by the corporation or which is otherwise controlled by the corporation” for “owned, directly or indirectly, by a second corporation, domestic or foreign, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation” in subsection (b); in (c), inserted “of this section” and substituted “held, directly or indirectly” for “held by it” and “capacity, unless they are held for the benefit of, or otherwise belong to, the corporation, directly or indirectly, through an entity of which a majority of the voting power is held directly or indirectly by the corporation or which is otherwise controlled by the corporation” for “capacity”; and added subsection (e).

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Agreement Depriving Stockholders of Right to Vote. —

See Harvey v. Linville Imp. Co., 118 N.C. 693, 24 S.E. 489, 1896 N.C. LEXIS 120 (1896); Sheppard v. Rockingham Power Co., 150 N.C. 776, 64 S.E. 894, 1909 N.C. LEXIS 145 (1909).

When Trustee May Vote. —

See Haywood v. Wright, 152 N.C. 421, 67 S.E. 982, 1910 N.C. LEXIS 295 (1910).

Vote of One Trustee as Act of All Trustees. —

The vote of one trustee ordinarily is the act of all the trustees where the trust owns shares of corporate stock. Fulk & Needham, Inc. v. United States, 411 F.2d 1403, 1969 U.S. App. LEXIS 12031 (4th Cir. 1969).

§ 55-7-21.1. Rights of holders of debt securities.

In addition to any rights otherwise lawfully conferred, the articles of incorporation of the corporation may confer upon the holders of any bonds, debentures or other debt obligations issued or to be issued by the corporation any one or more of the following powers and rights upon such terms and conditions as may be prescribed in the articles of incorporation:

  1. The power to vote on any matter either in conjunction with or to the full or partial exclusion of its shareholders, notwithstanding G.S. 55-6-01(c)(1), and in determination of votes and voting groups, the holders of such debt obligations shall be treated as shareholders;
  2. The right to inspect the corporate books and records;
  3. Any other rights concerning the corporation which its shareholders have or may have.

Any such power or right shall not be diminished, as to bonds, debentures or other obligations then outstanding, except by an amendment of the articles of incorporation approved by the vote or written consent of the holders of a majority in principal amount thereof or such larger percentage as may be specified in the articles of incorporation.

History. 1969, c. 751, s. 19; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.10; 1991, c. 645, s. 5.

North Carolina Commentary

This section, which does not appear in the Model Act, was added to bring forward the provisions of former G.S. 55-44.1(1), which enabled a corporation to confer upon the holders of debt securities the right to vote and to exercise other rights of shareholders in certain circumstances.

§ 55-7-22. Proxies.

  1. A shareholder may vote his shares in person or by proxy.
  2. A shareholder may appoint one or more proxies to vote or otherwise act for the shareholder by signing an appointment form, either personally or by the shareholder’s attorney-in-fact. Without limiting G.S. 55-1- 50, an appointment in the form of an electronic record that bears the shareholder’s electronic signature and that may be directly reproduced in paper form by an automated process shall be deemed a valid appointment form within the meaning of this section. In addition, a public corporation may permit a shareholder may to appoint one or more proxies by any kind of telephonic transmission, even if not accompanied by written communication, under circumstances or together with information from which the corporation can reasonably assume that the appointment was made or authorized by the shareholder.
  3. An appointment of a proxy is effective when received by the secretary or other officer or agent authorized to tabulate votes. An appointment is valid for 11 months unless a different period is expressly provided in the appointment form.
  4. An appointment of a proxy is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. Appointments coupled with an interest include the appointment of:
    1. A pledgee;
    2. A person who purchased or agreed to purchase the shares;
    3. A creditor of the corporation who extended it credit under terms requiring the appointment;
    4. An employee of the corporation whose employment contract requires the appointment; or
    5. A party to a voting agreement created under G.S. 55-7-31.
  5. The death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxy’s authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment.
  6. An appointment made irrevocable under subsection (d) shall be revocable when the interest with which it is coupled is extinguished.
  7. A transferee for value of shares subject to an irrevocable appointment may revoke the appointment if he did not know of its existence when he acquired the shares and the existence of the irrevocable appointment was not noted conspicuously on the certificate representing the shares or on the information statement for shares without certificates.
  8. Subject to G.S. 55-7-24 and to any express limitation on the proxy’s authority appearing on the face of the appointment form, a corporation is entitled to accept the proxy’s vote or other action as that of the shareholder making the appointment.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 24; 1973, c. 469, ss. 23-25; 1989, c. 265, s. 1; 1999-138, s. 1; 2001-387, s. 14.

Official Comment

Section 7.22 provides that shareholders may vote in person or by proxy and establishes the basic rules for appointing a proxy. As business organizations have increased in size and complexity, the number of shareholders has also increased. As a result, proxy voting is an essential step in the governance of many corporations.

  1. Nomenclature
  2. Appointment of proxy
  3. Duration of proxy
  4. Irrevocable proxies

The word “proxy” is often used ambiguously, sometimes referring to the grant of authority to vote, sometimes to the document granting the authority, and sometimes to the person to whom the authority is granted. In the revised Model Act the word “proxy” is used only in the last sense; the term “appointment form” is used to describe the document appointing the proxy; and the word “appointment” is used to describe the grant of authority to vote.

A shareholder may appoint a proxy to vote for him simply by signing an appointment form, either personally or by his attorney-in-fact. The appointment is effective when it is received by the secretary or other officer or agent authorized to receive and tabulate votes. The proxy has the same power to vote as that possessed by the shareholder, unless the appointment form contains an express limitation on the power to vote or direction as to how to vote the shares on a particular matter, in which event the corporation must tabulate the votes in a manner consistent with that limitation or direction. See section 7.22(h).

An appointment form that contains no expiration date is valid for 11 months. See section 7.22(c). This ensures that in the normal course a new appointment will be solicited at least once every 12 months. But an appointment form may validly specify a longer period if the parties agree.

The appointment of a proxy is essentially the appointment of an agent and is revocable in accordance with the principles of agency law unless it is “coupled with an interest.” See section 7.22(d). Thus, an appointment may be revoked either expressly or by implication, as when a shareholder later executes a second appointment form inconsistent with an earlier one, or attends the meeting in person and seeks to vote on his own behalf. The revised Model Act does not attempt to codify these common law principles of agency law.

While death or incapacity of the appointing shareholder revokes an agency appointment under common law principles, section 7.22(e) modifies the common law rule to provide that the corporation may accept the vote of the proxy until the appropriate corporate officer or agent receives notice of the shareholder’s death or incapacity. In view of the widespread dispersal of shareholders in many corporations, it is not feasible for the corporation to learn of these events independently of notice. On the other hand, section 7.22(e) does not affect the validity of the proxy appointment or its manner of exercise as between the proxy and the personal representatives of the decedent or incompetent. That relationship is governed by the law of agency independent of the Model Act.

Section 7.22(d) deals with the irrevocable appointment of a proxy. The general test adopted is the common law test that all appointments are revocable unless “coupled with an interest.” But section 7.22(d) provides considerable certainty since it describes several accepted forms of relationship as examples of “proxies coupled with an interest.” These examples are not exhaustive and other arrangements may also be held to be “coupled with an interest.” See Comment, “The Irrevocable Proxy and Voting Control of Small Business Corporations,” 98 U. PA. L. REV. 401, 405-7 (1950); see generally I RESTATEMENT OF AGENCY (SECOND) § 138 (1958).

Section 7.22(f) provides that an irrevocable proxy is revoked when the interest with which it was coupled is extinguished — for example, by repayment of the loan or release of the pledge.

A transferee for value of shares that are subject to an irrevocable appointment takes free of the appointment if (1) he did not know of the existence of the appointment and (2) the existence of the irrevocable appointment was not noted conspicuously on the certificate or information statement. See section 7.22(g). Under this subsection, both the appointment and the irrevocable nature of the appointment must conspicuously appear on the certificate.

North Carolina Commentary

The second sentence of subsection (b), which was contained in substance in former G.S. 55-68, was added to the Model Act’s provisions to broaden the permissible forms of proxies. The use of a variety of methods of modern communication to transmit a proxy is especially useful for public corporations.

The Model Act was modified in the second sentence of subsection (c) by changing “longer” to “different” to permit proxy appointments for less than 11 months.

The Model Act was modified in subsection (f) to provide that an irrevocable proxy appointment is revocable (but not automatically revoked) when the interest with which it is coupled is extinguished. The drafters concluded that the automatic revocation in the Model Act could create reliance problems for third parties.

Former G.S. 55-68(b) provided that no proxy was valid for more than 10 years from the date of its execution unless it was renewed or extended for an additional period of not more than 10 years. This limitation was not brought forward.

SUPPLEMENTAL NORTH CAROLINA COMMENTARY (2001)

Effective January 1, 2002, subsection (b) was amended to coordinate this section with the North Carolina Uniform Electronic Transactions Act.

Editor’s Note.

Session Laws 2001-387, s. 154(a) authorizes the Revisor of Statutes to cause to be printed all explanatory comments of the drafters of the act as the Revisor deems appropriate.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Legal Periodicals.

For comment on the proxy system in the corporate electoral process, see 60 N.C.L. Rev. 145 (1981).

For article, “Should Corporate Statutes Providing Special Protection for Directors Be Limited to Publicly Traded Corporations?,” see 24 Wake Forest L. Rev. 79 (1989).

CASE NOTES

Editor’s Note. —

The case below was decided under prior law.

Assignment Reserving Possession and Right to Dividends. —

A written agreement assigning stock in a corporation with authority to vote, reserving to the assignors who retain possession the right to all dividends, amounts only to a proxy. Bridgers v. Staton, 150 N.C. 216, 63 S.E. 892, 1909 N.C. LEXIS 32 (1909).

§ 55-7-23. Shares held by nominees.

  1. A corporation may establish a procedure by which the beneficial owner of shares that are registered in the name of a nominee is recognized by the corporation as a shareholder. The extent of this recognition may be determined in the procedure.
  2. The procedure may set forth:
    1. The types of nominees to which it applies;
    2. The rights or privileges that the corporation recognizes in a beneficial owner;
    3. The manner in which the procedure is selected by the nominee;
    4. The information that must be provided when the procedure is selected;
    5. The period for which selection of the procedure is effective; and
    6. Other aspects of the rights and duties created.

History. 1989, c. 265, s. 1.

Official Comment

Traditionally, a corporation recognizes only the registered owner as the owner of shares. Indeed, section 1.40 defines “shareholder” basically as the registered owner of shares. But it has become a common practice for persons purchasing shares to have them registered in the “street name” of a broker-dealer or other financial institution, principally to facilitate transfer by eliminating the need for the beneficial owner’s signature and delivery. In addition, in order to avoid the burdens of processing securities transfers, which caused a crisis in the securities industry in the late 1960s, a system of securities depositories (defined as “clearing corporations” in section 8-102(3) of the UNIFORM COMMERCIAL CODE) has been developed. In this system, financial institutions deposit securities with the depository, which becomes the registered owner of the shares. Transfers between depositories are then accomplished by book entry of the depository. As a result, there may be two entities interposed between the corporation and the beneficial owner with the depository being the registered owner for the account of the brokerage firm that in turn holds the shares for the account of the beneficial owner.

The purpose of section 7.23 is to facilitate direct communication between the corporation and the beneficial owner by authorizing the corporation to create a procedure for bypassing both the registered owner and intermediate brokerage firms. The adoption of this procedure is discretionary with each corporation and affirmative action by the corporation is necessary to accomplish it. The procedure is also discretionary with the shareholder, who must elect to follow the applicable procedure prescribed by the corporation. The shareholder retains all of his rights except those granted to the beneficial owner.

The corporation may limit or qualify the procedure as it deems appropriate. For example, the corporation may:

  1. limit the procedure to certain classes of shareholders, such as depositories, broker-dealers and banks, or their nominees, or make the procedure available to all shareholders;
  2. permit a shareholder to adopt the procedure with respect to some but not all of the shares registered in his name (and in that case he continues to be treated as the shareholder with respect to the balance);
  3. specify the purpose or purposes for which the certification is effective, e.g., for giving notice of, and voting at, shareholders’ meetings, for the distribution of proxy statements and annual reports, or for payment of cash dividends;
  4. specify the form of the certification, e.g., a written list, computer tape, or some other form of compatible input;
  5. specify the type of information that must be provided, e.g., the name and address of the beneficial owner, his taxpayer identification number, and the number of shares registered directly in his name;
  6. establish deadlines for receipt of the certifications after the establishment of a record date so that the corporation may schedule its mailings;
  7. provide that a new certification is required following each record date or that a certification as of a certain date may continue until changed by the certifying shareholder.

(2) permit a shareholder to adopt the procedure with respect to some but not all of the shares registered in his name (and in that case he continues to be treated as the shareholder with respect to the balance);

(3) specify the purpose or purposes for which the certification is effective, e.g., for giving notice of, and voting at, shareholders’ meetings, for the distribution of proxy statements and annual reports, or for payment of cash dividends;

(4) specify the form of the certification, e.g., a written list, computer tape, or some other form of compatible input;

(5) specify the type of information that must be provided, e.g., the name and address of the beneficial owner, his taxpayer identification number, and the number of shares registered directly in his name;

(6) establish deadlines for receipt of the certifications after the establishment of a record date so that the corporation may schedule its mailings;

(7) provide that a new certification is required following each record date or that a certification as of a certain date may continue until changed by the certifying shareholder.

This listing is illustrative and not exhaustive. It is expected that experimentation with various devices under this section may reveal other areas which the corporation’s plan should address.

The definition of “shareholder” in section 1.40 includes beneficial owners to the extent they obtain the rights of shareholders pursuant to the procedure authorized by this section.

§ 55-7-24. Corporation’s acceptance of votes.

  1. If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the corporation if acting in good faith is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder.
  2. If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of its shareholder, the corporation if acting in good faith is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if:
    1. The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity;
    2. The name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;
    3. The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of its status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;
    4. The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory’s authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment;
    5. Two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all the co-owners.
  3. The corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory’s authority to sign for the shareholder.
  4. The corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this section or G.S. 55-7-22(b) are not liable in damages to the shareholder for the consequences of the acceptance or rejection.
  5. Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this section is valid unless a court of competent jurisdiction determines otherwise.

History. 1901, c. 2, ss. 42, 43; c. 474, ss. 1, 2; Rev., ss. 1185, 1186, 1187; C.S., s. 1174; G.S., s. 55-111; 1955, c. 1371, s. 1; 1957, c. 1039; 1959, c. 1316, s. 36; 1989, c. 265, s. 1; 2005-268, ss. 4, 5.

Official Comment

Corporations are often asked to accept written instrument as evidence of action by a shareholder. These instruments usually involve appointment forms for a proxy to vote the shares, but may also include waivers of notice, consents to action without a meeting, requests for a special meeting of shareholders, and similar instruments involving action by the shareholders. Usually the corporation or its officers will have no personal knowledge of the circumstances under which the instrument was executed and no way of verifying whether the signature on the instrument is in fact the signature of the shareholder. This problem is particularly acute in large corporations with thousands of shareholders.

Section 7.24 establishes general rules permitting the corporation and its officers or agents to accept these instruments if they appear to be executed by the shareholder or by a person who has authority to execute the instrument for the shareholder and they are accompanied by whatever authenticating evidence the corporation reasonably requests. The rules set forth in this section are not exclusive and may be supplemented by additional rules established by the corporation pursuant to section 2.06(b). Section 7.24(a) authorizes acceptance of an instrument if the name appearing on the instrument “corresponds” to the name of the shareholder, while section 7.24(b) permits the acceptance of an instrument executed by a person other than the shareholder if there is a designation or evidence of the capacity of the person executing the instrument that indicates the act of the person is the act of the shareholder. On the other hand, section 7.24(c) permits rejection of an instrument if the officer or agent tabulating votes has a “reasonable basis for doubt” about the validity of the signature or about the authority of the person acting on behalf of the shareholder. These principles are described in greater detail below.

The purpose of section 7.24 is to protect the corporation and its officers or agents from liability for damages to the shareholder if action is taken in accordance with the section. Thus section 7.24(d) provides that there is no liability to the shareholder if the corporation’s officer or agent, acting in good faith, accepts an instrument that meets the requirements of section 7.24(a) or (b), even if it turns out that the execution was invalid or unauthorized; similarly, no liability exists if the officer or agent, again acting in good faith, rejects an instrument because of a “reasonable basis for doubt,” even though it turns out that the instrument was properly executed by the shareholder. But section 7.24 does not address the question whether an action was properly or improperly taken or approved, and section 7.24(e) makes clear that the validity or invalidity of corporate action is ultimately a matter for judicial resolution through review of the results of an election in a suit to enjoin or compel corporate action. It is contemplated that any such suit will be brought promptly, typically before the corporate action is consummated or the corporation’s position otherwise changes in reliance on the vote, and that any suit that is not brought promptly under the circumstances would normally be barred because of laches.

Similarly, section 7.24 does not address the liability of the proxy to the shareholder for exercising authority beyond that granted to him or for disobeying instructions. These matters are governed by the law of agency and not by section 7.24.

The American Society of Corporate Secretaries has established principles for the acceptance of proxy appointments in routine elections in which there is no proxy contest. Many of the examples of the application of section 7.24 set forth below are based on these principles.

  1. Examples of executions “corresponding with” the name of the shareholder
    1. Assuming that shares are registered in the name of an individual, an instrument may be accepted as corresponding to the name of the shareholder:
  1. Whether executed in ink, pencil, ballpoint, crayon, etc.
  2. Regardless of where the signature appears on the instrument (whether or not in the space provided), if there is no reason to doubt the intent to execute.
  3. Whether the name is handwritten, handprinted, or rubberstamped in facsimile-signature or printed form.
  4. Whether there are deviations between the registered name and the signature, provided that the deviations are not inconsistent with the registered name. For example, if the shares are registered in the name of “John F. Smith,” the following are acceptable: “J. Foster Smith,” “J. Smith,” “J.F. Smith,” “J.F.S.,” “J.S.,” “John F.,” and even simply “Smith.” Similarly, if “John Smith” is the name of the shareholder, “John F. Smith” and “J. Foster Smith” are also acceptable.
  5. If marked by an “X” and witnessed by one other person.
  6. If not executed at all, a signed letter or telegram from the shareholder states that he has signed the instrument or approves of the action taken by the instrument.
  7. The signature is illegible, unless it cannot reasonably be considered to be the signature of the shareholder. For example, if shares are registered in the name of “John F. Smith,” the signature is not acceptable if the first letter of the signature is clearly an “M” or the first word is “Mark.”
    1. Assuming that the shares are registered in the name of a partnership, e.g., “Smith Bros.,” an instrument may be accepted if executed either in the form “Smith Bros. by John Able, Partner” or simply “Smith Bros.”
    2. Assuming that the shares are registered in the name of a corporation, e.g., “Smith Corporation,” an instrument may be accepted if executed in the name of the corporation, by an officer or agent designated as holding a responsible position, by a person with a surname similar to the corporate name, or simply in the name of the corporation, e.g., “Smith Corporation by John Able, President,” “Smith Corporation by Peter Apt, Agent,” “Smith Corporation by John Smith,” or “Smith Corporation.”
    3. Assuming that the shares are registered in the name of an individual who is deceased, incompetent, a minor, in bankruptcy, or in receivership, an instrument may be accepted if it is executed by an executor, administrator, guardian, receiver, or trustee who signs as such. Shares registered in the name of a minor may be voted by a parent of the shareholder if he is identified as such, e.g., “Ralph Able by John Able, Father.”
    4. Assuming that the shares are registered in the name of an individual, an instrument may be accepted if it is executed by another individual who indicates (1) that he is signing as an agent or attorney-in-fact for the shareholder (see section 7.22); (2) that he has a close family or other relationship with the shareholder from which authority can be inferred; or (3) that he is the beneficial owner of shares, a pledgee of the shares, or a donee of the shares. For example: if shares are registered in the name of “Peter Jones,” “Ed Smith, Agent,” “Paul Smith, Son,” “Mary Smith Jones, Wife,” “Emelia Able, Attorney,” “Arthur Peters, Private Secretary,” “Paul Jones, Trustee under Deed of Trust dated April 1, 1980,” or “Mary Smith, Donee,” are all acceptable absent some indication that the execution was unauthorized.
    5. Assuming that the shares are registered in the names of two or more persons — as joint tenants or tenants in common, executors or administrators, guardians or conservators, a committee for an incompetent, or trustees — an instrument may be accepted if signed by or on behalf of fewer than all the persons named. This conclusion proceeds on the assumption that the signer or signers have authority to act for the others and there is nothing on the face of the instrument that rebuts this assumption.

b. If the shares are registered in the maiden name of a woman, e.g., Mary Smith, and the instrument is executed:

(1) In her married name, clearly indicated as such, e.g., “Mary Smith Jones (formerly Mary Smith)” or “Mary Smith (now Mrs. Mary Smith Jones).”

(2) In her married name or in a form that implies her married status, e.g., “Mary Smith Anderson,” “Mrs. Mary S. Anderson,” “Mrs. Mary Smith Anderson,” or “Mrs. Mary Anderson.”

c. If the shares are registered in the name “Peter Smith, Sr.” but the designation “Sr.” is omitted, e.g., “Peter Smith.” The execution “Peter Smith, Jr.,” however, does not correspond with the shareholder.

2. Examples of executions that “indicate the capacity” of the person signing

In all the following instances, the corporation may request additional evidence of authority but is not required to do so; officers and agents are protected from liability if they routinely accept the instrument without requiring additional evidence.

3. Examples of “reasonable basis for doubt”

The phrase “reasonable basis for doubt” about the validity of a signature or about the signer’s authority creates an objective standard for the exercise of the authority granted by section 7.24(c) to reject proffered instruments. In the absence of a proxy fight or a seriously contested issue, instruments should be rejected only if there seems to be no basis for finding the execution regular on its face. In a proxy fight or other contested issue, the possibility of illegal or unauthorized execution is greatly increased, and a more cautious attitude should therefore be adopted. The following are examples in which a “reasonable basis for doubt” could be found to exist:

a. The shares are registered in the name of “John F. Smith” and the instrument is executed by “Joseph F. Smith” or by “Frank W. Smith.”

b. The shares are registered in the name of “Ellen Smith, a Minor” or “John Smith, Custodian for Ellen Smith, a Minor,” and the instrument is executed by “Ellen Smith.” There is no “reasonable basis for doubt,” however, if the instrument is accompanied by evidence satisfactory to the corporation that the shareholder is no longer a minor.

c. A proxy appointment is received that is regular on its face, and the secretary or other corporate officer or agent receives a telephone call from a person who identifies himself as the shareholder and says either that he wishes to revoke the appointment or that he did not authorize its original execution.

d. Shares are registered in the name of two or more persons as co-owners, the instrument is executed by fewer than all of them, and the instrument shows on its face that not all the registered owners granted authority to the signers, as where the instrument states that it was not possible to obtain all the coowners’ signatures or that some refused to sign. For the normal rule of acceptability of proxies executed by fewer than all co-owners, however, see section 7.24(b)(5) and part 2.e of this Official Comment.

e. The corporation receives a copy of letters of appointment of a receiver, executor, administrator or other fiduciary, and the instrument is executed in the name of the shareholder rather than by the fiduciary.

4. Other principles applicable to proxy appointments

As indicated in the Official Comment to section 7.22, a proxy is simply an agent of the shareholder, and his appointment therefore involves primarily the law of agency. The law of agency determines the rights and duties of the shareholder and the proxy, and it is important to recognize that section 7.24 is not intended to affect these rights and duties. Rather, it recognizes that the great bulk of instruments executed in the name of a shareholder or on his behalf are in fact authorized and the corporation and its officers should be encouraged to accept them rather than to adopt unduly narrow requirements.

(2) Regardless of where the signature appears on the instrument (whether or not in the space provided), if there is no reason to doubt the intent to execute.

(3) Whether the name is handwritten, handprinted, or rubberstamped in facsimile-signature or printed form.

(4) Whether there are deviations between the registered name and the signature, provided that the deviations are not inconsistent with the registered name. For example, if the shares are registered in the name of “John F. Smith,” the following are acceptable: “J. Foster Smith,” “J. Smith,” “J.F. Smith,” “J.F.S.,” “J.S.,” “John F.,” and even simply “Smith.” Similarly, if “John Smith” is the name of the shareholder, “John F. Smith” and “J. Foster Smith” are also acceptable.

(5) If marked by an “X” and witnessed by one other person.

(6) If not executed at all, a signed letter or telegram from the shareholder states that he has signed the instrument or approves of the action taken by the instrument.

(7) The signature is illegible, unless it cannot reasonably be considered to be the signature of the shareholder. For example, if shares are registered in the name of “John F. Smith,” the signature is not acceptable if the first letter of the signature is clearly an “M” or the first word is “Mark.”

b. If the shares are registered in the maiden name of a woman, e.g., Mary Smith, and the instrument is executed:

(1) In her married name, clearly indicated as such, e.g., “Mary Smith Jones (formerly Mary Smith)” or “Mary Smith (now Mrs. Mary Smith Jones).”

(2) In her married name or in a form that implies her married status, e.g., “Mary Smith Anderson,” “Mrs. Mary S. Anderson,” “Mrs. Mary Smith Anderson,” or “Mrs. Mary Anderson.”

c. If the shares are registered in the name “Peter Smith, Sr.” but the designation “Sr.” is omitted, e.g., “Peter Smith.” The execution “Peter Smith, Jr.,” however, does not correspond with the shareholder.

2. Examples of executions that “indicate the capacity” of the person signing

In all the following instances, the corporation may request additional evidence of authority but is not required to do so; officers and agents are protected from liability if they routinely accept the instrument without requiring additional evidence.

a. Assuming that the shares are registered in the name of a partnership, e.g., “Smith Bros.,” an instrument may be accepted if executed either in the form “Smith Bros. by John Able, Partner” or simply “Smith Bros.”

b. Assuming that the shares are registered in the name of a corporation, e.g., “Smith Corporation,” an instrument may be accepted if executed in the name of the corporation, by an officer or agent designated as holding a responsible position, by a person with a surname similar to the corporate name, or simply in the name of the corporation, e.g., “Smith Corporation by John Able, President,” “Smith Corporation by Peter Apt, Agent,” “Smith Corporation by John Smith,” or “Smith Corporation.”

c. Assuming that the shares are registered in the name of an individual who is deceased, incompetent, a minor, in bankruptcy, or in receivership, an instrument may be accepted if it is executed by an executor, administrator, guardian, receiver, or trustee who signs as such. Shares registered in the name of a minor may be voted by a parent of the shareholder if he is identified as such, e.g., “Ralph Able by John Able, Father.”

d. Assuming that the shares are registered in the name of an individual, an instrument may be accepted if it is executed by another individual who indicates (1) that he is signing as an agent or attorney-in-fact for the shareholder (see section 7.22); (2) that he has a close family or other relationship with the shareholder from which authority can be inferred; or (3) that he is the beneficial owner of shares, a pledgee of the shares, or a donee of the shares. For example: if shares are registered in the name of “Peter Jones,” “Ed Smith, Agent,” “Paul Smith, Son,” “Mary Smith Jones, Wife,” “Emelia Able, Attorney,” “Arthur Peters, Private Secretary,” “Paul Jones, Trustee under Deed of Trust dated April 1, 1980,” or “Mary Smith, Donee,” are all acceptable absent some indication that the execution was unauthorized.

e. Assuming that the shares are registered in the names of two or more persons — as joint tenants or tenants in common, executors or administrators, guardians or conservators, a committee for an incompetent, or trustees — an instrument may be accepted if signed by or on behalf of fewer than all the persons named. This conclusion proceeds on the assumption that the signer or signers have authority to act for the others and there is nothing on the face of the instrument that rebuts this assumption.

3. Examples of “reasonable basis for doubt”

The phrase “reasonable basis for doubt” about the validity of a signature or about the signer’s authority creates an objective standard for the exercise of the authority granted by section 7.24(c) to reject proffered instruments. In the absence of a proxy fight or a seriously contested issue, instruments should be rejected only if there seems to be no basis for finding the execution regular on its face. In a proxy fight or other contested issue, the possibility of illegal or unauthorized execution is greatly increased, and a more cautious attitude should therefore be adopted. The following are examples in which a “reasonable basis for doubt” could be found to exist:

a. The shares are registered in the name of “John F. Smith” and the instrument is executed by “Joseph F. Smith” or by “Frank W. Smith.”

b. The shares are registered in the name of “Ellen Smith, a Minor” or “John Smith, Custodian for Ellen Smith, a Minor,” and the instrument is executed by “Ellen Smith.” There is no “reasonable basis for doubt,” however, if the instrument is accompanied by evidence satisfactory to the corporation that the shareholder is no longer a minor.

c. A proxy appointment is received that is regular on its face, and the secretary or other corporate officer or agent receives a telephone call from a person who identifies himself as the shareholder and says either that he wishes to revoke the appointment or that he did not authorize its original execution.

d. Shares are registered in the name of two or more persons as co-owners, the instrument is executed by fewer than all of them, and the instrument shows on its face that not all the registered owners granted authority to the signers, as where the instrument states that it was not possible to obtain all the coowners’ signatures or that some refused to sign. For the normal rule of acceptability of proxies executed by fewer than all co-owners, however, see section 7.24(b)(5) and part 2.e of this Official Comment.

e. The corporation receives a copy of letters of appointment of a receiver, executor, administrator or other fiduciary, and the instrument is executed in the name of the shareholder rather than by the fiduciary.

4. Other principles applicable to proxy appointments

As indicated in the Official Comment to section 7.22, a proxy is simply an agent of the shareholder, and his appointment therefore involves primarily the law of agency. The law of agency determines the rights and duties of the shareholder and the proxy, and it is important to recognize that section 7.24 is not intended to affect these rights and duties. Rather, it recognizes that the great bulk of instruments executed in the name of a shareholder or on his behalf are in fact authorized and the corporation and its officers should be encouraged to accept them rather than to adopt unduly narrow requirements.

(2) In her married name or in a form that implies her married status, e.g., “Mary Smith Anderson,” “Mrs. Mary S. Anderson,” “Mrs. Mary Smith Anderson,” or “Mrs. Mary Anderson.”

c. If the shares are registered in the name “Peter Smith, Sr.” but the designation “Sr.” is omitted, e.g., “Peter Smith.” The execution “Peter Smith, Jr.,” however, does not correspond with the shareholder.

2. Examples of executions that “indicate the capacity” of the person signing

In all the following instances, the corporation may request additional evidence of authority but is not required to do so; officers and agents are protected from liability if they routinely accept the instrument without requiring additional evidence.

a. Assuming that the shares are registered in the name of a partnership, e.g., “Smith Bros.,” an instrument may be accepted if executed either in the form “Smith Bros. by John Able, Partner” or simply “Smith Bros.”

b. Assuming that the shares are registered in the name of a corporation, e.g., “Smith Corporation,” an instrument may be accepted if executed in the name of the corporation, by an officer or agent designated as holding a responsible position, by a person with a surname similar to the corporate name, or simply in the name of the corporation, e.g., “Smith Corporation by John Able, President,” “Smith Corporation by Peter Apt, Agent,” “Smith Corporation by John Smith,” or “Smith Corporation.”

c. Assuming that the shares are registered in the name of an individual who is deceased, incompetent, a minor, in bankruptcy, or in receivership, an instrument may be accepted if it is executed by an executor, administrator, guardian, receiver, or trustee who signs as such. Shares registered in the name of a minor may be voted by a parent of the shareholder if he is identified as such, e.g., “Ralph Able by John Able, Father.”

d. Assuming that the shares are registered in the name of an individual, an instrument may be accepted if it is executed by another individual who indicates (1) that he is signing as an agent or attorney-in-fact for the shareholder (see section 7.22); (2) that he has a close family or other relationship with the shareholder from which authority can be inferred; or (3) that he is the beneficial owner of shares, a pledgee of the shares, or a donee of the shares. For example: if shares are registered in the name of “Peter Jones,” “Ed Smith, Agent,” “Paul Smith, Son,” “Mary Smith Jones, Wife,” “Emelia Able, Attorney,” “Arthur Peters, Private Secretary,” “Paul Jones, Trustee under Deed of Trust dated April 1, 1980,” or “Mary Smith, Donee,” are all acceptable absent some indication that the execution was unauthorized.

e. Assuming that the shares are registered in the names of two or more persons — as joint tenants or tenants in common, executors or administrators, guardians or conservators, a committee for an incompetent, or trustees — an instrument may be accepted if signed by or on behalf of fewer than all the persons named. This conclusion proceeds on the assumption that the signer or signers have authority to act for the others and there is nothing on the face of the instrument that rebuts this assumption.

3. Examples of “reasonable basis for doubt”

The phrase “reasonable basis for doubt” about the validity of a signature or about the signer’s authority creates an objective standard for the exercise of the authority granted by section 7.24(c) to reject proffered instruments. In the absence of a proxy fight or a seriously contested issue, instruments should be rejected only if there seems to be no basis for finding the execution regular on its face. In a proxy fight or other contested issue, the possibility of illegal or unauthorized execution is greatly increased, and a more cautious attitude should therefore be adopted. The following are examples in which a “reasonable basis for doubt” could be found to exist:

a. The shares are registered in the name of “John F. Smith” and the instrument is executed by “Joseph F. Smith” or by “Frank W. Smith.”

b. The shares are registered in the name of “Ellen Smith, a Minor” or “John Smith, Custodian for Ellen Smith, a Minor,” and the instrument is executed by “Ellen Smith.” There is no “reasonable basis for doubt,” however, if the instrument is accompanied by evidence satisfactory to the corporation that the shareholder is no longer a minor.

c. A proxy appointment is received that is regular on its face, and the secretary or other corporate officer or agent receives a telephone call from a person who identifies himself as the shareholder and says either that he wishes to revoke the appointment or that he did not authorize its original execution.

d. Shares are registered in the name of two or more persons as co-owners, the instrument is executed by fewer than all of them, and the instrument shows on its face that not all the registered owners granted authority to the signers, as where the instrument states that it was not possible to obtain all the coowners’ signatures or that some refused to sign. For the normal rule of acceptability of proxies executed by fewer than all co-owners, however, see section 7.24(b)(5) and part 2.e of this Official Comment.

e. The corporation receives a copy of letters of appointment of a receiver, executor, administrator or other fiduciary, and the instrument is executed in the name of the shareholder rather than by the fiduciary.

4. Other principles applicable to proxy appointments

As indicated in the Official Comment to section 7.22, a proxy is simply an agent of the shareholder, and his appointment therefore involves primarily the law of agency. The law of agency determines the rights and duties of the shareholder and the proxy, and it is important to recognize that section 7.24 is not intended to affect these rights and duties. Rather, it recognizes that the great bulk of instruments executed in the name of a shareholder or on his behalf are in fact authorized and the corporation and its officers should be encouraged to accept them rather than to adopt unduly narrow requirements.

b. The shares are registered in the name of “Ellen Smith, a Minor” or “John Smith, Custodian for Ellen Smith, a Minor,” and the instrument is executed by “Ellen Smith.” There is no “reasonable basis for doubt,” however, if the instrument is accompanied by evidence satisfactory to the corporation that the shareholder is no longer a minor.

c. A proxy appointment is received that is regular on its face, and the secretary or other corporate officer or agent receives a telephone call from a person who identifies himself as the shareholder and says either that he wishes to revoke the appointment or that he did not authorize its original execution.

d. Shares are registered in the name of two or more persons as co-owners, the instrument is executed by fewer than all of them, and the instrument shows on its face that not all the registered owners granted authority to the signers, as where the instrument states that it was not possible to obtain all the coowners’ signatures or that some refused to sign. For the normal rule of acceptability of proxies executed by fewer than all co-owners, however, see section 7.24(b)(5) and part 2.e of this Official Comment.

e. The corporation receives a copy of letters of appointment of a receiver, executor, administrator or other fiduciary, and the instrument is executed in the name of the shareholder rather than by the fiduciary.

4. Other principles applicable to proxy appointments

As indicated in the Official Comment to section 7.22, a proxy is simply an agent of the shareholder, and his appointment therefore involves primarily the law of agency. The law of agency determines the rights and duties of the shareholder and the proxy, and it is important to recognize that section 7.24 is not intended to affect these rights and duties. Rather, it recognizes that the great bulk of instruments executed in the name of a shareholder or on his behalf are in fact authorized and the corporation and its officers should be encouraged to accept them rather than to adopt unduly narrow requirements.

North Carolina Commentary

The word “pledgee,” which appears immediately prior to the words “beneficial owner” in subdivision 7.24(b)(4) of the Model Act, was omitted as misleading, since a pledgee does not automatically have the right to vote pledged shares.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, subdivision (b)(4) is amended to refer to “pledgee” in conformity with the Model Business Corporation Act. A corporation may require evidence that the pledgee has been granted authority to sign for the pledgor but the corporation is not obligated to do so. Also effective October 1, 2005, a reference to the proxy appointment provisions in G.S. 55-7-22(b) is added to subsection (d).

Effect of Amendments.

Session Laws 2005-268, ss. 4 and 5, effective October 1, 2005, substituted “pledge, beneficial, owner” for “beneficial owner” in subdivision (b)(4); and inserted “or G.S. 55-7-22(b)” in subsection (d).

Legal Periodicals.

For article on joint ownership of corporate securities in North Carolina, see 44 N.C.L. Rev. 290 (1966); 46 N.C.L. Rev. 520 (1968).

§ 55-7-25. Quorum and voting requirements for voting groups.

  1. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of that voting group exists with respect to that matter, except that, in the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by the vote of a majority of the votes cast on the motion to adjourn. Unless the articles of incorporation, a bylaw adopted by the shareholders, or this act provides otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter.
  2. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting.
  3. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation, a bylaw adopted by the shareholders, or this Chapter requires a greater number of affirmative votes.
  4. An amendment of the articles of incorporation or bylaws adding, changing, or deleting a quorum or voting requirement for a voting group greater than specified in subsection (a) or (c) is governed by G.S. 55-7-27.
  5. The election of directors is governed by G.S. 55-7-28.
  6. Whenever a provision of this Chapter provides for voting by one or more series as separate voting groups, unless otherwise provided in this Chapter, the requirement provided in G.S. 55-10-04(c) for amendments of articles of incorporation apply to that provision.

History. 1901, c. 2, s. 39; Rev., s. 1182; C.S., s. 1175; 1927, c. 138; G.S., s. 55-112; 1955, c. 1371, s. 1; 1973, c. 469, ss. 21, 22; 1989, c. 265, s. 1; 1991, c. 645, s. 16(a); 2018-45, s. 4.

Official Comment to the Model Business Corporation Act, 2016 Revision

Section 7.25 establishes general quorum and voting requirements for voting groups for purposes of the Act. As defined in section 1.40, a “voting group” consists of all shares of one or more classes or series that under the articles of incorporation or the Act are entitled to vote and be counted together collectively on a matter. Shares entitled to vote “generally” on a matter (that is, all shares entitled to vote on the matter by the articles of incorporation or the Act that do not expressly have the right to be counted separately) are a single voting group. On most matters coming before shareholders’ meetings, only a single voting group, consisting of a class of voting shares, will be involved, and action on such a matter is effective when approved by that voting group pursuant to section 7.25. See section 7.26(a).

Section 7.25 covers quorum and voting requirements for all actions by the shareholders of a corporation with a single class of voting shares. It also covers quorum and voting requirements for a matter on which only a class or series of shares is entitled to vote under the articles of incorporation, for example, when a class with preferential rights may vote to elect directors because of a default in the payment of dividends (a vote which is often described as a “class vote”). Finally, section 7.25 also covers quorum and voting requirements for a matter on which both common and preferred shares or separate classes or series of common or preferred shares are entitled to vote, either together as a single voting group under the articles of incorporation or separately as two or more voting groups under either the articles of incorporation or the Act. See section 7.26(b).

  1. Determination of Voting Groups under the Act
  2. Quorum and Voting Requirements in General
  3. Quorum Requirements for Action by Voting Group
  4. Voting Requirements for Approval by Voting Group
  5. Modification of Standard Requirements

Under the Act, classes or series of shares are generally not entitled to vote separately by voting group except to the extent specifically authorized by the articles of incorporation. But sections 9.21, 9.32, 10.04, and 11.04 of the Act grant classes or series of shares the right to vote separately when fundamental changes are proposed that may adversely affect that class or series. Section 10.04(c) further provides that when two or more classes or series are affected by an amendment covered by section 10.04 in essentially the same way, the classes or series are grouped together and must vote as a single voting group rather than as multiple voting groups on the matter, unless otherwise provided in the articles of incorporation or required by the board of directors. Section 7.25(f) provides that the group voting rule of section 10.04(c), including the ability to vary that rule in the articles of incorporation or by action of the board of directors, also applies to the group voting provisions in sections 9.21, 9.32, and 11.04. Under the Act even a class or series of shares that is expressly described as nonvoting under the articles of incorporation may be entitled to vote separately on an amendment to the articles of incorporation that affects the class or series in a designated way. See section 10.04(d).

In addition to the provisions of the Act, separate voting by voting group may be authorized by the articles of incorporation (except that the statutory privilege of voting by separate voting groups cannot be diluted or reduced). On some matters, the board of directors may condition its submission of matters to shareholders on their approval by specific voting groups designated by the board of directors. Sections 7.25 and 7.26 establish the mechanics by which all voting by single or multiple voting groups is carried out.

In some situations, shares of a single class or series may be entitled to vote in two different voting groups. See the Official Comment to section 7.26.

A corporation’s determination of the voting groups entitled to vote, and the quorum and voting requirements applicable to that determination, should be determined separately for each matter coming before a meeting. As a result, different quorum and voting requirements may be applicable to different portions of a meeting, depending on the matter being considered. In the normal case where only a single voting group is entitled to vote on all matters coming before a meeting of shareholders, a single quorum and voting requirement will usually be applicable to the entire meeting. To reflect the possibility that shares may have multiple or fractional votes per share, the provisions relating to quorums are phrased in terms of votes represented by shares.

Under section 7.25(b), once a share is present at a meeting, it is deemed present for quorum purposes throughout the meeting. Thus, a voting group may continue to act despite the withdrawal of persons having the power to vote one or more shares.

The shares owned by a shareholder who comes to the meeting to object on grounds of lack of notice are considered present for purposes of determining the presence of a quorum. Similarly, shares owned by a shareholder who attends a meeting solely for purposes of raising the objection that a quorum is not present are considered present for purposes of determining the presence of a quorum. Attendance at a meeting, however, does not constitute a waiver of other objections to the meeting such as the lack of notice. Such waivers are governed by section 7.06(b).

If a new record date is set, new notice must be given to holders of shares of a voting group and a quorum must be established from within the holders of shares of that voting group as of the new record date.

Section 7.25(c) provides that an action (other than the election of directors, which is governed by section 7.28) is approved by a voting group at a meeting at which a quorum is present if the votes cast in favor of the action exceed the votes cast opposing the action, unless the articles of incorporation require a greater number of votes. This default rule differs from a formulation appearing in some state statutes that an action is approved at a meeting at which a quorum is present if it receives the affirmative vote of a majority of the shares represented at that meeting. That formulation in effect treats abstentions as negative votes; the Act treats them truly as abstentions. For example, if a corporation (that has not, through the articles of incorporation, modified quorum and voting requirements) has 1,000 shares of a single class outstanding, each share entitled to cast one vote, a quorum consists of 501 shares; if 600 shares are represented at the meeting and the vote on a proposed action is 280 in favor, 225 opposed, and 95 abstaining, the action would not be approved in a state following the formulation that treats abstentions as negative votes because fewer than a majority of the 600 shares attending voted in favor of the action. Under section 7.25(c) the action would be approved and not be defeated by the 95 abstaining votes.

The articles of incorporation may modify the quorum and voting requirements of section 7.25 for a single voting group or for all voting groups entitled to vote on any matter. The articles of incorporation may increase the quorum and voting requirements to any extent desired up to and including unanimity, subject to section 7.27. They may also require that shares of different classes or series are entitled to vote separately or together on specific issues or provide that actions are approved only if they receive the favorable vote of a majority of the shares of a voting group present at a meeting at which a quorum is present. The articles may also decrease the quorum requirement as desired, subject to section 7.25(a) and section 7.27.

North Carolina Commentary

The Model Act was modified in subsection (a) to bring forward the provisions of former G.S. 55-65(d), which permitted adjournment of a meeting in the absence of a quorum until a quorum is present. Subsections (a), (c) and (d) were modified to provide that special quorum and voting requirements can be established by a bylaw adopted by the shareholders, as well as by the articles of incorporation or the provisions of this Act.

Editor’s Note.

Session Laws 2001-387, s. 154(a), authorizes the Revisor of Statutes to cause to be printed all explanatory comments of the drafters of the act as the Revisor deems appropriate.

Section 55-7-08, referred to in the commentary, was repealed by Session Laws 2013-153, s. 4, effective January 1, 2014.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2018-45, s. 4, effective October 1, 2018, added subsection (f).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Derivative Action by FDIC. —

Plaintiff FDIC, which had suffered a loss as an equitable shareholder in defendant corporation, was entitled to maintain a derivative action, and the FDIC’s individual claim did not preclude its derivative claim. FDIC v. Kerr, 650 F. Supp. 1356, 1986 U.S. Dist. LEXIS 16069 (W.D.N.C. 1986).

Effect of Illegal Motion of Adjournment on Election of Officers. —

When a motion to adjourn a stockholders’ meeting has been carried, and a sufficient number have withdrawn to reduce the number of those present below a majority of all the stock issued and outstanding, an election of officers cannot be lawfully held thereafter at that meeting, though the adjournment was carried by an illegal vote. Bridgers v. Staton, 150 N.C. 216, 63 S.E. 892, 1909 N.C. LEXIS 32 (1909).

§ 55-7-26. Action by single and multiple voting groups.

  1. If the articles of incorporation, a bylaw adopted by the shareholders, or this Chapter provides for voting by a single voting group on a matter, action on that matter is taken when voted upon by that voting group as provided in G.S. 55-7-25.
  2. If the articles of incorporation, a bylaw adopted by the shareholders, or this Chapter provides for voting by two or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately as provided in G.S. 55-7-25. Action may be taken by one voting group on a matter even though no action is taken at the same time by another voting group entitled to vote on the matter.

History. 1989, c. 265, s. 1.

Official Comment

Section 7.26(a) provides that when a matter is to be voted upon by a single voting group, action is taken when the voting group votes upon the action as provided in section 7.25. In most instances the single voting group will consist of all the shares of the class or classes entitled to vote by the articles of incorporation; voting by two or more voting groups as contemplated by section 7.26(b) is the exceptional case.

Section 7.26(b) basically requires that if more than one voting group is entitled to vote on a matter, favorable action on a matter is taken only when it is voted upon favorably by each voting group, counted separately. Implicit in this section are the concepts that (1) different quorum and voting requirements may be applicable to different matters considered at a single meeting and (2) different quorum and voting requirements may be applicable to different voting groups voting on the same matter. See the Official Comment to section 7.25. Thus, each group entitled to vote must independently meet the quorum and voting requirements established by section 7.25. But if a quorum is present for one or more voting groups but not for all voting groups, section 7.26(b) provides that the voting groups for which a quorum is present may vote upon the matter.

A single meeting, furthermore, may consider matters on which action by several voting groups is required and also matters on which only a single voting group may act. Action may be taken on the matters on which the single voting group may act even though no quorum is present to take action on other matters. For example, in a corporation with one class of nonvoting shares with preferential rights (“preferred shares”) and one class of general voting shares without preferential rights (“common shares”), a matter to be considered at the annual meeting may be a proposed amendment to the articles of incorporation that reduces the cumulative dividend right of the preferred shares (a matter on which the preferred shares have a statutory right to vote as a separate voting group). Other matters to be considered may include the election of directors and the appointment of an auditor, both matters on which the preferred shares have no vote. If a quorum of the voting group consisting of the common shares but no quorum of the voting group consisting of the preferred shares is present, the common shares may proceed to elect directors and appoint the auditor. The common shares voting group may also vote to approve the proposed amendment to the articles of the incorporation, but that amendment will not be approved until the preferred shares voting group also votes to approve the amendment.

  1. Voting requirements on multiple voting group matters
  2. Participation of shares in multiple voting groups

In many multiple voting group situations under the Model Act, proposals are adopted only if a majority of all the votes entitled to be cast by each voting group approve the proposal. This percentage of votes is higher than that required by section 7.25, and is required, for example, under sections 10.03(e)(1) and 10.04(b) for all amendments to articles of incorporation that create dissenters’ rights with respect to part or all of the shares of the voting group.

As described in section 7.26(b), if voting by multiple voting groups is required, the votes of members of each voting group must be separately tabulated. Normally, each class or series of shares will participate in only a single voting group. But since holders of shares entitled by the articles of incorporation to vote generally on a matter are always entitled to vote in the voting group consisting of the general voting shares, in some instances classes or series of shares may be entitled to be counted simultaneously in two voting groups. This will occur whenever a class or series of shares entitled to vote generally on a matter under the articles of incorporation is affected by the matter in a way that gives rise to the right to have its vote counted separately as an independent voting group under the Act. For example, assume that corporation Y has outstanding one class of general voting shares without preferential rights (“common shares”), 500 shares issued, and one class of shares with preferential rights (“preferred shares”), 100 shares issued, that also have full voting rights under the articles of incorporation, i.e., the preferred may vote for election of directors and on all other matters on which common may vote. The preferred and the common therefore are part of the general voting group. The directors propose to amend the articles of incorporation to change the preferential dividend rights of the preferred from cumulative to noncumulative. All shares are present at the meeting and they divide as follows on the proposal to adopt the amendment:

Yes — Common 230 — Preferred 80 No — Common 270 — Preferred 20. Both the preferred and the common are entitled to vote on the amendment to the articles of incorporation since they are part of a general voting group pursuant to the articles. But the vote of the preferred is also entitled to be counted separately on the proposal by section 10.04(a)(4) of the Model Act. The result is that the proposal passes by a vote of 310 to 290 in the voting group consisting of the shares entitled to vote generally and 80 to 20 in the voting group consisting solely of the preferred shares: :GB (a) First voting group Yes: Common 230 Preferred 80 310 No: Common 270 Preferred 20 290 :GX (b) Second voting group (preferred) Yes: Preferred 80 No: Preferred 20

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In this situation, in the absence of a special quorum requirement, a meeting could approve the proposal to amend the articles of incorporation if — and only if — a quorum of each voting group is present, i.e., at least 51 shares of preferred and 301 shares of common and preferred were represented at the meeting.

North Carolina Commentary

The Model Act was modified in subsections (a) and (b) to permit a bylaw adopted by the shareholders to provide for voting by a single voting group on a particular matter.

§ 55-7-27. Greater quorum or voting requirements.

  1. The articles of incorporation or a bylaw adopted by the shareholders may provide for a greater quorum or voting requirement for shareholders (or voting groups of shareholders) than is provided for by this Chapter. Any such bylaw adopted by the shareholders after the effective date of this section must be approved by a quorum and vote sufficient to amend the articles of incorporation for that purpose.
  2. Any provision in the articles of incorporation or bylaws prescribing the quorum or vote required for any purpose as permitted by this section may not itself be amended by a quorum or vote less than the quorum or vote therein prescribed.

History. 1955, c. 1371, s. 1; 1959, c. 1316, ss. 2, 3; 1973, c. 469, ss. 4, 22; 1989, c. 265, s. 1.

Official Comment

Section 7.27(a) permits the articles of incorporation to increase the quorum or voting requirements for approval of an action by shareholders up to any desired amount including unanimity. These provisions may relate to ordinary or routine actions by the general voting group (which otherwise may be acted upon under section 7.25 if the number of affirmative votes exceeds the number of negative votes at a meeting at which a quorum of that voting group is present) or to one or more other voting groups or to actions for which the Model Act provides a greater voting requirement — for example, changes of a fundamental nature in the corporation like certain amendments to articles of incorporation (section 10.03), mergers (section 11.03), sales of all or substantially all the property of a corporation not in the ordinary course of business (section 12.02), and dissolution (section 14.02). Generally, the Model Act requires these fundamental changes to receive the affirmative vote of a majority of the votes entitled to be cast on the proposal by each voting group entitled to vote thereon rather than by a majority of the shares voting affirmatively or negatively at a meeting at which a quorum is present.

A provision that increases the requirement for approval of an ordinary matter or a fundamental change is usually referred to as a “supermajority” provision.

Section 7.27(b) requires any amendment of the articles of incorporation that adds, modifies, or repeals any supermajority provision to be approved by the greater of the proposed quorum and vote requirement or by the quorum and vote required by the articles before their amendment. Thus, a supermajority provision that requires an 80 percent affirmative vote of all eligible votes of a voting group present at the meeting may not be removed from the articles of incorporation or reduced in any way except by an 80 percent affirmative vote. If the 80 percent requirement is coupled with a quorum requirement for a voting group that shares representing two-thirds of the total votes must be present in person or by proxy, both the 80 percent voting requirement and the two-thirds quorum requirement are immune from reduction except at a meeting of the voting group at which the two-thirds quorum requirement is met and the reduction is approved by an 80 percent affirmative vote. If the proposal is to increase the 80 percent voting requirement to 90 percent, that proposal must be approved by a 90 percent affirmative vote at a meeting of the voting group at which the two-thirds quorum requirement is met; if the proposal is to increase the two-thirds quorum requirement to three-fourths without changing the 80 percent voting requirement, that proposal must be approved by an 80 percent affirmative vote at a meeting of the voting group at which a three-fourths quorum requirement is met.

North Carolina Commentary

This section differs from the Model Act by permitting a bylaw adopted by the shareholders to establish greater quorum or voting requirements for shareholders. If adopted after July 1, 1990, such a bylaw must be approved by a quorum and vote sufficient to amend the articles of incorporation for that purpose. Any such provision, whether in the articles of incorporation or in the bylaws, may not itself be amended by a quorum or vote less than the quorum or vote therein prescribed.

§ 55-7-28. Voting for directors; cumulative voting.

  1. Unless otherwise provided in the articles of incorporation or in an agreement valid under G.S. 55-7-31, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present.
  2. Except as provided in subsection (e) of this section, shareholders do not have a right to cumulate their votes for directors unless the articles of incorporation so provide.
  3. A statement included in the articles of incorporation that “[all] [a designated voting group of ] shareholders are entitled to cumulate their votes for directors” (or words of similar import) means that the shareholders designated are entitled to multiply the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among two or more candidates.
  4. Shares otherwise entitled to vote cumulatively may not be voted cumulatively at a particular meeting unless:
    1. The meeting notice or proxy statement accompanying the notice states conspicuously that cumulative voting is authorized; or
    2. A shareholder or proxy who has the right to cumulate his votes announces in open meeting, before voting for directors starts, his intention to vote cumulatively; and if such announcement is made, the chair shall declare that all shares entitled to vote have the right to vote cumulatively and shall announce the number of votes represented in person and by proxy, and shall thereupon grant a recess of not less than one hour nor more than four hours, as he shall determine, or of such other period of time as is unanimously then agreed upon.
  5. Shareholders of a corporation incorporated in this State shall have the right to cumulate their votes for directors if
    1. The corporation was in existence prior to July 1, 1957, under a charter which does not grant the right of cumulative voting and at the time of the election the stock transfer book of such corporation discloses, or it otherwise appears, that there is at least one stockholder who owns or controls more than one-fourth of the voting stock of such corporation (shares represented at a meeting by revocable proxy relating to that meeting or adjourned meetings thereof shall not be deemed shares “controlled” within the meaning of this subsection), or if
    2. The corporation was incorporated on or after July 1, 1957, and before July 1, 1990,

unless, when the stock transfer books are closed or at the record date fixed to determine the shareholders entitled to receive notice of and to vote at the meeting of shareholders, the corporation is a public corporation as defined in G.S. 55-1-40(18a). This right to vote cumulatively may be denied or limited by amendment to the articles of incorporation, but no such amendment shall be made when the number of shares voting against the amendment would be sufficient to elect a director by cumulative voting if such shares are entitled to be voted cumulatively for the election of directors.

History. Rev., ss. 1183, 1184; 1907, c. 457, s. 1; 1909, c. 827, s. 1; C.S., s. 1173; 1945, c. 635; G.S., s. 55-110; 1951, c. 265, s. 2; 1953, c. 722; 1955, c. 1371, s. 1; 1959, c. 768; c. 1316, s. 23; 1963, c. 1065; 1969, c. 751, ss. 34, 35; 1985, c. 419; 1985 (Reg. Sess., 1986), c. 801, s. 45; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.11; 1991, c. 645, ss. 16(b), 19.

Official Comment

Section 7.28(a) provides that directors are elected by a plurality of the votes cast in an election of directors at a meeting at which a quorum is present of the voting group entitled to participate in the election. A “plurality” means that the individuals with the largest number of votes are elected as directors up to the maximum number of directors to be chosen at the election. In elections in which several factions are competing within a voting group, the individuals elected may have fewer than a majority of all the votes cast in the election. The articles of incorporation or bylaws of the corporation may, however, provide a different manner of election of directors.

The entire board of directors may be elected by a single voting group or the articles of incorporation may provide that different voting groups are entitled to elect a designated number or fraction of the board of directors. See section 8.04. Elections are contested only within specific voting groups.

Under section 7.28(b) each corporation may determine whether or not to elect its directors by cumulative voting. If directors are elected by different voting groups, the articles of incorporation may provide that specified voting groups are entitled to vote cumulatively while others are not. Cumulative voting affects the manner in which votes may be cast by shares participating in the election but does not affect the plurality principle set forth in section 7.28(a).

  1. The manner of electing cumulative voting
  2. The mechanics of cumulative voting

Section 7.28(b) provides basically for an “opt in” election. A corporation has cumulative voting with respect to a voting group only if an affirmative provision to that effect appears in its articles of incorporation. Under section 7.28(c) this election may be made simply by inserting a statement that “all directors are elected by cumulative voting” or “holders of class A shares are entitled to cumulate their votes,” or words of similar import. The effect of such a statement is to make applicable automatically the detailed provisions of subsections (c) and (d) describing the cumulative right to vote at elections of directors by the voting group or groups specified.

Section 7.28(c) describes the mechanics of cumulative voting: each shareholder may multiply the number of votes he is entitled to cast (based on the number of shares held by him) by the number of directors to be elected by the voting group at the meeting and may cast the product for a single candidate or distribute the product among two or more candidates. By casting all his votes for a single candidate or a limited number of candidates, a minority shareholder increases his voting power and may be able to elect one or more directors.

Section 7.28(d) applies only if cumulative voting is potentially available under section 7.28(b). It is designed to ensure that all shareholders participating in the election understand the rules and to avoid the distortions that may be created when some shareholders vote cumulatively while others do not. Cumulative voting will be employed if the notice of meeting or accompanying proxy statement conspicuously announces that a shareholder is entitled to cumulate his votes or a shareholder who is entitled to vote gives notice to the corporation of his intent to do so at least 48 hours before the meeting. This notice puts the corporation and all shareholders who are entitled to vote in the election with that shareholder on notice that voting will be on a cumulative basis. If this notice is given by any shareholder, all other shareholders who are part of the same voting group are entitled to vote cumulatively without giving further notice.

The proxy regulations of the Securities and Exchange Commission require proxy statements to include a statement that persons have the right to vote cumulatively, if that is the case, and briefly to describe that right.

Amended North Carolina Commentary

The Model Act was modified in subsection (a) to clarify that an agreement valid under G.S. 55-7-31 may modify the vote by which directors are elected.

For corporations incorporated on or after July 1, 1990, subsection (b) changes prior law, which mandated cumulative voting except with respect to corporations having shares listed on national securities exchanges or held by more than 2,000 holders of record. A corporation may elect to retain cumulative voting by a provision in its articles of incorporation or in a shareholders’ agreement complying with G.S. 55-7-31.

The provisions of subdivision (d)(2) were modified from the Model Act to conform with prior law with respect to the manner of electing to vote cumulatively.

Subsection (e) is a transitional provision that preserves cumulative voting for substantially all corporations that had cumulative voting by law prior to July 1, 1990.

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

The right of cumulative voting in an election of corporate directors was granted by former G.S. 55-68(c). Stancil v. Bruce Stancil Refrigeration, Inc., 81 N.C. App. 567, 344 S.E.2d 789, 1986 N.C. App. LEXIS 2336 (1986).

When Cumulative Voting Applies. —

See Bridgers v. Staton, 150 N.C. 216, 63 S.E. 892, 1909 N.C. LEXIS 32 (1909).

Requirements for Exercise of Cumulative Voting. —

Under former G.S. 55-68, before the right of cumulative voting may be exercised, four things must be done: (1) A shareholder must announce in the open meeting, before the voting starts, that he intends to vote cumulatively; (2) upon such an announcement, the chair must declare that all shares have the right to vote cumulatively; (3) the chair must announce the number of shares present in person or by proxy; and (4) the chair must declare a recess of not less than one hour nor more than four hours, unless a different time period is unanimously agreed upon. Stancil v. Bruce Stancil Refrigeration, Inc., 81 N.C. App. 567, 344 S.E.2d 789, 1986 N.C. App. LEXIS 2336 (1986).

Same — Purpose. —

The four requirements imposed by former G.S. 55-68(c) for the exercise of cumulative voting were designed, among other things, (1) to prevent a shareholder, by a surprise announcement of his intention to vote cumulatively, from taking unfair advantage of other shareholders, and (2) to permit the shareholders an opportunity to determine how their votes may be distributed to their best advantage. Stancil v. Bruce Stancil Refrigeration, Inc., 81 N.C. App. 567, 344 S.E.2d 789, 1986 N.C. App. LEXIS 2336 (1986).

Lack of Recess. —

Where the only person who could possibly have been prejudiced by the fact that no recess was taken after the announcement by the holder of 50% of the stock that he intended to vote cumulatively had been made was the owner of the other 50% of the stock, whose duty it was, as chairman of the meeting, to declare a recess, he would not be permitted, by his own violation of the statute, to defeat his fellow shareholder’s proper exercise of a right to vote cumulatively, nor to void an otherwise valid election. Stancil v. Bruce Stancil Refrigeration, Inc., 81 N.C. App. 567, 344 S.E.2d 789, 1986 N.C. App. LEXIS 2336 (1986).

§ 55-7-29.

Reserved for future codification purposes.

Part 3. Voting Trusts and Agreements.

§ 55-7-30. Voting trusts.

  1. One or more shareholders may create a voting trust, conferring on a trustee the right to vote or otherwise act for them, by signing an agreement setting out the provisions of the trust (which may include anything consistent with its purpose) and transferring their shares to the trustee. When a voting trust agreement is signed, the trustee shall prepare a list of the names and addresses of all owners of beneficial interests in the trust, together with the number and class of shares each transferred to the trust, and deliver copies of the list and agreement to the corporation’s principal office.
  2. A voting trust becomes effective on the date the first shares subject to the trust are registered in the trustee’s name.
  3. Repealed by Session Laws 2018-45, s. 5, effective October 1, 2018.
  4. Any limits on the duration of a voting trust shall be as set forth in the voting trust. A voting trust that became effective prior to October 1, 2018, is valid for not more than 10 years after its effective date unless the voting trust is amended to provide otherwise by agreement of the parties to the voting trust. An amendment to a voting trust under this subsection shall bind only those parties signing it. The voting trustee shall deliver copies of the amendment and a list of beneficial owners signing it to the corporation’s principal office.

History. 1955, c. 1371, s. 1; 1963, c. 1233; 1973, c. 469, ss. 26-28; 1989, c. 265, s. 1; 2018-45, s. 5.

Official Comment to the Model Business Corporation Act, 2016 Revision

A voting trust is a device by which one or more shareholders divorce the voting rights of their shares from the ownership, retaining the latter but transferring the former to one or more trustees in whom the voting rights of all the shareholders who are parties to the trust are pooled. Section 7.30(a) provides a straightforward procedure for the creation of an enforceable voting trust and does not impose narrow or technical requirements. Typically, the voting trust provides that all attributes of beneficial ownership other than the power to vote are retained by the voting trust beneficial owners. In addition, the voting trustees may issue to the voting trust beneficial owners voting trust certificates which may be transferable in the same way as shares. Section 7.30 does not limit the duration of a voting trust, consistent with section 7.32 governing shareholder agreements generally. Section 7.30 permits participants to specify limits but does not establish an automatic sunset provision as a matter of law. Section 7.30(c) addresses voting trusts entered into when the Act limited their duration to 10 years.

North Carolina Commentary

The Model Act was modified in the second sentence of subsection (c) to insert “not more than” in order to clarify that a voting trust may be extended for any period less than 10 years.

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2018-45, s. 5, effective October 1, 2018, deleted the former last sentence of subsection (b), which read: “A voting trust is valid for not more than 10 years after its effective date unless extended under subsection (c).”; deleted subsection (c), pertaining to extensions of voting trusts for additional terms; and added subsection (d).

Legal Periodicals.

For note, “Voting Trusts — Should Trust Principles Apply to Close Corporations?,” see 48 N.C.L. Rev. 342 (1970).

§ 55-7-31. Shareholders’ agreements.

  1. An agreement between two or more shareholders, if in writing and signed by the parties thereto, may provide that in the exercise of any voting rights of shares held by the parties, including any vote with respect to directors, the shares shall be voted as provided by the agreement, or as the parties may agree, or as determined in accordance with any procedure (including arbitration) specified in the agreement. A voting agreement created under this subsection is not subject to the provisions of G.S. 55-7-30 and is specifically enforceable.
  2. Except for public corporations, an agreement among the shareholders of a corporation that complies with this section and does any or all of the following is effective among the shareholders and the corporation even though it is inconsistent with one or more other provisions of this Chapter:
    1. Eliminates the board of directors or restricts the discretion or powers of the board of directors.
    2. Governs the authorization or making of distributions, whether or not in proportion to ownership of shares, subject to the limitations in G.S. 55-6-40.
    3. Establishes who shall be directors or officers of the corporation, or their terms of office or manner of selection or removal.
    4. Governs, in general or in regard to specific matters, the exercise or division of voting power by or between the shareholders and directors or by among any of them, including use of weighted voting rights or director proxies.
    5. Establishes the terms and conditions of any agreement for the transfer or use of property or the provision of services between or among the corporation and any shareholder, director, officer, or employee of the corporation.
    6. Transfers to one or more shareholders or other persons all or part of the authority to exercise the corporate powers or to manage the business and affairs of the corporation, including the resolution of any issue about which there exists a deadlock among directors or shareholders.
    7. Requires dissolution of the corporation at the request of one or more of the shareholders or upon the occurrence of a specified event or contingency.
    8. Otherwise governs the exercise of the 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.
  3. Repealed by Session Laws 2018-45, s. 6, effective October 1, 2018.
  4. Both of the following requirements apply to an agreement authorized by subsection (b) of this section:
    1. The agreement shall be set forth (i) in the articles of incorporation or bylaws and approved by all persons who are shareholders at the time of the agreement or (ii) in a written document that is signed by all persons who are shareholders at the time of the agreement and is made known to the corporation.
    2. The agreement is subject to amendment only by all persons who are shareholders at the time of the amendment unless the agreement provides otherwise.
  5. The existence of an agreement authorized by subsection (b) of this section shall be noted conspicuously on the front or back of each certificate for outstanding shares or on the information statement required by G.S. 55-6-26(b). If, at the time of the agreement, the corporation has shares outstanding represented by certificates, the corporation shall recall the outstanding certificates and issue substitute certificates that comply with this subsection. The failure to note the existence of the agreement on the certificate or information statement shall not affect the validity of the agreement or any action taken pursuant to it. Any purchaser of shares who, at the time of purchase, did not have knowledge of the existence of the agreement is entitled to rescission of the purchase. A purchaser is deemed to have knowledge of the existence of the agreement if its existence is noted on the certificate or information statement for the shares in compliance with this subsection and, if the shares are not represented by a certificate, the information statement is delivered to the purchaser at or prior to the time of purchase of the shares. An action to enforce the right of rescission authorized by this subsection shall be commenced within the earlier of 90 days after discovery of the existence of the agreement or two years after the time of purchase of the shares.
  6. An agreement authorized by subsection (b) of this section shall cease to be effective when the corporation becomes a public corporation. If the agreement ceases to be effective for any reason, the board of directors may, if the agreement is contained or referred to in the corporation’s articles of incorporation or bylaws, adopt an amendment to the articles of incorporation or bylaws, without shareholder action, to delete the agreement and any references to it.
  7. The existence or performance of an agreement authorized by subsection (b) of this section shall not be a ground for imposing personal liability on any shareholder for the acts or debts of the corporation even if the agreement or its performance treats the corporation as if it were a partnership or results in failure to observe the corporate formalities otherwise applicable to the matters governed by the agreement.
  8. Incorporators or subscribers for shares may act as shareholders with respect to an agreement authorized by subsection (b) of this section if no shares have been issued when the agreement is made.
  9. A written agreement between all or less than all of the shareholders, whether solely between themselves or between one or more of them and a party who is not a shareholder, is not invalid as between the parties thereto on the ground that it relates to the conduct of the affairs of the corporation so as to limit the discretion or powers of the board of directors. The effect of the agreement is to relieve the directors of, and impose upon the person or persons in whom the discretion or powers are vested, liability for managerial acts or omissions that are imposed on directors to the extent and so long as the discretion or powers of the board of directors in its management of corporate affairs is controlled by the agreement.
  10. Any limits on the duration of any agreement authorized by this section shall be set forth in the agreement. A voting agreement authorized by subsection (a) of this section that became effective prior to October 1, 2018, is valid as between the parties thereto for not more than 10 years after its effective date or, if later, the effective date of the most recent extension or renewal of the voting agreement, unless it is amended after October 1, 2018, to provide otherwise by agreement of the parties thereto. An amendment to a voting agreement under this subsection shall bind only those parties signing it.

History. 1955, c. 1371, s. 1; 1973, c. 469, s. 29; 1981 (Reg. Sess., 1982), c. 1163; 1989, c. 265, s. 1; 2018-45, s. 6.

Official Comment to the Model Business Corporation Act, 2016 Revision

Shareholders of some corporations, especially those that are closely held, frequently enter into agreements that govern the operation of the enterprise.

Section 7.32 provides, within the context of the traditional corporate structure, legal certainty to such agreements that embody various aspects of the business arrangement established by the shareholders to meet their business and personal needs. The subject matter of these arrangements includes governance of the entity, allocation of the economic return from the business, and other aspects of the relationships among shareholders, directors, and the corporation which are part of the business arrangement. Section 7.32 also recognizes that many of the corporate norms contained in the Act were designed with an eye towards corporations whose management and share ownership are distinct. These functions are often conjoined in some corporations, such as the close corporation. Thus, section 7.32 validates agreements among shareholders even when the agreements are inconsistent with the statutory norms contained in the Act.

Importantly, section 7.32 only addresses the parties to the shareholder agreement, their transferees, and the corporation, and does not have any binding legal effect on the state, creditors, or other third persons.

Section 7.32 supplements the other provisions of the Act. If an agreement is not in conflict with another section of the Act, no resort need be made to section 7.32 with its requirement of unanimity. For example, special provisions may be included in the articles of incorporation or bylaws with less than unanimous shareholder agreement so long as such provisions are not in conflict with other provisions of the Act. Similarly, section 7.32 would not have to be relied upon to validate typical buy-sell agreements among two or more shareholders or the covenants and other terms of a stock purchase agreement entered into in connection with the issuance of shares by a corporation.

=p0:0 1. Section 7.32(a)

An agreement authorized by section 7.32 is “not inconsistent with law” within the meaning of sections 2.02(b)(2) and 2.06(b) of the Act.

The range of agreements validated by section 7.32(a) is expansive though not unlimited. Section 7.32 defines the types of agreements that can be validated largely by illustration. The seven specific categories that are listed are designed to cover some of the most frequently used arrangements. There are numerous other arrangements that may be made, and section 7.32(a)(8) provides an additional category for any provisions that, in a manner inconsistent with any other provision of the Act, otherwise govern the exercise of the corporate powers or the management of the business and affairs of the corporation or the relationship between and among the shareholders, the directors, and the corporation or any of them, and are not contrary to public policy.

Section 7.32(a) validates virtually all types of shareholder agreements that, in practice, normally concern shareholders and their advisors. Given that breadth, any provision that may be contained in the articles of incorporation with a majority vote under sections 2.02(b)(2)(ii) and (iii), as well as under section 2.02(b)(4), may also be effective if contained in a shareholder agreement that complies with section 7.32.

The provisions of a shareholder agreement authorized by section 7.32(a) will often, in operation, conflict with the language of more than one section of the Act, and courts should in such cases construe all related sections of the Act flexibly and in a manner consistent with the underlying intent of the shareholder agreement. Thus, for example, in the case of an agreement that provides for weighted voting by directors, every reference in the Act to a majority or other proportion of directors should be construed to refer to a majority or other proportion of the votes of the directors.

Although the limits of section 7.32(a)(8) are left uncertain, there are provisions of the Act that may not be overridden if they reflect core principles of public policy with respect to corporate affairs. For example, a provision of a shareholder agreement that purports to eliminate all of the standards of conduct established under section 8.30 might be viewed as contrary to public policy and thus not validated under section 7.32(a)(8). Similarly, a provision that exculpates directors from liability more broadly than permitted by section 2.02(b)(4), or indemnifies them more broadly than permitted by section 2.02(b)(5), might not be validated under section 7.32 because of strong public policy reasons for the statutory limitations on the right to exculpate directors from liability and to indemnify them. The validity of some provisions may depend upon the circumstances. For example, a provision of a shareholder agreement that limited inspection rights under section 16.02 or the right to financial statements under section 16.20 might, as a general matter, be valid, but that provision might not be given effect if it prevented shareholders from obtaining information necessary to determine whether directors of the corporation have satisfied the standards of conduct under section 8.30. The foregoing are examples and are not intended to be exclusive.

As noted above, shareholder agreements otherwise validated by section 7.32 are not legally binding on the state, on creditors, or on other third parties. For example, an agreement that dispenses with the need to make corporate filings required by the Act would be ineffective. Similarly, an agreement among shareholders that provides that only the president has authority to enter into contracts for the corporation would not, without more, be binding against third parties, and ordinary principles of agency, including the concept of apparent authority, would continue to apply.

2. Section 7.32(b)

Section 7.32 minimizes the formal requirements for a shareholder agreement so as not to restrict unduly the shareholders’ ability to take advantage of the flexibility the section provides. Thus, it is not necessary to “opt in” to a special class of close corporations to obtain the benefits of section 7.32. An agreement can be validated under section 7.32 whether it is set forth in the articles of incorporation, the bylaws or in a separate agreement, and regardless of whether section 7.32 is specifically referenced in the agreement. Where the corporation has a single shareholder, the requirement of an “agreement among the shareholders” is satisfied by the unilateral action of the shareholder in establishing the terms of the agreement, evidenced by provisions in the articles of incorporation or bylaws, or in a writing signed by the sole shareholder. Although a writing signed by all the shareholders is not required where the agreement is contained in articles of incorporation or bylaws unanimously approved, it may be desirable to have all the shareholders actually sign the instrument to establish unequivocally their agreement. Similarly, although transferees are bound by a valid shareholder agreement, subject to section 7.32(c), it may be desirable to obtain the affirmative written assent of the transferee at the time of the transfer. Section 7.32(b) also establishes and permits amendments by less than unanimous agreement if the shareholder agreement so provides.

Section 7.32(b) requires unanimous shareholder approval of the shareholder agreement regardless of entitlement to vote. Unanimity is required because an agreement authorized by section 7.32 can effect material organic changes in the corporation’s operation and structure, and in the rights and obligations of shareholders.

The requirement that the shareholder agreement be made known to the corporation is the predicate for the requirement in section 7.32(c) that share certificates or information statements be legended to note the existence of the agreement. No specific form of notification is required and the agreement need not be filed with the corporation. In the case of shareholder agreements in the articles of incorporation or bylaws, the corporation will necessarily have notice. In the case of a shareholder agreement outside the articles of incorporation or bylaws, the requirement of signatures by all of the shareholders should in virtually all cases be sufficient to make the corporation aware of the agreement, as one or more signatories will normally also be a director or an officer.

3. Section 7.32(c)

Section 7.32(c) addresses the effect of a shareholder agreement on subsequent purchasers or transferees of shares. Typically, corporations with shareholder agreements also have restrictions on the transferability of the shares as authorized by section 6.27, thus lessening the practical effects of the problem in the context of voluntary transferees. Transferees of shares without knowledge of the agreement or those acquiring shares upon the death of an original participant in a close corporation may, however, be heavily affected. Weighing the burdens on transferees against the burdens on the remaining shareholders in the enterprise, section 7.32(c) affirms the continued validity of the shareholder agreement on all transferees, whether by purchase, gift, operation of law, or otherwise. Unlike restrictions on transfer, it may be impossible to enforce a shareholder agreement against less than all of the shareholders. Thus, under section 7.32, one who inherits shares subject to a shareholder agreement must continue to abide by the agreement. If that is not the desired result, care must be exercised at the initiation of the shareholder agreement to ensure a different outcome, such as providing for a buy-back upon death.

Where shares are transferred to a purchaser without knowledge of a shareholder agreement, the validity of the agreement is similarly unaffected, but the purchaser is afforded a rescission remedy against the seller. Under section 7.32(c), the time at which notice to a purchaser is relevant for purposes of determining entitlement to rescission is the time when a purchaser acquires the shares rather than when a commitment is made to acquire the shares. If the purchaser learns of the agreement after committing to purchase but before acquiring the shares, the purchaser may not proceed with the purchase and still obtain the benefit of the remedies in section 7.32(c). Under contract principles and the securities laws, a failure to disclose the existence of a shareholder agreement may constitute the omission of a material fact and may excuse performance of the commitment to purchase. The term “purchaser” includes a person acquiring shares upon initial issue or by transfer, and also includes a pledgee, for whom the time of purchase is the time the shares are pledged.

Section 7.32 addresses the underlying rights of shares and shareholders and the validity of shareholder action which redefines those rights, as contrasted with questions regarding entitlement to ownership of the security, competing ownership claims, and disclosure issues. Consistent with this dichotomy, the rights and remedies available to purchasers under section 7.32(c) are independent of those provided by contract law, Article 8 of the Uniform Commercial Code, the securities laws, and other laws outside the Act.

With respect to the related subject of restrictions on transferability of shares, note that section 7.32 does not directly address or validate such restrictions, which are governed instead by section 6.27 of the Act. However, if such restrictions are adopted as a part of a shareholder agreement that complies with the requirements of section 7.32, a court should apply the concept of reasonableness under section 6.27 in determining the validity of such restrictions.

Section 7.32(c) contains an affirmative requirement that the share certificate or information statement for the shares be legended to note the existence of a shareholder agreement. No specified form of legend is required, and a simple statement that “[t]he shares represented by this certificate are subject to a shareholder agreement” is sufficient. At that point, a purchaser must obtain a copy of the shareholder agreement from the transferor or proceed at the purchaser’s peril. In the event a corporation fails to legend share certificates or information statements, a court may, in an appropriate case, imply a cause of action against the corporation in favor of an injured purchaser without knowledge of a shareholder agreement. The circumstances under which such a remedy would be implied, the proper measure of damages, and other attributes of and limitations on such an implied remedy are left to development in the courts.

A purchaser who has no actual knowledge of a shareholder agreement and is not charged with knowledge by virtue of a legend on the certificate or information statement has a rescission remedy against the transferor (which would be the corporation in the case of a new issue of shares).

If the shares are certificated and duly legended, a purchaser is charged with notice of the shareholder agreement even if the purchaser never saw the certificate. In the case of uncertificated shares, however, the purchaser is not charged with notice of the shareholder agreement unless a duly-legended information statement is delivered to the purchaser at or before the time of purchase. This different rule for uncertificated shares is intended to provide an additional safeguard to protect innocent purchasers, and is necessary because section 6.26(b) of the Act and Article 8 of the Uniform Commercial Code permit delivery of statements after a transfer of shares.

4. Section 7.32(d)

Section 7.32(d) recognizes that the terms of a shareholder agreement may provide for its termination upon the happening of a specified event or condition. An example may be when the corporation undergoes an initial public offering. This approach is consistent with the broad freedom of contract provided to participants in such enterprises.

5. Section 7.32(e) through (g)

Section 7.32(e) provides a shift of liability from the directors to any person or persons in whom the discretion or powers otherwise exercised by the board of directors are vested under the shareholder agreement. A shareholder agreement which provides for such a shift of responsibility, with the concomitant shift of liability provided by subsection § 7.32(e), could also provide for exculpation from that liability to the extent otherwise authorized by the Act. The transfer of liability provided by subsection § 7.32(e) covers liabilities imposed on directors “by law,” which is intended to include liabilities arising under the Act, the common law, and statutory law outside the Act.

Section 7.32(f) provides that shareholders shall not have personal liability for the debts of a corporation arising out of acts or omissions taken pursuant to a shareholder agreement validated by section 7.32. Section 7.32(g) authorizes shareholder agreements for corporations that are in the process of being organized and do not yet have shareholders.

6. Section 7.32(h)

Section 7.32 does not limit the duration of a shareholder agreement. This approach is consistent with the wide freedom of contract provided to participants in such enterprises. For agreements entered into during a time that section 7.32 provided for a 10-year term if no other time limit was specified, section 7.32(h) provides that its duration will be governed by the provisions of section 7.32 concerning duration in force at the time the agreement became effective. This would include, for example, both the default termination rule and the authority under former section 7.32(b)(2) that such an agreement’s automatic 10-year term could be amended by all shareholders (unless the agreement had prohibited such amendment).

REVISED NORTH CAROLINA COMMENTARY 2018

The provisions of the Model Act relating to voting agreements were omitted entirely and replaced by the provisions, slightly modified, of former G.S. 55-73, which appear in subsection (a). Subsections (b), (d), (e), (f), (g), (h) and (j) are based on Model Act Section 7.32 subsections (a), (b), (c), (d), (f), (g) and (h), respectively. Model Act Section 7.32 subsection (e) was omitted entirely and replaced in subsection (i) by the provisions of former G.S. 55-31(c).

Supplemental North Carolina Commentary 2018

Subsections (b), (d), (e), (f), (g), (h) and (j) are based on Model Act subsections (a), (b), (c), (d), (f), (g) and (h), respectively. Model Act subsection (e) was omitted entirely and replaced in subsection (i) by the provisions of former G.S. 55-31(c).

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2018-45, s. 6, effective October 1, 2018, rewrote the section.

Legal Periodicals.

For note, “Voting Trusts — Should Trust Principles Apply to Close Corporations?,” see 48 N.C.L. Rev. 342 (1970).

For comment on tax and corporate aspects of professional incorporation in North Carolina, see 48 N.C.L. Rev. 573 (1970).

For note on unanimous approval of corporate bylaws and creation of shareholder agreements, see 1 Campbell L. Rev. 153 (1979).

For note on the amendment of shareholder agreements of close corporations in North Carolina, see 15 Wake Forest L. Rev. 531 (1979).

For note on close corporations and personal liability from execution of shareholder agreements, see 16 Wake Forest L. Rev. 975 (1980).

For article, “Defining the Scope of Controlling Shareholders’ Fiduciary Responsibilities,” see 22 Wake Forest L. Rev. 9 (1987).

For note discussing shareholder agreements in close corporations, in light of Penley v. Penley, 314 N.C. 1, 332 S.E.2d 51 (1985), see 22 Wake Forest L. Rev. 147 (1987).

CASE NOTES

Analysis

I.General Consideration

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Intent of Statute. —

Former G.S. 55-73 was not intended to, and it did not, define “shareholders’ agreements” to mean only those arrangements which were an attempt to treat the corporation as if it were a partnership or which arranged relationships in a manner that would be appropriate only between partners. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

The authorization of shareholders’ agreements was a recognition of the needs of stockholders in a close corporation to be able to protect themselves from each other and from hostile invaders. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

The reason for phrasing the provisions of the statute mainly in the negative was to provide latitude to both the shareholders who enter into agreements which relate to the affairs of the corporation and to the courts which must construe and assess their contracts. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

The provisions of former G.S. 55-73 were designed to permit the management of close corporations by shareholders thereof who act by other than normal corporate procedures, and such actions by the shareholders, if so intended, must perforce bind the corporation. Snyder v. Freeman, 300 N.C. 204, 266 S.E.2d 593, 1980 N.C. LEXIS 1067 (1980).

Principal Provision as to Close Corporations. —

With respect to close corporations, the heart of the North Carolina Business Corporation Act was former G.S. 55-73. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

By means of a shareholders’ agreement a small group of investors who seek gain from direct participation in their business and not from trading its stock or securities in the open market can adopt the decision-making procedures of partnership, avoid the consequences of majority rule (the standard operating procedure for corporations), and still enjoy the tax advantages and limited liability of a corporation. Such businesses are often called “incorporated partnerships.” Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Shareholders’ Agreement Defined. —

A shareholders’ agreement is a contract between shareholders which may apply broadly to the rights of the shareholders in conducting the business of the corporation, so long as their purposes are legal and not contrary to public policy. Blount v. Taft, 29 N.C. App. 626, 225 S.E.2d 583, 1976 N.C. App. LEXIS 2617, cert. denied, 290 N.C. 659, 228 S.E.2d 450, 1976 N.C. LEXIS 1129 (1976).

In a broad sense the term “shareholders’ agreement” refers to any agreement among two or more shareholders regarding their conduct in relation to the corporation whose shares they own. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Terms “bylaw” and “shareholders’ agreement” are not mutually exclusive. Bylaws which are unanimously enacted by all the shareholders of a corporation are also shareholders’ agreements. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Function of Shareholders’ Agreement. —

Ordinarily the function of a shareholders’ agreement is to avoid the consequences of majority rule or other statutory norms imposed by the corporate form. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Partnership-Like Management Enabled. —

The statute enables the shareholders of a close corporation by agreement in writing assented to by all to provide for the management and operation of the corporation in a manner similar to a partnership. Blount v. Taft, 29 N.C. App. 626, 225 S.E.2d 583, 1976 N.C. App. LEXIS 2617, cert. denied, 290 N.C. 659, 228 S.E.2d 450, 1976 N.C. LEXIS 1129 (1976).

No particular title, phrasing or content is necessary for a consensual arrangement among all shareholders to constitute a “shareholders’ agreement.” Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Form and Substance May Vary. —

The form and substance of a shareholders’ agreement will vary with the nature of the business and the objectives of the parties. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Who May Be Party to Agreement. —

A shareholders’ agreement may be between stockholders in a corporation the shares of which are publicly traded or one whose shares are closely held. However, agreements among shareholders are primarily a feature of close corporations. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Agreement as to Voting Is Valid Absent Fraud or Prejudice. —

North Carolina is aligned with the majority of jurisdictions which hold that a contract entered into between corporate stockholders to which they agree to vote their stock in a specified manner, including agreements for the election of directors and corporate officers, is not invalid, unless it is inspired by fraud or will prejudice the other stockholders. Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964); Stein v. Capital Outdoor Adv., Inc., 273 N.C. 77, 159 S.E.2d 351, 1968 N.C. LEXIS 560 (1968).

Agreements for Future Management Must Be “Otherwise Lawful”. —

Both former G.S. 55-24 and G.S. 55-73 required that contemplated agreements providing for the future management and control of a corporation be “otherwise lawful.” Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964).

When Such Agreements Held Invalid. —

Agreements providing for the future management and control of a corporation which violate the express charter or statutory provision, contemplate an illegal object, involve any fraud, oppression or wrong against other stockholders or are made in consideration of a private benefit to the promisor, will be declared invalid. Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964).

Invalidation of Agreements. —

A shareholders’ agreement is not valid and enforceable merely because it fits the specifications of this section. It can be invalidated under the law of contracts upon any ground which would entitle a party to such relief. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Burden of Proof of Valid Agreement. —

Those who have the burden of proving a valid shareholders’ agreement could ease this burden by offering an agreement in writing signed by all shareholders, or if embodied in the charter or bylaws, explicit designation therein of a shareholders’ agreement and provision for alteration of the agreement if different from the alteration or amendment provisions applicable to the charter or bylaw provisions which are not within the agreement. Blount v. Taft, 29 N.C. App. 626, 225 S.E.2d 583, 1976 N.C. App. LEXIS 2617, cert. denied, 290 N.C. 659, 228 S.E.2d 450, 1976 N.C. LEXIS 1129 (1976).

Enforcement of Agreements. —

Agreements by shareholders to vote their shares so as to cause their corporation to take certain action are generally enforceable against the shareholders. Snyder v. Freeman, 300 N.C. 204, 266 S.E.2d 593, 1980 N.C. LEXIS 1067 (1980).

Agreements Construed and Enforced Like Contracts. —

Since consensual arrangements among shareholders are agreements — the products of negotiation — they should be construed and enforced like any other contract so as to give effect to the intent of the parties as expressed in their agreements, unless they violate the express charter or statutory provision, contemplate an illegal object, involve fraud, oppression or wrong against other shareholders, or are made in consideration of a private benefit to the promisor. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978); Snyder v. Freeman, 300 N.C. 204, 266 S.E.2d 593, 1980 N.C. LEXIS 1067 (1980).

II.Decisions under Former G.S. 55-73(b)

Intent. —

Subsection (b) of former G.S. 55-73 was intended to supply a legal framework within which partner-like arrangements having a reasonable business purpose could be worked out with substantial assurance of legal validity. Blount v. Taft, 29 N.C. App. 626, 225 S.E.2d 583, 1976 N.C. App. LEXIS 2617, cert. denied, 290 N.C. 659, 228 S.E.2d 450, 1976 N.C. LEXIS 1129 (1976).

Subsection (b) of former G.S. 55-73 simply abrogated, as to agreements within its purview, certain judicial doctrines which had formerly invalidated particular shareholders’ agreements on those grounds which the statute disallowed. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Language in subsection (b) of former G.S. 55-73 was widely borrowed for the close corporations statutes of several other jurisdictions. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

Effect of Subsection (b) of Former G.S. 55-73 Generally. —

Subsection (b) of former G.S. 55-73 created no distinctions between a shareholders’ agreement in which the parties sought to deal with the corporation as a partnership and any other stockholders’ agreement which related to any phase of the affairs of the corporation. It added nothing, either expressly or impliedly, to the words of the agreement; nor did it suspend the rules of contract law relating to its construction, modification or rescission. It merely provided that a shareholders’ agreement in which the parties sought to deal with affairs of the corporation in a manner which would be appropriate only between partners was not invalid for that reason. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

To meet the requirements of subsection (b) of former G.S. 55-73 for establishing a valid shareholders’ agreement in a close corporation, there had to be an agreement in writing of all shareholders; but the writing could consist of a written provision in the charter or bylaws of the corporation which could be based on an oral agreement which had been embodied therein. Blount v. Taft, 29 N.C. App. 626, 225 S.E.2d 583, 1976 N.C. App. LEXIS 2617, cert. denied, 290 N.C. 659, 228 S.E.2d 450, 1976 N.C. LEXIS 1129 (1976).

Consensual agreements coming within subsection (b) of former G.S. 55-73 were shareholders’ agreements whether embodied in the bylaws or in a duly executed side agreement. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

III.Amendment and Termination

Amendment of Agreement in Charter or Bylaws. —

When parties to a shareholders’ agreement choose to embody it in the charter or bylaws, it must be concluded that they intended for statutory or common-law norms governing amendment to apply, absent an expressed intention to deviate from them. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

If a shareholders’ agreement is made a part of the charter or bylaws it will be subject to amendment as provided therein, or in the absence of an internal provision governing amendments, as provided by statutory norms. Blount v. Taft, 295 N.C. 472, 246 S.E.2d 763, 1978 N.C. LEXIS 1014 (1978).

How Altered or Terminated. —

A shareholders’ agreement may not be altered or terminated except as provided by the agreement, or by all the parties, or by operation of law. Blount v. Taft, 29 N.C. App. 626, 225 S.E.2d 583, 1976 N.C. App. LEXIS 2617, cert. denied, 290 N.C. 659, 228 S.E.2d 450, 1976 N.C. LEXIS 1129 (1976).

§§ 55-7-32 through 55-7-39.

Reserved for future codification purposes.

Part 4. Derivative Proceedings.

§ 55-7-40. Shareholders’ derivative actions.

Subject to the provisions of G.S. 55-7-41 and G.S. 55-7-42, a shareholder may bring a derivative proceeding in the superior court of this State. The superior court has exclusive original jurisdiction over shareholder derivative actions.

History. 1973, c. 469, s. 12; 1989, c. 265, s. 1; 1995, c. 149, s. 1.

Official Comment

Section 7.40 deals with the procedural requirements applicable to derivative suits. A great deal of controversy has surrounded the derivative suit, and widely different perceptions as to the value and efficacy of this litigation continue to exist. On the one hand, the derivative action has historically been the principal method of challenging allegedly improper, illegal, or unreasonable action by management. On the other hand, it has long been recognized that the derivative suit may be instituted more with a view to obtaining a settlement favorable to the plaintiff and his attorney than to righting a wrong to the corporation (the so-called “strike suit”).

Earlier versions of section 7.40, and similar statutes in many states, imposed a series of procedural requirements designed in part to deter or prevent strike suits. The FEDERAL RULES OF CIVIL PROCEDURE, rule 23.1, also imposes procedural requirements on derivative litigation brought in federal court. There has thus been a great deal of experience with procedural devices to control abuses of the derivative suit. Section 7.40 reflects a reappraisal of these devices in light of major developments in corporate governance, the public demand for corporate accountability, and the corporate response in the form of greater independence and sense of responsibility in boards of directors.

  1. Procedural Requirements
    1. The plaintiff may be either a registered or beneficial owner of shares held by a nominee in his behalf
    2. The plaintiff must have been an owner of shares at the time of the transaction in question
    3. The complaint must be verified
    4. Option holders and convertible debenture holders are not permitted to sue
    5. There must be prior notice and demand on directors in most circumstances
    6. There need be no prior notice to or demand on shareholders
    7. A court may stay a derivative suit while the board of directors investigate
    8. Plaintiffs are not required to post bond as security for expenses
    9. Recovery of reasonable expenses of suit, including attorneys’ fees, if suit brought without good cause
    10. Settlement or discontinuance of derivative litigation requires judicial approval

The procedural requirements imposed by section 7.40 are as follows:

Many statutes, including earlier versions of the Model Act, required the plaintiff to be a shareholder “of record.” This limiting requirement was dropped in revising section 7.40, in light of the widespread use of street name or nominee ownership of shares. At the same time, it was determined that the beneficial owner of shares held in a voting trust should also be permitted to serve as a plaintiff in a derivative suit. These changes were accomplished by the addition of a special definition of “shareholder” in subsection (e) to broaden the definition of that term in section 1.40.

The Model Act and the statutes of many states have long imposed a “contemporaneous ownership” rule, i.e., the plaintiff must have been an owner of shares at the time of the transaction in question. This rule has been criticized as being unduly narrow and technical and unnecessary to prevent the transfer or purchase of lawsuits. A few states, particularly California, Cal. G.C.L. § 800(B), have relaxed this rule to the extent of allowing some subsequent purchasers of shares to be plaintiffs in limited circumstances.

The decision to retain the contemporaneous ownership rule in section 7.40 was based primarily on the view that it was simple, clear, and easy to apply while the California approach might encourage litigation on peripheral issues like the extent of the plaintiff’s knowledge of the transaction in question when he acquired his shares. Further, there has been no persuasive showing that the contemporaneous ownership rule has prevented the litigation of substantial suits since there appear to be many persons who might qualify as plaintiffs to bring suit even if subsequent purchasers are disqualified.

Section 7.40(b) requires the complaint in a derivative suit to be verified, i.e., sworn to. Compare FEDERAL RULES OF CIVIL PROCEDURE, rule 23.1; Surowitz v. Hilton Hotels Corp., 383 U.S. 363 (1966). This requirement provides some protection against groundless litigation without deterring suits brought in good faith.

Arguments may be made that long-term creditors and investors with the privilege of becoming shareholders by the exercise of options or conversion rights should be permitted to bring derivative suits. These arguments, however, appear to involve the substantive rights of these various classes of investors more than the procedures required for the assertion of derivative rights on behalf of the corporation. See, e.g., Harff v. Kerkorian, 324 A.2d 215 (Del. Ch. 1974), rev’d in part, 347 A.2d 133 (Del. 1975). Therefore, section 7.40(a) does not permit option holders or convertible debenture holders to serve as derivative plaintiffs.

The purpose of a demand on the board of directors is to stimulate the board of directors to enforce the rights of the corporation on its own. Modern trends in corporate governance—particularly the increasing number of outside directors and greater directors sensitivity to their roles in the corporation and to the possibility of personal liability—improve the likelihood that the board of directors will weigh carefully the shareholder’s demand. Therefore, section 7.40(b) requires an allegation with particularity of the demand made, if any, on the board of directors. On the other hand, there may be circumstances showing that a demand on the board of directors would be useless, and in those circumstances it should be sufficient to allege the reasons why the plaintiff did not make the demand.

Of itself, the rejection by the board of directors of the shareholder’s demand neither permits nor precludes the shareholder’s suit. See paragraph 2a. below.

Rule 23.1 of the FEDERAL RULES OF CIVIL PROCEDURE requires that, in addition to a demand on the board of directors, a demand be made on shareholders “if necessary.” The statutes of a number of states, including California and New York, require demands only on boards of directors.

Although a demand on shareholders seems generally consistent with the broad doctrine of requiring exhaustion of all internal avenues of relief before commencement of suit, the board of directors, not the shareholders, is charged with governance of the corporation, including the commencement and management of litigation. Further, to require a demand on shareholders would virtually require the plaintiff to engage in a preliminary proxy contest and, in the case of publicly held corporations, would greatly increase the costs of filing all derivative suits, discouraging even legitimate cases.

For these reasons, it was concluded that the requirement of a demand on shareholders would add uncertainty, expense, and delay without commensurately improving the prospects of resolving the substantive issues.

The last sentence of section 7.40(b) provides that if the corporation undertakes an investigation, the court may stay the proceeding until the investigation of the charges made in the demand or complaint is completed. The purpose of this stay is to preserve the right of the board of directors to consider whether or not to seek to enforce on its own the corporation’s claim.

Earlier versions of the Model Act and the statutes of many states required a plaintiff to give security for reasonable expenses, including attorneys’ fees, if his holdings of shares did not reach a specified size or value—five percent of the outstanding shares or a value of $25,000 in the earlier version of the Model Act. This requirement has been deleted. The security for expenses requirement, to the extent it was based on the size or value of the plaintiff’s holdings rather than on the apparent good faith of his claim, was subject to criticism that it unreasonably discriminated against small shareholders.

The basic policy question with respect to the requirement of a bond for small shareholders is how far to go in protecting the corporation and its officers and directors from suits. The choice is between making the right to sue widely available, without obstacles except in obviously baseless cases, or imposing obstacles in the way of the small shareholder without imposing a similar obstacle in the way of the large shareholder. Moreover, no bond requirement exists for class actions, antitrust cases, or individual actions for personal injury, all of which involve the corporation in substantial expense of defending against suit.

Several states have concluded on the basis of these considerations that the bond requirement for small plaintiffs should be repealed or not adopted.

In lieu of the bond requirement, section 7.40(d) provides that on termination of a proceeding the court may require the complainant to pay the defendants’ reasonable expenses, including attorneys’ fees, if it finds that the proceeding “was commenced without reasonable cause.” This test is similar to but not identical with the test utilized in section 13.31, relating to dissenters’ rights, where the standard for award of expenses and attorneys’ fees is that dissenters “acted arbitrarily, vexatiously or not in good faith” in demanding a judicial appraisal of their shares. The derivative action situation is sufficiently different from the dissenters’ rights situation to justify a different and less onerous test for imposing costs on the plaintiff. The test of section 7.40 that the action was brought without reasonable cause is appropriate to deter strike suits, on the one hand, and on the other hand to protect plaintiffs whose suits have a reasonable foundation.

Section 7.40(d) does not refer to the award of expenses, including attorneys’ fees, to successful plaintiffs. The right of successful plaintiffs in derivative suits to this recovery is so universally recognized, both by statute and on the theory of a recovery of a fund or benefit for the corporation, that specific reference was thought to be unnecessary. The intention is to preserve fully these nonstatutory rights of reimbursement. Therefore, no negative inference should be drawn from section 7.40(d) as to the rights of plaintiffs to reimbursement.

Abuses in the conduct of derivative litigation may occur on the part of defendants and their counsel as well as by plaintiffs and their counsel. Abuses may occur with respect to motions, pleadings, requests for discovery and resistance to discovery when conducted either in bad faith or without good cause. Sanctions to deal with such conduct are not included in this Act because courts possess adequate power to impose appropriate sanctions under rules of civil procedure or the general equity power of courts. See Roadway Express, Inc. v. Piper, 447 U.S. 752 (1980).

Section 7.40(c) follows the FEDERAL RULES OF CIVIL PROCEDURE, and the statutes of a number of states, including New York and Michigan, and requires that all proposed settlements and discontinuances must receive judicial approval. This requirement seems a natural consequence of the proposition that a derivative suit is brought on behalf of the class of all shareholders and avoids many of the evils of the strike suit by preventing the individual shareholder-plaintiff from settling privately with the defendants.

Section 7.40(c) also requires notice to all affected shareholders if the court determines that the proposed settlement may substantially affect the interest of one or more classes of shareholders. Unlike the statutes of some states, however, section 7.40(c) does not address the issue of which party should bear the cost of giving this notice. That is a matter left to the discretion of the court reviewing the proposed settlement.

2. Issues unresolved by section 7.40

Several issues relating to section 7.40 were reserved for future consideration because it was felt that further experience or experimentation was desirable before their resolution was encapsulated in model statutory language. The issues so reserved include the following:

a. Should a decision by the board of directors that maintenance of a derivative suit is against the corporation’s interest bar the suit?

The case law concerning the power of the board of directors or of an independent committee of the board to bar a derivative suit without judicial review is in a state of flux. See, e.g., Burks v. Lasker, 441 U.S. 471 (1979); Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979); Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981); Aronson v. Lewis, 473 A.2d 805 (Del. 1984). For the present it should be permitted to continue to develop. Moreover, this issue may be the subject of an amendment to the Model Act at a later date.

b. Should the method of calculating attorneys’ fees be specified?

Courts are today scrutinizing plaintiffs’ fees more closely than they have in the past. This trend should be encouraged, and it was therefore concluded that the subject was not appropriate for statutory language at the present time. It is believed that the problem is more acute with respect to plaintiffs’ fees recoverable under general principles of derivative litigation than it is under section 7.40(d).

c. Should there be a maximum limit on an individual’s liability?

The sums involved in claims of alleged wrongdoing by a corporation and its officers and directors are often extremely large when viewed in the light of the personal resources of even an affluent person. Claims for millions of dollars may create a high leverage to settle, and the potential exposure to these claims is an undesirable deterrent to service on the board of directors, particularly by outside directors. The proposed Federal Securities Code imposes a limit on individual liability resulting from certain violations of the Code and similar suggestions have also been made by others. On the other hand, where a director’s or officer’s conduct has proved to be wrongful and detrimental to the corporation, he should clearly be required to disgorge the entire benefit, and it also may be appropriate to require him rather than the victimized corporation and shareholders to bear any other loss suffered.

Since no state has yet adopted a limitation of liability provision, and there is no experience with these provisions, it was thought inappropriate at the present time to discard the principle of unlimited liability.

North Carolina Commentary

The provisions of the Model Act relating to the procedures in derivative proceedings were omitted in their entirety. The provisions of former G.S. 55-55, with minor modifications, have become subsections (a), (b), (d), (e), and (f). The second sentence of subsection (b) was added to permit the stay of any proceeding in the discretion of the court during pendency of an investigation by the corporation of the charges made in the demand or complaint.

Subsection (c) permits a recently developed procedure whereby two or more disinterested directors or other disinterested persons determine whether a corporation should pursue a particular legal right or remedy and report their findings to the court, which may then determine whether or not the derivative proceedings should be continued.

Subsection (g), which had no equivalent under prior law, imposes additional conditions upon plaintiffs who bring derivative proceedings on behalf of public corporations.

Subsection (h), which also had no equivalent under prior law, assures availability of the normal corporate attorney-client privilege in derivative proceedings.

Legal Periodicals.

For note, “The Nonprofit Corporation in North Carolina: Recognizing a Right to Member Derivative Suits,” see 63 N.C.L. Rev. 999 (1985).

For note, “Alford v. Shaw: North Carolina Adopts a Prophylactic Rule to Prevent Termination of Shareholders’ Derivative Suits Through Special Litigation Committees,” see 64 N.C.L. Rev. 1228 (1986).

For article, “The Corporate Fox and the Shareholders’ Hen House: Reflections on Alford v. Shaw,” see 65 N.C.L. Rev. 569 (1987).

For article, “The Perils Of Caesar’s Wife: Special Litigation Committees v. The Judiciary; Is Anyone Above Reproach?,” see 22 Wake Forest L. Rev. 57 (1987).

For note discussing presumption of good faith in deliberations by special litigation committees, in light of Alford v. Shaw, see 22 Wake Forest L. Rev. 127 (1987).

For article discussing derivative suit litigation, see 66 N.C.L. Rev. 565 (1988).

For note, “Shareholder Derivative Suits Under the New North Carolina Business Corporation Act,” see 68 N.C. L. Rev. 1091 (1990).

For article, “Agency Theory: Still Viable? Six Degrees of Separation: From Derivative Suits to Shareholder Class Actions,” see 48 Wake Forest L. Rev. 643 (2013).

For article, “How Understanding the Nature of Corporate Norms Can Prevent Their Destruction by Settlements,” see 66 Duke L.J. 501 (2016).

For article, “Regulating Derivatives: A Fundamental Rethinking,” see 70 Duke L.J. 545 (2020).

CASE NOTES

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Derivative actions are brought by one or more shareholders to enforce the rights of the corporation. Robbins v. Tweetsie R.R., Inc., 126 N.C. App. 572, 486 S.E.2d 453, 1997 N.C. App. LEXIS 621 (1997).

There is no individual recovery where a shareholder alleges mere injury to the corporation and nothing more. Robbins v. Tweetsie R.R., Inc., 126 N.C. App. 572, 486 S.E.2d 453, 1997 N.C. App. LEXIS 621 (1997).

No Standing to Bring Suit Without Beneficial Interest. —

Plaintiff had no standing to bring suit challenging action of corporation where he failed to maintain his status as a holder of a beneficial interest in the stock of that corporation throughout the pendency of the litigation. Ashburn v. Wicker, 95 N.C. App. 162, 381 S.E.2d 876, 1989 N.C. App. LEXIS 686 (1989), overruled, Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990) (decided under the former Business Corporation Act).

Plaintiff had no standing to challenge a loan made by defendant corporation to other defendant when plaintiff’s beneficial interest, if any, in the defendant corporation consisted of a pledge of stock which secured a debt that was paid by another pledgee of the stock before plaintiff filed suit. Ashburn v. Wicker, 95 N.C. App. 162, 381 S.E.2d 876, 1989 N.C. App. LEXIS 686 (1989), overruled, Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990) (decided under the former Business Corporation Act).

Effect of Futility Doctrine. —

The futility doctrine does not allow a shareholder to bring a claim directly. Rather, it simply allows a shareholder to bring a derivative claim without first making demand upon corporate management. Thus, this doctrine offered no support to plaintiff’s attempt to recover directly for the breach of his fellow directors’ fiduciary duty to corporation. Silverman v. Miller, 155 B.R. 362, 1993 Bankr. LEXIS 741 (Bankr. E.D.N.C. 1993).

Pledgee of corporate stock has a significant beneficial interest to have standing to sue the corporation derivatively for mismanagement, provided he maintains an equitable interest in the collateral. Ashburn v. Wicker, 95 N.C. App. 162, 381 S.E.2d 876, 1989 N.C. App. LEXIS 686 (1989), overruled, Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990) (decided under the former Business Corporation Act).

Demand for Action by Directors as Prerequisite. —

Former G.S. 55-55(b) codified the prior case law of this and other jurisdictions that in order for an individual as a shareholder to bring suit against the directors of a corporation for breach of their duties to the corporation, he must show that he has exhausted his intracorporate remedies by making demand upon the board to do that which he seeks to have done. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

In the absence of circumstances indicating that such a step would be futile, a demand that the directors act is a prerequisite of a shareholder suing upon behalf of the corporation. Roney v. Joyner, 86 N.C. App. 81, 356 S.E.2d 401, 1987 N.C. App. LEXIS 2663 (1987).

Exhaustion of intracorporate remedies (that is, “demand”) is a procedural prerequisite to the filing of a derivative action in this State. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Minutes of board of directors meeting introduced into evidence by plaintiff confirmed that plaintiff made a motion that the corporation retain counsel to investigate the usurpation of a commercial leasing deal, and that this motion died for lack of a second. This action satisfied the demand requirement of this section, and any further demand would have been futile. Silverman v. Miller, 155 B.R. 362, 1993 Bankr. LEXIS 741 (Bankr. E.D.N.C. 1993).

An equitable exception to the demand requirement may be invoked when the directors who are in control of the corporation are the same ones (or under the control of the same ones) as were initially responsible for the breaches of duty alleged; in such a case, the demand of a shareholder upon the directors to sue themselves or their principals would be futile and therefore is not required for the maintenance of the action. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978); Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Mere negligence of the directors in evaluation of a purchase or in relying upon the advice of accounting and investment experts does not excuse a shareholder from demanding action by the board of directors before suing to enforce a corporate right. Roney v. Joyner, 86 N.C. App. 81, 356 S.E.2d 401, 1987 N.C. App. LEXIS 2663 (1987).

Pleading of Damages and Defenses Thereto. —

The pleading of the damages is an issue which is central to the merits of a derivative action and was not an area in which the corporation had standing to assert a defense. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Business Judgment Rule. —

The business judgment rule, stated simply, provides that when a corporation’s decision not to assert a claim represents a good faith business judgment by its directors, a shareholder will not be permitted to substitute his judgment for that of the company’s management by asserting the claim in a derivative action. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Business Judgment Defense Involves Question of Good Faith. —

Where the business judgment question is presented to the court as a ground for dismissal, the sole issue for determination is whether the decision was made in good faith. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

When Defense of “Business Judgment” Available to Corporation. —

The defense of business judgment is not available to the corporation in a derivative action where a majority of its directors are implicated in the allegations of the suit, as it is a defense on the merits which may properly be interposed only by the directors and management of the corporation, unless the corporation is a real defendant as to some meritorious issue in the suit. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Recommendation of Special Litigation Committee. —

To rely blindly on the report of a corporation-appointed special litigation committee is to abdicate the judicial duty to consider the interests of shareholders imposed by statute; this abdication is particularly inappropriate in a case where shareholders allege serious breaches of fiduciary duties owed to them by the directors controlling the corporation. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

The fact that a special litigation committee appointed by directors charged with self-dealing recommends that derivative action should not proceed, while carrying weight, is not binding upon the trial court; rather, the court must make a fair assessment of the report of the special committee, along with all the other facts and circumstances in the case, in order to determine whether the defendants will be able to show that the transaction complained of was just and reasonable to the corporation. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

The burden is on the movant, usually the corporation on whose behalf the suit was initiated, to prove the independence, disinterestedness, and appropriate qualifications of the committee and that it conducted a reasonable investigation in good faith of the matters alleged in the complaint. The committee is not entitled to a presumption of independence, disinterestedness, good faith, or reasonableness. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Corporation as Defendant Where Interest Adverse to Plaintiff’s. —

In some situations, the corporation in whose interest the derivative action is purportedly brought will have interests adverse to those of the nominal plaintiffs bringing the action derivatively, and will of necessity be more than a nominal defendant. Such situations would include an action to enjoin the performance of a contract by the corporation, to appoint a receiver, to interfere with a corporate reorganization, or to interfere with internal management, where there is no allegation of fraud or bad faith. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Corporation’s Right to Defend Generally. —

A corporation is not powerless in all cases and in all circumstances to resist a derivative action. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Individual and Derivative Action Available to Minority Shareholders in Closely Held Corporation. —

Minority shareholders in a closely held corporation who allege wrongful conduct and corruption against the majority shareholders in the corporation may bring an individual action against those shareholders, in addition to maintaining a derivative action on behalf of the corporation. Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 537 S.E.2d 248, 2000 N.C. App. LEXIS 1207 (2000).

Burden of Proving Reasonableness of Transactions. —

When a stockholder in a derivative action seeks to establish self-dealing on the part of a majority of the board, the burden should be upon those directors to establish that the transactions complained of were just and reasonable to the corporation when entered into or approved. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Defenses Not on Merits Available to Corporation. —

Certain defenses, such as matters of personal jurisdiction, venue and subject matter jurisdiction (which question may arise in the context of alleged existence of prior pending actions involving matters identical to those complained of in the derivative suit) could be asserted by both the corporation and individual defendants where appropriate, as they are not defenses on the merits of the derivative claim. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Additionally, certain defenses which are properly asserted before trial on the merits of the derivative action are peculiar to the corporation alone, and may be properly raised only by the corporate nominal defendant who, for purposes of those matters, ceases to be a nominal defendant and becomes an actual party defendant. These defenses would include the lack of standing of the plaintiffs to sue derivatively for reasons of insufficient representation of shareholders and a failure on plaintiffs’ part to make a demand upon the board of directors. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Limits on Corporation’s Right to Defend. —

In an action brought by a minority shareholder derivatively in the name and right of a corporation, to enforce rights or to seek redress accruing to the corporation, that corporation will be deemed for purposes of the litigation to be aligned as a party plaintiff (except to the extent that the corporation is an actual defendant as to an issue in the action) although for purposes of form it is designated as a nominal defendant. Accordingly, the corporation may not defend itself against the derivative action on the merits and must limit its defenses, if any, to the pre-trial matters proper to it. Where a corporation seeks to extend its defenses beyond those areas in which it may properly conduct them, dismissal will lie against it. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

When Order Not Void for Lack of Notice to Shareholders. —

In an action challenging the appointment of operating receivers for a corporation, there was no merit to defendants’ contention that the initial order of the trial court appointing the receivers was void because certain shareholders were not given notice of the proceedings and were thereby denied their due process rights to notice prior to a court proceeding, the outcome of which would affect their property interests, since there was no requirement in the statutes, either in the provisions governing the appointment of receivers or in the provisions governing derivative shareholder suits, that notice be given to persons who are not parties to the action. Lowder v. All Star Mills, Inc., 301 N.C. 561, 273 S.E.2d 247, 1981 N.C. LEXIS 1013 (1981).

The statute sets forth two distinct standards for awarding attorneys’ fees to successful litigants and taxing unsuccessful litigants with their opponents’ attorney’s fees. The court may award attorney’s fees to a successful litigant who obtains a compromise and settlement or judgment, and may also assess attorney’s fees against an unsuccessful litigant in certain cases. Lowder ex rel. Doby v. Doby, 79 N.C. App. 501, 340 S.E.2d 487, 1986 N.C. App. LEXIS 2084 (1986).

When Fees May Be Awarded. —

The statute does not impose a requirement to quantify the financial success of the derivative claim before fees may be awarded. The plaintiff need only succeed, in whole or in part, on behalf of the corporation. Lowder v. All Star Mills, Inc., 82 N.C. App. 470, 346 S.E.2d 695, 1986 N.C. App. LEXIS 2514 (1986).

Amount of Award. —

The statute does not provide, directly or indirectly, that the award of fees and expenses cannot exceed the specific monetary recovery. Lowder v. All Star Mills, Inc., 82 N.C. App. 470, 346 S.E.2d 695, 1986 N.C. App. LEXIS 2514 (1986).

Award Upheld. —

The removal of a self-dealing, controlling director from office and the appointment of a permanent receiver to protect the corporation in question conferred a substantial benefit on the corporation, so as to justify an award of attorneys’ fees against the corporation. Lowder v. All Star Mills, Inc., 82 N.C. App. 470, 346 S.E.2d 695, 1986 N.C. App. LEXIS 2514 (1986).

Merit Bonus Improperly Added to Award. —

An award of a merit bonus added by the court to the attorneys’ fees awarded, based on factors that were properly considered in the initial determination of the hourly rates and the number of hours reasonably expended, was an abuse of discretion. Lowder v. All Star Mills, Inc., 82 N.C. App. 470, 346 S.E.2d 695, 1986 N.C. App. LEXIS 2514 (1986).

The trial court, in its discretion, may charge plaintiffs with defendants’ reasonable expenses, including attorneys’ fees, incurred in defense of the action. Lowder ex rel. Doby v. Doby, 79 N.C. App. 501, 340 S.E.2d 487, 1986 N.C. App. LEXIS 2084 (1986).

Plaintiffs’ actions were brought without reasonable cause where both the federal bankruptcy court and state receivership court had previously, either in Chapter X reorganization proceeding or receivership proceeding, dealt with the merits of the allegations made by plaintiffs in their five complaints, and the record was devoid of evidence to support any reasonable belief that there was a sound chance that plaintiffs’ claims in the litigation might be sustained. Lowder ex rel. Doby v. Doby, 79 N.C. App. 501, 340 S.E.2d 487, 1986 N.C. App. LEXIS 2084 (1986).

Calculation of Fees and Expenses. —

Where plaintiff filed five lawsuits involving substantially overlapping contentions of law and fact, four of which were virtually identical and were linked together for purposes of appeal, plaintiffs, who created the situation, could not complain that the fees and expenses apportioned by the trial court to each of these nominally separate proceedings were not calculated with precision. Lowder ex rel. Doby v. Doby, 79 N.C. App. 501, 340 S.E.2d 487, 1986 N.C. App. LEXIS 2084 (1986).

Judicial Review. —

The plain language of the statute requires thorough judicial review of suits initiated by shareholders on behalf of a corporation. The court is directed to determine whether the interest of any shareholder will be substantially affected by the discontinuance, dismissal, compromise, or settlement of a derivative suit. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Although the statute does not specify what test the court must apply in making its determination, it would be difficult for the court to determine whether the interests of shareholders or creditors would be substantially affected by such discontinuance, dismissal, compromise, or settlement without looking at the proposed action substantively; the court must of necessity evaluate the adequacy of materials prepared by the corporation which support the corporation’s decision to settle or dismiss a derivative suit, along with the plaintiff’s forecast of evidence. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Court approval is required for disposition of all derivative suits, even where the directors are not charged with fraud or self-dealing, or where the plaintiff and the board agree to discontinue, dismiss, compromise, or settle the lawsuit. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Disposition Where Amount of Recovery Would Not Outweigh Detriment to Corporation. —

If it appears likely that plaintiff could prevail on the merits, but that the amount of the recovery would not be sufficient to outweigh the detriment to the corporation, the court may allow discontinuance, dismissal, compromise, or settlement. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

In exercising its own independent business judgment, the court must consider “such ethical, commercial, promotional, public relations and fiscal factors as may be involved in a given situation.” Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

The corporation as the party seeking final disposition of the case under former G.S. 55-55(c) (see now this section) has the burden of going forward with evidence, on such items, and to show that continuing the action is more likely than not to be against the interests of the corporation. Of course, the shareholders initiating the suit are also entitled to present evidence and arguments as to their contentions. Ultimately, however, while “the review contemplated does not lend itself to any formula-like approach,” it is for the court to decide whether the case begun in the superior court will continue. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Trial judge may allow discovery to enable him to assess the committee of decision-makers, the investigation made by the committee, the findings of the committee, and the recommendation of the committee. After hearing evidence on these matters, the trial court is to determine the independence, disinterestedness, and good faith of the committee in making its investigation, in addition to the reasonableness of the bases relied upon by the committee in concluding and recommending that the cause of action on behalf of the corporation be disposed of as recommended. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Plaintiffs were not required to pursue statutory dissenters’ rights under former G.S. 55-113 (see now Art. 13 of ch. 55) to oppose merger during litigation in order to maintain standing. Subdivision (c) of former G.S. 55-113 would have deprived them of all interest in defendant corporation. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Responsibility of Court When Party Challenges Recommendation of Corporation. —

Since proceedings under former G.S. 55-55(c) (see now this section) are held before a trial judge sitting without a jury, when a party challenges the recommendation of the corporation in whose name a lawsuit was initiated derivatively, it is the court’s responsibility first, to require the party taking issue with the recommendation to outline his contentions so he may receive an appropriate response from the other parties to the suit, and then secondly, to hear evidence on these contentions, in order to be able to determine whether the lawsuit is to be discontinued, dismissed, settled, or turned over to the plaintiff-shareholders or the corporation for litigation. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

There was no requirement of continuing share ownership in former G.S. 55-55 in order for an individual, who was a shareholder at the time of the transaction about which he was complaining and at the time the action was filed, to proceed with a derivative action. Had the legislature intended to include such a requirement in the corporate statutes, it would have done so. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Section Does Not Contain Continuing Share Ownership Requirement. —

This section, the new statute, while elaborating some of the procedures set forth in former G.S. 55-55, does not contain a continuing share ownership requirement. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

No State Constitutional Right Exists to Trial by Jury of Factual Issues. —

Although a litigant’s right to have a jury try issues of fact concerning the merits of the action initiated by the filing of a derivative suit complaint is guaranteed by the Constitution of North Carolina, the procedure required by former G.S. 55-55(c) (see now this section) did not exist before the adoption of the Constitution of 1868, and therefore no State constitutional right exists to a trial by jury of factual issues that might arise during the course of the proceedings required under this statute. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

A litigant has no right to the determination of factual issues by a jury during proceedings occurring pursuant to former G.S. 55-55(c) (see now this section). In this section of the statute, it is clear that the word “court” referred to the trial judge and not to a jury. The remaining sentences of former G.S. 55-55(c) referred to discretionary decisions exercisable properly only by the trial judge; clearly the legislature did not intend that a jury be involved in the procedures required under former G.S. 55-55(c). Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Jury Properly Not Involved in Deciding Future of Case. —

The trial judge proceeded properly insofar as he did not involve a jury in the decision whether to allow the case to be discontinued, dismissed, compromised or settled. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Judge May Need to Resolve Fact Issues to Determine Future of Case. —

As the judicial official charged under former G.S. 55-55(c) (see now this section) with this authority, the trial judge may well have to resolve issues of fact to decide whether to permit the suit to go forward, be settled, or be dismissed. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Judge, Not Jury, Decides Whether Case Will Be Settled, Dismissed, etc. —

The hearing on motions filed under former G.S. 55-55(c) (see now this section) was appropriately held by the trial judge sitting without a jury. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Trial Court’s Review of Motions to Settle, Dismiss, Compromise or Discontinue. —

The trial court is to undertake a two-step review of motions brought under former G.S. 55-55(c) (see now this section). First, it is to decide whether the proposal for disposition of the case which is submitted to the court was reached by qualified independent disinterested decision-makers who in good faith proceeded to thoroughly investigate and evaluate the claims set forth in the complaint. The second step requires the trial court to exercise its own independent business judgment as to whether the case is to be discontinued, dismissed, compromised or settled. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Procedure and Discovery in Hearing Concerning Motion to Dismiss, Settle, etc. —

For a case discussing interplay of rules and statutes governing procedure and discovery in shareholder’s derivative action, particularly with respect to former G.S. 55-55(c) (see now this section) and G.S. 1A-1, Rules 12, 23 and 56. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Rule 23.1, Fed. R. Civ. P., is entirely consistent with this section, as this section allows for a device that the federal rule does not contemplate. The terms of Rule 23.1 and the appointment of a committee pursuant to this section both can be fully honored in a federal court sitting in diversity. Crown Crafts, Inc. v. Aldrich, 148 F.R.D. 547, 1993 U.S. Dist. LEXIS 12788 (E.D.N.C. 1993).

Appointment of a committee under subsection (c) of former similar section is generally more appropriate in the context of a publicly held corporation, or at the very least within a close corporation with more than two owners. The appointment of a committee would likely only delay litigation in action brought by minority shareholders of close corporation alleging breach of fiduciary duties and deceptive and unfair trade practices. Crown Crafts, Inc. v. Aldrich, 148 F.R.D. 547, 1993 U.S. Dist. LEXIS 12788 (E.D.N.C. 1993).

Issuance of Stay Pending Committee Report. —

The language of subsection (c) of former similar section, while not expressly granting it, contemplates the issuance of a stay pending the committee’s report. The appointment of a committee would be meaningless if the litigation were allowed to continue pending its investigation. Crown Crafts, Inc. v. Aldrich, 148 F.R.D. 547, 1993 U.S. Dist. LEXIS 12788 (E.D.N.C. 1993).

§ 55-7-40.1. Definitions.

In this Part:

  1. “Derivative proceeding” means a civil suit in the right of a domestic corporation or, to the extent provided in G.S. 55-7-47, in the right of a foreign corporation.
  2. “Shareholder” has the same meaning as in G.S. 55-1-40 and includes a beneficial owner whose shares are held in a voting trust or held by a nominee on the beneficial owner’s behalf.

History. 1995, c. 149, s. 1.

CASE NOTES

Standing. —

As 50% shareholder failed to show that her damages differed from those sustained by her corporation, by reason of some special circumstances or special relationship to the defendants, she lacked standing to maintain a direct action against defendants on claims of fraud, constructive fraud, and unfair and deceptive practices. Aubin v. Susi, 149 N.C. App. 320, 560 S.E.2d 875, 2002 N.C. App. LEXIS 190 (2002).

§ 55-7-41. Standing.

A shareholder may not commence or maintain a derivative proceeding unless the shareholder:

  1. Was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time; and
  2. Fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.

History. 1995, c. 149, s. 1.

Legal Periodicals.

For recent development, “In re Wachovia Shareholders Litigation: The Case for the Common Benefit Doctrine,” see 84 N.C. L. Rev. 2066 (2006).

§ 55-7-42. Demand.

No shareholder may commence a derivative proceeding until:

  1. A written demand has been made upon the corporation to take suitable action; and
  2. 90 days have expired from the date the demand was made unless, prior to the expiration of the 90 days, the shareholder was notified that the corporation rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period.

History. 1995, c. 149, s. 1.

Legal Periodicals.

For recent development, “In re Wachovia Shareholders Litigation: The Case for the Common Benefit Doctrine,” see 84 N.C. L. Rev. 2066 (2006).

CASE NOTES

The enactment of this section has eliminated the futility exception to the demand requirement; that is, all derivative actions based on conduct occurring on or after 1 October 1995 require demand. Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 537 S.E.2d 248, 2000 N.C. App. LEXIS 1207 (2000).

This section does not require that the complaint in a derivative proceeding state how the demand requirement was met, although its predecessor statute (G.S. 55-7-40) required that a plaintiff allege his efforts “with particularity;” consequently, the trial court erred in dismissing the plaintiffs’ complaint in the context of a G.S. 1A-1, Rule 12(b)(6) motion for failure to comply with the statutory requirements of a derivative action where the plaintiffs had complied with G.S. 1A-1, Rule 9(c). Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 537 S.E.2d 248, 2000 N.C. App. LEXIS 1207 (2000).

Failure to Satisfy Requirements of This Section Results in Dismissal. —

The trial court properly dismissed plaintiff’s claims pursuant to G.S. 1A-1, Rule 12(b)(6) for failure to satisfy the shareholder derivative action demand requirement of this section where he was not excused from meeting the requirements because the enactment of it abolished the futility exception under North Carolina law. Allen v. Ferrera, 141 N.C. App. 284, 540 S.E.2d 761, 2000 N.C. App. LEXIS 1404 (2000).

Trial court properly dismissed a property owners association’s suit against its developer, which asserted claims of constructive fraud and unfair and deceptive trade practices, for lack of standing on the part of the association, because the association failed to obtain a two-thirds vote of its membership authorizing the suit, as was required by its bylaws; as a result, the trial court lacked subject matter jurisdiction and properly granted the developer’s motion to dismiss and motion for summary judgment. Peninsula Prop. Owners Ass'n v. Crescent Res., LLC, 171 N.C. App. 89, 614 S.E.2d 351, 2005 N.C. App. LEXIS 1165 (2005).

The failure to make adequate pre-litigation demand did not bar plaintiffs minority shareholders’ claims insofar as they were based on defendant’s actions prior to October 1, 1995, the date that this section became effective. Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 537 S.E.2d 248, 2000 N.C. App. LEXIS 1207 (2000).

No Impact on Class Certification Request. —

Tobacco cooperative had not shown that the trial court abused its discretion by allowing the motion for class certification notwithstanding the cooperative’s contention that the current and former flue-cured tobacco producers’ action was derivative in nature as nothing in G.S. 55-7-42 precluded class certification. Fisher v. Flue-Cured Tobacco Coop. Stabilization Corp., 369 N.C. 202, 794 S.E.2d 699, 2016 N.C. LEXIS 1120 (2016).

§ 55-7-43. Stay of proceedings.

If the corporation commences an inquiry into the allegations set forth in the demand or complaint, the court may stay a derivative proceeding for a period of time the court deems appropriate.

History. 1995, c. 149, s. 1.

§ 55-7-44. Dismissal.

  1. The court shall dismiss a derivative proceeding on motion of the corporation if one of the groups specified in subsection (b) or (f) of this section determines in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the derivative proceeding is not in the best interest of the corporation.
  2. Unless a panel is appointed pursuant to subsection (f) of this section, the inquiry and determination shall be made by:
    1. A majority vote of independent directors present at a meeting of the board of directors if the independent directors constitute a quorum; or
    2. A majority vote of a committee consisting of two or more independent directors appointed by majority vote of independent directors present at a meeting of the board of directors, whether or not the independent directors constituted a quorum.
  3. For purposes of this section, none of the following factors by itself shall cause a director to be considered not independent:
    1. The nomination or election of the director by persons who are defendants in the derivative proceeding or against whom action is demanded;
    2. The naming of the director as a defendant in the derivative proceeding or as a person against whom action is demanded; or
    3. The approval by the director of the act being challenged in the derivative proceeding or demand if the act resulted in no personal benefit to the director.
  4. If a derivative proceeding is commenced after a determination has been made rejecting a demand by a shareholder, the complaint shall allege with particularity facts establishing that the requirements of subsection (a) of this section have not been met. Defendants may make a motion to dismiss a complaint under subsection (a) of this section for failure to comply with this subsection. Prior to the court’s ruling on such a motion to dismiss, the plaintiff shall be entitled to discovery only with respect to the issues presented by the motion and only if and to the extent that the plaintiff has alleged such facts with particularity. The preliminary discovery shall be limited solely to matters germane and necessary to support the facts alleged with particularity relating solely to the requirements of subsection (a) of this section.
  5. If a majority of the board of directors does not consist of independent directors at the time the determination is made, the corporation shall have the burden of proving that the requirements of subsection (a) of this section have been met. If a majority of the board of directors consists of independent directors at the time the determination is made, the plaintiff shall have the burden of proving that the requirements of subsection (a) of this section have not been met.
  6. The court may appoint a panel of one or more independent persons upon motion of the corporation to make a determination whether the maintenance of the derivative proceeding is in the best interest of the corporation. The plaintiff shall have the burden of proving that the requirements of subsection (a) of this section have not been met.

History. 1995, c. 149, s. 1; c. 509, s. 135.2(t).

Legal Periodicals.

For recent development, “In re Wachovia Shareholders Litigation: The Case for the Common Benefit Doctrine,” see 84 N.C. L. Rev. 2066 (2006).

CASE NOTES

Appointment of Panel. —

Appointment of an independent panel to assess the merits of the alleged derivative claims was not warranted because appointment of the panel would not be a cost efficient way to determine the merits of the derivative claims, and the closely-held corporation at issue was no longer a going concern. McKee v. James, 2010 NCBC LEXIS 81 (N.C. Super. Ct. Oct. 29, 2010), dismissed in part, 2013 NCBC 38, 2013 NCBC LEXIS 33 (N.C. Super. Ct. July 24, 2013).

Special Committee Conducted Reasonable Inquiry. —

Shareholder derivative action failed because a special committee, which was comprised of independent directors and a law firm, conducted a reasonable inquiry that actually exceeded the scope of the shareholder’s allegations of corporate misconduct based on alleged accounting errors, and the committee made a good faith decision that the lawsuit was not in the best interests of the corporation since there was no evidence supporting the shareholder’s claims, and damages were questionable while litigation would be costly and disruptive. Madvig v. Gaither, 461 F. Supp. 2d 398, 2006 U.S. Dist. LEXIS 85031 (W.D.N.C. 2006).

In a shareholder derivative case in which a corporation moved to dismiss, a magistrate judge correctly found that the special committee acted reasonably in determining that the derivative suit was not in the corporation’s best interest; under G.S. 55-8-30(b)(2), the special committee was entitled to rely in good faith on the outside counsel’s report. Borchardt v. King, 2015 U.S. Dist. LEXIS 10604 (M.D.N.C. Jan. 29, 2015).

In a shareholder derivative case in which a corporation moved to dismiss, it met its burden of showing that the special committee acted independently, in good faith, and based upon a reasonable inquiry in determining that the derivative suit was not in the corporation’s best interest. Borchardt v. King, 2015 U.S. Dist. LEXIS 10604 (M.D.N.C. Jan. 29, 2015).

§ 55-7-45. Discontinuance or settlement.

  1. A derivative proceeding may not be discontinued or settled without the court’s approval. If the court determines that a proposed discontinuance or settlement will substantially affect the interests of the corporation’s shareholders or a class of shareholders, the court shall direct that notice be given to the shareholders affected.
  2. The court shall determine the manner and form of the notice and the manner in which costs of the notice shall be borne.

History. 1995, c. 149, s. 1.

§ 55-7-46. Payment of expenses.

On termination of the derivative proceeding, the court may:

  1. Order the corporation to pay the plaintiff’s reasonable expenses, including attorneys’ fees, incurred in the proceeding if it finds that the proceeding has resulted in a substantial benefit to the corporation;
  2. Order the plaintiff to pay any defendant’s reasonable expenses, including attorneys’ fees, incurred in defending the proceeding if it finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose; or
  3. Order a party to pay an opposing party’s reasonable expenses, including attorneys’ fees, incurred as a result of the filing of a pleading, motion, or other paper, if the court, after reasonable inquiry, finds that the pleading, motion, or other paper was not well grounded in fact or was not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it was interposed for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

History. 1995, c. 149, s. 1.

Legal Periodicals.

For recent development, “In re Wachovia Shareholders Litigation: The Case for the Common Benefit Doctrine,” see 84 N.C. L. Rev. 2066 (2006).

CASE NOTES

Award of Fees to Non-Prevailing Party. —

Under G.S. 55-7-46(1), the party seeking attorney’s fees need not necessarily be the prevailing party, nor must the derivative claim have proceeded to a final judgment or order; upon a plaintiff’s motion, the trial court is at least required to consider whether the proceeding resulted in a substantial benefit to the corporation, and whether such benefit warranted any award of fees. Aubin v. Susi, 149 N.C. App. 320, 560 S.E.2d 875, 2002 N.C. App. LEXIS 190 (2002).

§ 55-7-47. Applicability to foreign corporations.

In any derivative proceeding in the right of a foreign corporation, the matters covered by this Part shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation except for the matters governed by G.S. 55-7-43, 55-7-45, and 55-7-46.

History. 1995, c. 149, s. 1.

CASE NOTES

Internal Affairs Doctrine. —

In a suit between a lender and a broker, a prior New York decision was not overturned when the North Carolina court found that the lender breached fiduciary duties because: (1) collateral estoppel, res judicata, and full faith and credit did not apply since the New York court did not dispose of or address the broker’s counterclaims; and (2) the internal affairs doctrine was a conflict of laws principle, not a jurisdictional principal. Bluebird Corp. v. Aubin, 188 N.C. App. 671, 657 S.E.2d 55, 2008 N.C. App. LEXIS 279 (2008).

Suit for Breach of Fiduciary Duty. —

In a shareholder’s suit asserting breach of fiduciary duties and other violations wherein the substantive law of North Carolina applied, the shareholder’s motion to amend the complaint was granted despite the motion being filed without seeking the required leave of court; regardless, the motion to dismiss filed by the defending officers and directors was granted for failure to state a claim because the amended complaint failed to show any misrepresentations made in the 2011 proxy statement sent out with regard to the executive compensation plan. Haberland v. Bulkeley, 896 F. Supp. 2d 410, 2012 U.S. Dist. LEXIS 137980 (E.D.N.C. 2012).

§ 55-7-48. Suits against directors of public corporations.

In addition to the requirements of this Part, the plaintiff in an action brought on behalf of a corporation that is a public corporation at the time of the action against one or more of its directors for monetary damages shall:

  1. Allege, and it must appear, that each plaintiff has been a shareholder or holder of a beneficial interest in shares of the corporation for at least one year;
  2. Bring the action within two years of the date of the transaction of which the plaintiff complains; and
  3. If the court orders, execute and deposit with the clerk of court a written undertaking with sufficient surety, approved by the court, to indemnify the corporation against any and all expenses reasonably expected to be incurred by the corporation in connection with the proceeding, including expenses arising by way of indemnity.

History. 1995, c. 149, s. 1.

§ 55-7-49. Privileged communications.

In any derivative proceeding, no shareholder shall be entitled to obtain or have access to any communication within the scope of the corporation’s attorney-client privilege that could not be obtained by or would not be accessible to a party in an action other than on behalf of the corporation.

History. 1995, c. 149, s. 1.

§ 55-7-50. Exclusive forum or venue provisions valid.

A provision in the articles of incorporation or bylaws of a corporation that specifies a forum or venue in North Carolina as the exclusive forum or venue for litigation relating to the internal affairs of the corporation shall be valid and enforceable.

History. 2014-110, s. 3.

Article 8. Directors and Officers.

Part 1. Board of Directors.

§ 55-8-01. Requirement for and duties of board of directors.

  1. Except as provided in subsection (c), each corporation must have a board of directors.
  2. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors, except as otherwise provided in the articles of incorporation or in an agreement valid under G.S. 55-7-31(b).
  3. A corporation may dispense with or limit the authority of a board of directors by describing in its articles of incorporation or in an agreement valid under G.S. 55-7-31(b) who will perform some or all of the duties of a board of directors; but no such limitation upon the authority which the board of directors would otherwise have shall be effective against other persons without actual knowledge of such limitation.
  4. To the extent the articles of incorporation or an agreement valid under G.S. 55-7-31(b) vests authority of the board of directors in an individual or group other than the board of directors, such individual or group in the exercise of such authority shall be deemed to be acting as the board of directors for all purposes of this Chapter.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2005-268, s. 6.

Official Comment

Section 8.01 requires that every corporation have a board of directors except that a corporation with 50 or fewer shareholders may dispense with or limit the authority of the board of directors by describing in the articles “who will perform some or all of the duties of a board of directors.” Section 8.01(c). This election is independent of the various close corporation elections permitted by the Model Statutory Close Corporation Supplement, though the basic standard of 50 shareholders is the same in both section 8.01 and that Supplement.

Obviously, some form of governance is necessary for every corporation. The board of directors is the traditional form of corporate governance but it need not be the exclusive form. Patterns of management may be tailored to specific needs in connection with family controlled enterprises, wholly or partially owned subsidiaries, or corporate joint ventures without the requirement of electing close corporation status under the Model Statutory Close Corporation Supplement. The persons who perform some or all of the duties of the board of directors may be designated “trustees,” “agents,” or “managers,” and they may be selected in ways other than the traditional election by the shareholders. It is necessary, however, that some person or group perform these duties, and the designated persons, while performing them, are subject to the same duties as directors.

An example of the restructuring of the traditional board of directors permitted by section 8.01 is presented by the facts of Lehrman v. Cohen, 43 Del. Ch. 222, 222 A.2d 800 (Del. 1966), where two shareholders (or allied family interests) had equal voting power and wished to permit the corporation’s attorney to cast a tie-breaking vote on the board of directors without giving him a participating equity interest in the corporation. While the desired result was successfully achieved in that case by creating a class of voting shares without a significant economic interest in the corporation, the same result may be reached under section 8.01 directly by provision in the articles of incorporation without creating a special class of shares.

Any arrangement under section 8.01(c) may also be established by a close corporation election under the Model Statutory Close Corporation Supplement.

When a corporation has more than 50 shareholders, it must adopt the traditional board of directors as its sole form of governance. Because questions may at least theoretically arise how joint share ownership and other arrangements should be counted in applying a numerical limitation, section 1.42 prescribes rules for calculating the number of shareholders for the purpose of this and other numerical limitations in the Model Act.

Section 8.01(b) states that if a corporation has a board of directors “all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of,” the board of directors. The quoted language is chosen to reflect the role and functions of boards of directors in all varieties of corporations. In a small corporation and in some larger corporations where the board of directors is composed entirely of persons actively involved in the management of the corporate business, it may be reasonable to describe management as being “by” the board of directors. But a different model is appropriate for the boards of directors of publicly held corporations, which usually include individuals not actively involved in management. In these corporations it is not feasible to impose a requirement that the business and affairs of the corporation be managed “by” the board of directors. In these corporations the appropriate model is that the business and affairs be managed “under the direction of” the board of directors, since the role of the board of directors consist principally of the formulation of major management policy with little or no direct involvement in day-to-day management.

As a correlative in large and complex publicly held corporations it is generally recognized that the board of directors may delegate to appropriate officers those powers not required by law to be exercised by the board of directors itself. Although delegation does not relieve the board of directors from its responsibilities of oversight, directors should not be held personally responsible for actions or omissions of officers, employees, or agents of the corporation so long as the directors have relied reasonably upon these officers, employees, or agents. See section 8.30 and its Official Comment. The board of directors has the power to probe to any depth its chooses in day-to-day management, but it has the responsibility to do so only to the extent that section 8.30 requires.

Section 8.01(b) also recognizes that the powers of the board of directors may be limited by express provisions in the articles of incorporation.

North Carolina Commentary

This section contains several variations from former G.S. 55-24 and former G.S. 55-73. First, it requires that the board direct the management of the business and affairs of the corporation whereas former G.S. 55-24 required that the board manage the corporation’s business and affairs. As pointed out in the Official Comment, the new language clarifies the role of directors as policy makers rather than managers. Also, this section clarifies that all shareholders must assent to an agreement (not contained in the articles of incorporation) which limits or dispenses with the board; and it explicitly provides that those in whom the board’s authority is vested under such an arrangement are deemed to be acting as the board for all purposes of this Act (including the duties defined in G.S. 55-8-30 et seq.). Such substitutes for the board would be subject to liability to the same extent as directors.

This section differs from the Model Act in permitting limitation of the board’s authority in a shareholders’ agreement as well as in the articles of incorporation, and it permits dispensing with or limiting the board of a corporation regardless of the number of shareholders. Any such arrangement accomplished through a shareholders’ agreement must comply with G.S. 55-7-31(b). The second clause of subsection (c) relating to rights of third parties without knowledge does not appear in the Model Act; it brings forward former G.S. 55-24(b). Finally, paragraph (d) does not appear in the Model Act, although it is likely that the same result would be reached under the Model Act. See Official Comment, supra , para. 2.

Former G.S. 55-33, which provided for jurisdiction over nonresident directors, was not brought forward because G.S. 1-75.4, the general jurisdiction statute, specifically provides such jurisdiction. It was therefore deemed unnecessary to continue to include a special provision in Chapter 55.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, subsection (b) is amended to recognize that a corporation’s business and affairs may be managed by the board of directors.

Effect of Amendments.

Session Laws 2005-268, s. 6, effective October 1, 2005, inserted “by or” following “corporation managed” in subsection (b).

Legal Periodicals.

For note on the liability of directors and officers for negligent management, see 45 N.C.L. Rev. 748 (1967).

For note on the fiduciary duty of interested directors and the business judgment rule, see 45 N.C.L. Rev. 755 (1967).

For comment on promoters of corporations dealing in condominiums, see 12 Wake Forest L. Rev. 979 (1976).

For note on close corporations and personal liability from execution of shareholder agreements, see 16 Wake Forest L. Rev. 975 (1980).

For article on corporate directors’ accountability, see 66 N.C.L. Rev. 171 (1987).

For article discussing derivative suit litigation, see 66 N.C.L. Rev. 565 (1988).

For comment, “Fiduciary Duties of Directors, How Far Do They Go?,” see 23 Wake Forest L. Rev. 163 (1988).

For comment, “North Carolina’s Statutory Limitation on Directors’ Liability,” see 24 Wake Forest L. Rev. 117 (1989).

For article, “The Corporate Persona, Contract (and Market) Failure, and Moral Values,” see 69 N.C.L. Rev. 273 (1991).

For article, “Discrimination, Managerial Discretion and the Corporate Contract,” see 26 Wake Forest L. Rev. 541 (1991).

For note, “Ignorance is not Bliss: Responsible Corporate Officers Convicted of Environmental Crimes and the Federal Sentencing Guidelines,” see 1992 Duke L.J. 145.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article, “Branch Office of the Prosecutor: The New Role of the Corporation in Business Crime Prosecutions,” 89 N.C.L. Rev. 23 (2010).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Diversity and Corporate Performance: A Review of the Psychological Literature,” see 89 N.C. L. Rev. 715 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Commentary: The Milieu of the Boardroom and the Precinct of Employment,” see 89 N.C.L. Rev. 749 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Dangerous Categories: Narratives of Corporate Board Diversity,” see 89 N.C.L. Rev. 759 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Corporate Board Gender Diversity and Stock Performance: The Competence Gap or Institutional Investor Bias?,” see 89 N.C.L. Rev. 809 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Commentary: Puzzles about Corporate Boards and Board Diversity,” see 89 N.C.L. Rev. 841 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Board Diversity Revisted: New Rationale Same Old Story?,” see 89 N.C.L. Rev. 855 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Commentary: Diversity on Corporate Boards: Limits of the Business Case and the Connection Between Supporting Rationales and the Appropriate Response of the Law,” see 89 N.C.L. Rev. 887 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Justifying Board Diversity,” see 89 N.C.L. Rev. 901 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Commentary: The Mismatch Critique Comment on Fanto, Solan, and Darley,” see 89 N.C.L. Rev. 937 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: The Diversity Double Standard,” see 89 N.C.L. Rev. 945 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Commentary: Different Strokes for Different Folks: A Different Standard is not Inherently a Double Standard,” see 89 N.C.L. Rev. 1003 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Showcasing Diversity,” see 89 N.C.L. Rev. 1017 (2011).

For article, “Board Diversity and Corporate Performance: Filling in the Gaps: Commentary: Showcasing: The Positive Spin,” see 89 N.C.L. Rev. 1055 (2011).

For article, “Beyond the Board of Directors,” see 46 Wake Forest L. Rev. 783 (2011).

For article, “Is the Corporate Director’s Duty of Care a ‘Fiduciary’ Duty? Does it Matter?,” see 48 Wake Forest L. Rev. 1027 (2013).

For article, “The Agent’s Problem,” see 70 Duke L.J. 1509 (2021).

CASE NOTES

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Director occupies a fiduciary relation to the company which, by virtue of his office, he represents in the management of its principal functions. Hill v. Pioneer Lumber Co., 113 N.C. 173, 18 S.E. 107, 1893 N.C. LEXIS 39 (1893).

Directors are to be considered and dealt with as trustees or quasi trustees. Besseliew v. Brown, 177 N.C. 65, 97 S.E. 743, 1919 N.C. LEXIS 74 (1919).

Liability for Gross Mismanagement and Neglect. —

Good faith alone will not relieve the directors of a corporation from liability to its creditors for damages caused them by their gross mismanagement and neglect of its affairs. Anthony v. Jeffress, 172 N.C. 378, 90 S.E. 414, 1916 N.C. LEXIS 310 (1916).

Duty of Care. —

Directors are not, as a rule, responsible for mere errors of judgment, nor for slight omissions from which the loss complained of could not have been reasonably expected; but where they accept these positions of trust they are expected and required to give them the care and attention that a prudent man should exercise in like circumstances, and are charged with a like duty, usually the care that a prudent man shows in the conduct of his own affairs of a similar kind. Besseliew v. Brown, 177 N.C. 65, 97 S.E. 743, 1919 N.C. LEXIS 74 (1919).

Same Good Faith Required of Promoters as Directors. —

The promoters of a corporation occupy a relation of trust and confidence towards the corporation which they are calling into existence as well as to each other, and the law requires of them the same good faith it exacts from directors and other fiduciaries. Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964).

Right of Corporation to Sue Negligent Directors. —

Where the directors or managing officers of a corporation are liable in damages for their willful or negligent failure to exercise the care and attention to corporate affairs entrusted to them and which they have assumed, an action will lie against them in favor of the corporation, and in case of its insolvency and receivership, in favor of its receiver. Besseliew v. Brown, 177 N.C. 65, 97 S.E. 743, 1919 N.C. LEXIS 74 (1919).

Directors Establish Policies. —

In general, the directors establish corporate policies and supervise the carrying out of those policies through their duly elected and authorized officers. Burlington Indus., Inc. v. Foil, 284 N.C. 740, 202 S.E.2d 591, 1974 N.C. LEXIS 1339 (1974).

Powers to Borrow Money and Encumber Property. —

The directors of a corporation, unless they are specially restrained by the charter or bylaws, have the power to borrow money with which to conduct its business and to secure payment by mortgage on corporate property. Wall v. Rothrock, 171 N.C. 388, 88 S.E. 633, 1916 N.C. LEXIS 91 (1916).

Director of a company may lend it money when needed for its benefit, and take a lien upon the corporate property as security for its repayment, provided the transaction is open and entirely fair and capable of strict proof as to its bona fides. Hill v. Pioneer Lumber Co., 113 N.C. 173, 18 S.E. 107, 1893 N.C. LEXIS 39 (1893).

Director who is also a creditor of a corporation cannot prefer himself to the other creditors in the application of the corporation’s assets to the security or payment of its debts. Hill v. Pioneer Lumber Co., 113 N.C. 173, 18 S.E. 107, 1893 N.C. LEXIS 39 (1893); Merchants Nat'l Bank v. Newton Cotton Mills, 115 N.C. 507, 20 S.E. 765, 1894 N.C. LEXIS 263 (1894); McIver v. Young Hdwe. Co., 144 N.C. 478, 57 S.E. 169, 1907 N.C. LEXIS 172 (1907).

Right of Directors to Security. —

By taking a mortgage on corporate property when the corporation is in failing circumstances, directors, occupying a fiduciary relation, are not permitted to secure themselves against preexisting liabilities of the corporation upon which they are already bound. Wall v. Rothrock, 171 N.C. 388, 88 S.E. 633, 1916 N.C. LEXIS 91 (1916); Caldwell v. Robinson, 179 N.C. 518, 103 S.E. 75, 1920 N.C. LEXIS 281 (1920).

Judgment Liens of Directors. —

Where the directors of a corporation made a bona fide sale of property to it, for value and free from fraud, judgments against the corporation for the purchase price, duly docketed, constitute liens in favor of the directors against the corporate property. Caldwell v. Robinson, 179 N.C. 518, 103 S.E. 75, 1920 N.C. LEXIS 281 (1920).

Use of Inside Information by Director to Gain Advantage Against Other Creditors. —

Where a corporation is insolvent, a director who is a creditor cannot, upon a debt theretofore existing, take advantage of his superior means of information to secure his debt as against other creditors. Hill v. Pioneer Lumber Co., 113 N.C. 173, 18 S.E. 107, 1893 N.C. LEXIS 39 (1893).

Stockholder’s Agreements on Election of Directors Are Valid Absent Fraud or Prejudice. —

North Carolina is aligned with the majority of jurisdictions which hold that a contract entered into between corporate stockholders by which they agree to vote their stock in a specified manner — including agreements for the election of directors and corporate officers — is not invalid unless it is inspired by fraud or will prejudice the other stockholders. Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964).

Agreements for Future Management Must Be “Otherwise Lawful”. —

Former G.S. 55-24 and former G.S. 55-73 required that contemplated agreements providing for the future management and control of a corporation be “otherwise lawful.” Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964).

When Such Agreements Will Be Declared Invalid. —

Agreements providing for the future management and control of a corporation which violate express charter or statutory provisions, contemplate an illegal object, involve any fraud, oppression or wrong against other stockholders, or are made in consideration of a private benefit to the promisor will be declared invalid. Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964).

§ 55-8-02. Qualifications of directors.

The articles of incorporation or bylaws may prescribe qualifications for directors. A director need not be a resident of this State or a shareholder of the corporation unless the articles of incorporation or bylaws so prescribe.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

The elimination of mandatory special qualifications for directors is now nearly universal. The articles of incorporation or bylaws, however, may prescribe special qualifications, an option that is most likely to be utilized in closely held corporations where qualifications for directors may be used as a device for ensuring representation and voting power on the board of directors.

§ 55-8-03. Number and election of directors.

  1. A board of directors must consist of one or more individuals, with the number specified in or fixed in accordance with the articles of incorporation or bylaws.
  2. The number of directors may be increased or decreased from time to time by amendment to, or in the manner provided in, the articles of incorporation or the bylaws, but for a corporation to which G.S. 55-7-28(e) applies in which shares are entitled to be voted cumulatively, the number of directors shall not be decreased unless one of the following applies:
    1. The decrease is approved by the shareholders in a vote in which the number of shares entitled to be voted cumulatively that vote against the proposal for decrease would not be sufficient to elect a director by cumulative voting.
    2. The decrease is made pursuant to a provision of the articles of incorporation or bylaws fixing a minimum and maximum number of directors and authorizing the number of directors to be fixed or changed from time to time, within the maximum and the minimum, by the shareholders or, unless the articles of incorporation or an agreement valid under G.S. 55-7-31 provides otherwise, the board of directors.
  3. Repealed by Session Laws 2005-268, s. 7.
  4. Directors are elected at the first annual shareholders’ meeting and at each annual meeting thereafter unless their terms are staggered under G.S. 55-8-06.

History. 1901, c. 2, ss. 14, 39; Rev., ss. 1147, 1182; C.S., ss. 1144, 1175; 1927, c. 138; G.S., ss. 55-48, 55-112; 1955, c. 1371, s. 1; 1959, c. 1316, s. 33; 1969, c. 751, ss. 10, 11; 1989, c. 265, s. 1; 1993, c. 552, s. 13; 2005-268, s. 7; 2006-264, s. 44(a).

Official Comment

Section 8.03 prescribes rules for the determination of the size of the board of directors of corporations that have not dispensed with a board of directors under section 8.01(c), and for changes in the size of the board of directors once it is established.

  1. Minimum number of directors
  2. Changes in the size of the board of directors
  3. Annual elections of directors

Section 8.03(a) provides that the size of the initial board of directors may be “specified in or fixed in accordance with” the articles of incorporation or bylaws. The size of the board of directors may thus be fixed initially in the fundamental corporate documents, or the decision as to the size of the initial board of directors may be made thereafter by those authorized in those documents. After shares have been issued, however, the power to increase or decrease the size of the board of directors by more than 30 percent, whether by amendment of the bylaws or otherwise, is reserved to the shareholders.

Before 1969 the Model Act required a board of directors to consist of at least three directors. Since then, however, the Model Act, and the corporation statutes of an increasing number of states, have provided that the board of directors may consist of one or more members. A board of directors consisting of one or more individuals may be appropriate for corporations with one or two shareholders, or for corporations with more than two shareholders where in fact the full power of management is vested in only one or two persons. The requirement that every corporation have a board of directors of at least three directors may require the introduction into these closely held corporations of persons with no financial interest in the corporation.

Section 8.03(b) and (c) prescribe rules for corporations in which the board of directors has authority to establish or change the size of the board of directors. It has no application to corporations in which the size of the board of directors is fixed by the bylaws and the shareholders reserve to themselves the power to amend bylaws. See section 10.20. The basic premise is that the determination of the size of the board of directors should rest with the shareholders. These subsections also prevent the board of directors from manipulating its own size without the approval of the shareholders. But experience has shown, particularly in larger corporations, that it is desirable to grant the board of directors some authority to change its size without incurring the expense of obtaining shareholder approval.

Subsection (b) therefore permits the board of directors to increase or decrease its own size by up to 30 percent without shareholder approval. The 30 percent is calculated from the size last approved by the shareholders, thereby preventing directors from tacking a series of 30 percent increases or decreases to alter the basic composition of a board of directors without shareholder approval. For example, in a board of directors fixed or approved by the shareholders at 15 members, the board may, without shareholder approval, change the size of the board to as few as 11 or as many as 19; a board of 5 may be changed by the board to as few as 4 or as many as 6. The 30-percent limit was established to give the board of directors reasonable leeway in adjusting its own size. Thus, when a director resigns, the board of directors should normally be able to reduce its own size and elect not to fill the vacancy without shareholder action; similarly, if an exceptionally qualified person becomes available (or is invited to serve on the board of directors because of a felt need), he may normally be added to the board of directors without shareholder approval.

Alternatively, subsection (c) authorizes the articles of incorporation or bylaws to establish a variable-range size for the board of directors. If a variable range size is established, either the shareholders or the board of directors may prescribe or change the size of the board of directors within that range. However, only the shareholders may amend the bylaws to change the limits established for the size of the board of directors, or to change from a variable-range size board to a fixed board or vice versa. A variable-range size board is intended to provide essentially the same benefits as the authority granted a board of directors by subsection (b) to change its own size by 30 percent. Many publicly held corporations have established variable-range size boards of directors pursuant to general authority in state statutes. Specific recognition and regulation of this widespread practice seems desirable.

Section 8.03(c) also applies to a variable-range size board of directors whose initial size is established by the articles of incorporation if the articles authorize changing the limits of the size of the board without having to amend the articles.

The limitations on the authority of the board of directors set forth in this section are substantive restrictions that may not be changed by provisions in articles of incorporation or bylaws. For example, a general provision in bylaws granting the board of directors authority to amend bylaws does not authorize a board of directors, after shares are issued, to change the limits of a variable-range board established by the bylaws.

Sections 8.03(b) and (c) are primarily designed for publicly held corporations. In closely held corporations, typically, a change in the size of the board of directors may be accomplished readily by the shareholders if that is desired. In many closely held corporations, on the other hand, a board of directors of a fixed size may be an essential part of a control arrangement. In these situations, an increase or decrease in the size of the board of directors by even a single member may significantly affect control. In order to effectuate control arrangements dependent on a board of directors of a fixed size, the power of the board of directors to change its own size must be negated. This may be accomplished by fixing the size of the board of directors in the articles of incorporation or by expressly negating all powers of the board of directors to change the size of the board, whether by amendment of the bylaws or otherwise. See section 10.22.

Section 8.03(d) makes it clear that all directors are elected annually unless the board is staggered. See section 8.05 and its Official Comment.

North Carolina Commentary

This section permits any corporation to have fewer than three directors, whereas former G.S. 55-25(a) permitted it only where there were fewer than three shareholders. In addition, unless there is cumulative voting, this section permits the board to change the number of directors by up to 30% in a 12-month period, whereas former G.S. 55-25(b) required shareholder action or a provision in the articles of incorporation to change the number of directors except within a variable range. Finally, this section eliminates the provision in former G.S. 55-25(e) which allowed a shareholder to demand election by ballot unless the articles of incorporation or bylaws provided otherwise.

Subsection (b) of this section modifies the Model Act’s subsection 8.03(b) to retain the former G.S. 55-25(b) protection of the right of cumulative voting if it exists. The Model Act leaves cumulative voting unprotected in this situation unless such protection is written into the articles of incorporation.

Subsection (c) modifies the Model Act by the addition of the parenthetical clause in the second sentence of this subsection.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section’s limitations on the authority of the board of directors to set the size of the board are removed, subject to retaining certain limitations if shareholders are entitled to vote cumulatively in the election of directors.

Effect of Amendments.

Session Laws 2005-268, s. 7, effective October 1, 2005, rewrote subsection (b); and deleted former subsection (c), which read: “The articles of incorporation or bylaws may establish a variable range for the size of the board of directors by fixing a minimum and maximum number of directors. If a variable range is established, the number of directors may be fixed or changed from time to time, within the minimum and maximum, by the shareholders or (unless the articles of incorporation or an agreement valid under G.S. 55-7-31 shall otherwise provide) the board of directors. After shares are issued, only the shareholders may change the range for the size of the board or change from a fixed to a variable-range size board or vice versa.”

Session Laws 2006-264, s. 44(a), effective August 27, 2006, substituted “applies in which shares are entitled to be voted cumulatively, the number” for “applies, the number” in subsection (b), in subsection (b)(1) substituted “entitled to be voted cumulatively that vote against” for “voting against.”

Legal Periodicals.

For recent development, “In re Wachovia Shareholders Litigation: The Case for the Common Benefit Doctrine,” see 84 N.C. L. Rev. 2066 (2006).

§ 55-8-04. Election of directors by certain classes of shareholders.

If the articles of incorporation authorize dividing the shares into classes, the articles may also authorize the election of all or a specified number of directors by the holders of one or more authorized classes of shares. A class (or classes) of shares entitled to elect one or more directors is a separate voting group for purposes of the election of directors.

History. 1901, c. 2, ss. 14, 39; Rev., ss. 1147, 1182; C.S., ss. 1144, 1175; 1927, c. 138; G.S., ss. 55-48, 55-112; 1955, c. 1371, s. 1; 1959, c. 1316, s. 33; 1969, c. 751, ss. 10, 11; 1989, c. 265, s. 1.

Official Comment

Section 8.04 makes explicit that the articles of incorporation may provide that a specified number (or all) of the directors may be elected by the holders of one or more classes of shares. This approach is widely used in closely held corporations to effect an agreed upon allocation of control, for example, to ensure minority representation on the board of directors by issuing to that minority a class of shares entitled to elect one or more directors. A class (or classes) of shares entitled to elect separately one or more directors constitutes a separate voting group for purposes of the election of directors; within each voting group directors are elected by a plurality of votes and quorum and voting requirements must be separately met by each voting group. See sections 7.25, 7.26, and 7.28.

North Carolina Commentary

This section is substantially the same as former G.S. 55-25(b) and former G.S. 55-26.

§ 55-8-05. Terms of directors generally.

  1. The terms of the initial directors of a corporation expire at the first shareholders’ meeting at which directors are elected.
  2. The terms of all other directors expire at the next annual shareholders’ meeting following their election unless their terms are staggered under G.S. 55-8-06.
  3. A decrease in the number of directors does not shorten an incumbent director’s term.
  4. The term of a director elected to fill a vacancy expires at the next shareholders’ meeting at which directors are elected.
  5. Despite the expiration of a director’s term, he continues to serve until his successor is elected and qualifies or until there is a decrease in the number of directors.

History. 1901, c. 2, ss. 14, 39; Rev., ss. 1147, 1182; C.S., ss. 1144, 1175; 1927, c. 138; G.S., ss. 55-48, 55-112; 1955, c. 1371, s. 1; 1959, c. 1316, s. 33; 1969, c. 751, ss. 10, 11; 1989, c. 265, s. 1.

Official Comment

Section 8.05 provides for the annual election of directors at the annual shareholders’ meeting with a single exception that terms may be staggered as permitted in section 8.06.

Section 8.05(c) provides that a decrease in the number of directors does not shorten the term of an incumbent director or divest any director of his office. Rather, the incumbent director’s term expires at the annual meeting at which his successor would otherwise be elected.

Section 8.05(d) provides that the terms of all directors elected to fill vacancies expire at the next meeting of shareholders at which directors are elected. Thus, if terms are staggered under section 8.06, the term of a director elected to fill a vacant term with more than a year to run is shorter than the term of his predecessor. The board of directors may take appropriate steps, by designation of short terms or otherwise, to return the rotation of election of directors to the original terms established or fixed by the articles or bylaws.

Section 8.05(e) provides for “holdover” directors so that directorships do not automatically become vacant at the expiration of their terms but the same persons continue in office until successors qualify for office. Thus the power of the board of directors to act continues uninterrupted even though an annual shareholders’ meeting is not held or the shareholders are deadlocked and unable to elect directors at the meeting.

North Carolina Commentary

This section is substantially the same as former G.S. 55-25(c) and (d).

§ 55-8-06. Staggered terms for directors.

The articles of incorporation or bylaws adopted by the shareholders may provide for staggering the terms of directors by dividing the total number of directors into two, three, or four groups, with each group containing one-half, one-third, or one-fourth of the total, as near as may be. In that event, the terms of directors in the first group expire at the first annual shareholders’ meeting after their election, the terms of the second group expire at the second annual shareholders’ meeting after their election, the terms of the third group, if any, expire at the third annual shareholders’ meeting after their election, and the terms of the fourth group, if any, expire at the fourth annual shareholders’ meeting after their election. At each annual shareholders’ meeting held thereafter, directors shall be chosen for a term of two, three, or four years, as the case may be, to succeed those whose terms expire.

History. 1901, c. 2, ss. 14, 44; Rev., ss. 1147, 1148; C.S., s. 1144; 1937, c. 179; 1945, c. 200; 1949, c. 917; G.S., s. 55-48; 1955, c. 914, s. 1; c. 1371, s. 1; 1959, c. 1316, s. 7; 1989, c. 265, s. 1; 1993, c. 552, s. 10; 2005-268, s. 8.

Official Comment

Section 8.06 recognizes the practice of “classifying” the board or “staggering” the terms of directors so that only one-half or one-third of them are elected at each annual shareholders’ meeting and directors are elected for two- or three-year terms rather than one-year terms.

Under section 8.06 at least three directors must be elected at each annual meeting. These directors may be elected by one or more voting groups, as provided in the articles of incorporation.

The principal justification for staggering the board today is that it protects against sudden change in the management of the corporation despite a change in shareholdings. It also reduces the impact of cumulative voting since a greater number of votes is required to elect a director if the board is staggered than is required if the entire board were elected at each annual meeting.

The staggered board of directors is sometimes used by incumbent management to make unwanted takeover attempts more difficult to effectuate. It is unlikely to be effective alone, however, since the shareholders may in any event remove directors under section 8.08 whether or not their terms are staggered. As a result, a staggered board is likely to be used for this purpose only in conjunction with a provision that directors may be removed only for cause.

North Carolina Commentary

This section is substantially the same as former G.S. 55-26. The corresponding provision in the Model Act was modified to permit staggered terms for directors to be fixed in a bylaw adopted by the shareholders, thus continuing the former North Carolina practice.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, the requirement that a board of directors consist of at least nine directors before directors’ terms may be staggered is eliminated.

Effect of Amendments.

Session Laws 2005-268, s. 8, effective October 1, 2005, in the first sentence, deleted “If the number of directors is fixed at nine or more directors” from the beginning, inserted “of directors” following “terms” and made a minor stylistic change.

§ 55-8-07. Resignation of directors.

  1. A director may resign at any time by communicating his resignation to the board of directors, its chair, or the corporation.
  2. A resignation is effective when it is communicated unless it specifies in writing a later effective date or subsequent event upon which it will become effective.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 34; 1973, c. 469, s. 7; 1989, c. 265, s. 1; 2001-358, s. 6(c); 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Official Comment

The resignation of a director is effective when the written notice is delivered unless the notice specifies a later effective date, in which case the director continues to serve until that later date. Since the person giving the notice is still a member of the board, he may participate in all decisions until the specified date, including the choice of his successor under section 8.10. The participation of the retiring director in the decision on his successor may be of importance in closely held corporations where control of the board may be affected by the resignation.

Vacancies created by a resignation effective at a later date may be filled before that date under section 8.10.

North Carolina Commentary

This section is more explicit than former G.S. 55-27(a)(1) in specifying the effective time of a director’s resignation.

The section is also more explicit than the Model Act in clarifying that notice is effective when communicated unless a later date is specified in writing. The Model Act merely uses the term “delivered.” Since “delivered” is defined to include “mail,” a more precise term was deemed desirable.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, s. 6(c), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, substituted “chair” for “chairman” in subsection (a).

§ 55-8-08. Removal of directors by shareholders.

  1. The shareholders may remove one or more directors with or without cause unless the articles of incorporation provide that directors may be removed only for cause.
  2. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him.
  3. If cumulative voting is authorized, unless the entire board of directors is to be removed, a director may not be removed if the number of votes sufficient to elect him under cumulative voting is voted against his removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove him exceeds the number of votes cast not to remove him.
  4. A director may not be removed by the shareholders at a meeting unless the notice of the meeting states that the purpose, or one of the purposes, of the meeting is removal of the director.
  5. Unless otherwise provided in the articles of incorporation or a bylaw adopted by the shareholders, the entire board of directors may be removed from office with or without cause by the affirmative vote of a majority of the votes entitled to be cast at any election of directors.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 34; 1973, c. 469, s. 7; 1989, c. 265, s. 1; 1991, c. 645, s. 6.

Official Comment

Section 8.08(a) accepts the view that since the shareholders are the owners of the corporation, they should normally have the power to change the directors at will. This section reverses the common law position that directors have a statutory entitlement to their office and can be removed only for cause—fraud, criminal conduct, gross abuse of office amounting to a breach of trust, or similar conduct. The power to remove directors is subject to several restrictions set forth in section 8.08:

  1. The power to remove a director without cause may be eliminated by a provision in the articles of incorporation. Such a provision in effect guarantees the directors the same entitlement to office that directors enjoyed at common law. It is likely to be used in closely held corporations as an element of an agreed-upon allocation of power and control which ensures directors immunity from removal except for cause. It may also be used in publicly held corporations that fear changes in ownership of the majority of the shares and desire to provide security to the directors.
  2. If the articles of incorporation provide that one or more classes of shares constitute a separate voting group entitled to elect a director (see section 8.04), only the shareholders of that voting group may participate in the vote whether or not to remove that director. But that director may be removed by court proceeding under section 8.09 despite this section.
  3. If cumulative voting is not authorized, a director is removed (with or without cause) only if the votes cast to remove him exceed the votes cast to retain him at a meeting of the voting group electing him at which a quorum of shares entitled to vote on his election is present.
  4. If cumulative voting is authorized, a different standard for removal is involved. Under cumulative voting, a director may be removed (with or without cause) only if the votes cast in favor of retaining him would not have been sufficient to elect him pursuant to cumulative voting at that meeting. This provision guarantees that a minority faction with sufficient votes to guarantee the election of a director under cumulative voting will be able to protect that director from removal by the remaining shareholders. The director, however, may be removed by court proceeding under section 8.09 despite this section. In computing whether or not a director elected by cumulative voting is protected from removal from office by section 8.08(c), the votes should be counted as though (1) the vote to remove the director occurred in an election to elect the number of directors normally elected by the voting group along with the director whose removal is sought, (2) the number of votes cast cumulatively against removal of the director had been cast for his election, and (3) all votes cast for removal of the director had been cast cumulatively in an efficient pattern for the election of a sufficient number of candidates so as to deprive the director whose removal is being sought of his office.

Removal of directors under section 8.08(d) requires the meeting notice to state that removal of specific directors will be proposed.

(2) If the articles of incorporation provide that one or more classes of shares constitute a separate voting group entitled to elect a director (see section 8.04), only the shareholders of that voting group may participate in the vote whether or not to remove that director. But that director may be removed by court proceeding under section 8.09 despite this section.

(3) If cumulative voting is not authorized, a director is removed (with or without cause) only if the votes cast to remove him exceed the votes cast to retain him at a meeting of the voting group electing him at which a quorum of shares entitled to vote on his election is present.

(4) If cumulative voting is authorized, a different standard for removal is involved. Under cumulative voting, a director may be removed (with or without cause) only if the votes cast in favor of retaining him would not have been sufficient to elect him pursuant to cumulative voting at that meeting. This provision guarantees that a minority faction with sufficient votes to guarantee the election of a director under cumulative voting will be able to protect that director from removal by the remaining shareholders. The director, however, may be removed by court proceeding under section 8.09 despite this section. In computing whether or not a director elected by cumulative voting is protected from removal from office by section 8.08(c), the votes should be counted as though (1) the vote to remove the director occurred in an election to elect the number of directors normally elected by the voting group along with the director whose removal is sought, (2) the number of votes cast cumulatively against removal of the director had been cast for his election, and (3) all votes cast for removal of the director had been cast cumulatively in an efficient pattern for the election of a sufficient number of candidates so as to deprive the director whose removal is being sought of his office.

Removal of directors under section 8.08(d) requires the meeting notice to state that removal of specific directors will be proposed.

Amended North Carolina Commentary

This section is consistent with prior law as contained in former G.S. 55-27(f) with two notable differences. This section does not contain a specific provision allowing removal of the entire board by a majority vote, and the notice requirement of subsection (d) is new. Subsection (d) does not prohibit removal of a director by unanimous consent ( see G.S. 55-7-04) but requires notice if the removal is to be considered at a meeting. The language of the Model Act was modified in this subsection for clarity.

§ 55-8-09. Removal of directors by judicial proceeding.

  1. The superior court of the county where a corporation’s principal office (or, if none in this State, its registered office) is located may remove a director of the corporation from office in a proceeding commenced either by the corporation or by its shareholders holding at least ten percent (10%) of the outstanding shares of any class if the court finds that:
    1. The director engaged in fraudulent or dishonest conduct, or gross abuse of authority or discretion, with respect to the corporation; and
    2. Removal is in the best interest of the corporation.
  2. The court that removes a director may bar the director from reelection for a period prescribed by the court.
  3. If shareholders commence a proceeding under subsection (a), they shall make the corporation a party defendant.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 34; 1973, c. 469, s. 7; 1989, c. 265, s. 1.

Official Comment

Section 8.09 authorizes the removal of a director who is found in a judicial proceeding to have engaged in fraudulent or dishonest conduct or gross abuse of office. For example, a judicial proceeding (as contrasted with removal under section 8.08) may be necessary or appropriate in the following situations:

  1. In a closely held corporation, the director charged with misconduct is elected by voting group or cumulative voting, and the shareholders with power to prevent his removal exercise that power despite the existence of fraudulent or dishonest conduct. The classic example is where the director charged with misconduct himself possesses sufficient votes to prevent his own removal and exercises his voting power to that end.
  2. In a publicly held corporation, the director charged with misconduct declines to resign, though urged to do so, and because of the large number of widely scattered shareholders, a special shareholders’ meeting can be held only after a period of delay and at considerable expense.

A shareholder who owns less than 10 percent of the outstanding shares of the corporation may bring suit derivatively in the name of the corporation under this section upon compliance with the requirements of section 7.40. A shareholder who owns at least 10 percent of the outstanding shares of the corporation may maintain suit in his own name and in his own right without compliance with section 7.40. The corporation, however, must be made a party to the proceeding. See section 8.09(c).

The purpose of section 8.09 is to permit the prompt and efficient elimination of dishonest directors. It is not intended to permit judicial resolution of internal corporate struggles for control except in those cases in which a court finds that the director has been guilty of wrongful conduct of the type described.

North Carolina Commentary

This section increases from 5% (as in former G.S. 55-27(g)) to 10% the number of shares needed to petition for removal of a director. Otherwise, this section is consistent with the prior law.

§ 55-8-10. Vacancy on board.

  1. Unless the articles of incorporation provide otherwise, if a vacancy occurs on a board of directors, including, without limitation, a vacancy resulting from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors:
    1. The shareholders may fill the vacancy;
    2. The board of directors may fill the vacancy; or
    3. If the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors, or by the sole director, remaining in office.
  2. If the vacant office was held by a director elected by a voting group of shareholders, only the remaining director or directors elected by that voting group or the holders of shares of that voting group are entitled to fill the vacancy.
  3. A vacancy that will occur upon a specific later date or subsequent event (by reason of a resignation effective upon a later date or subsequent event under G.S. 55-8-07(b) or otherwise) may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 34; 1973, c. 469, s. 7; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.12.

Official Comment

Vacancies on the board of directors may be filled either by the shareholders or by the board of directors. In large corporations the cost of calling a special meeting of shareholders may be prohibitive so that in those corporations filling vacancies by the board of directors is the norm. On the other hand, in a closely held corporation the shareholders may fill vacancies as readily as the board.

Section 8.10(a)(3) allows the directors remaining in office to fill vacancies even though they are fewer than a quorum. The test for the exercise of this power is whether the directors remaining in office are fewer than a quorum, not whether the directors seeking to act are fewer than a quorum. For example, on a board of six directors where a quorum is four, if there are two vacancies, they may not be filled under section 8.10(a)(3) at a “meeting” attended by only three directors. Even though the three directors are fewer than a quorum, section 8.10(a)(3) is not applicable because the number of directors remaining in office—four—is not fewer than a quorum.

Section 8.10(b) provides that if a voting group of shares is entitled to elect a director, only that voting group is entitled to fill a vacant office which was held by a director elected by that voting group. This section is part of the consistent treatment of directors elected by a voting group of shareholders. See sections 1.40, 7.25, 7.26, 7.28, 8.04 and 8.08(b).

Section 8.10(c) permits vacancies that will arise on a specific later date to be filled in advance of that date so long as the designee does not actually take office until the vacancy occurs. The director in the office that will become vacant may participate in the selection of his successor. A vacancy arising at a later date is most likely to arise because of a resignation effective at a later date; it may also arise in connection with retirements or with prospective amendments to bylaws. In a closely held corporation with a balance of power on the board of directors that was reached by agreement, a prospective resignation followed by the appointment of a successor under this section permits the board to act on the replacement before the change in balance caused by the resignation.

Amended North Carolina Commentary

This section is generally consistent with prior law. However, unlike the present section, former G.S. 55-27(c) permitted the bylaws as well as the articles of incorporation to withhold from directors the power to fill board vacancies and did not permit the directors to fill vacancies created by an increase in the authorized number of directors, except within a minimum-maximum range fixed by the shareholders.

This section expands the comparable Model Act section in subsection (a) by explicitly recognizing a vacancy occurring from failure by the shareholders to elect a full board and in subsection (b) by permitting the remaining directors elected by a voting group to fill a vacancy in that class of directors, both of which are consistent with former G.S. 55-27(c). The Model Act was modified in subsection (c) to conform to the changes made in G.S. 55-8-07(b) regarding the effective date of a resignation.

§ 55-8-11. Compensation of directors.

Unless the articles of incorporation or bylaws provide otherwise, the board of directors, without regard to personal interest, may fix the compensation of directors for services in any capacity as a director. The compensation established pursuant to this section of directors of a public corporation or of a corporation that so provides in its articles of incorporation is presumed to be fair to the corporation unless proven not to be fair to the corporation by a preponderance of the evidence.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2018-45, s. 7; 2021-106, s. 2(a).

Official Comment

This section puts at rest the question whether the board of directors can fix the compensation of its members for serving as directors. The practice of compensating directors is now of long standing, and the establishment of a policy with respect to director compensation is an appropriate function of the board of directors.

In publicly held corporations, compensation is customarily provided to nonmanagement directors. As stated in The Corporate Director’s Guidebook, “. . . it is expected that a nonmanagement director will devote substantial attention to the affairs of the corporation and will be compensated accordingly.” 33 BUS. LAW. 1591, 1622 (1978).

North Carolina Commentary 2018

This section differs from the Model Act by confirming that, in the case of a public corporation or of a private corporation that so provides in its articles of incorporation, if the board of directors fixes the compensation of directors, then regardless of their personal interest in that decision, the amount of compensation is presumed fair to the corporation and the challenger would be required to allege facts, that if proven true, would be sufficient to overcome the presumption in order to avoid dismissal at the summary judgment stage of any proceeding. In effect, the section confirms that the decision of a board regarding its compensation is subject to review under the business judgment rule, but the amendment does not preclude meritorious challenges where a board of directors has awarded itself compensation that is proven not to be fair to the corporation.

Supplemental North Carolina Commentary (2021)

The 2021 amendment is intended to codify the holding of the North Carolina Business Court in Ehmann v. Medflow, Inc., 2019 NCBC 9 (2019).

Editor’s Note.

Session Laws 2018-45, s. 33, provides: ‘The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2018-45, s. 7, effective October 1, 2018, rewrote the first sentence which formerly read “Unless the articles of incorporation or bylaws provide otherwise, the board of directors may fix the compensation of directors”, and added the second sentence.

Session Laws 2021-106, s. 2(a), effective October 1, 2021, substituted “capacity as a director” for “capacity” in the first sentence.

§§ 55-8-12 through 55-8-19.

Reserved for future codification purposes.

Part 2. Meetings and Action of the Board.

§ 55-8-20. Meetings.

  1. The board of directors may hold regular or special meetings in or out of this State.
  2. Unless otherwise provided by the articles of incorporation, the bylaws, or the board of directors, any or all directors may  participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.
  3. Unless the bylaws provide otherwise, special meetings of the board of directors may be called by the president or any two directors.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 8; 1969, c. 751, s. 12; 1973, c. 469, ss. 8-10; 1989, c. 265, s. 1; 1991, c. 645, s. 7.

Official Comment

This section authorizes meetings of directors anywhere. No distinction is made between meetings in-state and out-of-state. It also authorizes the board of directors to permit any or all directors to participate in a meeting by the use of any means of communication by which all directors participating may simultaneously hear each other. This decision is discretionary with the board of directors, and a person participating in this fashion is deemed to be present in person at the meeting for purposes of quorum and voting requirements.

With the development of modern electronic technology, it is possible that the advantages of the traditional meeting, at which all members are present at a single place, may be obtained even though the members are physically dispersed and no two directors are present at the same place. The advantage of the traditional meeting is the opportunity for interchange that is permitted by a meeting in a single room at which members are physically present. If this opportunity for interchange is thought to be available by the board of directors, a meeting may be conducted by electronic means although no two directors are physically present at the same place and no specific place for the meeting is designated.

North Carolina Commentary

By providing that, in the absence of contrary provisions in the articles of incorporation or bylaws, “the board of directors may permit” telephonic participation in its meetings, this section resolves the ambiguity of former G.S. 55-29(c), which provided that a director “may participate” telephonically in such meetings. It is now clear that an individual director may not assert telephonic participation as a right.

§ 55-8-21. Action without meeting.

  1. Unless the articles of incorporation or bylaws provide otherwise, action required or permitted by this Chapter to be taken at a board of directors’ meeting may be taken without a meeting if the action is taken by all members of the board. The action must be evidenced by one or more unrevoked written consents signed by each director before or after such action, describing the action taken, and included in the minutes or filed with the corporate records. To the extent the corporation has agreed pursuant to G.S. 55-1-50, a director’s consent to action taken without meeting or revocation thereof may be in electronic form and delivered by electronic means.
  2. Action taken under this section is effective when one or more unrevoked consents signed by all of the directors are delivered to the corporation, unless the consents specify a different effective date. A director’s consent to action may be revoked in a writing signed by the director and delivered to the corporation prior to the action becoming effective.
  3. A consent signed under this section has the effect of a meeting vote and may be described as such in any document.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 8; 1969, c. 751, s. 12; 1973, c. 469, ss. 8-10; 1989, c. 265, s. 1; 2001-387, s. 15; 2005-268, s. 9.

Official Comment

The power of the board of directors to act unanimously without a meeting is based on the pragmatic consideration that in many situations a formal meeting is a waste of time. For example, in a closely held corporation there will often be informal discussion by the manager-owners of the venture before a decision is made. And, of course, if there is only a single director (as is permitted by section 8.03), a written consent is the natural method of signifying director action. Consent may be signified on one or more documents if desirable.

In publicly held corporations, formal meetings of the board of directors may be appropriate for many actions. But there will always be situations where prompt action is necessary and the decision noncontroversial, so that approval without a formal meeting may be appropriate.

Under section 8.21 the requirement of unanimous consent precludes the possibility of stifling or ignoring opposing argument. A director opposed to an action that is proposed to be taken by unanimous consent, or uncertain about the desirability of that action, may compel the holding of a directors’ meeting to discuss the matter simply by withholding his consent.

North Carolina Commentary

This section is generally consistent with former G.S. 55-29, except that it does not contain the provisions for estoppel of a director who does not object promptly after obtaining knowledge of the action. The drafters believed that little, if any, use was made of the estoppel provisions of former G.S. 55-29(a)(3).

The Model Act was modified in subsection (a) to conform to a corresponding change made in G.S. 55-7-04(a), providing that written consent to action without a meeting can be given before or after the action is taken.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Effect of Amendments.

Session Laws 2005-268, s. 9, effective October 1, 2005, in subsection (a), inserted “unrevoked” preceding “written consents signed” in the second sentence and “or revocation thereof” in the last sentence; and rewrote subsection (b).

§ 55-8-22. Notice of meeting.

  1. Unless the articles of incorporation or bylaws provide otherwise, regular meetings of the board of directors may be held without notice of the date, time, place, or purpose of the meeting.
  2. Special meetings of the board of directors shall be held upon such notice as is provided in the articles of incorporation or bylaws, or in the absence of any such provision, upon notice sent by any usual means of communication not less than five days before the meeting. The notice need not describe the purpose of the special meeting unless required by this chapter, the articles of incorporation or bylaws.

History. 1955, c. 1371, s. 1; 1969, c. 751, s. 12; 1973, c. 469, s. 8; 1989, c. 265, s. 1.

Official Comment

Regular meetings of the board of directors may be held without notice and special meetings require only two days’ notice unless other requirements are imposed by the articles of incorporation or bylaws. The notice may be written or oral. Also, no statement of the purpose of either a regular or special meeting is necessary unless required by the articles of incorporation or bylaws. These requirements differ from the requirements applicable to meetings of shareholders because of fundamental differences in their roles: directors are expected to be more closely involved in corporate affairs than shareholders, and meetings of directors are held more systematically and regularly than meetings of shareholders.

North Carolina Commentary

This section is consistent with former G.S. 55-28(c).

The section differs in subsection (b) from the Model Act by requiring five instead of two days’ notice of meetings in the absence of a notice provision in the articles of incorporation or bylaws, and by adding “this act” to the last sentence of the subsection.

§ 55-8-23. Waiver of notice.

  1. A director may waive any notice required by this Chapter, the articles of incorporation, or bylaws before or after the date and time stated in the notice. Except as provided by subsection (b), the waiver must be in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records.
  2. A director’s attendance at or participation in a meeting waives any required notice to him of the meeting unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

History. 1955, c. 1371, s. 1; 1969, c. 751, s. 12; 1973, c. 469, s. 8; 1989, c. 265, s. 1.

Official Comment

Section 8.23(a) reverses the common law rule that invalidates waivers of notice by directors after the date and time of the meeting. In modern practice notice is often a technical requirement and waivers should be freely permitted.

Section 8.23(b) recognizes that the function of notice is to inform directors of a meeting. If a director actually appears at the meeting he has probably had notice of it and generally should not be able to raise a technical objection that he was not given notice.

In cases where actual prejudice occurs because of the lack of notice, as may be indicated by the absence of one or more other directors, the director must call attention to the defect at the outset of the meeting or promptly upon his arrival. That director, or a director who did not receive notice and was not present at the meeting, may then attack the validity of the action taken for want of notice. If a director properly objects to the meeting being held, he is not presumed to have assented to actions taken thereafter, but he waives his objection if he there after votes for or assents to action taken at the meeting. See section 8.24(d).

North Carolina Commentary

This section is substantially the same as former G.S. 55-28(c) and 55-172.

§ 55-8-24. Quorum and voting.

  1. Unless the articles of incorporation or bylaws provide for a greater or lesser number or unless otherwise expressly provided in this Chapter, a quorum of a board of directors consists of a majority of the number of directors specified in or fixed in accordance with the articles of incorporation or bylaws.
  2. The quorum of the board of directors provided in the articles of incorporation or bylaws shall not consist of less than one-third of the number of directors specified in or fixed in accordance with the articles of incorporation or bylaws.
  3. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors unless the articles of incorporation or bylaws require the vote of a greater number of directors or unless otherwise expressly provided in this Chapter.
  4. A director who is present at a meeting of the board of directors or a committee or subcommittee of the board of directors when corporate action is taken is deemed to have assented to the action taken unless any of the following requirements are met:
    1. The director objects at the beginning of the meeting, or promptly upon the director’s arrival, to holding it or transacting business at the meeting.
    2. The director’s dissent or abstention from the action taken is entered in the minutes of the meeting.
    3. The director files written notice of the director’s dissent or abstention with the presiding officer of the meeting before its adjournment or with the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken.

History. Code, s. 681; 1901, c. 2, ss. 33, 52; Rev., s. 1192; C.S., s. 1179; 1927, c. 121; 1933, c. 354, s. 1; G.S., s. 55-116; 1955, c. 1371, s. 1; 1959, c. 1316, s. 35; 1969, c. 751, s. 12; 1973, c. 469, s. 8; 1989, c. 265, s. 1; 2018-45, s. 8; 2021-106, s. 3(a).

Official Comment to the Model Business Corporation Act, 2016 Revision

In the absence of a provision in the articles of incorporation or bylaws, a quorum is a majority of the total number of directors specified ( e.g., “the number of directors shall be X”) in or fixed ( e.g., “the number of directors shall be not less than Y or more than Z as determined by the board of directors”) in accordance with the articles of incorporation or the bylaws.

Section 8.24(a) recognizes that the Act itself may provide for a different quorum in certain specified situations. See sections 8.53(c)(1) and 8.55(b)(1).

Section 8.24 allows the articles of incorporation or bylaws to decrease the required quorum (but not below one-third) or to increase the quorum or the vote necessary to take action up to and including unanimity. The articles of incorporation or bylaws may also establish quorum or voting requirements with respect to directors elected by voting groups of shareholders pursuant to section 8.04. The options to increase the quorum and vote requirements might be used, for example, in closely held corporations where a greater degree of participation is thought appropriate or where a minority participant in the venture seeks to obtain a veto power over corporate action.

The phrase “when the vote is taken” in section 8.24(c) is designed to make clear that the board of directors may act only when a quorum is present. If directors leave during the course of a meeting, the board of directors may not act after the number of directors present is reduced to less than a quorum.

If a director who is present at a meeting wishes to object or abstain with respect to action taken by the board of directors or a committee, that director must make his or her position clear in one of the ways described in section 8.24(d). If objection is made in the form of a written dissent under clause (iii) of section 8.24(d), it may be transmitted by any form of delivery authorized by the definition of that term in section 1.40, including electronic transmission, if authorized by section 1.41. Section 8.24(d) serves the important purpose of bringing the position of the dissenting director clearly to the attention of the other directors. The provision that a director who is present is deemed to have assented unless an objection is noted also prevents a director from later seeking to avoid responsibility because of unexpressed doubts about the wisdom of the action taken.

Section 8.24(d) applies only to directors who are present at the meeting. Directors who are not present are not deemed to have assented to any action taken at the meeting in their absence.

North Carolina Commentary

This section is generally consistent with prior law but clarifies an ambiguity in former G.S. 55-28(d) by expressly requiring in subsection (c) that a quorum be present when the vote is taken, thus explicitly permitting directors to prevent further action by withdrawing from the meeting to eliminate a quorum.

This section varies from the Model Act in requiring in subsection (b) that a bylaw fixing a low quorum be “adopted by the shareholders.” For clarification, the word “files” was substituted in subdivision (d) (3) for the Model Act’s ambiguous “delivers.”

Supplemental North Carolina Commentary (2021)

Session Laws 2021-106, s. 3(a) includes amendments to conform to changes to the Model Act that clarify provisions regarding quorum and voting requirements applicable to the board of directors. The changes eliminate the use of the terms “fixed board size” and “variable-range size board,” and substitute a clearer formulation, in which the denominator for quorum and voting purposes would be the number of directors “specified in or fixed in accordance with the articles of incorporation or bylaws.” The changes also address an apparent inconsistency that previously existed between G.S. 55-8-24(a), which provided that a quorum consists of a majority of the number of directors unless the articles of incorporation or bylaws require a greater number, and G.S. 55-8-24(b), which limited the articles of incorporation or bylaws from establishing a quorum to be no fewer than one-third of the number of directors. The amendments to G.S. 55-8-24(a) clarify that the articles of incorporation or the bylaws may establish a quorum greater than or lesser than the statutory presumption of a majority of the number of directors, while G.S. 55-8-24(b) provides that the minimum quorum that may be set in the articles of incorporation or bylaws is one-third of the number of directors. The amendment to G.S. 55-8-24(a) also recognizes that other provisions of the North Carolina Business Corporation Act, such as G.S. 55-8-55(b)(1), provide for board of director actions to be taken by groups of directors that in number may not satisfy these quorum requirements. The change to G.S. 55-8-24(c) recognizes that certain provisions of the North Carolina Business Corporation Act, such as G.S. 55-8-55(b)(1) and G.S. 55-9-04(c), specify different voting standards than the standard specified in G.S. 55-8-24(c).

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2018-45, s. 8, effective October 1, 2018, in subsection (d), substituted “committee or subcommittee” for “committee”, “unless any of the following requirements are met” for “unless”, “The director” for “He”, “The director’s” for “His”, and made minor stylistic changes throughout.

Session Laws 2021-106, s. 3(a), effective October 1, 2021, rewrote subsections (a) and (b); added “or unless otherwise expressly provided in this Chapter” at the end of subsection (c); and substituted “meeting, or promptly upon the director’s arrival, to” for “meeting (or promptly upon the director’s arrival) to” in subdivision (d)(1).

Legal Periodicals.

For note on unanimous approval of corporate bylaws and creation of shareholder agreements, see 1 Campbell L. Rev. 153 (1979).

CASE NOTES

No Cause of Action Stated. —

Claim against director of dissolved corporation did not state a cause of action where plaintiff only alleged that director was officer when corporation dissolved and where there was no allegation that corporation’s assets were distributed by officers without providing for known or reasonably ascertainable liabilities. Heather Hills Home Owners Ass'n v. Carolina Custom Dev. Co., 100 N.C. App. 263, 395 S.E.2d 154, 1990 N.C. App. LEXIS 918, cert. denied, 327 N.C. 634, 399 S.E.2d 327, 1990 N.C. LEXIS 1011 (1990) (decided under former G.S. 55-32).

§ 55-8-25. Committees.

  1. Unless this Chapter, the articles of incorporation, or the bylaws provide otherwise, a board of directors may create one or more committees and appoint one or more members of the board of directors to serve on the committee. Unless otherwise provided in the articles of incorporation, the bylaws, or the resolution of the board of directors designating the committee, a committee, by action of a majority of its members then in office when the action is taken, may create one or more subcommittees consisting of one or more members of the committee and delegate to the one or more subcommittees any or all of the powers and authority of the committee.
  2. Unless this Chapter provides otherwise, the creation of a committee and appointment of members to it shall be approved by the greater of either of the following:
    1. A majority of all the directors in office when the action is taken.
    2. The number of directors required by the articles of incorporation or bylaws to take action under G.S. 55-8-24.
  3. The creation and appointment of a committee pursuant to G.S. 55-7-44(b)(2) may be approved in the manner set forth in G.S. 55-7-44(b)(2).
  4. G.S. 55-8-20 through G.S. 55-8-24 apply both to committees and subcommittees of the board of directors and to their members.
  5. To the extent specified by the board of directors or in the articles of incorporation or bylaws, each committee may exercise the authority of the board of directors under G.S. 55-8-01.
  6. A committee shall not, however, do any of the following:
    1. Authorize or approve distributions, except according to a formula or method, or within limits, prescribed by the board of directors.
    2. Approve or propose to shareholders action that this act requires be approved by shareholders.
    3. Fill vacancies on the board of directors or on any of its committees.
    4. Amend articles of incorporation pursuant to G.S. 55-10-02.
    5. Adopt, amend, or repeal bylaws.
    6. Approve a plan of merger not requiring shareholder approval.
  7. The creation of, delegation of authority to, or action by a committee or subcommittee does not alone constitute compliance by a director with the standards of conduct described in G.S. 55-8-30.
  8. The board of directors may appoint one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, or a subcommittee of the committee, during the member’s absence or disqualification.

History. 1955, c. 1371, s. 1; 1969, c. 751, s. 13; 1973, c. 1087, ss. 1, 2; 1989, c. 265, s. 1; 2005-268, s. 10; 2007-385, s. 1; 2018-45, s. 9.

Official Comment

Section 8.25 makes explicit the common law power of a board of directors to act through committees of directors and specifies the powers of the board of directors that are nondelegable, that is, powers that only the full board of directors may exercise. Section 8.25 deals only with committees of the board of directors exercising the functions of the board of directors; the board of directors or management, independently of section 8.25, may establish nonboard committees composed of directors, employees, or others to deal with corporate powers not required to be exercised by the board of directors.

Section 8.25(b) provides that a committee of the board of directors may be created only by the affirmative vote of a majority of the board of directors then in office, or, if greater, by the number of directors required to take action by the articles of incorporation or the bylaws. This supermajority requirement reflects the importance of the decision to invest board committees with power to act under section 8.25.

Committees of the board of directors are assuming increasingly important roles in the governance of publicly held corporations. See “The Corporate Director’s Guidebook,” 33 BUS. LAW. 1591 (1978); “The Overview Committees of the Board of Directors,” 35 BUS. LAW. 1335 (1980). Executive committees have long provided guidance to management between meetings of the full board of directors. Audit committees also have a long history of performing essential review and control functions on behalf of the board of directors. In recent years nominating and compensation committees, composed primarily or entirely of nonmanagement directors, have also become more widely used by publicly held corporations.

Section 8.25 establishes the desirable and appropriate role of director committees in light of competing considerations: on the one hand, it seems clear that appropriate board committee action is not only desirable but also is likely to improve the functioning of larger and more diffuse boards of directors; on the other hand, wholesale delegation of authority to a board committee, to the point of abdication of director responsibility as a board of directors, is manifestly inappropriate and undesirable. Overbroad delegation also increase the potential, where the board of directors is divided, for usurpation of basic board functions by means of delegation to a committee dominated by one faction.

The statement of nondelegable functions set out in section 8.25(e) is based on the principle that prohibitions against delegation should be limited generally to actions substantially affecting the rights of shareholders among themselves as shareholders and specifically to (1) those matters that have immediate and irrevocable effect (such as the declaration of a dividend), (2) those matters that may well become irrevocable without swift action, and (3) those matters that will cause changes of position by others that cannot be rectified. As a result, delegation of authority to committees under section 8.25(e) may be broader than mere authority to act with respect to matters arising within the ordinary course of business. The ordinary course of business standard for delegation was rejected as being too narrow and inappropriate for many modern corporations. For example, although section 8.25(e)(8) makes nondelegable the decision whether to issue and sell shares or create a class or series of shares with designated rights and preferences, it permits the board of directors to delegate to a committee (within limits specifically prescribed by the board of directors) the important but more limited functions of fixing the specific terms—including without limitation, the price, the dividend rate, provisions for redemption, sinking fund, conversion, voting or preferential rights, and provisions for other features of a class or series of shares. The committee may also be empowered to adopt any final resolution setting forth the terms and to authorize the appropriate filing with the Secretary of State required by this Act. Thus, terms of the sale of shares may be set quickly and upon the most accurate information without necessarily involving a meeting of the board of directors. The phrase “(or senior executive officer of the corporation)” also permits these functions to be delegated to the chief financial officer or other appropriate officer of the corporation. The subsection also permits delegation to a committee of authority to determine the terms of a contract or option for the sale of shares if the board prescribes specific limits in a stock option plan or otherwise. This delegation avoids requiring involvement of the full board in the details of the administration of stock option or other compensation plans.

Section 8.25(e) prohibits delegation of authority with respect to most mergers, sales of substantially all the assets, amendments to articles of incorporation and voluntary dissolution under section 8.25(e)(2) since these require shareholder action. In addition, section 8.25(e) prohibits delegation to a board committee of authority to declare dividends or distributions, designate director candidates for purposes of proxy solicitation, fill board vacancies, approve a so-called “short-form merger” (where the interests of the minority shareholders warrant special attention), authorize the disposition or reacquisition of shares, or amend the bylaws or the articles of incorporation (without shareholder approval under section 10.02). On the other hand, under section 8.25(e) many actions of a material nature, such as the authorization of long-term debt and capital investment or the pricing of shares, may properly be made the subject of committee delegation.

The statutes of several states make nondelegable certain powers not listed in section 8.25(e)—for example, the power to change the principal corporate office, to appoint or remove officers, to fix director compensation, or to remove agents. These are not prohibited by section 8.25(e) since the whole board of directors may reverse or rescind the committee action taken, if it should wish to do so, without undue risk that implementation of the committee action might be irrevocable or irreversible.

Section 8.25(f) makes clear that although the board of directors may delegate to a committee the authority to take action, the designation of the committee, the delegation of authority to it, and action by the committee will not alone constitute compliance by a noncommittee board member with his responsibility under section 8.30. On the other hand, a noncommittee director also will not automatically incur liability should the action of the particular committee fail to meet the standard of care set out in section 8.30. The noncommittee member’s liability in these cases will depend upon whether he failed to comply with section 8.30(b)(3). Factors to be considered in this regard will include the care used in the delegation to and supervision over the committee, and the amount of knowledge regarding the particular matter which the noncommittee director has available to him. Care in delegation and supervision include appraisal of the capabilities and diligence of the committee directors in light of the subject and its relative importance and may be facilitated, in the usual case, by review of minutes and receipt of other reports concerning committee activities. The enumeration of these factors is intended to emphasize that directors may not abdicate their responsibilities and secure exoneration from liability simply by delegating authority to board committees. Rather, a director against whom liability is asserted based upon acts of a committee of which he is not a member avoids liability if the standards contained in section 8.30 are met.

Section 8.25(f) has no application to a member of the committee itself. The standard applicable to a committee member is set forth in section 8.30(a).

Amended North Carolina Commentary

The powers which may not be delegated to committees, specified in subsection (e) of this section, are different and more extensive than those specified in former G.S. 55-31(a). Also, this section contains no counterpart of former G.S. 55-31(c), which expressly held the board responsible for action of its committees. This difference is moderated by subsection (f) of the present section.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended (i) to permit a committee of the board of directors to consist of a single director, (ii) to permit a committee to approve the corporation’s purchase of its own shares, to approve the issuance of shares, and to determine the designation and relative rights, preferences, and limitations of a class or series of shares, and (iii) to recognize the special procedures provided in G.S. 55-7-44(b)(2) for appointment of a committee to make certain determinations in a derivative proceeding.

Supplemental North Carolina Commentary (2007)

The amendment to subsection (e)(1) affected by Session Law 2007-385 permits a board of directors to delegate to a committee the authority to authorize or approve distributions, but only according to a formula or method, or within limits, prescribed by the board of directors. This applies to distributions as defined in G.S. 55-1-40, including but not limited to share reacquisitions and dividends.

Supplemental North Carolina Commentary (2018)

Subsection (a) provides that a board of directors may create committees and appoint one or more members of the board of directors to serve on the committees, but does not address the use of substitute committee members. The change in subsection (h), which is based on Model Act (2016 Revision) Section 8.25(e), empowers board committees to continue operating despite a member’s absence or disqualification by allowing the full board to designate another board member who would be available to act without delay in committee meetings if a regular committee member was disqualified or unable to be present at a committee meeting.

Unless otherwise required by committee governing documents, replacement of an absent or disqualified member is not necessary to permit the other committee members to continue to perform their duties (provided that a quorum is present). Rather, appointing alternate committee members in advance is intended as an expedient temporary solution, allowing a committee to continue effectively accomplishing its duties despite an absent or disqualified committee member and without necessity of convening a special meeting of the full board to make a short-fuse replacement. The alternate director owes the same fiduciary duties and is subject to the same liabilities as any other director.

Editor’s Note.

Session Laws 2007-385, s. 7, provides: “The Revisor of Statutes may cause to be printed all explanatory comments of the drafters of the act as the Revisor deems appropriate.”

The comment under the heading Supplemental North Carolina Commentary (2007) above was printed under authority of Session Laws 2007-385, s. 7. It was provided by the original drafters of Session Laws 2007-385 and was printed as received.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2005-268, s. 8, effective October 1, 2005, rewrote subsections (a) and (c); added “unless this chapter provides otherwise” in subsection (b); added subsection (b1); substituted “shall not, however, do any of the following” for “may not, however” in subsection (e); deleted former subdivisions (e)(7) and (e)(8); and made minor punctuation changes.

Session Laws 2007-385, s. 1, effective August 19, 2007, substituted “or approve distributions, except according to a formula or method, or within limits, prescribed by the board of directors” for “distributions” in subdivision (e)(1).

Session Laws 2018-45, s. 9, effective October 1, 2018, in subsection (a), substituted “the committee” for “any such committee” in the first sentence, and added the last sentence; in subsection (b), substituted “shall” for “must”, and “greater of either of the following” for “greater of”, and made a minor stylistic change; substituted “committees and subcommittees” for “committees” in subsection (c); substituted “committee or subcommittee” for “committee” in subsection (f); and added subsection (g).

Legal Periodicals.

For note, “Alford v. Shaw: North Carolina Adopts a Prophylactic Rule to Prevent Termination of Shareholders’ Derivative Suits Through Special Litigation Committees,” see 64 N.C.L. Rev. 1228 (1986).

CASE NOTES

Editor’s Note. —

The case below was decided under the Business Corporation Act adopted in 1955.

Special Litigation Committee. —

The fact that the appointing members of a board of directors are acting under the “disability” of potential liability as a result of shareholder allegations does not per se extend to disable them from delegating managerial authority over the litigation to a special litigation committee. Alford v. Shaw, 318 N.C. 289, 349 S.E.2d 41, 1986 N.C. LEXIS 2659 (1986), op. withdrawn, sub. op., 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

§ 55-8-26. Submission of matters for shareholder vote.

A corporation may agree to submit a matter to a vote of its shareholders even if, after approving the matter, the board of directors determines it no longer recommends the matter.

History. 2013-153, s. 7.

OFFICIAL COMMENTS (2013)

Section 8.26 is intended to clarify that a corporation can enter into an agreement, such as a merger agreement, containing a force the vote provision. Section 8.26 is broader than some analogous state corporation law provisions and applies to several different provisions of the Model Act that require the directors to approve a matter before recommending that the shareholders vote to approve it. Under section 8.26, directors can agree to submit a matter to the shareholders for approval even if they later determine that they no longer recommend it. The provision is not intended to relieve the board of directors of its duty to consider carefully the proposed transaction and the interests of the shareholders.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

§§ 55-8-27 through 55-8-29.

Reserved for future codification purposes.

Part 3. Standards of Conduct.

§ 55-8-30. General standards for directors.

  1. A director shall discharge the director’s duties as a director, including the director’s duties as a member of a committee or subcommittee, in accordance with all of the following:
    1. In good faith.
    2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
    3. In a manner the director reasonably believes to be in the best interests of the corporation.
  2. In discharging the duties of a director’s office, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by any of the following:
    1. One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented.
    2. Legal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence.
    3. A committee or subcommittee of the board of directors of which the director is not a member if the director reasonably believes the committee or subcommittee merits confidence.
  3. A director is not entitled to the benefit of subsection (b) of this section if the director has actual knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) of this section unwarranted.
  4. A director is not liable for (i) any action taken as a director, or any failure to take any action, if the director performed the duties of the director’s office in compliance with this section or (ii) any failure to offer the corporation the right to have or participate in a business opportunity prior to the pursuit or taking of the opportunity by the director or other person if the corporation’s articles of incorporation include a provision authorized by G.S. 55-2-02(b)(4) and the procedures and approvals required by the provision, if any, were complied with or obtained prior to the pursuit or taking of the opportunity by the director or other person. The duties of a director weighing a change of control situation shall not be any different, nor the standard of care any higher, than otherwise provided in this section.
  5. A director’s personal liability for monetary damages for breach of a duty as a director may be limited or eliminated only to the extent permitted in G.S. 55-2-02(b)(3), and a director may be entitled to indemnification against liability and expenses pursuant to Part 5 of Article 8 of this Chapter.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1993, c. 552, s. 11; 2018-45, s. 10.

Official Comment

Section 8.30 defines the general standard of conduct for directors. It sets forth the standard by focusing on the manner in which the director performs his duties, not the correctness of his decisions. Section 8.30(a) thus requires a director to perform his duties in good faith, with the care of an ordinarily prudent person in a like position and in a manner he believes to be in the best interests of the corporation. This standard is based on former section 35 of the 1969 Model Act, a number of state statutes and on judicial formulations of the duty of care applicable to directors. Section 8.30 also parallels, to the extent possible, the indemnification provisions of sections 8.50 through 8.58.

In determining whether to impose liability, the courts recognize that boards of directors and corporate managers continuously make decisions that involve the balancing of risks and benefits for the enterprise. Although some decisions turn out to be unwise or the result of a mistake of judgment, it is unreasonable to reexamine these decisions with the benefit of hindsight. Therefore, a director is not liable for injury or damage caused by his decision, no matter how unwise or mistaken it may turn out to be, if in performing his duties he met the requirements of section 8.30.

Even before statutory formulations of directors’ duty of care, courts sometimes invoked the business judgment rule in determining whether to impose liability in a particular case. In doing so, courts have sometimes used language similar to the standards set forth in section 8.30(a). The elements of the business judgment rule and the circumstances for its application are continuing to be developed by the courts. In view of that continuing judicial development, section 8.30 does not try to codify the business judgment rule or to delineate the differences, if any, between that rule and the standards of director conduct set forth in this section. That is a task left to the courts and possibly to later revisions of this Model Act.

Section 8.30 should be read in light of the basic duty of directors set forth in section 8.01(b) that the “business and affairs of a corporation [shall be] managed under the direction of” the board. Since the board may delegate or assign to appropriate officers of the corporation the authority or duty to exercise powers that section 8.01 does not require the board to retain, directors are not personally responsible under section 8.30 for actions or omissions of officers, employees, or agents of the corporation so long as the directors, complying with the standard of care set forth in section 8.30, have acted reasonably in delegating responsibility.

  1. Section 8.30(a)
  2. Section 8.30(b)
  3. Section 8.30(c)
  4. Section 8.30(d)
  5. Application to officers

Section 8.30(a) establishes a general standard of care for all directors. It requires a director to exercise “the care an ordinarily prudent person in a like position would exercise.” Some state statutes use the words “diligence,” “care,” and “skill” to define this duty. E.G., N.C. GEN. STAT. ANN. § 55-35 (1975). There is very little authority as to what “skill” and “diligence,” as distinguished from “care,” can be required or properly expected of corporate directors in the performance of their duties. “Skill,” in the sense of technical competence in a particular field, should not be a qualification for the office of director. The concept of “diligence” is sufficiently subsumed within the concept of “care.” Accordingly, the words “diligence” and “skill” were omitted from the standard adopted.

Likewise, section 8.30 does not use the term “fiduciary” in the standard for directors’ conduct, because that term could be confused with the unique attributes and obligations of a fiduciary imposed by the law of trusts, some of which are not appropriate for directors of a corporation.

Several of the phrases chosen to define the general standard of care in section 8.30(a) deserve specific mention.

  1. The reference to “ordinarily prudent person” embodies long traditions of the common law, in contrast to suggested standards that might call for some undefined degree of expertise, like “ordinarily prudent businessman.” The phrase recognizes the need for innovation, essential to profit orientation, and focuses on the basic director attributes of common sense, practical wisdom, and informed judgment.
  2. The phrase “in a like position” recognizes that the “care” under consideration is that which would be used by the “ordinarily prudent person” if he were a director of the particular corporation.
  3. The combined phrase “in a like position . . . under similar circumstances” is intended to recognize that (a) the nature and extent of responsibilities will vary, depending upon such factors as the size, complexity, urgency, and location of activities carried on by the particular corporation, (b) decisions must be made on the basis of the information known to the directors without the benefit of hindsight, and (c) the special background, qualifications, and management responsibilities of a particular director may be relevant in evaluating his compliance with the standard of care. Even though the quoted phrase takes into account the special background, qualifications and management responsibilities of a particular director, it does not excuse a director lacking business experience or particular expertise from exercising the common sense, practical wisdom, and informed judgment of an “ordinarily prudent person.”

The process by which a director informs himself will vary but the duty of care requires every director to take steps to become informed about the background facts and circumstances before taking action on the matter at hand. In relying upon the performance by management of delegated or assigned duties pursuant to section 8.01 (including, for example, matters of law and legal compliance), the director may depend upon the presumption of regularity, absent knowledge or notice to the contrary. A director may also rely on information, opinions, reports, and statements prepared or presented by others as set forth in section 8.30(b). Furthermore, a director should not be expected to anticipate the problems which the corporation may face except in those circumstances where something has occurred to make it obvious to the director that the corporation should be addressing a particular problem.

A director complying with the standards expressed in section 8.30(a) is entitled to rely upon information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by the persons or committees described in section 8.30(b). The right to rely under this section applies to the entire range of matters for which the board of directors is responsible. Under section 8.30(c), however, a director so relying must be without knowledge concerning the matter in question that would cause his reliance to be unwarranted. Also inherent in the concept of good faith is the requirement that, in order to be entitled to rely on a report, statement, opinion, or other matter, the director must have read the report or statement in question, or have been present at a meeting at which it was orally presented, or have taken other steps to become generally familiar with its contents. In short, the director must comply with the general standard of care of section 8.30(a) in making a judgment as to the reliability and competence of the source of information upon which he proposes to rely.

Section 8.30(b) permits reliance upon outside advisers, including not only those in the professional disciplines customarily supervised by state authorities, such as lawyers, accountants, and engineers, but also those in other fields involving special experience and skills, such as investment bankers, geologists, management consultants, actuaries, and real estate appraisers. The concept of “expert competence” in section 8.30(b)(2) embraces a wide variety of qualifications and is not limited to the more precise and narrower recognition of experts under the Securities Act of 1933. In this respect section 8.30(b) goes beyond any existing state business corporation act, although several state statutes permit reliance on reports of appraisers selected with reasonable care by the board of directors and deal with the scope and nature of corporate reports and records generally.

Section 8.30(b) permits reliance upon a committee of the board of directors when performing a supervisory or other functions in instances where neither the full board of directors nor the committee takes dispositive action. For example, there may be reliance upon an investigation undertaken by a board committee and reported to the full board of directors, which forms the basis for action by the board of directors itself. Another example is reliance upon a committee of the board of directors, such as a corporate audit committee, with respect to the ongoing role of oversight of the accounting and auditing functions of the corporation. In addition, where reliance upon information or materials prepared or presented by a board committee is not involved, a director may properly rely on dispositive action by a board committee (of which he is not a member) empowered to act pursuant to authority delegated under section 8.25 or acting with the acquiescence of the board of directors. In this connection, see the Official Comment to section 8.25. A director may similarly rely on committees not created under section 8.25 which have nondirector members.

Section 8.30(b) permits reliance upon a committee of the board of directors when performing a supervisory or other functions in instances where neither the full board of directors nor the committee takes dispositive action. For example, there may be reliance upon an investigation undertaken by a board committee and reported to the full board of directors, which forms the basis for action by the board of directors itself. Another example is reliance upon a committee of the board of directors, such as a corporate audit committee, with respect to the ongoing role of oversight of the accounting and auditing functions of the corporation. In addition, where reliance upon information or materials prepared or presented by a board committee is not involved, a director may properly rely on dispositive action by a board committee (of which he is not a member) empowered to act pursuant to authority delegated under section 8.25 or acting with the acquiescence of the board of directors. In this connection, see the Official Comment to section 8.25. A director may similarly rely on committees not created under section 8.25 which have nondirector members.

In conditioning reliance upon reasonable belief that the board committee merits the director’s “confidence,” section 8.30(b)(3) recognizes a difference between a board committee and an expert. In sections 8.30(b)(1) and (2) the reference is to “competence of an expert,” which recognizes the expectation of experience and in most instances technical skills on the part of those upon whom the director may rely. In section 8.30(b)(3), the concept of “confidence” is substituted for “competence” in order to avoid any inference that technical skills are a prerequisite.

By identifying those upon whom a director may rely in discharging his duties, section 8.30(b) does not limit the ability of directors to delegate their powers under section 8.01(a) to committees of the board of directors or officers of the corporation, except where this delegation is expressly prohibited by the Act. Delegation should be carried out in accordance with the standards set forth in section 8.30(a). See also section 8.25 and its Official Comment with respect to delegation to committees.

Section 8.30(c) expressly prevents a director from “hiding his head in the sand” and relying on information, opinions, reports, or statements when he has actual knowledge which makes reliance unwarranted.

Section 8.30(d) follows former section 35 of the Model Act, which provided that “An individual who performs the duties of his office in accordance with this section is not liable for serving or having served as a director.” Thus, both former section 35 and current section 8.30(d) are self-executing, and the individual director’s exoneration from liability is automatic. If compliance with the standard of conduct set forth in former section 35 or section 8.30 is established, there is no need to consider possible application of the business judgment rule. The possible application of the business judgment rule need only be considered if compliance with the standard of conduct set forth in former section 35 or section 8.30 is not established.

Section 8.30(d) makes clear that the section will apply whether or not affirmative action was in fact taken. If the board of directors or a committee considers an issue (such as a recommendation of independent auditors concerning the corporation’s internal accounting controls) and determines not to take action, the determination not to act is protected by section 8.30. Similarly, if the board of directors or committee delegates responsibility for handling a matter to subordinates, the delegation constitutes “action” under section 8.30. Section 8.30(d) applies (assuming its requirements are satisfied) to any conscious consideration of matters involving the affairs of the corporation. It also applies to the determination by the board of directors of which matters to address and which not to address. Section 8.30(d) does not apply only when the director has failed to consider taking action which under the circumstances he is obliged to consider taking.

Section 8.30 generally deals only with directors. Section 8.42 and its Official Comment explain the extent to which the provisions of section 8.30 apply to officers.

North Carolina Commentary

Although the word “fiduciary” is no longer used in describing the duty owed by a director to a corporation, there is no intent to change North Carolina law in this area. The decision not to bring forward the language stating that a director shall “be deemed to stand in a fiduciary relation to the corporation” in former G.S. 55-35 is not intended to modify in any way the duty of directors recognized under the former law. Removal of the word “fiduciary” was solely because of confusion in other jurisdictions between the corporate and the trust standards of fiduciary duty. This Act does not attempt to define the full range of a director’s duty, since the language chosen might be used to limit the standards under which directors should act.

Former G.S. 55-35 provided that officers and directors stand in a fiduciary relation “to the corporation and to its shareholders.” The drafters decided not to bring forward the words “and to its shareholders” in order to avoid an interpretation that there is a duty running directly from directors to the shareholders that would give shareholders a direct right of action on claims that should be asserted derivatively.

The drafters noted the dictum in Snyder v. Freeman , 300 N.C. 204, 266 S.E.2d 593 (1980), suggesting that directors owe a fiduciary duty to creditors. The drafters considered adding a new section 55-8-34 expressly stating that the directors do not have any such duty to creditors; but, because of the complexities and novelty of such a provision, they finally decided not to add the new section but instead to express in this Comment their opinion that in general no such duty exists.

Subsection (c) of this section is different from the Model Act in two respects. First, it requires “actual” knowledge for a director to be denied the right of reliance under subsection (b); and, second, it says more specifically that a director who has such knowledge is not “entitled to the benefit of subsection (b)” instead of saying that such director is not “acting in good faith.”

Subsection (e) of the section was added to the Model Act’s provisions to clarify the two points covered. It should be noted that a provision in the articles of incorporation that limits a director’s monetary liability for a breach of the duty of due care does not affect the duty of due care itself.

Supplemental North Carolina Commentary 2018

Clause (ii) of subsection (d), effective October 1, 2018, provides an affirmative defense to liability where an articles of incorporation provision has been adopted under G.S. 55-2-02(b)(4) that eliminates a director’s duties with respect to the applicable business opportunity.

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2018-45, s. 10, effective October 1, 2018, substituted “committee or subcommittee, in accordance with all of the following:” for “committee:” in subsection (a); in subsection (b), substituted “the duties of a director’s office,” for “his duties”, “by any of the following:” for “by:”, and substituted “committee or subcommittee” for “committee” in subdivision (b)(3); added “of this section” following “subsection (b)” throughout subsection (c); rewrote subsection (d); substituted “the director” for “he” and made minor stylistic changes throughout the section.

Legal Periodicals.

For note on the fiduciary duty of interested directors and the business judgment rule, see 45 N.C.L. Rev. 755 (1967).

For comment on promoters of corporations dealing in condominiums, see 12 Wake Forest L. Rev. 979 (1976).

For note on close corporations and personal liability from execution of shareholder agreements, see 16 Wake Forest L. Rev. 975 (1980).

For article on corporate directors’ accountability, see 66 N.C.L. Rev. 171 (1987).

For article discussing derivative suit litigation, see 66 N.C.L. Rev. 565 (1988).

For comment, “Fiduciary Duties of Directors, How Far Do They Go?,” see 23 Wake Forest L. Rev. 163 (1988).

For article, “Reliance and Liability Standards for Outside Directors,” see 24 Wake Forest L. Rev. 5 (1989).

For article, “The Effect of Statutes Limiting Directors’ Due Care Liability on Hostile Takeover Defenses,” see 24 Wake Forest L. Rev. 31 (1989).

For article, “Should Corporate Statutes Providing Special Protection for Directors Be Limited to Publicly Traded Corporations?,” see 24 Wake Forest L. Rev. 79 (1989).

For article, “Intracorporate Process and the Avoidance of Director Liability,” see 24 Wake Forest L. Rev. 97 (1989).

For comment, “North Carolina’s Statutory Limitation on Directors’ Liability,” see 24 Wake Forest L. Rev. 117 (1989).

For comment on corporate law and director liability, see 24 Wake Forest L. Rev. 141 (1989).

For article, “The Duty of Directors to Non-Shareholder Constituencies in Control Transactions — A Comparison of U.S. and U.K. Law,” see 25 Wake Forest L. Rev. 61 (1990).

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For note, “First Union v. Suntrust and The Delaware Experience: An Analysis of Deal Protection Measures,” see 80 N.C.L. Rev. 2109 (2002).

For recent development, “In re Wachovia Shareholders Litigation: The Case for the Common Benefit Doctrine,” see 84 N.C. L. Rev. 2066 (2006).

For article, “Duties of the Modern Corporate Executive: Article & Essay: Fiduciary Constraints: Correlating Obligation with Liability,” see 42 Wake Forest L. Rev. 697 (2007).

For article, “To Incorporate or not to Incorporate - That is the Question: How State v. Custard Clarified Corporate Governance in North Carolina,” see 33 N.C. Cent. L. Rev. 175 (2011).

For article, “Duties of Nonprofit Corporate Directors - Emphasizing Oversight Responsibilities,” see 90 N.C. L. Rev. 1845 (2012).

For article, “Is the Corporate Director’s Duty of Care a ‘Fiduciary’ Duty? Does it Matter?,” see 48 Wake Forest L. Rev. 1027 (2013).

For article, “Holding Out for a Change: Why North Carolina Should Permit Holder Claims,” see 92 N.C. L. Rev. 988 (2014).

For article, “Overcoming the Rippy Effect: Why the North Carolina Business Corporations Act Should Allow Permissive Officer Exculpation,” see 94 N.C.L. Rev. 2155 (2016).

CASE NOTES

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Common Law of Business Judgment Rule Not Abrogated. —

This section does not abrogate the common law of the business judgment rule. State ex rel. Long v. ILA Corp., 132 N.C. App. 587, 513 S.E.2d 812, 1999 N.C. App. LEXIS 259 (1999).

Directors Are Trustees of Property of Corporation. —

Directors of a corporation are trustees of the property of the corporation for the benefit of the corporate creditors, as well as shareholders. It is their duty to administer the trust assumed by them, not for their own profit, but for the mutual benefit of all interested parties; and, when such directors receive an advantage to themselves not common to all, they are guilty of a plain breach of trust. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Directors owe the corporation fidelity and the duty to use due care in the management of its business. Wilson v. McClenny, 262 N.C. 121, 136 S.E.2d 569, 1964 N.C. LEXIS 615 (1964).

Director in Fiduciary Relationship to Shareholder. —

Under special circumstances, a director of a corporation stands in a fiduciary relationship to a shareholder or director in the acquisition of the shareholder’s stock. Lazenby v. Godwin, 40 N.C. App. 487, 253 S.E.2d 489, 1979 N.C. App. LEXIS 2298 (1979).

Director’s Fiduciary Duty to Creditors. —

As a general rule, directors of a corporation do not owe a fiduciary duty to creditors of the corporation under G.S. 55-8-30, but a corporate director can breach a fiduciary duty to a creditor if the transaction at issue occurs under circumstances amounting to a winding-up or dissolution of the corporation. Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 554 S.E.2d 840, 2001 N.C. App. LEXIS 1047 (2001).

General rule under North Carolina law that the fiduciary duties owed by a director of a corporation per G.S. 55-8-30(a) were owed to the corporation and not to its creditors did not foreclose a suit by corporate creditors against directors thereof where the creditors claimed that the directors had continued to operate the corporation despite the fact that it was insolvent for the purposes of obtaining payment of debts owed by the corporation to the directors. In re Bostic Constr., Inc., 435 B.R. 46, 2010 Bankr. LEXIS 2124 (Bankr. M.D.N.C. 2010).

Officer Not Protected. —

The director and chief executive officer of an insolvent insurer and its parent corporation was not protected by the business judgment rule from liability for breach of his fiduciary duties, where the director was a leading participant in a plan to benefit himself and his interests at the expense of the insurer. State ex rel. Long v. ILA Corp., 132 N.C. App. 587, 513 S.E.2d 812, 1999 N.C. App. LEXIS 259 (1999).

Where the former president of a Chapter 11 debtor claimed that his actions were sheltered by the business judgment rule and G.S. 55-8-30(d), the debtor was entitled to summary judgment on its claim against the president for breach of fiduciary duty because the debtor rebutted any presumption that the president acted in good faith and with the care of an ordinarily prudent person by showing that certain transfers of property from the debtor to the president were transactions in which the president had a direct financial interest. Anderson v. Brokers Inc., 363 B.R. 458, 2007 Bankr. LEXIS 792 (Bankr. M.D.N.C. 2007).

Duty Owed to Minority Shareholders. —

Directors, officers, and majority shareholders owe a fiduciary duty and obligation of good faith to minority shareholders as well as to the corporation. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983); Umstead v. Durham Hosiery Mills, Inc., 578 F. Supp. 342, 1984 U.S. Dist. LEXIS 20089 (M.D.N.C. 1984).

Fiduciary Duty. —

Directors of a corporation generally owed a fiduciary duty to their corporation and the complaint adequately stated a cause of action for breach of the fiduciary duty against a corporation’s directors. Governor's Club Inc. v. Governors Club Ltd. P'ship, 152 N.C. App. 240, 567 S.E.2d 781, 2002 N.C. App. LEXIS 926 (2002), aff'd, 357 N.C. 46, 577 S.E.2d 620, 2003 N.C. LEXIS 313 (2003).

Evidence was sufficient to establish a breach of defendant’s fiduciary duty to plaintiff as a minority shareholder. Freese v. Smith, 110 N.C. App. 28, 428 S.E.2d 841, 1993 N.C. App. LEXIS 409 (1993).

Board of directors of a bank that merged with another bank did not breach its fiduciary duties by employing improper deal protection measures, failing to comply with statutory share exchange requirements, and failing to make material disclosures concerning the merger. Ehrenhaus v. Baker, 216 N.C. App. 59, 717 S.E.2d 9, 2011 N.C. App. LEXIS 2161 (2011).

Shareholders of an acquired bank could not proceed with their lawsuit as individual shareholders under the “special duty” exception to the general rule as they failed to allege any facts from which it may be inferred that the financial institution owed the shareholders a duty that was personal to the shareholders and distinct from the duty owed to an acquired bank and its shareholders. Rice-Marko v. Wachovia Corp., 398 S.C. 301, 728 S.E.2d 61, 2012 S.C. App. LEXIS 174 (S.C. Ct. App. 2012).

As the former director and officers of an insolvent corporation tried to secure financing for its continued operation up until the point that a lender foreclosed on its secured loans, the directors and officers did not own a fiduciary duty to plaintiff or the corporation’s other creditors. United States Trouser, S.A. de C.V. v. Int'l Legwear Group, Inc., 2012 U.S. Dist. LEXIS 177456 (W.D.N.C. Dec. 13, 2012), aff'd in part, vacated in part, 612 Fed. Appx. 158, 2015 U.S. App. LEXIS 7425 (4th Cir. 2015).

Director of a corporation, by the director’s concealment of the criminal and driving history of the director and the director’s adult child, who was also an employee of the corporation, breached a fiduciary duty of loyalty to the corporation and the other directors, who, upon learning of the concealment, terminated the director from the director’s position with the corporation. Harris v. Testar, Inc., 243 N.C. App. 33, 777 S.E.2d 776, 2015 N.C. App. LEXIS 736 (2015).

It was error to dismiss a homeowners’ association’s breach of fiduciary duty claim against the association’s directors and officers because (1) the directors and officers owed the association such a duty, and (2) it was alleged that the directors and officers did not act in the association’s interests. Conleys Creek Ltd. P'ship v. Smoky Mt. Country Club Prop. Owners Ass'n, 799 S.E.2d 879, 2017 N.C. App. LEXIS 225 (Ct. App.), sub. op., 255 N.C. App. 236, 805 S.E.2d 147, 2017 N.C. App. LEXIS 740 (2017).

Trial court erred in dismissing a homeowners association’s (HOA) counterclaim for breach of fiduciary duty as to a director and officer of the HOA because the HOA made a number of allegations which, if true, tended to show that they acted in their own interests and not in the best interests of the HOA or within the applicable limitations period. Conleys Creek Limited Partnership v. Smoky Mt. Country Club Prop. Owners Ass'n, 255 N.C. App. 236, 805 S.E.2d 147, 2017 N.C. App. LEXIS 740 (2017).

This Section Applies to Limited Partnerships. —

In a limited partnership the duty of the general partner to the limited partners is a duty to discharge his responsibilities according to the business judgment rule outlined in G.S. 55-8-30. Jackson v. Marshall, 140 N.C. App. 504, 537 S.E.2d 232, 2000 N.C. App. LEXIS 1211 (2000).

Fiduciary Duty as Question Where Revolving Fund Certificate Was Issued. —

Revolving fund certificate held by plaintiff issued in exchange for stock sold to defendant had some characteristics of a corporation/shareholder relationship; therefore, issue of whether defendants owed plaintiff a fiduciary duty was properly submitted to the jury. HAJMM Co. v. House of Raeford Farms, Inc., 94 N.C. App. 1, 379 S.E.2d 868, reversed on other grounds, HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 403 S.E.2d 483 (1991), appeal of right allowed pursuant to Rule 16(b) and petition allowed as to additional issues, 325 N.C. 271, 382 S.E.2d 439 (1989) (decided under the former Business Corporation Act).

Balance Sheet Insolvency. —

For a corporate director to breach a fiduciary duty to a creditor, the transaction at issue must occur under circumstances amounting to a “winding up” or dissolution of the corporation; balance sheet insolvency, absent such circumstances, is insufficient to give rise to a breach of fiduciary duty to creditors of a corporation. Whitley v. Carolina Clinic, Inc., 118 N.C. App. 523, 455 S.E.2d 896, 1995 N.C. App. LEXIS 303 (1995).

Suit for Breach of Duty Is Derivative. —

A suit against corporation’s officers and directors for breach of their fiduciary duty on account of mismanagement is clearly derivative. Gilbert v. Bagley, 492 F. Supp. 714, 1980 U.S. Dist. LEXIS 11659 (M.D.N.C. 1980).

Shareholder’s claims that corporate officers misrepresented the corporation’s financial health, causing the value of its stock to decline, had to be brought in a derivative suit rather than an individual action. The special duty exception did not apply, as the fiduciary duty of disclosure was owed to the corporation itself under North Carolina law and did not give the shareholder a direct right of action. Rivers v. Wachovia Corp., 665 F.3d 610, 2011 U.S. App. LEXIS 25552 (4th Cir. 2011).

When Action by Shareholders Is Individual. —

Where several officers and directors were alleged to have breached the fiduciary duty owed to shareholders by maintaining the market price of the corporation’s shares at artificial levels and in issuing false or misleading financial statements, the shareholder plaintiffs would be entitled to receive any recovery under these allegations and the action was thus individual. Gilbert v. Bagley, 492 F. Supp. 714, 1980 U.S. Dist. LEXIS 11659 (M.D.N.C. 1980).

Shareholder plaintiffs need not demonstrate that all defendants are amenable to suit. Rather, nonofficers and nondirectors may, by North Carolina common-law principles, be held to answer for substantially assisting or encouraging another’s breach of fiduciary duty. Gilbert v. Bagley, 492 F. Supp. 714, 1980 U.S. Dist. LEXIS 11659 (M.D.N.C. 1980).

Civil Conspiracy Claim Premised on Statute. —

Plaintiff former president’s civil conspiracy claim alleged defendants, the directors of the corporation, violated the provisions of three federal criminal statutes relating to witness tampering and obstruction of justice, as set forth in 18 U.S.C.S. §§ 1503, 1512(b), (d), 1513(e), but none of those criminal statutes authorized a private cause of action for money damages, thus, he failed to allege the existence of a “predicate tort” to support the civil conspiracy claim, and further, although he also alleged the directors entered into an agreement to violate G.S. 55-8-30 as to the directors’ fiduciary duties, those duties were owed to the corporation and the alleged violation of G.S. 55-8-30 was insufficient to support a claim for civil conspiracy. Feldman v. Law Enforcement Assocs. Corp., 779 F. Supp. 2d 472, 2011 U.S. Dist. LEXIS 24994 (E.D.N.C. 2011), dismissed in part, 955 F. Supp. 2d 528, 2013 U.S. Dist. LEXIS 91131 (E.D.N.C. 2013).

Stockholders’ “Holder” Claim Was Not Recognized in North Carolina. —

Stockholders’ complaint against the directors of a corporation failed to state a claim because North Carolina did not recognize holder claims. Estate of Browne v. Thompson, 219 N.C. App. 637, 727 S.E.2d 573, 2012 N.C. App. LEXIS 439 (2012).

Creditor’s Standing to Assert Violation of Duty. —

Plaintiff’s claim that former director and officers failed to perform their statutory duties by continuing to operate the corporation during insolvency instead of “winding down” did not survive summary judgment; as directors’ and officers’ duties under G.S. 55-8-30 and G.S. 55-8-42 were owed to the corporation, not to its creditors, plaintiff lacked standing to assert the claim. United States Trouser, S.A. de C.V. v. Int'l Legwear Group, Inc., 2012 U.S. Dist. LEXIS 177456 (W.D.N.C. Dec. 13, 2012), aff'd in part, vacated in part, 612 Fed. Appx. 158, 2015 U.S. App. LEXIS 7425 (4th Cir. 2015).

Genuine Issue of Material Fact Shown. —

Where defendants submitted a number of affidavits tending to substantiate their version of the facts and where plaintiff responded with evidence which, if believed, would enable a jury to find in the corporation’s favor, the parties’ submissions created a genuine issue of material fact as to whether defendants breached their duty of loyalty by diverting a deal from the corporation for which they were directors to another corporation so as to warrant denial of defendants’ summary judgment motion. Silverman v. Miller, 155 B.R. 362, 1993 Bankr. LEXIS 741 (Bankr. E.D.N.C. 1993).

Issues regarding knowledge, intent and motive, in determining whether directors’ actions were taken in good faith in order to further the interests of the corporations, depend upon credibility of witnesses and are therefore not amenable to resolution on summary judgment. Clark v. B.H. Holland Co., 852 F. Supp. 1268, 1994 U.S. Dist. LEXIS 15486 (E.D.N.C. 1994).

Where a Chapter 11 debtor claimed that a former director breached his fiduciary duty in approving or executing transfers of property to the debtor’s former president, the debtor was not entitled to summary judgment because there was an issue of material fact as to whether the director acted in good faith because there was evidence that the director honestly believed that a partnership existed between the debtor and the president, and that it was in the best interests of the debtor to pay its indebtedness to the president. Anderson v. Brokers Inc., 363 B.R. 458, 2007 Bankr. LEXIS 792 (Bankr. M.D.N.C. 2007).

Where directors of a bankruptcy debtor formed a management company to manage the debtor, genuine issues of material fact remained concerning whether the directors breached fiduciary duties since it was unclear whether the directors caused unnecessary transfer of the debtor’s funds and whether the company’s contract with the debtor served a legitimate business purpose. Ivey v. McDaniel, 2009 Bankr. LEXIS 70 (Bankr. M.D.N.C. Jan. 15, 2009).

Failure to Rely on the Advice of Professionals. —

The director of an insolvent insurer did not rely on the advice of accounting and legal professionals, and thus, his statutory right to rely on their advice did not protect him from liability for breach of fiduciary duty in connection with loans made by the insurer, where actual advice received made the director aware that the loans were undercollateralized. State ex rel. Long v. ILA Corp., 132 N.C. App. 587, 513 S.E.2d 812, 1999 N.C. App. LEXIS 259 (1999).

Officer Not Personally Liable for Debt. —

Where the evidence showed the defendant was an officer of a lawful corporation but had no knowledge, at the time debt was incurred on behalf of the corporation, that the corporate charter was suspended, the defendant had no personal liability for the corporation’s debt to the plaintiff. Charles A. Torrence Co. v. Clary, 121 N.C. App. 211, 464 S.E.2d 502, 1995 N.C. App. LEXIS 1051 (1995).

Safe Harbor Protection. —

Defendant was not entitled to G.S. 55-8-30(b) protection since the plaintiffs’ claim was not a derivative action, and defendant’s fundraising attempts were neither the product of the company’s collective approval nor a business judgment. Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695, 2016 N.C. App. LEXIS 371 (2016), aff'd in part, modified, 372 N.C. 137, 827 S.E.2d 479, 2019 N.C. LEXIS 379 (2019).

Action Untimely. —

Summary judgment was granted in favor of a director of a corporation in an action alleging violations of G.S. 55-8-30 and N.Y. Gen. Bus. Law § 717 relating to the sale of certain illegal agreements because the causes of action were time barred. Rich Food Servs., Inc. v. Rich Plan Corp., 2002 U.S. Dist. LEXIS 27799 (E.D.N.C. Nov. 11, 2002).

§ 55-8-31. Director conflict of interest.

  1. A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. A conflict of interest transaction is not voidable by the corporation solely because of the director’s interest in the transaction if any one of the following is true:
    1. The material facts of the transaction and the director’s interest were disclosed or known to the board of directors or a committee or subcommittee of the board of directors and the board of directors, or the committee or subcommittee of the board of directors, authorized, approved, or ratified the transaction.
    2. The material facts of the transaction and the director’s interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction.
    3. The transaction was fair to the corporation.
  2. For purposes of this section, a director of the corporation has an indirect interest in a transaction if either of the following is true:
    1. Another entity in which the director has a material financial interest or in which the director is a general partner is a party to the transaction.
    2. Another entity of which the director is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the board of directors of the corporation.
  3. For purposes of subdivision (a)(1) of this section, a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the directors on the board of directors (or on the committee or subcommittee) who have no direct or indirect interest in the transaction. If a majority of the directors who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action under this section. The presence of, or a vote cast by, a director with a direct or indirect interest in the transaction does not affect the validity of any action taken under subdivision (a)(1) of this section if the transaction is otherwise authorized, approved, or ratified as provided in that subdivision.
  4. For purposes of subsection (a)(2), a conflict of interest transaction is authorized, approved, or ratified if it receives the vote of a majority of the shares entitled to be counted under this subsection. Shares owned by or voted under the control of a director who has a direct or indirect interest in the transaction, and shares owned by or voted under the control of an entity described in subsection (b)(1), may not be counted in a vote of shareholders to determine whether to authorize, approve, or ratify a conflict of interest transaction under subsection (a)(2). The vote of those shares, however, shall be counted in determining whether the transaction is approved under other sections of this Chapter. A majority of the shares that would if present be entitled to be counted in a vote on the transaction under this subsection constitutes a quorum for the purpose of taking action under this section.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2005-268, s. 11; 2018-45, s. 11.

Official Comment

Historically, the scope of a director’s duty of loyalty to a corporation has been defined by judicial decision rather than by statute. The courts have developed and refined this duty based on increasing sophistication and experience with the corporate form, and the need to encourage honest decisions by directors and to discourage direct or indirect devices by which directors may benefit personally at the expense of creditors or shareholders. Over the years, courts have been vigilant to subject novel transactions and devices to scrutiny.

Sections 8.31 and 8.32 deal with various facets of the duty of loyalty. The Model Act, however, does not attempt to define the full range of this duty. Indeed, any such attempt would probably be self-defeating since the language chosen might be used to limit prematurely the standards under which directors should act.

  1. Conflict of interest transactions in general
  2. Requirements for approval of conflict of interest transactions
    1. Consideration by the directors
    2. Consideration by the shareholders

Section 8.31 deals only with “conflict of interest” transactions by a director with the corporation, that its, transactions in which the director has an interest either (1) directly or (2) indirectly through an entity in which the director has a financial or managerial interest covered by section 8.31(b). A conflict of interest transaction does not include transactions in which the director participates in the transaction only as a shareholder and receives only a proportionate share of the advantage or benefit of the transaction. Section 8.31 deals only with conflict of interest transactions involving directors; it does not address analogous transactions entered into by officers, employees, or substantial or dominating shareholders unless they are also directors.

Section 8.31 rejects the common law view that all conflict of interest transactions entered into by directors are automatically voidable at the option of the corporation without regard to the fairness of the transaction or the manner in which the transaction was approved by the corporation. Section 8.31(a) makes any automatic rule of voidability inapplicable to transactions that are fair or that have been approved by directors or shareholders in the manner provided by the balance of section 8.31. The approval mechanisms set forth in section 8.31(c) and (d) relate only to the elimination of this automatic rule of voidability and do not address the manner in which the transactions must be approved under other sections of this Act. This is made clear by the express limitations in sections 8.31(c) and (d) that they are applicable only “for the purposes of this section” as well as the language of the second and third sentences of section 8.31(d).

The elimination of the automatic rule of voidability does not mean that all transactions that meet one or more of the tests set forth in section 8.31(a) are automatically valid. These transactions may be subject to attack on a variety of grounds independent of section 8.31—for example, that the transaction constituted waste, that it was not authorized by the appropriate corporate body, that it violated other sections of the Model Business Corporation Act, or that it was unenforceable under other common law principles. The sole purpose of section 8.31 is to sharply limit the common law principle of automatic voidability and in this respect section 8.31 follows earlier versions of the Model Act and the statutes of many states dealing with conflict of interest transactions.

Sections 8.31(c) and (d) provide special rules for determining whether the board of directors (or a committee thereof) or the shareholders have authorized, approved, or ratified a conflict of interest transaction so as to bring subsections (a)(1) or (a)(2) into play. Basically, these subsections require the transaction in question to be approved by an absolute majority of the directors (on the board of directors, or on the committee, as the case may be) or shares whose votes may be counted in determining whether the transaction should be authorized, approved, or ratified. If these votes are not obtained the transaction is tested under the fairness test of subsection (a)(3). The vote required for authorization, approval, or ratification of a conflict of interest transaction is more onerous than the standard applicable to normal voting requirements for approval of corporate actions—i.e., that a quorum be present and only the votes of directors or shares present or represented at that meeting be considered—because of the importance of assuring that conflict of interest transactions receive as broad consideration within the corporation as possible if independent review on the basis of fairness is to be avoided.

Section 8.31(c) provides that if a conflict of interest transaction is to be considered by the board of directors or a committee of the board, only the votes of directors “who have no direct or indirect interest in the transaction” may be counted in determining whether to authorize, approve, or ratify the transaction. A vote mistakenly cast by an interested director, however, does not affect the validity of the authorization, approval, or ratification by a committee or by the board of directors under section 8.31 if it otherwise meets the requirement of this subsection. The presence of the interested director at the meeting similarly does not affect the validity of the action by the disinterested directors. Because of the voting disqualification of interested directors, section 8.31(c) provides that a majority of the disinterested directors on the committee or on the board of directors, as the case may be, constitute a quorum for purposes of authorizing, approving, or ratifying the conflict of interest transaction under section 8.31, subject always, however, to the requirement that more than one director must approve the transaction. This two director minimum is applicable to a committee of the board of directors as well as the board of directors itself.

When a director’s conflict of interest transaction is considered by the shareholders, section 8.31(d) applies a similar but somewhat more complex prohibition: votes by shares “owned by or voted under the control of a director who has a direct or indirect interest in the transaction” and votes by shares “owned by or voted under the control of an entity described in subsection (b)(1)”—that is, an entity in which the director has a material financial interest or is a general partner—may not be counted. This prohibition is based on the belief that the same considerations that prevent votes cast be interested directors from being counted in favor of a conflict of interest transaction also compel the conclusion that votes cast by shares owned or controlled by them, or by entities involved in the transaction in which they have a material financial interest, should also not be counted when the issue is the authorization, approval, or ratification of a conflict of interest transaction under section 8.31. A similar prohibition does not appear in section 41 of the 1969 Model Act.

In some situations, the prohibition of section 8.31(d) will result in the conflict of interest issue being resolved by a majority of a minority of the shares. This will occur, for example, whenever a director who is the majority shareholder of the corporation is interested in a transaction. The vote on the conflict of interest issue under section 8.31, however, must be distinguished from the vote on the approval of the transaction itself under other sections of the Model Act, in which there is no prohibition against the voting of shares owned or controlled by an interested director. For example, if a parent corporation wishes to merge its 60-percent-owned subsidiary into itself, and the majority shareholder of the parent is a director of the subsidiary, the votes of the shares owned by the parent corporation may not be counted under section 8.31(d) (since the shares are owned by an entity which is a party to the transaction and which the director controls). The shares nevertheless may be voted on the merger proposal itself under chapter 11 of the Model Act, and the merger will, of course, normally be approved solely by the vote of the shares owned by the parent corporation. On the other hand, the test of section 8.31(a)(2) is not met unless the transaction is approved by at least a majority of the votes cast by the holders of the 40 percent of the shares not owned by the parent corporation. If this requirement is not met, the transaction may be evaluated under the fairness test of section 8.31(a)(3).

3. Indirect Conflicts of Interest

Section 8.31 is applicable to “indirect” as well as direct conflicts; “indirect” is defined in section 8.31(b) to cover transactions between the corporation and an entity in which the director has a material financial interest or is a general partner. Further, section 8.31(b) covers indirect conflicts where the director is an officer or director of another entity (but does not have a material financial interest in the transaction) if the transaction is of sufficient importance that it is or should be considered by the board of directors of the corporation. The purpose of this last clause is to permit normal business transactions between large business entities that may have a common director to go forward without concern about the technical rules relating to conflict of interest unless the transaction is of such importance that it is or should be considered by the board of directors or the director may be deemed to have a material financial interest in the transaction. Thus, section 8.31 covers transactions between corporations with interlocking or common directors as well as the direct “interested director” transaction.

4. “Fairness” of a transaction

The fairness of a transaction for purposes of section 8.31 should be evaluated on the basis of the facts and circumstances as they were known or should have been known at the time the transaction was entered into. For example, the terms of a transaction subject to section 8.31 should normally be deemed “fair” if they are within the range that might have been entered into at arm’s-length by disinterested persons.

5. An “interested” director

The Model Act does not attempt to define precisely when a director should be viewed as “interested” for purposes of participating in the decision to adopt, approve, or ratify a conflict of interest transaction. Secton 8.31(b) does, however, define one aspect of this concept—the “indirect” interest. For purposes of section 8.31 a director should normally be viewed as interested in a transaction if he or the immediate members of his family have a financial interest in the transaction or a relationship with the other parties to the transaction such that the relationship might reasonably be expected to affect his judgment in the particular matter in a manner adverse to the corporation.

North Carolina Commentary

This section replaces former G.S. 55-30(b); subsection (a) of the prior law is covered by G.S. 55-8-11. The section is more precise than former G.S. 55-30(b) in several respects. First, it says that a conflict of interest transaction “is not voidable by the corporation solely because of the director’s interest” if it passes one of the three prescribed tests, thus recognizing that it might be voidable for some other reason. Second, subsection (b) of this section defines “indirect interest.” Finally, subsections (c) and (d) define the manner in which the transaction may be approved by the disinterested directors or shareholders, respectively. The specific requirement of “good faith” by the directors in former G.S. 55-30(b)(1) is unnecessary because it is generally imposed by G.S. 55-8-30.

The only change in this section from the Model Act is a minor clarification of the last sentence in subsection (d).

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, subsection (c) is amended to remove the limitation that a conflict of interest transaction may not be approved by a single disinterested director.

Effect of Amendments.

Session Laws 2005-268, s. 11, effective October 1, 2005, in subsection (c), inserted “of this section” following “subsection (a)(1)” twice and deleted “but a transaction may not be authorized, approved, or ratified under this section by a single director” at the end of the first sentence.

Session Laws 2018-45, s. 11, effective October 1, 2018, substituted “committee or subcommittee” for “committee” in subsections (a), and (c); substituted “directors, or the committee or subcommittee of the board of directors,” for “directors or committee” in subdivision (a)(1); in subsection (b), substituted “if either of the following is true:” for “if:” and “the director” for “he” throughout; substituted “subdivision” for “subsection” throughout subsection (c); and made minor stylistic changes throughout the section.

Legal Periodicals.

For comment on promoters of corporations dealing in condominiums, see 12 Wake Forest L. Rev. 979 (1976).

For article on corporate directors’ accountability, see 66 N.C.L. Rev. 171 (1987).

For article, “Should Corporate Statutes Providing Special Protection for Directors Be Limited to Publicly Traded Corporations?,” see 24 Wake Forest L. Rev. 79 (1989).

For comment, “North Carolina’s Statutory Limitation on Directors’ Liability,” see 24 Wake Forest L. Rev. 117 (1989).

For article, “Fairness and Trust in Corporate Law,” see 1993 Duke L.J. 425.

CASE NOTES

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

“Corporate Transaction” Construed. —

The words “corporate transaction” in former G.S. 55-30 were intended to apply to a situation where the corporate director was dealing directly with the corporation. Smith v. Robinson, 343 F.2d 793, 1965 U.S. App. LEXIS 6336 (4th Cir. 1965).

Corporate officer acts in a fiduciary capacity and cannot profit at the expense of the corporation. Smith v. Robinson, 343 F.2d 793, 1965 U.S. App. LEXIS 6336 (4th Cir. 1965).

Contracts Fixing Compensation Not Void or Voidable Per Se. —

Notwithstanding the fiduciary relationship existing between officers and the corporation which they serve, contracts fixing the amount and method of paying compensation for services to be rendered are not void or voidable per se. Fulton v. Talbert, 255 N.C. 183, 120 S.E.2d 410, 1961 N.C. LEXIS 545 (1961).

Derivative Action Against Director Does Not Necessarily Make Him “Adversely Interested.” —

In a derivative action brought by shareholders against directors of a corporation alleging malfeasance in office, former G.S. 55-30 did not operate to prevent former G.S. 55-19(d) from being effective in allowing the corporation to advance any legal fees to the directors, since the advancement of legal fees under former G.S. 55-19(d) was not necessarily a transaction in which a director was adversely interested, and since, even if it were, the disinterested directors of the corporation had approved the advancement. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Adversely Interested Party Must Prove Transaction Was Fair. —

While North Carolina law and general law do not prohibit corporate officers from dealing with the corporation, the adversely interested party must prove that the transaction was fair, just and reasonable when entered into. Smith v. Robinson, 343 F.2d 793, 1965 U.S. App. LEXIS 6336 (4th Cir. 1965).

When a stockholder in a derivative action seeks to establish self-dealing on the part of a majority of the board, the burden should be upon those directors to establish that the transactions complained of were just and reasonable to the corporation when entered into or approved. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Where officer of corporation engaged in transactions which were not approved by the corporate defendants or shareholders, the burden was on him to prove that the transactions were just and reasonable. Lowder v. All Star Mills, Inc., 103 N.C. App. 479, 405 S.E.2d 794, 1991 N.C. App. LEXIS 806 (1991).

Where the former director and president of a Chapter 11 debtor claimed that he complied with G.S. 55-8-31(a)(1) by having two disinterested directors approve or ratify the transfer of certain property to him, although the president sufficiently established that the two directors were disinterested, the director failed to disclose the material facts of the transactions to the disinterested directors, and could not show that the transactions were fair to the debtor. Anderson v. Brokers Inc., 363 B.R. 458, 2007 Bankr. LEXIS 792 (Bankr. M.D.N.C. 2007).

For discussion of the “doctrine of corporate opportunity,” see Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Determination of what is “just and reasonable” and thus, whether a corporate opportunity has been usurped, is one in which no hard and fast rule can be formulated. Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Decision of Special Committee Not Binding on Trial Court. —

The fact that a special litigation committee appointed by directors charged with self-dealing recommends that derivative action should not proceed, while carrying weight, is not binding upon the trial court. Rather, the court must make a fair assessment of the report of the special committee, along with all the other facts and circumstances in the case, in order to determine whether the defendants will be able to show that the transaction complained of was just and reasonable to the corporation. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 1987 N.C. LEXIS 2299 (1987).

Corporate director and majority shareholder of closely held corporation did not breach a fiduciary duty to minority shareholder and director when the corporate director purchased the corporation’s sole property at a foreclosure on a mortgage the corporate director had personally guaranteed without telling the minority shareholder he intended to do so in advance. Boyd v. Howard, 147 N.C. App. 491, 556 S.E.2d 337, 2001 N.C. App. LEXIS 1187 (2001).

Approval of Employment Contract by Disinterested Officers. —

Execution of employment contract with the former director and president of a Chapter 11 debtor complied with G.S. 55-8-31(a)(1) because the contract was approved by two disinterested directors. Anderson v. Brokers Inc., 363 B.R. 458, 2007 Bankr. LEXIS 792 (Bankr. M.D.N.C. 2007).

No Conflict of Interest Based Solely on Familial Relationship. —

Shareholders did not establish that corporate directors had a conflict of interest, based solely on a familial relationship, in their actions in electing the officers and managers of the corporation and setting their compensation because G.S. 55-8-31 did not provide for a conflict of interest solely based on a family relationship; also, none of the actions at issue by the board of directors was a “transaction with the corporation”. Geitner v. Mullins, 182 N.C. App. 585, 643 S.E.2d 435, 2007 N.C. App. LEXIS 808 (2007).

§ 55-8-32. Loans to directors.

  1. Except as provided by subsection (c), a corporation may not directly or indirectly lend money to or guarantee the obligation of a director of the corporation unless:
    1. The particular loan or guarantee is approved by a majority of the votes represented by the outstanding voting shares of all classes, voting as a single voting group, except the votes of shares owned by or voted under the control of the benefited director; or
    2. The corporation’s board of directors determines that the loan or guarantee benefits the corporation and either approves the specific loan or guarantee or a general plan authorizing loans and guarantees.
  2. The fact that a loan or guarantee is made in violation of this section does not affect the borrower’s liability on the loan.
  3. This section does not apply to loans and guarantees authorized by statute regulating any special class of corporations.
  4. For purposes of this section, a loan or guarantee is made indirectly to or for a director if such director has an indirect interest in the loan or guarantee as defined in G.S. 55-8-31(b).

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 6; 1961, c. 198; 1969, c. 751, s. 9; 1989, c. 265, s. 1.

Official Comment

Section 8.32 treats specially a second type of conflict of interest transaction: loans by the corporation to directors (including loans obtained by directors from third persons on the basis of the corporation’s credit). Early statutes in many states made all these loans unlawful because they were believed to be inherently subject to abuse; the modern view epitomized by section 8.32 recognizes that these loans may be proper and desirable in some situations.

The basic test for validity under section 8.32(a) is that either (1) the particular loan is approved by a majority of the shares or by the board of directors after a specific finding that the loan benefits the corporation, or (2) the loan is pursuant to a general plan approved by the board of directors as being of benefit to the corporation. This type of plan will normally cover at least directors, officers, and high-level employees, and possibly lower level employees as well. Examples of these plans are employee benefit plans, plans authorizing loans of petty cash, and advances for expenses reasonably anticipated to be incurred in the performance of the duties of the director, officer, or employee.

Section 8.32(b) makes clear that an irregular or improper loan is nevertheless legally enforceable by the corporation by the corporation against the borrower.

Section 8.32(c) provides for an exception for loans by banks, savings and loans, and other lending institutions that are authorized by law to make loans to directors in the ordinary course of business. The protections provided by the statutes applicable to these entities render unnecessary the protections provided by section 8.32.

North Carolina Commentary

Former G.S. 55-22 required shareholder approval of loans to directors, officers, and dominant shareholders. This section permits the board of directors to authorize loans to directors without shareholder approval if the board determines that the loan benefits the corporation. There are no special limits on loans to officers who are not directors or to dominant shareholders.

This section differs from the Model Act by the addition of the words “directly or indirectly” to the loan prohibition in subsection (a) of this section. These words are then defined in a new subsection (d).

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955.

Grant of Security Interest. —

Former G.S. 55-22 was not drafted or designed to prevent a corporation from granting a security interest in its own property to secure its own obligation to another party. Landscaping Servs., Inc. v. Poole, 38 B.R. 21, 1983 Bankr. LEXIS 5212 (Bankr. E.D.N.C. 1983).

Restriction Imposed. —

The language contained in former G.S. 55-22 was very broad and severely restricted the right of a corporation to lend money or property to, or guarantee or otherwise secure the obligation of a dominant shareholder, directors or officers of any corporation of which the officers and directors of the lending or securing corporation owned more than 50% of the outstanding stock of any class; such a restriction was consistent with the fiduciary relationship created by former G.S. 55-35 between the corporation and directors of the corporation. Landscaping Servs., Inc. v. Poole, 38 B.R. 21, 1983 Bankr. LEXIS 5212 (Bankr. E.D.N.C. 1983).

§ 55-8-33. Liability for unlawful distributions.

  1. A director who votes for or assents to a distribution made in violation of G.S. 55-6-40 or the articles of incorporation is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating G.S. 55-6-40 or the articles of incorporation if it is established that he did not perform his duties in compliance with G.S. 55-8-30. In any proceeding commenced under this section, a director has all of the defenses ordinarily available to a director.
  2. A director held liable under subsection (a) for an unlawful distribution is entitled to:
    1. Contribution from every other director who could be held liable under subsection (a) for the unlawful distribution; and
    2. Reimbursement from each shareholder for the amount the shareholder accepted knowing the distribution was made in violation of G.S. 55-6-40 or the articles of incorporation.
  3. A proceeding under subsection (a) is barred unless it is commenced within three years after the date on which the effect of the distribution was measured under G.S. 55-6-40(e) or (g).

History. Code, s. 681; 1901, c. 2, ss. 33, 52; Rev., s. 1192; C.S., s. 1179; 1927, c. 121; 1933, c. 354, s. 1; G.S., s. 55-116; 1955, c. 1371, s. 1; 1959, c. 1316, s. 35; 1989, c. 265, s. 1.

North Carolina Commentary

This section is substantially the same as the revised version of the comparable section in the Model Act as published in the November 1986 issue of The Business Lawyer. Subsection (b) was modified for greater precision in terminology. The limitation period in subsection (c) was increased to three rather than two years, and the subsection was clarified to ensure that the rights of individual directors to contribution and reimbursement under subsection (b) cannot be cut off before their own liability or lack thereof is determined.

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Primary Right to Enforce Liabilities Lies in Corporation. —

The primary right of enforcement of liabilities to the corporation lies in the corporation, and as such the corporation is the real party in interest and a necessary party to such action. Underwood v. Stafford, 270 N.C. 700, 155 S.E.2d 211, 1967 N.C. LEXIS 1408 (1967).

Creditor or Stockholder Cannot Maintain Action Without First Demanding Suit by Corporation. —

Where alleged breach or injuries are based on duties owed to the corporation and not to any particular creditor or stockholder, the creditor or stockholder cannot maintain an action without a demand on the corporation, or its receiver if insolvent, to bring suit and a refusal to do so, and a joinder of the corporation as a party. Underwood v. Stafford, 270 N.C. 700, 155 S.E.2d 211, 1967 N.C. LEXIS 1408 (1967).

Liability of Director for Improper Dividend. —

A director of a corporation who has not brought himself within the exemptions to liability for the payment of dividends to the stockholders when the profits of the business did not justify it, or its debts exceeded two thirds of its assets, etc., is liable, in the action of the trustee in bankruptcy of such corporation, for the amount of such debts, and the proper court costs and charges, not exceeding the amount of the dividends unlawfully declared. Claypoole v. McIntosh, 182 N.C. 109, 108 S.E. 433, 1921 N.C. LEXIS 189 (1921).

Effect of Charter Provision Exempting Stockholders from Liability. —

A charter provision that “no stockholder of the corporation shall be individually liable for debt, liability, contract, tort, omission, or engagement of the corporation or any other stockholder therein” did not interfere with the just and equitable principle embodied in former statute holding stockholders who were directors liable for a joint tort or misfeasance committed by them to the prejudice of creditors. McIver v. Young Hdwe. Co., 144 N.C. 478, 57 S.E. 169, 1907 N.C. LEXIS 172 (1907).

Trial court was justified in disregarding the corporate entity and holding defendant personally liable to the extent of plaintiff ’s damages under the contract where defendant, who was president and sole shareholder of company, received substantial compensation from the sale of the corporation’s assets without informing plaintiff of the sale or making provision for contractual debt to plaintiff. Hudson v. Jim Simmons Pontiac-Buick, Inc., 94 N.C. App. 563, 380 S.E.2d 612, 1989 N.C. App. LEXIS 561 (1989) (decided under the former Business Corporation Act).

No Cause of Action Stated. —

Claim against director of dissolved corporation did not state a cause of action where plaintiff only alleged that director was officer when corporation dissolved and where there was no allegation that corporation’s assets were distributed by officers without providing for known or reasonably ascertainable liabilities. Heather Hills Home Owners Ass'n v. Carolina Custom Dev. Co., 100 N.C. App. 263, 395 S.E.2d 154, 1990 N.C. App. LEXIS 918, cert. denied, 327 N.C. 634, 399 S.E.2d 327, 1990 N.C. LEXIS 1011 (1990) (decided under former G.S. 55-32).

Creditors Lacked Standing. —

Plaintiffs lacked standing to assert claims (1) that the joinder agreements executed by two defendants were fraudulent transfers in violation of G.S. 39-23.1 and unlawful distributions in violation of G.S. 55-8-33 and G.S. 55-6-40, for which all defendants were liable, or alternatively, (2) for unauthorized execution, because such claims could have been brought by any of the corporation’s creditors who, like plaintiffs, were denied timely payment of the corporation’s debts when execution of the joinder agreements led to its insolvency. Angell v. Kelly, 336 F. Supp. 2d 540, 2004 U.S. Dist. LEXIS 19003 (M.D.N.C. 2004).

§§ 55-8-34 through 55-8-39.

Reserved for future codification purposes.

Part 4. Officers.

§ 55-8-40. Officers.

  1. A corporation has the officers described in its bylaws or appointed by the board of directors in accordance with the bylaws.
  2. A duly appointed officer may appoint one or more officers or assistant officers if authorized by the bylaws or the board of directors.
  3. The secretary or any assistant secretary or any one or more other officers designated by the bylaws or the board of directors shall have the responsibility and authority to maintain and authenticate the records of the corporation.
  4. The same individual may simultaneously hold more than one office in a corporation, but no individual may act in more than one capacity where action of two or more officers is required.
  5. Whenever a specific office is referred to in this Chapter, it shall be deemed to include any individual who, alone or collectively with one or more other individuals, holds or occupies such office.

History. 1901, c. 2, ss. 15, 16, 17; Rev., ss. 1149, 1150, 1151; C.S., s. 1145; G.S., s. 55-49; 1955, c. 1371, s. 1; 1959, c. 1316, s. 9; 1973, c. 1217; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.13.

Official Comment

Section 8.40 permits every corporation to designate the officers it wants. The designation may be made in the bylaws or by the board of directors consistently with the bylaws. This is a departure from earlier versions of the Model Act and most state corporation acts, which require certain officers, usually the president, the secretary, and the treasurer, and generally authorize the corporation to designate additional or assistant officers. Experience has shown, however, that little purpose is served by a statutory requirement that there be certain officers, and statutory requirements may sometimes create problems of implied or apparent authority or confusion with nonstatutory offices the corporation desires to create.

The board of directors may appoint assistant officers pursuant to its general powers under section 8.40(a); duly appointed officers may also appoint assistant officers if authorized by the board under section 8.40(b).

Throughout the Model Act, the act of a board designating an officer is referred to as an “appointment” rather than an “election.” The Act also consistently uses the word “elect” when referring to the selection of directors, thus emphasizing the difference in the selection process.

The board of directors, as well as duly appointed corporate officers or other agents, may also appoint agents for the corporation.

The bylaws or the board of directors must also delegate to an officer the responsibility to prepare minutes and authenticate records of the corporation; the person performing this function is referred to as the “secretary” of the corporation throughout the Model Act. See section 1.40. Under this Act a corporation may have this and all other corporate functions performed by a single individual.

The person who is designated by the bylaws or the board as responsible for maintaining minutes of meetings and authenticating records of the corporation thereby has authority to bind the corporation by his authentication under this section. This delegation of authority, traditionally vested in the corporate “secretary,” allows third persons to rely on authenticated records without inquiring into their truth or accuracy.

Amended North Carolina Commentary

This section was adapted from the corresponding section of the Model Act with several changes. The word “required” was deleted from the catchline of the section because it covers officers that are optional as well as those that are required.

No changes were made in subsections (a) and (b). Subsection (b) permits the board of directors to authorize officers to appoint other officers or assistant officers, whereas former G.S. 55-34 was silent on this point. The drafters were in favor of this provision but noted that the appointment should be documented as a practical matter, e.g., in the minute books.

Subsection (c) was changed to designate the secretary or any assistant secretary as the officers who have responsibility and authority to maintain and authenticate corporate records, subject to any other provision in the bylaws, in accordance with existing practice, and subsection (d) was changed by adding the final clause relating to acting in a dual capacity when the action of more than one officer is required, thus conforming to former G.S. 55-34(a). Subsection (e) brings forward the last sentence of former G.S. 55-34(a) with updated terminology.

CASE NOTES

Whether Level of Control and Authority Rose to De Facto Director Status. —

In a business dispute involving asserted allegations of breach of a covenant-not-to-compete and other claims, a trial court erred by granting defendants summary judgment on the issue of whether one of defendants’ level of control and authority rose to the level of a de facto officer as, although none of plaintiff’s corporate records indicated that the defendant was the president of plaintiff, testimony from plaintiff stated that the defendant was promoted to that position when the defendant signed the covenant-not-to-compete and other agreements and that the defendant’s own business cards named him as president of plaintiff. Kinesis Adver., Inc. v. Hill, 187 N.C. App. 1, 652 S.E.2d 284, 2007 N.C. App. LEXIS 2251 (2007).

§ 55-8-41. Duties of officers.

Each officer has the authority and duties set forth in the bylaws or, to the extent consistent with the bylaws, the authority and duties prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the authority and duties of other officers.

History. 1901, c. 2, ss. 15, 16, 17; Rev., ss. 1149, 1150, 1151; C.S., s. 1145; G.S., s. 55-49; 1955, c. 1371, s. 1; 1959, c. 1316, s. 9; 1973, c. 1217; 1989, c. 265, s. 1.

Official Comment

Section 8.41 recognizes that persons designated as officers have the formal authority set forth for that position (1) by its description in the bylaws, (2) by specific resolution of the board of directors, or (3) by direction of another officer authorized by the board of directors to prescribe the duties of other officers.

These methods of investing officers with formal authority do not exhaust the sources of an officer’s actual or apparent authority. Many cases state that specific corporate officers, particularly the chief executive officer, may have implied authority merely by virtue of their positions. This authority, which may overlap the express authority granted by the bylaws, generally has been viewed as extending only to ordinary business transactions, though some cases have recognized unusually broad implied authority of the chief executive officer or have created a presumption that corporate officers have broad authority, thereby placing on the corporation the burden of showing lack of authority. Corporate officers may also be vested with apparent (or ostensible) authority by reason of corporate conduct on which third persons reasonably rely.

In addition to express, implied, or apparent authority, a corporation is normally bound by unauthorized acts of officers if they are ratified by the board of directors. Generally, ratification extends only to acts that could have been authorized as an original matter. Ratification may itself be express or implied and may in some cases serve as the basis of apparent (or ostensible) authority.

North Carolina Commentary

This section was modified by deleting the Model Act’s words “shall perform the” before the word “duties” in the first use of that word and by adding the words “authority and” before the word “duties” in the other two uses of that word.

Former G.S. 55-34(c) expressly gave the president of a corporation authority to institute or defend legal proceedings when the directors are deadlocked. See Thomas v. Baker, 227 N.C. 226, 41 S.E.2d 842 (1947). That provision was not brought forward. The drafters concluded that situations involving a deadlocked board of directors should be determined by the courts on a case by case basis rather than having a definitive statutory statement that the president can act in such situations.

Legal Periodicals.

For note on the liability of directors and officers for negligent management, see 45 N.C.L. Rev. 748 (1967).

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Conduct of Day-to-Day Business. —

The day-to-day business of a corporation is actually conducted by its officers, employees and other agents under the authority and control of its board of directors. The officers of a corporation have such authority and may perform such duties in the management of the corporation as provided either specifically or generally in the bylaws, or as may be determined by action of the board of directors not inconsistent with the bylaws. Burlington Indus., Inc. v. Foil, 284 N.C. 740, 202 S.E.2d 591, 1974 N.C. LEXIS 1339 (1974).

President as Head and General Agent of Corporation. —

The president of a corporation by the very nature of his position is the head and general agent of the corporation, and accordingly he may act for the corporation, in the business in which the corporation is engaged. Burlington Indus., Inc. v. Foil, 284 N.C. 740, 202 S.E.2d 591, 1974 N.C. LEXIS 1339 (1974).

But the authority of the president to act for the corporation is limited to those matters that are incidental to the business in which the corporation is engaged, that is, to matters that are within the corporation’s ordinary course of business. Burlington Indus., Inc. v. Foil, 284 N.C. 740, 202 S.E.2d 591, 1974 N.C. LEXIS 1339 (1974).

Necessity for Contract for Compensation. —

An officer of a corporation, for services in the course and scope of his official duties, can only recover when compensation therefor has been authoritatively agreed upon in advance. It is not always required that a definite sum be fixed upon, but there must be a previous agreement for compensation existent or in some way expressed so as to bind the company. There can be no recovery on a quantum meruit. Chiles v. United States Furn. Mfg. Co., 167 N.C. 574, 83 S.E. 812, 1914 N.C. LEXIS 170 (1914). See Caho v. Norfolk & S. Ry., 147 N.C. 20, 60 S.E. 640, 1908 N.C. LEXIS 5 (1908).

Individual Liability of Officers. —

Where officers of a corporation knowingly participate in a wrong which is actionable, they are jointly and severally liable therefor. Cone v. United Fruit Growers' Ass'n, 171 N.C. 530, 88 S.E. 860, 1916 N.C. LEXIS 118 (1916).

Defense Based on Unwritten Limitation on Powers. —

The president of a corporation is not bound by any secret limitation upon the authority usually vested in the chief officer of a corporation; hence a defense to a note, issued by the president of a corporation, that it was unauthorized because of an unwritten bylaw, is untenable. Phillips v. Interstate Land Co., 176 N.C. 514, 97 S.E. 417, 1918 N.C. LEXIS 285 (1918).

The president of a corporation under former G.S. 55-49 had implied power to sign a note, and secret limitations on his authority were not binding on the payee. White v. Johnson & Sons, 205 N.C. 773, 172 S.E. 370, 1934 N.C. LEXIS 66 (1934).

The secretary of an incorporated garage and automobile repair company had the implied authority to settle claims made for damages upon the corporation, and one so dealing with him therein would not be bound by a secret limitation of his authority; and upon his own testimony that he was the proper one to be dealt with in this respect, the question of the corporation’s liability for his promise to pay the claim was properly presented. Beck v. Wilkins-Ricks Co., 186 N.C. 210, 119 S.E. 235, 1923 N.C. LEXIS 210 (1923).

The general manager of one of a chain of stores had implied authority to employ clerks by the year, and the corporation was bound by such contract though there existed an undisclosed limitation of the agent’s authority to make contracts of employment for more than a month. Strickland v. S.H. Kress & Co., 183 N.C. 534, 112 S.E. 30, 1922 N.C. LEXIS 311 (1922).

Suit for Breach of Duty is Derivative. —

Dismissal of all claims against a minority shareholder of a closely held corporation, who was also a former corporate officer of a subsidiary corporation, was appropriate because the majority shareholder lacked standing to maintain a direct action seeking individual recovery against the minority shareholder as the majority shareholder’s individual claims based upon the minority shareholder’s conduct as an officer, which were derivative in nature, did not fall under an exception to the general rule prohibiting individual shareholder suits. Raymond James Capital Partners, L.P. v. Hayes, 248 N.C. App. 574, 789 S.E.2d 695, 2016 N.C. App. LEXIS 819 (2016).

§ 55-8-42. Standards of conduct for officers.

  1. An officer with discretionary authority shall discharge his duties under that authority:
    1. In good faith;
    2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
    3. In a manner he reasonably believes to be in the best interests of the corporation.
  2. In discharging his duties an officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:
    1. One or more officers or employees of the corporation whom the officer reasonably believes to be reliable and competent in the matters presented; or
    2. Legal counsel, public accountants, or other persons as to matters the officer reasonably believes are within their professional or expert competence.
  3. An officer is not entitled to the benefit of subsection (b) if he has actual knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) unwarranted.
  4. An officer is not liable for (i) any action taken as an officer, or any failure to take any action, if the officer performed the duties of the officer’s office in compliance with this section or (ii) any failure to offer the corporation the right to have or participate in a business opportunity prior to the pursuit or taking of the opportunity by the officer or other person if the corporation’s articles of incorporation include a provision authorized by G.S. 55-2-02(b)(4) and the procedures and approvals required by the provision, if any, were complied with or obtained prior to the pursuit or taking of the opportunity by the officer or other person.
  5. An officer may be entitled to indemnification against liability and expenses pursuant to Part 5 of Article 8 of this Chapter.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2018-45, s. 12.

Official Comment

This section provides that a nondirector officer with discretionary authority must meet the same standards of conduct required of directors under section 8.30. But his ability to rely on information, reports, or statements, may, depending upon the circumstances of the particular case, be more limited than in the case of a director in view of the greater obligation he may have to be familiar with the affairs of the corporation. See section 8.42(b). Nondirector officers with more limited discretionary authority may be judged by a narrower standard, though every corporate officer or agent owes duties of fidelity, honesty, good faith, and fair dealing to the corporation. The Official Comment to section 8.30 is generally applicable to nondirector officers as well as to directors.

North Carolina Commentary

Subsection (c) of this section is different from the Model Act, first, in requiring “actual” knowledge and, second, in providing that an officer with such knowledge is not “entitled to the benefit of subsection (b)” instead of not “acting in good faith.” This change conforms to the change made in subsection 55-8-30(c). Subsection (e) was added for clarification.

Supplemental North Carolina Commentary 2018

Clause (ii) of subsection (d), effective October 1, 2018, provides an affirmative defense to liability where an articles of incorporation provision has been adopted under G.S. 55-2-02(b)(4) that eliminates an officer’s duties with respect to the applicable business opportunity.

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2018-45, s. 12, effective October 1, 2018, rewrote subsection (d) which formerly read “An officer is not liable for any action taken as an officer, or any failure to take any action, if he performed the duties of his office in compliance with this section.”

Legal Periodicals.

For article, “Is the Corporate Director’s Duty of Care a ‘Fiduciary’ Duty? Does it Matter?,” see 48 Wake Forest L. Rev. 1027 (2013).

For article, “Overcoming the Rippy Effect: Why the North Carolina Business Corporations Act Should Allow Permissive Officer Exculpation,” see 94 N.C.L. Rev. 2155 (2016).

CASE NOTES

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Duty Owed to Minority Shareholders. —

Directors, officers, and majority shareholders owe a fiduciary duty and obligation of good faith to minority shareholders as well as to the corporation. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983); Umstead v. Durham Hosiery Mills, Inc., 578 F. Supp. 342, 1984 U.S. Dist. LEXIS 20089 (M.D.N.C. 1984).

Fiduciary Duty. —

As the former director and officers of an insolvent corporation tried to secure financing for its continued operation up until the point that a lender foreclosed on its secured loans, the director and officers did not own a fiduciary duty to plaintiff or the corporation’s other creditors. United States Trouser, S.A. de C.V. v. Int'l Legwear Group, Inc., 2012 U.S. Dist. LEXIS 177456 (W.D.N.C. Dec. 13, 2012), aff'd in part, vacated in part, 612 Fed. Appx. 158, 2015 U.S. App. LEXIS 7425 (4th Cir. 2015).

Trial court erred in concluding that a corporate officer’s failure to remit payroll taxes and make 401(k) contributions did not constitute a breach of fiduciary duties where the failure to make the required payments violated both federal and state law, and the officer knew that the payments remained unpaid during his tenure. Seraph Garrison, LLC v. Garrison, 247 N.C. App. 115, 787 S.E.2d 398, 2016 N.C. App. LEXIS 1376 (2016).

Trial court erred in concluding that damages could not be awarded on a shareholder’s fraud claim where the court had diminished the legal significance of the officer’s concealed execution of a later contract, and the officer had used an initial payment from the contractor for his personal benefit. Seraph Garrison, LLC v. Garrison, 247 N.C. App. 115, 787 S.E.2d 398, 2016 N.C. App. LEXIS 1376 (2016).

Trial court erred in dismissing a homeowners association’s (HOA) counterclaim for breach of fiduciary duty as to a director and officer of the HOA because the HOA made a number of allegations which, if true, tended to show that they acted in their own interests and not in the best interests of the HOA or within the applicable limitations period. Conleys Creek Limited Partnership v. Smoky Mt. Country Club Prop. Owners Ass'n, 255 N.C. App. 236, 805 S.E.2d 147, 2017 N.C. App. LEXIS 740 (2017).

Fiduciary Duty as Question Where Revolving Fund Certificate Was Issued. —

Revolving fund certificate held by plaintiff issued in exchange for stock sold to defendant had some characteristics of a corporation/shareholder relationship; therefore, issue of whether defendants owed plaintiff a fiduciary duty was properly submitted to the jury. HAJMM Co. v. House of Raeford Farms, Inc., 94 N.C. App. 1, 379 S.E.2d 868, 1989 N.C. App. LEXIS 450 (1989), modified in part and rev'd in part, 328 N.C. 578, 403 S.E.2d 483, 1991 N.C. LEXIS 320 (1991).

Officers Must Act in Good Faith. —

The officers of a company have no right to take advantage of their knowledge of its financial condition to secure a preference for themselves on all its property as to a preexisting debt. Hill v. Pioneer Lumber Co., 113 N.C. 173, 18 S.E. 107, 1893 N.C. LEXIS 39 (1893); Thomson-Houston Elec. Light Co. v. Henderson Elec. Light Co., 116 N.C. 112, 21 S.E. 951, 1895 N.C. LEXIS 186 (1895); Graham v. Carr, 130 N.C. 271, 41 S.E. 379, 1902 N.C. LEXIS 61 (1902); Holshouser v. Copper Co., 138 N.C. 248, 50 S.E. 650, 1905 N.C. LEXIS 255 (1905); Edwards v. Hill Supply Co., 150 N.C. 171, 63 S.E. 742, 1909 N.C. LEXIS 20 (1909).

An officer may be held liable for the torts committed by agents of the corporation if the officer fails to act with due diligence in their supervision. Air Traffic Conference of Am. v. Marina Travel, Inc., 69 N.C. App. 179, 316 S.E.2d 642, 1984 N.C. App. LEXIS 3387 (1984).

Corporate officer cannot take business for himself from the corporation. Brite v. Penny, 157 N.C. 110, 72 S.E. 964, 1911 N.C. LEXIS 15 (1911).

The law will not permit corporate officers to create obligations in the name of the corporation, knowing the acts are without authority and invalid, and then be permitted to use the corporate name as shield against creditors. Pierce Concrete, Inc. v. Cannon Realty & Constr. Co., 77 N.C. App. 411, 335 S.E.2d 30, 1985 N.C. App. LEXIS 4065 (1985).

Officers Not to Incur Ordinary Business When Charter Suspended. —

While corporate officers in North Carolina are not trustees, their fiduciary duty to the corporation is a high one; this includes a duty not to continue to incur ordinary business obligations on behalf of the corporation when they have knowledge that the corporation’s charter has been suspended. Pierce Concrete, Inc. v. Cannon Realty & Constr. Co., 77 N.C. App. 411, 335 S.E.2d 30, 1985 N.C. App. LEXIS 4065 (1985).

Whether Level of Control and Authority Rose to De Facto Director Status. —

In a business dispute involving asserted allegations of breach of a covenant-not-to-compete and other claims, a trial court erred by granting defendants summary judgment on the issue of whether one of defendants’ level of control and authority rose to the level of a de facto officer as, although none of plaintiff’s corporate records indicated that the defendant was the president of plaintiff, testimony from plaintiff stated that the defendant was promoted to that position when the defendant signed the covenant-not-to-compete and other agreements and that the defendant’s own business cards named him as president of plaintiff. Kinesis Adver., Inc. v. Hill, 187 N.C. App. 1, 652 S.E.2d 284, 2007 N.C. App. LEXIS 2251 (2007).

Contracts Fixing Compensation Not Void or Voidable Per Se. —

Notwithstanding the fiduciary relationship existing between officers and the corporation which they serve, contracts fixing the amount and method of paying compensation for services to be rendered are not void or voidable per se. Fulton v. Talbert, 255 N.C. 183, 120 S.E.2d 410, 1961 N.C. LEXIS 545 (1961).

Suit for Breach of Duty Is Derivative. —

A suit against corporation’s officers and directors for breach of their fiduciary duty on account of mismanagement is clearly derivative. Gilbert v. Bagley, 492 F. Supp. 714, 1980 U.S. Dist. LEXIS 11659 (M.D.N.C. 1980).

Shareholder’s claims that corporate officers misrepresented the corporation’s financial health, causing the value of its stock to decline, had to be brought in a derivative suit rather than an individual action. The special duty exception did not apply, as the fiduciary duty of disclosure was owed to the corporation itself under North Carolina law and did not give the shareholder a direct right of action. Rivers v. Wachovia Corp., 665 F.3d 610, 2011 U.S. App. LEXIS 25552 (4th Cir. 2011).

Dismissal of all claims against a minority shareholder of a closely held corporation, who was also a former corporate officer of a subsidiary corporation, was appropriate because the majority shareholder lacked standing to maintain a direct action seeking individual recovery against the minority shareholder as the majority shareholder’s individual claims based upon the minority shareholder’s conduct as an officer, which were derivative in nature, did not fall under an exception to the general rule prohibiting individual shareholder suits. Raymond James Capital Partners, L.P. v. Hayes, 248 N.C. App. 574, 789 S.E.2d 695, 2016 N.C. App. LEXIS 819 (2016).

When Action by Shareholders Is Individual. —

Where several officers and directors were alleged to have breached the fiduciary duty owed to shareholders by maintaining the market price of the corporation’s shares at artificial levels and in issuing false or misleading financial statements, the shareholder plaintiffs would be entitled to receive any recovery under these allegations and the action was thus individual. Gilbert v. Bagley, 492 F. Supp. 714, 1980 U.S. Dist. LEXIS 11659 (M.D.N.C. 1980).

Shareholder plaintiffs need not demonstrate that all defendants are amenable to suit. Rather, nonofficers and nondirectors may, by North Carolina common-law principles, be held to answer for substantially assisting or encouraging another’s breach of fiduciary duty. Gilbert v. Bagley, 492 F. Supp. 714, 1980 U.S. Dist. LEXIS 11659 (M.D.N.C. 1980).

Creditor’s Standing to Assert Violation of Duty. —

Plaintiff’s claim that former director and officers failed to perform their statutory duties by continuing to operate the corporation during insolvency instead of “winding down” did not survive summary judgment; as directors’ and officers’ duties under G.S. 55-8-30 and G.S. 55-8-42 were owed to the corporation, not to its creditors, plaintiff lacked standing to assert the claim. United States Trouser, S.A. de C.V. v. Int'l Legwear Group, Inc., 2012 U.S. Dist. LEXIS 177456 (W.D.N.C. Dec. 13, 2012), aff'd in part, vacated in part, 612 Fed. Appx. 158, 2015 U.S. App. LEXIS 7425 (4th Cir. 2015).

Action Based on Fraud for Salaries Not Honestly Earned. —

The right of action which accrues for the fixing and taking by one in authority of salaries, bonuses, or other moneys not honestly earned and fairly owing is based on fraud. When one seeks to recover for wrongs fraudulently inflicted, he must allege the facts which, if proven, will establish the fraud. It is not sufficient merely to allege as a conclusion that the payments were “exorbitant, unreasonable, and unjust.” Fulton v. Talbert, 255 N.C. 183, 120 S.E.2d 410, 1961 N.C. LEXIS 545 (1961).

Wrongful Discharge Action for Compliance With Fiduciary Duties. —

While plaintiff former president alleged defendant employer terminated him because he discharged his duties as an officer of the corporation as required by G.S. 55-8-42, by reporting possible illegal activities to federal authorities, he failed to specifically allege that he refused to violate the law in the face of a request or an instruction from the employer, as there was no allegation that the employer instructed him not to report the information to federal investigators or that the employer specifically asked or encouraged him to violate his duties as a corporate officer, and thus, the president’s wrongful discharge in violation of public policy claim failed. Feldman v. Law Enforcement Assocs. Corp., 779 F. Supp. 2d 472, 2011 U.S. Dist. LEXIS 24994 (E.D.N.C. 2011), dismissed in part, 955 F. Supp. 2d 528, 2013 U.S. Dist. LEXIS 91131 (E.D.N.C. 2013).

Conversion of Corporate Money Justifying Punitive Damages. —

Defendant officers and directors’ conversions to their own use of money belonging to corporation held to support an award of punitive damages. Stone v. Martin, 85 N.C. App. 410, 355 S.E.2d 255, 1987 N.C. App. LEXIS 2622 (1987).

§ 55-8-43. Resignation and removal of officers.

  1. An officer may resign at any time by communicating his resignation to the corporation. A resignation is effective when it is communicated unless it specifies in writing a later effective time. If a resignation is made effective at a later time and the corporation accepts the future effective time, its board of directors or the appointing officer may fill the pending vacancy before the effective time if the board of directors or the appointing officer provides that the successor does not take office until the effective time.
  2. An officer may be removed at any time with or without cause by (i) the board of directors, (ii) the appointing officer, unless the bylaws or the board of directors provide otherwise, or (iii) any other officer if authorized by the bylaws or the board of directors.
  3. In this section, “appointing officer” means the officer, including any successor to that officer, who appointed the officer resigning or being removed.

History. 1901, c. 2, ss. 15, 16, 17; Rev., ss. 1149, 1150, 1151; C.S., s. 1145; G.S., s. 55-49; 1955, c. 1371, s. 1; 1959, c. 1316, s. 9; 1973, c. 1217; 1989, c. 265, s. 1; 2005-268, s. 12.

Official Comment

Section 8.43(a) is declaratory of current law. It recognizes that corporate officers may resign, that, with the consent of the board of directors, they may resign effective at a later date, and that the board of directors may fill a future vacancy to become effective as of the effective date of the resignation.

In part because of the unlimited power of removal, confirmed by section 8.43(b), a board of directors may grant an officer an employment contract that extends beyond the term of the board of directors. This type of contract is binding on the corporation even if the articles of incorporation or bylaws provide that officers are appointed for a term shorter than the period of the employment contract. If a later board of directors refuses to reappoint that person as an officer, he has the right to sue for damages but not for specific performance of his employment contract.

Section 8.43(b) is also declaratory of current law. The tenure of all corporate officers is subject to the will of the board of directors. If the board of directors loses confidence in a corporate officer, that officer may be removed irrespective of contract rights or the presence or absence of “cause” in a legal sense. Section 8.44 provides that removal of an officer who has contract rights is without prejudice to whatever rights the former officer may assert in a suit for damages for breach of contract.

North Carolina Commentary

The reference to an officer “communicating his resignation” is broader language than the reference in the Model Act to “delivering notice” of the resignation. This change parallels the change made in section 55-8-07.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended to provide that an officer may be removed by another officer in certain circumstances.

Effect of Amendments.

Session Laws 2005-268, s. 12, effective October 1, 2005, in subsection (a), substituted “time” for “date” throughout and inserted “or the appointing officer” twice in the second sentence; rewrote subsection (b); and added subsection (c).

CASE NOTES

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Removal. —

The officers of a corporation created for private purposes have no franchise in their offices, and are removable during the term for which they are appointed, when found to be incompetent or faithless. Eliason v. Coleman, 86 N.C. 235, 1882 N.C. LEXIS 180 (1882).

Where plaintiff had no written contract, and his employment was indefinite, he was not wrongfully discharged even though his employment was not terminated by the board of directors. While the board of directors may remove an officer, there is no indication that it is mandatory that it do so. Buffaloe v. United Carolina Bank, 89 N.C. App. 693, 366 S.E.2d 918, 1988 N.C. App. LEXIS 348 (1988).

§ 55-8-44. Contract rights of officers.

  1. The appointment of an officer does not itself create contract rights.
  2. An officer’s removal does not itself affect the officer’s contract rights, if any, with the corporation. An officer’s resignation does not affect the corporation’s contract rights, if any, with the officer.

History. 1901, c. 2, ss. 15, 16, 17; Rev., ss. 1149, 1150, 1151; C.S., s. 1145; G.S., s. 55-49; 1955, c. 1371, s. 1; 1959, c. 1316, s. 9; 1973, c. 1217; 1989, c. 265, s. 1.

Official Comment

Section 8.43 makes clear that the appointment of an officer does not itself create contract rights in the officer. The removal of an officer with contract rights is without prejudice to his later enforcement of contract rights in a suit for damages for breach of contract. See the Official Comment to section 8.43. Similarly, an officer with an employment contract who prematurely resigns may be in breach of his employment contract. The mere appointment of an officer for a term does not create a contractual obligation on his part to complete the term.

§§ 55-8-45 through 55-8-49.

Reserved for future codification purposes.

Part 5. Indemnification.

§ 55-8-50. Policy statement and definitions.

  1. It is the public policy of this State to enable corporations organized under this Chapter to attract and maintain responsible, qualified directors, officers, employees and agents, and, to that end, to permit corporations organized under this Chapter to allocate the risk of personal liability of directors, officers, employees and agents through indemnification and insurance as authorized in this Part.
  2. Definitions in this Part:
    1. “Corporation” includes any domestic or foreign corporation absorbed in a merger which, if its separate existence had continued, would have had the obligation or power to indemnify its directors, officers, employees, or agents, so that a person who would have been entitled to receive or request indemnification from such corporation if its separate existence had continued shall stand in the same position under this Part with respect to the surviving corporation.
    2. “Director” means an individual who is or was a director of a corporation or an individual who, while a director of a corporation, is or was serving at the corporation’s request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. A director is considered to be serving an employee benefit plan at the corporation’s request if his duties to the corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan. “Director” includes, unless the context requires otherwise, the estate or personal representative of a director.
    3. “Expenses” means expenses of every kind incurred in defending a proceeding, including counsel fees.
    4. “Liability” means the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), or reasonable expenses incurred with respect to a proceeding.
    5. “Officer”, “employee”, or “agent” includes, unless the context requires otherwise, the estate or personal representative of a person who acted in that capacity.
    6. “Official capacity” means: (i) when used with respect to a director, the office of director in a corporation; and (ii) when used with respect to an individual other than a director, as contemplated in G.S. 55-8-56, the office in a corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation. “Official capacity” does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise.
    7. “Party” includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding.
    8. “Proceeding” means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal.

History. 1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1; 1993, c. 552, s. 12.

Official Comment

The definitions set forth in section 8.50 apply only to subchapter E and have no application elsewhere in the Model Act.

  1. Corporation
  2. Director
  3. Expenses
  4. Liability
  5. Official capacity
  6. Party
  7. Proceeding

A special definition of “corporation” is included in subchapter E to make it clear that predecessor entities that have been absorbed in mergers or other transactions are included within the definition. It is probable that the same result would be reached for many transactions under section 11.06 (effect of merger or share exchange), which provides for the assumption of liabilities by operation of law upon a merger. The express responsibility of successor entities for the liabilities of their predecessors under this subchapter is broader than under section 11.06 and may impose liability on a successor although section 11.06 does not. Section 8.50(1) is thus an essential aspect of the protection provided by this subchapter for persons eligible for indemnification.

A special definition of “director” is included in subchapter E to make it clear that a person who is or was a director is covered by this subchapter while serving at the corporation’s request in another enterprise. The purpose of this definition is to give directors the benefits of the protection of this subchapter while serving at the corporation’s request in a responsible position in employee benefit plans, trade associations, nonprofit or charitable entities, foreign or domestic entities, and other kinds of profit or nonprofit ventures. A director serving at the corporation’s request in such a venture is viewed as acting as a director of the corporation for purposes of this subchapter even though he is also acting in some other capacity in the other venture.

The second sentence of section 8.50(2) addresses the question of liabilities arising under the Employee Retirement Income Security Act (ERISA). It makes clear that a director who is serving as a fiduciary of an employee benefit plan is nevertheless viewed as acting as a director for purposes of this subchapter. Special treatment is felt to be necessary because of the broad definition of “fiduciary” in section 3(21) of ERISA, 29 U.S.C. § 1002(21) (1974), and the requirement of section 404 (§ 1104(a)) that a “fiduciary” must discharge his duties “solely in the interest” of the participants and beneficiaries of the employee benefit plan. Decisions by a director serving as a fiduciary under the plan on questions regarding eligibility for benefits, investment decisions, and interpretation of plan provisions regarding qualifying service, years of service, and retroactivity are all subject to the protections of this subchapter. See also sections 8.50(4) and 8.51(b) of this subchapter. Similar provisions appear in the business corporation acts of New York, N.Y. BUS. CORP. LAW ANN. § 723 (McKinney 1963), and Connecticut, CONN. GEN. STAT. ANN. § 33-320a (West Supp. 1981).

The estate or personal representative of a director is entitled to the rights of indemnification possessed by the director himself. See the last sentence of section 8.50(2). The phrase, “unless the context requires otherwise,” was added to make clear that the estate or personal representative did not have the right to participate in directoral decisions whether to grant indemnification authorized in this subchapter.

“Expenses” is defined to include counsel fees to avoid repeated references to such fees every time “expenses” appears throughout the subchapter.

“Liability” is defined for convenience, to avoid repeated references to recoverable items throughout the subchapter. Even though the definition of “liability” includes both expenses and amounts paid to satisfy or to settle substantive claims, indemnification against substantive claims is not allowed in several provisions in subchapter E. For example, indemnification in suits brought by or in the name of the corporation is limited to expenses. See section 8.51(e).

The definition of “liability” permits the indemnification only of “reasonable expenses incurred.” The intention is that any portion of expenses falling outside the perimeter of reasonableness should not be indemnified, and that, if necessary, an allocation of expenses should be made. By contrast, unlike earlier versions of the Model Act and statutes of many states, section 8.50(4) provides that amounts paid to settle or satisfy substantive claims are not subject to a reasonableness test. Since payment of these amounts is permissive — mandatory indemnification is available under section 8.52 only where the defendant is “wholly successful” — a special limitation of “reasonableness” for settlements is inappropriate. Further, it is undesirable to base the statutory test of power to indemnify on an affirmative finding that a settlement is reasonable. Indeed, the grant of authority to indemnify only those settlements that are “reasonable” would suggest an “all or nothing” approach inconsistent with the basic philosophy of indemnification of “reasonable” expenses.

“Penalties” and “fines” are expressly included within the definition of “liability” so that in appropriate cases these items may also be indemnified. See section 8.51. The purpose of this definition is to cover every type of monetary obligation that may be imposed upon a director, including civil penalties (which have been authorized in a number of recent statutes), restitution, and obligations to give notice (which are proposed as part of the revision of the federal criminal code). This definition also expressly includes the levy of excise taxes under the Internal Revenue Code pursuant to ERISA within the definition of “fines.”

The definition of “official capacity” is necessary because the term determines which of the two alternative standards of conduct set forth in section 8.51 applies: if action is taken in an “official capacity,” the person to be indemnified must have reasonably believed he was acting in the best interests of the corporation, while if the action in question was not taken in his “official capacity,” he need only have reasonably believed that the conduct was not opposed to the best interests of the corporation.

The definition of “party” establishes the basic coverage of the subchapter. The definition includes every individual “who was, is, or is threatened to be made a named defendant or respondent in a proceeding.” A person who is only called as a witness is not a “party” within this definition, and as specifically provided in section 8.58(b), indemnification of this person is not limited by this subchapter.

The broad definition of “proceeding” ensures that the benefits of this subchapter will be available to directors in new and unexpected, as well as traditional, types of proceedings whether civil, criminal, administrative, or investigative. It also includes appeals in lawsuits and petitions to review administrative actions.

North Carolina Commentary

Subsection (a) of this section contains a policy statement that is not in the Model Act.

The definitions in subsection (b) are essentially the same as in the Model Act, and in the opinion of the drafters they all broaden the scope of prior law. For example, “corporation” includes predecessor entities (e.g., in a merger), whether or not incorporated; “director” broadens the coverage of persons who have responsibilities with respect to employee benefit plans and includes the successors of deceased directors; “party” includes persons who are threatened to be named as a party; and “proceeding” includes any kind of formal or informal proceeding, whether threatened or actual. The drafters do not believe there are any uncertainties or ambiguities in any of these definitions that permit a court to limit their scope, and any contrary restrictive decision by a court of another jurisdiction should be overridden by the broad public policy intent expressed in G.S. 55-8-50(a).

G.S. 55-8-51, 55-8-52, 55-8-54, 55-8-55 and 55-8-56 provide for indemnification of directors, officers, employees and agents. Indemnification in addition to and independent of that statutory indemnification is authorized in G.S. 55-8-57.

Legal Periodicals.

For comment, “North Carolina’s Statutory Limitation on Directors’ Liability,” see 24 Wake Forest L. Rev. 117 (1989).

§ 55-8-51. Authority to indemnify.

  1. Except as provided in subsection (d), a corporation may indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if:
    1. He conducted himself in good faith; and
    2. He reasonably believed (i) in the case of conduct in his official capacity with the corporation, that his conduct was in its best interests; and (ii) in all other cases, that his conduct was at least not opposed to its best interests; and
    3. In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful.
  2. A director’s conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subsection (a)(2)(ii).
  3. The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of no contest or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section.
  4. A corporation may not indemnify a director under this section:
    1. In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or
    2. In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.
  5. Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation that is concluded without a final adjudication on the issue of liability is limited to reasonable expenses incurred in connection with the proceeding.
  6. The authorization, approval or favorable recommendation by the board of directors of a corporation of indemnification, as permitted by this section, shall not be deemed an act or corporate transaction in which a director has a conflict of interest, and no such indemnification shall be void or voidable on such ground.

History. 1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1.

Official Comment

  1. Section 8.51(a)
  2. Section 8.51(b)
  3. Section 8.51(c)
  4. Section 8.51(d)
  5. Section 8.51(e)

The standards for indemnification of directors contained in this subsection define the outer limits for which voluntary indemnification is permitted under the Model Act. Conduct which does not meet these standards is not eligible for voluntary indemnification under the Model Act, although court-ordered indemnification may be available under section 8.54(2). Conduct that falls within these outer limits does not automatically entitle directors to indemnification, although many corporations have adopted bylaw provisions that obligate the corporation to indemnify directors to the maximum extent permitted by statute. Absent such a bylaw provision, section 8.52 defines a much narrower area in which the directors are entitled as a matter of right to indemnification.

Some state statutes provide separate, but usually similarly worded, standards for indemnification in third-party suits and indemnification in suits brought by or in the name of the corporation. The Model Act establishes a single uniform test to make clear that the outer limits of conduct for which indemnification is permitted should not be dependent on the type of proceeding in which the claim arises. To prevent circularity in recovery, however, section 8.51(e) limits indemnification in connection with suits brought by or in the name of the corporation to expenses incurred and excludes amounts paid to settle or satisfy substantive claims.

The standards of conduct described in sections 8.5(a)(1) and 8.5(a)(2)(i) — that a director’s conduct in his official capacity was in “good faith” and in the corporation’s “best interests” — is closely related to the basic standards of conduct imposed by section 8.30, but the two standards are not identical. No attempt is made to define “good faith,” a term used in both section 8.30 and section 8.51. The concept of good faith involves a subjective test, which would include “a mistake of judgment,” in the words of the Official Comment to section 8.30, even though made unwisely by objective standards. But the affirmative requirement of section 8.30 — that the “care of an ordinarily prudent person in a like position” be exercised — is not included in the standard of conduct for indemnification. On the other hand, section 8.51 requires that there be a “reasonable” belief on the part of the director in most instances, and in the case of criminal proceedings that there be no “reasonable” cause to believe the conduct was unlawful. Accordingly, it is possible that a director who has not acted “with the care an ordinarily prudent person in a like position would exercise under similar circumstances,” as required by section 8.30, could nevertheless be indemnified if the standard of section 8.51 were met. As a corollary, it is clear that a director who has met the section 8.30 standards of conduct would be eligible in virtually every case to be indemnified under section 8.51.

Section 8.5(a)(2)(ii) requires, if a director is not acting in his official capacity, that his action be “at least not opposed to” the corporation’s best interests. This standard is applicable to the director when serving another entity at the request of the corporation or when sued simply because he is or was a director. The words “at least” were added to qualify “not opposed to” in order to make it clear that this test is an outer limit for conduct other than in an official capacity.

This section makes clear that a director who is serving as a trustee or fiduciary for an employee benefit plan under ERISA meets the standard for indemnification under section 8.51(a) if he reasonably believes his conduct was in the best interests of the participants in and beneficiaries of the plan. This standard is a specific application of the more general test that conduct not in official corporate capacity is indemnifiable if it is “at least not opposed to” the best interests of the corporation and provides a standard for indemnification that is consistent with the statutory policies embodied in ERISA. See the Official Comment to section 8.50.

The purpose of section 8.51(c) is to reject the argument that indemnification is automatically improper whenever a proceeding has been terminated on a basis that does not exonerate the director claiming indemnification. Even though a final judgment or conviction is not automatically determinative of the issue whether the minimum standard of conduct was met, any judicial determination of substantive liability would in most instances be entitled to considerable weight. By the same token, it is clear that the termination of a proceeding by settlement or plea of nolo contendere should not of itself create a presumption either that conduct met or did not meet the standard of section 8.51. On the other hand, a final determination of nonliability or acquittal automatically entitles the director to indemnification of expenses under section 8.52.

Section 8.51(c) applies expressly to indemnification expenses in derivative actions as well as to indemnification in third party suits. The most likely application of this subsection to derivative actions will be to settlements since a judgment or order would normally result in liability to the corporation and thereby preclude all indemnification under section 8.51(d). In the rare event that a judgment or order entered against the director did not include a determination of liability to the corporation, the entry of the judgment or order would not be determinative that the director failed to meet the requisite standard of conduct.

This subsection makes clear that indemnification is not permissible under section 8.51 in the face of a finding of improper conduct either because liability is imposed in favor of the corporation in a suit brought by or in its name or because there is a finding that the director improperly received a personal benefit as a result of his conduct. Indemnification under this subsection is prohibited if a director is adjudged liable in a derivative suit because it is believed that there should be no indemnification in this situation unless a court first finds it proper. Section 8.54 permits a director found liable to the corporation to petition a court for a judicial determination of entitlement to indemnification. Voluntary indemnification is also prohibited if there has been an adjudication that a director improperly received a personal benefit, even if, for example, he acted in a manner not opposed to the best interests of the corporation. Improper use of inside information for personal benefit should not be an action for which the corporation may provide indemnification, even if the corporation was not thereby harmed. Although it is unlikely that a person found liable for receiving an improper personal benefit would be found to have met the statutory standard of conduct set forth in section 8.51(a)(2)(ii), this limitation is made explicit in section 8.51(d)(2). Recourse to a court under section 8.54 may also be appropriate in some improper benefit cases — for example, where it would be unfair for a small personal benefit to foreclose indemnification in an expensive and complicated matter.

This subsection limits indemnification in suits brought by or in the right of the corporation to expenses incurred in connection with the proceeding. Its purpose is to avoid circularity that would be involved if a corporation seeks to indemnify a director for payments made in settlement by the director to the corporation. This subsection applies only to settlements since all indemnification is prohibited by section 8.5(d)(1) — subject to the right to seek judicially approved indemnification under section 8.54 — in cases where a director is “adjudged” liable to the corporation.

North Carolina Commentary

This section differs in two respects from Section 8.51 of the Model Act. First, the qualifying clause “that is concluded without a final adjudication on the issue of liability” was added to subsection (e) to make it clear that the subsection applies only to settlements, as noted in the Official Comment on that subsection, and thus to remove any possible conflict with the prohibition in subdivision (d)(1) against indemnification under this section in a proceeding in which the director was adjudged liable to the corporation. Second, the entire subsection (f) was added.

This section does not limit any additional indemnification that may be payable under G.S. 55-8-57.

Legal Periodicals.

For article, “Overcoming the Rippy Effect: Why the North Carolina Business Corporations Act Should Allow Permissive Officer Exculpation,” see 94 N.C.L. Rev. 2155 (2016).

§ 55-8-52. Mandatory indemnification.

Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding.

History. 1955, c. 1371, s. 1; 1969, c. 797, ss. 2, 3; 1973, c. 469, s. 6; 1986 (Reg. Sess., 1986), c. 1027, ss. 39, 40; 1989, c. 265, s. 1.

Official Comment

Section 8.51 determines whether indemnification may be made voluntarily by a corporation if it elects to do so. Section 8.52 determines whether a corporation must indemnify a director for his expenses; in other words, section 8.52 creates a statutory right of indemnification in favor of the director who meets the requirements of that section. Enforcement of this right by judicial proceeding is specifically contemplated by section 8.54(1), which also gives the director a statutory right to recover expenses incurred by him in enforcing his statutory right to indemnification under section 8.52.

The basic standard for mandatory indemnification is that the director has been “wholly successful, on the merits or otherwise,” in the defense of the proceeding. The word “wholly” is added to avoid the argument accepted in Merritt-Chapman & Scott Corp. v. Wolfson, 321 A.2d 138 (Del. 1974), that a defendant may be entitled to partial mandatory indemnification if he succeeded by plea bargaining or otherwise to obtain the dismissal of some but not all counts of an indictment. A defendant is “wholly successful” only if the entire proceeding is disposed of on a basis which involves a finding of nonliability. However, the language in earlier versions of the Model Act and in many other state statutes that the basis of success may be “on the merits or otherwise” is retained. While this standard may result in an occasional defendant becoming entitled to indemnification because of procedural defenses not related to the merits — e.g., the statute of limitations or disqualification of the plaintiff, it is unreasonable to require a defendant with a valid procedural defense to undergo a possibly prolonged and expensive trial on the merits in order to establish eligibility for mandatory indemnification.

Legal Periodicals.

For article, “Corporate Director and Officer Indemnification: Alternative Methods for Funding,” see 24 Wake Forest L. Rev. 53 (1989).

For article, “Should Corporate Statutes Providing Special Protection for Directors Be Limited to Publicly Traded Corporations?,” see 24 Wake Forest L. Rev. 79 (1989).

For comment, “North Carolina’s Statutory Limitation on Directors’ Liability,” see 24 Wake Forest L. Rev. 117 (1989).

§ 55-8-53. Advance for expenses.

Expenses incurred by a director in defending a proceeding may be paid by the corporation in advance of the final disposition of such proceeding as authorized by the board of directors in the specific case or as authorized or required under any provision in the articles of incorporation or bylaws or by any applicable resolution or contract upon receipt of an undertaking by or on behalf of the director to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation against such expenses.

History. 1955, c. 1371, s. 1; 1969, c. 797, s. 1; 1973, c. 469, s. 5; 1985 (Reg. Sess., 1986), c. 1027, ss. 35-38; 1989, c. 265, s. 1.

Official Comment

It is often critically important to a director who is made a party to a complex proceeding that the corporation he served have power to make advances for expenses at the beginning of and during the proceeding. Adequate legal representation and adequate preparation of a defense may require substantial payments of expenses before a final determination, and unless the corporation may make advances for expenses, a defendant may be unable to finance his own defense. This problem is complicated by reason of the fact that during the early stages of a proceeding (when advances are often needed) the facts underlying the claim cannot be fully evaluated and the board of directors therefore cannot accurately ascertain the ultimate propriety of indemnification.

Section 8.53 establishes a workable standard: indemnification is permitted if the facts then known to those making the determination do not establish that indemnification would be precluded under section 8.51. The directors (or special legal counsel) making the determination under section 8.53(c) would normally communicate with counsel and the person or persons monitoring the matter for the corporation in order to gain familiarity with the status of the proceeding and the relevant facts that have emerged, but it is not required (or expected) that any form of independent investigation be undertaken for purposes of the determination. Thus, an advance may be made under section 8.53 unless it becomes clear, from the facts at hand, that indemnification under section 8.51 cannot be provided. As additional facts become known, a different determination may be required.

This section is a compromise between the view of some that advances should be made automatically at the claimant’s request and at any time before the litigation is terminated and the view of others that a special investigation should be made before each advance.

In addition to the requirement that the facts then known to those acting on the request for an advance do not preclude indemnification, section 8.53(a) requires a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and a written undertaking by or on behalf of the director to repay the advance if it is ultimately determined that he has not met the standard of conduct. Under section 8.53(b), the undertaking need not be secured and financial ability to repay is not a prerequisite. The theory underlying this subsection is that, in advancing expenses, wealthy directors should not be favored over directors whose financial resources are modest.

The limitations of section 8.53 apply only to persons who are directors at the time the advance is made. Thus the corporation may advance the expenses of former directors without obtaining the undertaking otherwise required by section 8.53(a)(1) or (2).

North Carolina Commentary

The Model Act counterpart of this section was replaced by the less restrictive provisions of former G.S. 55-19(d). See North Carolina Comment to G.S. 55-8-57, supra.

CASE NOTES

Editor’s Note. —

The case below was decided under the Business Corporation Act adopted in 1955.

“Undertaking” Defined. —

The “undertaking” required by former G.S. 55-19(d) for the repayment of fees advanced if the director is unsuccessful is just that: a written promise, not made under seal, given as security for the performance of some act as required in a legal proceeding. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

Legal Fees May Be Advanced for Defense of Derivative Action. —

In a derivative action brought by shareholders against directors of a corporation alleging malfeasance in office, former G.S. 55-30 did not operate to prevent former G.S. 55-19(d) from being effective in allowing the corporation to advance any legal fees to the directors, since the advancement of legal fees under that section was not necessarily a transaction in which a director was adversely interested, and since, even if it were, the disinterested directors of the corporation had approved the advancement. Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E.2d 279, 1978 N.C. App. LEXIS 2346 (1978).

§ 55-8-54. Court-ordered indemnification.

Unless a corporation’s articles of incorporation provide otherwise, a director of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court after giving any notice the court considers necessary may order indemnification if it determines:

  1. The director is entitled to mandatory indemnification under G.S. 55-8-52, in which case the court shall also order the corporation to pay the director’s reasonable expenses incurred to obtain court-ordered indemnification; or
  2. The director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he met the standard of conduct set forth in G.S. 55-8-51 or was adjudged liable as described in G.S. 55-8-51(d), but if he was adjudged so liable his indemnification is limited to reasonable expenses incurred.

History. 1955, c. 1371, s. 1; 1969, c. 797, ss. 2, 3; 1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, ss. 39, 40; 1989, c. 265, s. 1.

Official Comment

Section 8.54 permits court-ordered indemnification in two situations: (1) a director entitled to mandatory indemnification may enforce that entitlement by judicial proceeding (in which case the court may also order the corporation to pay the reasonable expenses incurred in connection with the proceeding); and (2) indemnification at the court’s discretion is permitted in all cases whether or not the director met the requisite standard of conduct in section 8.51 or is otherwise ineligible for indemnification. But indemnification with respect to derivative suits or improper benefit is always limited to expenses by the last clause of section 8.54(2).

Application for indemnification under section 8.54 may be made either to the court in which the proceeding was heard or to another court of appropriate jurisdiction. For example, a defendant in a criminal action who has been convicted but believes that indemnification would be proper could apply either to the court which heard the criminal action or bring an action against the corporation in another court. A decision by the board of directors not to oppose the request for indemnification is governed by the general standards of conduct found in section 8.30. Even if the corporation decided not to oppose the request, the court must satisfy itself that the person seeking indemnification is properly entitled to it.

A corporation may limit the right of a director under section 8.54 by a provision in its articles of incorporation. In the absence of such a provision, however, the court has general power to grant indemnification under this section.

§ 55-8-55. Determination and authorization of indemnification.

  1. A corporation may not indemnify a director under G.S. 55-8-51 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because he has met the standard of conduct set forth in G.S. 55-8-51.
  2. The determination shall be made:
    1. By the board of directors by majority vote of a quorum consisting of directors not at the time parties to the proceeding;
    2. If a quorum cannot be obtained under subdivision (1), by majority vote of a committee duly designated by the board of directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding;
    3. By special legal counsel (i) selected by the board of directors or its committee in the manner prescribed in subdivision (1) or (2); or (ii) if a quorum of the board of directors cannot be obtained under subdivision (1) and a committee cannot be designated under subdivision (2), selected by majority vote of the full board of directors (in which selection directors who are parties may participate); or
    4. By the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination.
  3. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subsection (b)(3) to select counsel.

History. 1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1.

Official Comment

Section 8.55 provides the method for determining whether a corporation should voluntarily indemnify directors under section 8.51. In this section a distinction is made between a “determination” and an “authorization.” A “determination” involves a decision whether under the circumstances the person seeking indemnification has met the requisite standard of conduct under section 8.51 and is therefore eligible for indemnification. This decision may be made by the persons or groups described in section 8.55(b). In addition, after a favorable “determination” is made, the corporation must “authorize” indemnification; this includes a review of the reasonableness of the expenses, the financial ability of the corporation to make the payment, and the judgment whether limited financial resources should be devoted to this or some other use by the corporation. Section 8.55(c) provides that “authorization” of indemnification may be made only by the board of directors, by a committee of the board, or by the shareholders. While special legal counsel may make the “determination” of eligibility for indemnification, he may not “authorize” the indemnification.

Section 8.55(b) establishes a procedure for selecting the person or persons who will make the determination of eligibility for indemnification. Even though directors who are parties to the proceeding may not participate in the decision determining eligibility for indemnification, they may, if necessary to permit valid action by the board of directors, participate in the decision establishing a committee of independent directors or selecting special legal counsel. Directors who are parties may also participate in the decision to “authorize” indemnification on the basis of a favorable “determination” if necessary to permit action by the board of directors. This limited participation of interested directors in the decision is justified by a principle of necessity.

Legal counsel authorized to make the required determination is referred to as “special legal counsel.” In earlier versions of the Model Act, and in the statutes of many states, he is referred to as “independent” legal counsel. The word “special” is felt to be more descriptive of the role to be performed and is not intended to indicate that the counsel selected should not be independent in accordance with governing legal precepts. “Special legal counsel” should normally be counsel having no prior professional relationship with those seeking indemnification, should be retained for the specific occasion, and should not be either inside counsel or regular outside counsel. It is important that the selection process be sufficiently flexible to permit selection of counsel in light of the particular circumstances and so that unnecessary expense may be avoided. Hence the phrase “special legal counsel” is not defined in the statute.

Determinations by shareholders rather than by directors or special counsel are permitted by section 8.55(b)(4), but shares owned by or voted under the control of directors seeking indemnification may not be voted on the determination of eligibility for indemnification. This does not affect rules governing the determination of a quorum at the meeting.

§ 55-8-56. Indemnification of officers, employees, and agents.

Unless a corporation’s articles of incorporation provide otherwise:

  1. An officer of the corporation is entitled to mandatory indemnification under G.S. 55-8-52, and is entitled to apply for court-ordered indemnification under G.S. 55-8-54, in each case to the same extent as a director;
  2. The corporation may indemnify and advance expenses under this Part to an officer, employee, or agent of the corporation to the same extent as to a director; and
  3. A corporation may also indemnify and advance expenses to an officer, employee, or agent who is not a director to the extent, consistent with public policy, that may be provided by its articles of incorporation, bylaws, general or specific action of its board of directors, or contract.

History. 1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1.

Official Comment

Section 8.56 correlates the general legal principles relating to the indemnification of officers, employees, and agents of the corporation with the limitations on indemnification in subchapter E. This correlation may be summarized in general terms as follows:

  1. Subchapter E (except for section 8.56) applies only to, and limits the indemnification of, directors.
  2. An officer, agent or employee of a corporation who is not a director may be indemnified by the corporation on a discretionary basis to the same extent as though he were a director, and, in addition, may have additional indemnification rights apart from subchapter E. (Section 8.56(2) and (3).)
  3. A director who is also an officer, employee, or agent of the corporation is limited to his indemnification rights under subchapter E and is therefore treated the same way as other directors. (Section 8.56(3) by negative inference.) Such an officer/director is limited to his rights under subchapter E even though he is sued solely in his capacity as an officer.
  4. An officer of the corporation (but not employees or agents generally) who is not a director has the mandatory right of indemnification granted to directors under section 8.52 and the right to apply for court-ordered indemnification under section 8.54. (Section 8.56(1).)
  1. Officers, employees, or agents who are not directors
  2. Directors who are also officers, employees, or agents
  3. Officers who are not directors

Section 8.56(3) authorizes indemnification for officers, employees, and agents who are not directors, but neither requires nor prescribes standards for their indemnification and expressly states that their indemnification may be broader than the right of indemnification granted to directors by this subchapter. The rights of employees or agents may derive from principles of agency, the doctrine of respondeat superior, or collective bargaining or other contractual agreement, rather than from the statute. Indemnification of employees or agents may appropriately protect the person indemnified from liabilities incurred while serving at the corporation’s request as a director, officer, partner, trustee, or agent of another commercial, charitable, or nonprofit enterprise. See the definition of “director” in section 8.50(2). But indemnification under section 8.56(3) must ultimately be “consistent with law.” In effect, this leaves public policy determinations as to what are permissible limits, in a particular case, to the courts. For example, in Koster v. Warren, 297 F.2d 418, 423 (9th Cir. 1961), the court allowed indemnification of an officer and an employee, both of whom pleaded nolo contendere to an antitrust indictment at the corporation’s request, the court reasoning that they had foregone their personal right to defend for the corporation’s benefit. On the other hand, the court indicated in dictum that an agreement in advance by the corporation to indemnify anyone convicted of antitrust violations would be against public policy.

(2) An officer, agent or employee of a corporation who is not a director may be indemnified by the corporation on a discretionary basis to the same extent as though he were a director, and, in addition, may have additional indemnification rights apart from subchapter E. (Section 8.56(2) and (3).)

(3) A director who is also an officer, employee, or agent of the corporation is limited to his indemnification rights under subchapter E and is therefore treated the same way as other directors. (Section 8.56(3) by negative inference.) Such an officer/director is limited to his rights under subchapter E even though he is sued solely in his capacity as an officer.

(4) An officer of the corporation (but not employees or agents generally) who is not a director has the mandatory right of indemnification granted to directors under section 8.52 and the right to apply for court-ordered indemnification under section 8.54. (Section 8.56(1).)

1. Officers, employees, or agents who are not directors

Section 8.56(3) authorizes indemnification for officers, employees, and agents who are not directors, but neither requires nor prescribes standards for their indemnification and expressly states that their indemnification may be broader than the right of indemnification granted to directors by this subchapter. The rights of employees or agents may derive from principles of agency, the doctrine of respondeat superior, or collective bargaining or other contractual agreement, rather than from the statute. Indemnification of employees or agents may appropriately protect the person indemnified from liabilities incurred while serving at the corporation’s request as a director, officer, partner, trustee, or agent of another commercial, charitable, or nonprofit enterprise. See the definition of “director” in section 8.50(2). But indemnification under section 8.56(3) must ultimately be “consistent with law.” In effect, this leaves public policy determinations as to what are permissible limits, in a particular case, to the courts. For example, in Koster v. Warren, 297 F.2d 418, 423 (9th Cir. 1961), the court allowed indemnification of an officer and an employee, both of whom pleaded nolo contendere to an antitrust indictment at the corporation’s request, the court reasoning that they had foregone their personal right to defend for the corporation’s benefit. On the other hand, the court indicated in dictum that an agreement in advance by the corporation to indemnify anyone convicted of antitrust violations would be against public policy.

The broad grant of indemnification in section 8.56(3) may be limited by appropriate provisions in the articles of incorporation.

Section 8.56 provides that officers, employees, or agents who are also directors are subject to the same standards of indemnification as other directors. Consideration was given to whether these officer-directors, if acting in their capacity as an officer but not as a director, should have the benefit of the additional flexibility afforded by section 8.56(3) for officers who are not directors. It was concluded, however, that all directors should be treated alike; complications may be created if directors who are not officers have potentially less protection under the statute than directors who are officers. It would also be difficult in many instances to distinguish in what capacity an officer-director is acting. Finally, this subchapter offers sufficient flexibility in indemnifying directors so that, as a practical matter, foreseeable problems for officer-directors can be handled within the statutory framework.

Section 8.56(1) grants nondirector officers the same mandatory rights to indemnification under section 8.52 (or to petition a court for indemnification under section 8.54) as are granted directors. Thus, the net effect of section 8.56 is to provide officers with no less protection than is provided directors (including protection for service to third parties at the request of the corporation) and, additionally, to permit the corporation to provide broader indemnification for officers who are not directors.

North Carolina Commentary

The words “who is not a director” appear after the words “of the corporation” in subdivisions 8.56(1) and (2) of the Model Act. The drafters omitted that language from the North Carolina version, without intending to change the meaning of the section, because they believe the words were unnecessary and confusing. If an officer, employee or agent is also a director, his rights of indemnification in his capacity as director will be defined by the other sections and his indemnification rights in his capacity as officer, employee or agent will be defined by this section. The addition of the unnecessary language in the Model Act might possibly be read as limiting a director’s indemnification rights if he is also an officer, which was not intended.

§ 55-8-57. Additional indemnification and insurance.

  1. In addition to and separate and apart from the indemnification provided for in G.S. 55-8-51, 55-8-52, 55-8-54, 55-8-55 and 55-8-56, a corporation may in its articles of incorporation or bylaws or by contract or resolution indemnify or agree to indemnify any one or more of its directors, officers, employees, or agents against liability and expenses in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities; provided, however, that a corporation may not indemnify or agree to indemnify a person against liability or expenses he may incur on account of his activities which were at the time taken known or believed by him to be clearly in conflict with the best interests of the corporation. A corporation may likewise and to the same extent indemnify or agree to indemnify any person who, at the request of the corporation, is or was serving as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan. Any provision in any articles of incorporation, bylaw, contract, or resolution permitted under this section may include provisions for recovery from the corporation of reasonable costs, expenses, and attorneys’ fees in connection with the enforcement of rights to indemnification granted therein and may further include provisions establishing reasonable procedures for determining and enforcing the rights granted therein.
  2. The authorization, adoption, approval, or favorable recommendation by the board of directors of a public corporation of any provision in any articles of incorporation, bylaw, contract or resolution, as permitted in this section, shall not be deemed an act or corporate transaction in which a director has a conflict of interest, and no such articles of incorporation or bylaw provision or contract or resolution shall be void or voidable on such grounds. The authorization, adoption, approval, or favorable recommendation by the board of directors of a nonpublic corporation of any provision in any articles of incorporation, bylaw, contract or resolution, as permitted in this section, which occurred prior to July 1, 1990, shall not be deemed an act or corporate transaction in which a director has a conflict of interest, and no such articles of incorporation, bylaw provision, contract or resolution shall be void or voidable on such grounds. Except as permitted in G.S. 55-8-31, no such bylaw, contract, or resolution not adopted, authorized, approved or ratified by shareholders shall be effective as to claims made or liabilities asserted against any director prior to its adoption, authorization, or approval by the board of directors.
  3. A corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by him in that capacity or arising from his status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify him against the same liability under any provision of this Chapter.

History. 1955, c. 1371, s. 1; 1969, c. 797, s. 1; 1973, c. 469, s. 5; 1985 (Reg. Sess., 1986), c. 1027, ss. 35-38; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.14.

Official Comment

Section 8.57 authorizes a corporation to purchase and maintain insurance on behalf of directors, officers, employees, or agents against liabilities imposed on them by reason of actions in their official capacity or arising from their service to the corporation or another entity at the corporation’s request. Insurance is not limited to claims against which corporations are entitled to indemnify under this subchapter. This insurance, usually referred to as “D&O Liability Insurance,” provides a useful supplement to the rights of indemnification created by this subchapter, providing a source of reimbursement for corporations who indemnify directors and others for conduct covered by the insurance, and protecting the insureds against the corporation’s failure to pay indemnification required or permitted by this subchapter. On the other hand, policies do not cover uninsurable events like self-dealing, bad faith, knowing violations of the securities acts, or other willful misconduct. See generally Johnston, “Corporate Indemnification and Liability Insurance,” 33 BUS. LAW. 1993 (1978); Hinsey, “The New Lloyd’s Policy Form for Directors and Officers’ Liability Insurance — An Analysis,” 33 BUS. LAW. 1961 (1978).

Amended North Carolina Commentary

Section 8.57 of the Model Act is entitled “Insurance” and deals only with that subject. In the North Carolina version the catchline has been expanded and the section is intended to permit broad nonstatutory indemnification completely in addition to and notwithstanding any other provisions of this Act. G.S. 55-8-50(a) expressly states that purpose and declares it to be the public policy of North Carolina.

This section permits indemnification, insurance and reimbursement of expenses in addition to, and notwithstanding, any other provisions of this Chapter. The section embodies the public policy of this State set forth in G.S. 55-8-50(a) to permit a corporation organized under this Chapter to spread the risk of corporate management, notwithstanding any other general or special law of this State or of any other jurisdiction including the federal government.

Subsection (a) permits and defines the scope of contractual indemnification under which the corporation, essentially as a self-insurer, may commit in advance to indemnify its directors, officers, employees or agents. This provision brings forward and clarifies all of former G.S. 55-19(a), which was added by the 1986 amendments. It adds an express statement, for example, that a corporation may agree in advance to indemnify its personnel even in a corporate or derivative action, subject only to the limitation brought forth from former G.S. 55-19(a).

Similarly, subsection (b) brings forward former G.S. 55-19(b) relating to the conflict of interest rules in G.S. 55-8-31 (which replaced former G.S. 55-30), but the application of the subsection to indemnification plans adopted on or after July 1, 1990 has been limited to public corporations (i.e., those required to file reports under Section 12 of the Securities Exchange Act of 1934). This limitation to public corporations was considered appropriate because (1) former G.S. 55-19(b) was intended to deal with the need to attract qualified outside directors — a need experienced mainly by public corporations, (2) shareholders of public corporations receive current disclosure of material changes in the indemnification scheme, and (3) shareholders have an active market in which they can dispose of their shares if they disapprove of a particular scheme of indemnification. Subsection (b) does not prevent a shareholder from challenging indemnification in a particular case. Instead, its effect is to shift to the shareholder of a public corporation the burden of proving that indemnification constitutes a breach of duty to the corporation under all of the facts and circumstances, including the facts and circumstances existing at the time indemnification was authorized or approved.

Subsection (c) replaces former G.S. 55-19(c) with section 8.57 of the Model Act because the drafters concluded that these insurance provisions of the Model Act are broader and clearer than former G.S. 55-19(c). Subsection (c) applies whether or not a corporation provides additional indemnification pursuant to subsections (a) and (b). As previously noted, former G.S. 55-19(d) was brought forward as G.S. 55-8-53.

CASE NOTES

Indemnification Prohibited. —

Law firm was not entitled to fees for representing a bankruptcy debtor and its majority shareholders in an action in state court by a minority shareholder since the firm’s claim was derivative of indemnification rights of the majority shareholders as directors of the debtor, and indemnification was precluded since the majority shareholder’s actions in looting the debtor and forming a new entity were clearly in conflict with the best interests of the debtor. In re Prot. Sys. Techs., 2014 Bankr. LEXIS 5148 (Bankr. W.D.N.C. Dec. 24, 2014).

§ 55-8-58. Application of Part.

  1. Subject to subsection (d) of this section, if the articles of incorporation limit indemnification or advance for expenses, indemnification and advance for expenses are valid only to the extent consistent with the articles.
  2. This Part does not limit a corporation’s power to pay or reimburse expenses incurred by a director in connection with the director’s appearance as a witness in a proceeding at a time when the director has not been made a named defendant or respondent to the proceeding.
  3. This Part shall not affect rights or liabilities arising out of acts or omissions occurring before July 1, 1990.
  4. A right of indemnification, or to advances for expenses, created by this Part or under G.S. 55-8-57(a) and in effect at the time of an act or omission, shall not be eliminated or impaired with respect to the act or omission by an amendment of the articles of incorporation or bylaws or a resolution of the directors or shareholders, adopted after the occurrence of the act or omission, unless, in the case of a right created under G.S. 55-8-57(a), the provision creating the right and in effect at the time of the act or omission explicitly authorizes the elimination or impairment of the right after the act or omission has occurred.

History. 1989, c. 265, s. 1; 2018-45, s. 13.

Official Comment

Section 8.58(a) provides that a provision treating the indemnification of directors by the corporation in articles of incorporation, bylaws, shareholders’ or directors’ resolution, or contract “is valid only if and to the extent it is consistent with” this subchapter. Earlier versions of the Model Act and the statutes of many states provided that the statutory provisions were not “exclusive” and made no attempt to limit the nonstatutory creation of rights of indemnification. This kind of language is subject to misconstruction, however, since nonstatutory conceptions of public policy limit the power of a corporation to indemnify or to contract to indemnify directors, officers, employees, or agents.

The language of the first sentence of section 8.58(a), “to the extent it is consistent with this subchapter,” is believed to be a more accurate description of the limited validity of nonstatutory indemnification provisions than the “nonexclusive” provisions of earlier versions of the Model Act. It is important to recognize that “to the extent it is consistent with” is not synonymous with “exclusive.” Situations may well develop from time to time in which indemnification is permissible under section 8.58 but would be precluded if all portions of subchapter E were viewed as exclusive. But indemnification provisions protecting against the consequences of bad faith or willful misconduct are not consistent with this subchapter and would not be valid. Furthermore, they would violate well-understood principles of public policy and doubtless would be invalidated on that ground even under statutes purporting to make “nonexclusive” the statutory provisions for indemnification. To the extent the consistency language may preclude indemnification in circumstances where it is reasonable and violates no statutory policy, an escape valve is provided in section 8.55(2), which authorizes a court to grant indemnification if a director “is fairly and reasonably entitled to indemnification in view of all the relevant circumstances,” even though he may not have fully met the standards of conduct set forth in section 8.51.

Section 8.58 does not preclude provisions in articles of incorporation, bylaws, resolutions, or contracts designed to provide procedural machinery different from that provided by section 8.55 or to make mandatory the permissive provisions of subchapter E. For example, a corporation may properly obligate the board of directors to consider and act expeditiously on an application for indemnification or advances, or obligate the board of directors to cooperate in the procedural steps required to obtain a judicial determination under section 8.54.

Some corporations currently commit themselves, in one form or another, to indemnify directors to the fullest extent permitted by applicable law. These commitments are consistent with subchapter E, subject to appropriate interpretation in light of the facts and circumstances of the particular case. Furthermore, a commitment to maintain liability insurance for a director, pursuant to section 8.57, is consistent with this subchapter.

The first sentence of section 8.58(a) applies only to directors; it does not apply to officers, employees, or agents who are not directors. See section 8.56 and its Official Comment. The inherent problems of conflict of interest and the need to encourage persons to serve as directors are not present to the same degree in the case of nondirector officers, employees, or agents. The standard for permissible indemnification of these persons in section 8.56(3) is “consistent with law” without regard to this subchapter.

Section 8.58(b) is designed to make clear that subchapter E deals only with directors who are actual or prospective defendants or respondents in a proceeding, and that expenses incurred in connection with appearance as a witness may be indemnified without regard to the limitations of subchapter E. Indeed, most of the standards described in sections 8.51 and 8.54 by their own terms can have no meaningful application to a director whose only connection with a proceeding is that he has been called as a witness.

North Carolina Commentary

This section differs from the Model Act in two respects. First, the first sentence of subsection 8.58(a) of the Model Act, dealing with nonstatutory contractual indemnification, has been omitted because the subject is more broadly covered by G.S. 55-8-57; and second, the new subsection (c) has been added.

Effect of Amendments.

Session Laws 2018-45, s. 13, effective October 1, 2018, substituted “Subject to subsection (d) of this section, if the” for “If” in subsection (a); substituted “the director’s” for “his” and “the director” for “he” in subsection (b); and added subsection (d).

Article 9. Shareholder Protection Act.

§ 55-9-01. Short title and definitions.

  1. The provisions of this Article shall be known and may be cited as The North Carolina Shareholder Protection Act.
  2. In this Article:
    1. “Business combination” includes any merger, consolidation, or conversion of a corporation with or into any other corporation or any unincorporated entity, or the sale or lease of all or any substantial part of the corporation’s assets to, or any payment, sale or lease to the corporation or any subsidiary thereof in exchange for securities of the corporation of any assets (except assets having an aggregate fair market value of less than five million dollars ($5,000,000)) of any other entity.
    2. “Common stock” means the shares of capital stock of the corporation that were not entitled to preference over any other shares, either in payment of dividends or in dissolution, at the time that the other entity acquired in excess of ten percent (10%) of the voting shares.
    3. “Continuing director” means a person who was a member of the board of directors of the corporation elected by the public shareholders prior to the time that the other entity acquired in excess of ten percent (10%) of the voting shares of the corporation, or a person recommended to succeed a continuing director by a majority of the continuing directors.
    4. “Exchange Act” means the act of Congress known as the Securities Exchange Act of 1934, as the same has been or hereafter may be amended from time to time.
    5. “Other consideration to be received” means, for the purposes of G.S. 55-9-03(1) and G.S. 55-9-03(2), the corporation’s common stock retained by its existing public shareholders in the event of a business combination with the other entity in which the corporation is the surviving corporation.
    6. “Other entity” includes any domestic or foreign corporation, person or other form of entity and any such entity with which it or its “affiliate” or “associate” has an agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of capital stock of the corporation, or which is its “affiliate” or “associate”, as those terms are defined in the General Rules and Regulations under the Exchange Act, together with the successors and assigns of such persons in any transaction or series of transactions not involving a public offering of the corporation’s capital stock within the meaning of the Securities Act of 1933, as amended.
    7. “Voting shares” means shares of the corporation’s capital stock entitled to vote in the election of directors.

History. 1987, c. 88, s. 1; c. 124, s. 1; 1989, c. 265, s. 1; 1999-369, s. 1.5; 2001-387, s. 16.

Editor’s Note.

Article 9, as set out in Session Laws 1989, ch. 265, is essentially former Article 7 of Chapter 55, as enacted by Session Laws 1987, c. 88, s. 1. Amendments by Session Laws 1987, c. 124, ss. 1, 1.1 and 2 expired by the terms of that act on June 30, 1989. This article is not in the Revised Model Business Corporation Act, and there are no Official Comments or North Carolina Comments thereto.

The present Article 9, as set out in Session Laws 1989, c. 265, differs from former Article 7 as it was on June 30, 1989, in the following particulars: (1) In G.S. 55-9-01, the definition of “corporation” found in former G.S. 55-75 has expired and was not reenacted (see Session Laws 1987, c. 124, s. 1) and the definition of “other entity” has been amended by changing the first reference to “corporation” to read “domestic or foreign corporation.” (2) In G.S. 55-9-05, there are new opt-out provisions different from those of former G.S. 55-79. (3) Former G.S. 55-79.1 and 55-80, relating to conflict of laws and severability, expired and were not reenacted. (See Session Laws 1987, c. 124, ss. 1.1, 2.)

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Legal Periodicals.

For note, “The North Carolina Shareholder Protection Act,” see 66 N.C.L. Rev. 1146 (1988).

For article, “State Anti-Takeover Legislation: The Second and Third Generations,” see 23 Wake Forest L. Rev. 77 (1988).

For article, “Government Regulation of Business: Golden Parachutes Revisited,” see 23 Wake Forest L. Rev. 121 (1988).

For comment, “The Duty to Disclose v. The Duty Not to Mislead During Merger Negotiations,” see 23 Wake Forest L. Rev. 143 (1988).

For comment, “Fiduciary Duties of Directors: How Far Do They Go?,” see 23 Wake Forest L. Rev. 163 (1988).

For article, “Should Corporate Statutes Providing Special Protection for Directors Be Limited to Publicly Traded Corporations?,” see 24 Wake Forest L. Rev. 79 (1989).

For article, “The Corporate Persona, Contract (and Market) Failure, and Moral Values,” see 69 N.C.L. Rev. 273 (1991).

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

For article, “The Public Choice Problem in Corporate Law: Corporate Social Responsibility After Citizens United,” see 89 N.C.L. Rev. 1197 (2011).

For article, “Friends with Benefits: Measuring Corruption in Politics After Citizens United,” see 36 N.C. Cent. L. Rev. 1 (2013).

For article, “Is the Corporate Director’s Duty of Care a ‘Fiduciary’ Duty? Does it Matter?,” see 48 Wake Forest L. Rev. 1027 (2013).

For article, “Shareholder Voting and the Symbolic Politics of Corporation as Contract,” see 53 Wake Forest L. Rev. 512 (2018).

§ 55-9-02. Voting requirement.

Notwithstanding any other provisions of the North Carolina Business Corporation Act, the affirmative vote of the holders of ninety-five percent (95%) of the voting shares of a corporation, considered for the purposes of this section as one class, shall be required for the adoption or authorization of a business combination with any other entity if, as of the record date for the determination of shareholders entitled to notice thereof and to vote thereon, the other entity is the beneficial owner, directly or indirectly, of more than twenty percent (20%) of the voting shares of the corporation, considered for the purposes of this section as one class.

History. 1987, c. 88, s. 1; 1989, c. 265, s. 1.

Legal Periodicals.

For article, “State Anti-Takeover Legislation: The Second and Third Generations,” see 23 Wake Forest L. Rev. 77 (1988).

§ 55-9-03. Exception to voting requirement.

The voting requirement of G.S. 55-9-02 shall not be applicable to a business combination if each of the following conditions is met:

  1. The cash, or fair market value of other consideration, to be received per share by the holders of the corporation’s common stock in such business combination bears the same or a greater percentage relationship to the market price of the corporation’s common stock immediately prior to the announcement of such business combination by the corporation as the highest per share price (including brokerage commissions and/or soliciting dealers’ fees) which such other entity has theretofore paid for any of the shares of the corporation’s common stock already owned by it bears to the market price of the corporation’s common stock immediately prior to the commencement of acquisition of the corporation’s common stock by such other entity, directly or indirectly;
  2. The cash, or fair market value of other consideration, to be received per share by holders of the corporation’s common stock in such business combination (i) is not less than the highest per share price (including brokerage commissions and/or soliciting dealers’ fees) paid by such other entity in acquiring any of its holdings of the shares of the corporation’s common stock and (ii) is not less than the earnings per share of the corporation’s common stock for the four full consecutive fiscal quarters immediately preceding the record date for the solicitation of votes on such business combination, multiplied by the then price/earnings multiple, if any, of such other entity as customarily computed and reported in the financial community;
  3. After the other entity has acquired a twenty percent (20%) interest and prior to the consummation of such business combination: (i) the other entity shall have taken steps to ensure that the corporation’s board of directors included at all times representation by continuing directors proportionate to the outstanding shares of the corporation’s common stock held by persons not affiliated with the other entity (with a continuing director to occupy any resulting fractional board position); (ii) there shall have been no reduction in the rate of dividends payable on the corporation’s common stock, except as may have been approved by a unanimous vote of its directors; (iii) the other entity shall have not acquired any newly issued shares of the corporation’s capital stock, directly or indirectly, from the corporation, except upon conversion of any convertible securities acquired by the other entity prior to obtaining a twenty percent (20%) interest or as a result of a pro rata stock dividend or stock split; and (iv) the other entity shall not have acquired any additional shares of the corporation’s outstanding common stock, or securities convertible into common stock, except as part of the transaction which resulted in the other entity acquiring its twenty percent (20%) interest;
  4. The other entity shall not have (i) received the benefit, directly or indirectly, except proportionately with other shareholders, of any loans, advances, guarantees, pledges, or other financial assistance or tax credits provided by the corporation or (ii) made any major change in the corporation’s business or equity capital structure unless by a unanimous vote of the directors, in either case prior to the consummation of the business combination; and
  5. A proxy statement responsive to the requirements of the Exchange Act shall be mailed to the public shareholders of the corporation for the purpose of soliciting shareholder approval of the business combination and shall contain prominently in the forepart thereof any recommendations as to the advisability or inadvisability of the business combination which the continuing directors, or any of them, may choose to state and, if deemed advisable by a majority of the continuing directors, an opinion of a reputable investment banking firm as to the fairness (or not) of the terms of the business combination to the remaining public shareholders of the corporation, which investment banking firm shall be selected by a majority of the continuing directors and shall be paid by the corporation a reasonable fee for its services upon receipt of such opinion.

History. 1987, c. 88, s. 1; 1989, c. 265, s. 1.

§ 55-9-04. General.

  1. The provisions of this Article shall also apply to a business combination with an other entity which at any time has been the beneficial owner, directly or indirectly, of more than twenty percent (20%) of the outstanding voting shares, considered for the purposes of this section as one class, notwithstanding that the other entity has reduced its percentage of shares below twenty percent (20%) if, as of the record date for the determination of shareholders entitled to notice of and to vote on the business combination, the other entity is an “affiliate” of the corporation.
  2. For the purposes of the Article, an other entity shall be deemed the beneficial owner of any shares of the corporation’s capital stock which the other entity has the right to acquire pursuant to any agreement, or upon exercise of any conversion rights, warrants or options, or otherwise (whether the right to acquire shares is exercisable immediately or only after the passage of time); and, further, the outstanding shares of any class of capital stock of the corporation shall include shares deemed beneficially owned through the application of the foregoing, but shall not include any other shares which may be issuable pursuant to any agreement, or upon exercise of any conversion rights, warrants or options, or otherwise.
  3. A majority of the continuing directors shall have the power and duty to determine for the purposes of this Article on the basis of information known to them whether (i) an other entity beneficially owns more than twenty percent (20%) of the voting shares; (ii) an other entity is an “affiliate” or “associate” of another; (iii) an other entity has an agreement, arrangement or understanding with another; and (iv) the assets to be acquired by the corporation, or any subsidiary thereof, have an aggregate fair market value of less than five million dollars ($5,000,000).
  4. Nothing contained in this Article shall be construed to relieve any other entity from any fiduciary obligation imposed by law. This Article shall be broadly construed so as to be applicable to any transaction reasonably calculated to avoid the application of the provisions hereof including, without limitation, any merger or other recapitalization, initiated by or for the benefit of an other entity that owns more than twenty percent (20%) of the voting shares, which would reincorporate a corporation under the laws of another state or which would reorganize a corporation as an unincorporated entity.

History. 1987, c. 88, s. 1; 1989, c. 265, s. 1; 1999-369, s. 1.6.

§ 55-9-05. Exemptions.

The provisions of G.S. 55-9-02 shall not be applicable to any corporation that shall be made the subject of a business combination by an other entity if: (i) the corporation was not a public corporation (as defined in G.S. 55-1-40 (18a)) at the time such other entity acquired in excess of ten percent (10%) of the voting shares; (ii) on or before September 30, 1990 (or such earlier date as may be irrevocably established by resolution of the board of directors), the board of directors of a corporation to which G.S. 55-9-02 was not applicable on July 1, 1990, (other than a corporation described in G.S. 55-9-05 (iii)) adopted a bylaw stating that the provisions of this Article shall not be applicable to the corporation; (iii) in the case of a corporation to which G.S. 55-9-02 was not applicable on July 1, 1990, as the result of adoption by its board of directors under G.S. 55-9-05(ii) of a bylaw providing that G.S. 55-9-02 not apply to such corporation, the board of directors of such corporation shall not have rescinded such bylaw on or before September 30, 1990 (or such earlier date as may be irrevocably established by resolution of the board of directors); (iv) in the case of a corporation (including its predecessors) which becomes a public corporation for the first time after July 1, 1990, such corporation adopts a bylaw within 90 days of becoming a public corporation stating that the provisions of this Article shall not be applicable to it; (v) in the case of a newly formed corporation after April 23, 1987, the initial articles of incorporation of the corporation shall provide that the provisions of this Article shall not be applicable; (vi) such business combination was the subject of an existing agreement of the corporation on April 23, 1987; or (vii) on or after September 1, 2000, and on or before December 31, 2000, the board of directors of a corporation to which G.S. 55-9-02 was applicable on September 1, 2000, adopts a bylaw stating that the provisions of this Article shall not be applicable to the corporation. Neither the adoption or failure to adopt a bylaw of the type set forth in G.S. 55-9-05(ii), (iv), or (vii) of this section nor the rescission or failure to rescind a bylaw of the type referred to in G.S. 55-9-05(iii) shall constitute grounds for any cause of action, at law or in equity, against the corporation or any of its directors.

History. 1987, c. 88, s. 1; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.15; 2000-140, s. 44.

Legal Periodicals.

For article, “State Anti-Takeover Legislation: The Second and Third Generations,” see 23 Wake Forest L. Rev. 77 (1988).

Article 9A. Control Share Acquisitions.

§ 55-9A-01. Short title and definitions.

  1. The provisions of this Article shall be known and may be cited as The North Carolina Control Share Acquisition Act.
  2. In this Article:
    1. “Beneficial ownership” of shares means the sole or shared ownership of any shares or the sole or shared power to vote any shares or to direct the exercise of voting power of any shares, whether such ownership or power is direct or indirect or through any contract, arrangement, understanding, relationship or otherwise, and includes shares beneficially owned by any person acting in concert with such beneficial owner pursuant to any contract, arrangement, understanding, relationship or otherwise. Notwithstanding the foregoing, beneficial ownership does not include shares acquired in the ordinary course of business for the benefit of others in good faith and not for the purpose of circumventing this Article, unless the acquiror of such shares may exercise or direct the exercise of voting of such shares without instruction from others.
    2. “Control shares” means shares of a covered corporation that when added to all other shares of the corporation beneficially owned by a person would entitle (except for this Article) that person to voting power in the election of directors that is equal to or greater than any of the following levels of voting power:
      1. One-fifth of all voting power.
      2. One-third of all voting power.
      3. A majority of all voting power.
    3. “Control share acquisition” means the acquisition by any person of beneficial ownership of control shares, except that the acquisition of beneficial ownership of any shares of a covered corporation does not constitute a control share acquisition if the acquisition is consummated in any of the following circumstances:
      1. Before April 30, 1987.
      2. Pursuant to a contract existing before April 30, 1987, with either:
        1. The covered corporation; or
        2. A seller of such shares who owned such shares before April 30, 1987.
      3. Pursuant to the laws of descent and distribution.
      4. Pursuant to the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing this Article.
      5. Pursuant to a transaction effected in compliance with applicable law, but only if the transaction is pursuant to an agreement to which the covered corporation is a party.
      6. Pursuant to the sale of such shares by the covered corporation or its parent or subsidiary corporation.
      7. Pursuant to a written agreement to which the covered corporation is a party that permits the purchasers of shares from the covered corporation or its parent or subsidiary corporation also to purchase in any manner within 90 days before or after the purchase from the covered corporation or its parent or subsidiary up to the same aggregate number of shares as were sold by the covered corporation or its parent or subsidiary corporation.
      8. By an employee benefit plan established by the covered corporation.
      9. Before the corporation became a covered corporation.
    4. “Interested shares” means the shares of a covered corporation beneficially owned by any of the following persons:
      1. Any person who has acquired or proposes to acquire control shares in a control share acquisition.
      2. Any officer of the covered corporation.
      3. Any employee of the covered corporation who is also a director of the corporation.
    5. “Covered corporation” means a corporation that:
      1. Is incorporated under the laws of North Carolina and has substantial assets within North Carolina;
      2. Has a class of shares registered under Section 12 of the Securities Exchange Act of 1934;
      3. Has its principal place of business or principal office within North Carolina; and
      4. Has either:
        1. More than ten percent (10%) of its shareholders resident in North Carolina; or
        2. More than ten percent (10%) of its shares owned by North Carolina residents.
    6. The residence of a shareholder is presumed to be the address appearing in the records of the corporation.
    7. For purposes of calculating the percentages or numbers described in subsection (b)(5) of this section, any shares held in trust or by a nominee shall be deemed to be held by the beneficiaries of such trust or by the beneficiaries of such shares held by such nominee.

For purposes of this definition, shares acquired within any consecutive 90-day period or shares acquired pursuant to a plan to make a control share acquisition are considered to have been acquired in the same acquisition.

History. 1987, c. 182, s. 1; 1989, c. 200, s. 1; c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.16; 2001-201, s. 16.

Editor’s Note.

Article 9A, as set out in Session Laws 1989, c. 265, is essentially former Article 7A of Chapter 55, as enacted by Session Laws 1987, c. 182, s. 1, and c. 773, s. 12, and amended by Session Laws 1989, c. 200. This article is not in the Revised Model Business Corporation Act, and there are no Official Comments or North Carolina Comments thereto.

The present Article 9A, as set out in Session Laws 1989, c. 265, differs from former Article 7A in three main respects. First, the term “issuing public corporation” was changed to “covered corporation.” Second, former G.S. 55-98, dealing with the effect of former Article 7A on former Article 7, was deleted. Third, § 55-9A-08 was added. In addition, minor amendments to conform new Article 9A to the rest of new Chapter 55 were made throughout the Article.

Legal Periodicals.

For note, “The Constitutionality of the North Carolina Control Share Acquisition Act,” see 66 N.C.L. Rev. 1123 (1988).

For article, “Tender Offer Regulation: The Need for Reform,” see 23 Wake Forest L. Rev. 1 (1988).

For article, “Multiservice Securities Firms: Coping with Conflicts in a Tender Offer Context,” see 23 Wake Forest L. Rev. 41 (1988).

For article, “State Anti-Takeover Legislation: The Second and Third Generations,” see 23 Wake Forest L. Rev. 77 (1988).

For article, “Government Regulation of Business: Golden Parachutes Revisited,” see 23 Wake Forest L. Rev. 121 (1988).

For comment, “The Duty to Disclose v. The Duty Not to Mislead During Merger Negotiations,” see 23 Wake Forest L. Rev. 143 (1988).

For comment, “Fiduciary Duties of Directors: How Far Do They Go?,” see 23 Wake Forest L. Rev. 163 (1988).

For article, “Should Corporate Statutes Providing Special Protection for Directors Be Limited to Publicly Traded Corporations?,” see 24 Wake Forest L. Rev. 79 (1989).

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

For article, “Is the Corporate Director’s Duty of Care a ‘Fiduciary’ Duty? Does it Matter?,” see 48 Wake Forest L. Rev. 1027 (2013).

§ 55-9A-02. Acquiring person statement.

Any person who has made a control share acquisition or who has made a bona fide written offer to make a control share acquisition may at the person’s election deliver an acquiring person statement to the covered corporation at the covered corporation’s principal office. The acquiring person statement must set forth all of the following:

  1. The identity of the acquiring person and each other beneficial owner of shares that are beneficially owned by the acquiring person.
  2. A statement that the acquiring person statement is given pursuant to this Article.
  3. The number of shares of the covered corporation beneficially owned by the acquiring person and each other beneficial owner named under subdivision (1) of this section.
  4. The level of voting power above which the control share acquisition falls or would, if consummated, fall.
  5. If the control share acquisition has not taken place:
    1. A description in reasonable detail of the terms of the proposed control share acquisition; and
    2. Representations of the acquiring person, together with a statement in reasonable detail of the facts upon which they are based, that the proposed control share acquisition, if consummated, will not be contrary to law, and that the acquiring person has the financial capacity to make the proposed control share acquisition.

History. 1987, c. 182, s. 1; 1989, c. 200, s. 1; c. 265, s. 1.

§ 55-9A-03. Meeting of shareholders.

  1. If the acquiring person so requests at the time of delivery of an acquiring person statement and gives an undertaking to pay the covered corporation’s expenses of a special meeting, within 10 days after delivery of such request the directors of the covered corporation shall call a special meeting of shareholders of the covered corporation for the purpose of considering the voting rights to be accorded the control shares acquired or to be acquired in the control share acquisition.
  2. Unless the acquiring person agrees in writing to another date, the special meeting of shareholders shall be held within 50 days after the receipt by the covered corporation of the request.
  3. If no request is made, the voting rights to be accorded the control shares acquired in the control share acquisition shall be considered at the next special or annual meeting of shareholders.
  4. If the acquiring person so requests in writing at the time of delivery of the acquiring person statement, the special meeting must not be held sooner than 30 days after receipt by the covered corporation of the acquiring person statement.

History. 1987, c. 182, s. 1; 1989, c. 265, s. 1.

§ 55-9A-04. Notice.

If a special meeting is requested pursuant to G.S. 55-9A-03, notice of the special meeting of shareholders shall be given as promptly as reasonably practicable by the covered corporation. Notice of any special or annual meeting at which the voting rights of control shares are to be considered shall be given to all shareholders who are entitled to vote at the meeting and who are shareholders of record as of the record date set for the meeting, and to all holders of interested shares, and such notice must include or be accompanied by each of the following:

  1. A copy of the acquiring person statement delivered to the covered corporation pursuant to this Article.
  2. A statement by the board of directors of the covered corporation, authorized by a majority of its directors, of its position or recommendation, or that it is taking no position or making no recommendation, with respect to granting voting rights to the control shares acquired or proposed to be acquired in the control share acquisition.
  3. If the shareholders would have a right of redemption under G.S. 55-9A-06, a statement, displayed with reasonable prominence, describing such right and advising the shareholders that it will be available only to those who give the written notice required by G.S. 55-9A-06(b).

History. 1987, c. 182, s. 1; 1989, c. 200, s. 1; c. 265, s. 1.

§ 55-9A-05. Voting rights.

  1. Control shares acquired in a control share acquisition shall not have voting rights unless such rights are granted by resolution adopted by the shareholders of the covered corporation.
  2. To be approved under this section, the resolution must be adopted by the affirmative vote of the holders of at least a majority of all the outstanding shares of the covered corporation (not including interested shares) entitled to vote for the election of directors; provided that if applicable law or an articles of incorporation or bylaw provision adopted by the shareholders before the occurrence of the control share acquisition that is the subject of the vote prescribes voting by separate classes of shares, the resolution must also be adopted by the affirmative vote of the holders of at least a majority of each such class (but excluding in any such case all interested shares); and provided further that if applicable law or an articles of incorporation or bylaw provision adopted by the shareholders before the occurrence of the control share acquisition that is the subject of the vote prescribes voting by shares that would not otherwise be entitled to vote, such shares shall be treated solely for purposes of this section as shares entitled to vote for directors (but excluding in any such case all interested shares).

History. 1987, c. 182, s. 1; 1989, c. 265, s. 1.

§ 55-9A-06. Right of redemption by shareholders.

  1. Unless otherwise provided in the articles of incorporation or a bylaw of the covered corporation adopted by the shareholders before a control share acquisition has occurred and subject to G.S. 55-6-40, if control shares acquired in a control share acquisition are accorded voting rights and the holders of the control shares have a majority of all voting power for the election of directors, all shareholders of the covered corporation (other than holders of control shares) have rights as prescribed in this section to have their shares redeemed by the corporation at the fair value of those shares as of the day prior to the date on which the vote was taken under G.S. 55-9A-05.
  2. If the notice of meeting at which voting rights are accorded to control shares contains the statement required by G.S. 55-9A-04(3), a shareholder will not have any right of redemption under this section unless he gives to the corporation, prior to or at the meeting of shareholders at which the voting rights to be accorded to control shares are considered, written notice that if voting rights are accorded to such shares he may ask for the redemption of his shares hereunder.
  3. As soon as practicable after control shares held by persons having a majority of all voting power for the election of directors have been accorded voting rights, the board of directors shall cause a notice to be sent to all shareholders of the corporation advising them of the facts and that if they gave the notice required by subsection (b) of this section they may have rights to have their shares redeemed at the fair value of those shares pursuant to this section.
  4. Within 30 days after the date on which a shareholder receives such notice, such shareholder may make written demand on the corporation for payment of the fair value of his shares, and after such demand, if such shareholder has complied with the notice requirement in subsection (b) of this section, the corporation shall redeem his shares at their fair value within 30 days after the date on which the corporation receives such shareholder’s written demand for payment.
  5. As used in this section, “fair value” means a value not less than the highest price paid per share by the acquiring person in the control share acquisition.

History. 1987, c. 182, s. 1; 1989, c. 200, s. 1; c. 265, s. 1.

§ 55-9A-07. Severability.

If any provision or clause of this Article or application thereof to any person or circumstance is held invalid, such invalidity shall not affect other provisions or applications of this Article that can be given effect without the invalid provision or application, and to this end the provisions of this Article are declared to be severable.

History. 1987, c. 182, s. 1; 1989, c. 265, s. 1.

§ 55-9A-08. Construction.

The provisions of this Article shall apply notwithstanding any provisions of Article 7 of this Chapter and in the event of any conflict between this Article and Article 7, the provisions of this Article shall control.

History. 1989, c. 265, s. 1.

§ 55-9A-09. Exemptions.

The provisions of this Article shall not be applicable to any corporation if, on or before September 30, 1990, or such earlier date as may be irrevocably established by resolution of the board of directors, or at any time before the corporation becomes, or after it ceases to be, a covered corporation, the board of directors adopts a bylaw stating that the provisions of this Article shall not be applicable to the corporation; or, in the case of a corporation formed after August 12, 1987, its initial articles of incorporation provide that this Article shall not be applicable to the corporation; or on or after September 1, 2000, and on or before December 31, 2000, the board of directors of a corporation to which the provisions of this Article were applicable on September 1, 2000, adopts a bylaw stating that the provisions of this Article shall not be applicable to the corporation. Neither adoption nor failure to adopt such a bylaw or provision shall constitute grounds for any cause of action against the corporation, or any officer or director of the corporation.

History. 1987, c. 773, s. 12; 1989, c. 200, s. 1; c. 265, s. 1; 2000-140, s. 47.

Article 10. Amendment of Articles of Incorporation and Bylaws.

Part 1. Amendment of Articles of Incorporation.

§ 55-10-01. Authority to amend.

  1. A corporation may amend its articles of incorporation at any time to add or change a provision that is required or permitted in the articles of incorporation or to delete a provision not required in the articles of incorporation. Whether a provision is required or permitted in the articles of incorporation is determined as of the effective date of the amendment.
  2. A shareholder of the corporation does not have a vested property right resulting from any provision in the articles of incorporation, including provisions relating to management, control, capital structure, dividend entitlement, or purpose or duration of the corporation.

History. 1901, c. 2, ss. 29, 30, 37; 1903, c. 510; Rev., ss. 1175, 1178; C.S., s. 1131; 1927, c. 142; G.S., s. 55-31; 1955, c. 1371, s. 1; 1959, c. 1316, s. 29; 1989, c. 265, s. 1.

Official Comment

Section 10.01(a) authorizes a corporation to amend its articles of incorporation by adding a new provision to its articles of incorporation, modifying an existing provision, or deleting a provision in its entirety. The sole test for the validity of an amendment is whether the provision could lawfully have been included in (or in the case of a deletion, omitted from) the original articles of incorporation as of the effective date of the amendment.

The power of amendment must be exercised pursuant to the procedures set forth in the rest of this chapter, which require significant amendments to be approved either by a majority of the votes cast on the proposed amendment or by a majority of all of the votes eligible to be cast on the proposed amendment (section 10.03). This majority vote requirement is supplemented by section 10.04, which establishes a right of voting by voting group on amendments that directly affect a single class or series of shares, and by section 7.27, which treats amendments that change the voting requirements for future amendments.

Section 10.01(b) restates explicitly the policy embodied in earlier versions of the Model Act and in all modern state corporation statutes, that a shareholder “does not have a vested property right” in any provision of the articles of incorporation. Corporations and their shareholders are also subject to amendments of the governing statute by the state under section 1.02.

Section 10.01(b) should be construed liberally and without qualification or restriction to achieve the fundamental purpose of this chapter of permitting corporate adjustment and change by majority vote. Section 10.01(b) rejects decisions by a few courts that have applied a “vested rights” or “property right” doctrine to restrict or invalidate amendments to articles of incorporation because they modified particular rights conferred on shareholders by the original articles of incorporation. These holdings are rejected because their effect often is to create a tyranny of the minority: the individual consent of each shareholder becomes necessary to adopt any important change, and each shareholder, no matter how small his holding, can prevent the change.

Section 10.01(b) does not change in any way the purpose of similar provisions in earlier versions of the Model Act, which included, along with general language similar to section 10.01(b), a long list of specific permissible amendments. This list was designed to eliminate the last possible vestige of the “vested rights” theory by expressly referring to and validating all types of amendments to which a vested rights challenge could be made. Section 10.01(b) omits this “laundry list” of permissible amendments as prolix and unnecessary to carry out the policies of the section. Examples of amendments that may be made under section 10.01 include:

  1. Amendments to eliminate a narrow or limited purpose clause (thereby authorizing the corporation to engage in any lawful business) or a limited duration clause (thereby authorizing the corporation to have perpetual duration).
  2. Amendments increasing or decreasing the number of shares a corporation is authorized to issue.
  3. Amendments exchanging, classifying, reclassifying, or cancelling any part of a corporation’s shares, whether or not previously issued.
  4. Amendments limiting or cancelling the right of holders of a class of shares to receive dividends, whether or not the dividends or rights to receive the dividends had accumulated or accrued in the past.
  5. Amendments creating new classes of shares whether superior or inferior to shares already outstanding, or changing the designations of shares, or the preferences, limitations, or rights of classes of shares, whether or not previously issued.
  6. Amendments dividing a class of shares into series and authorizing the directors to fix the relative rights and preferences of a class or series.
  7. Amendments changing the voting rights of outstanding shares, including elimination of the power to vote cumulatively or assigning multiple or fractional votes per share, or denying the power to vote entirely to classes of shares, whether or not previously issued.

(2) Amendments increasing or decreasing the number of shares a corporation is authorized to issue.

(3) Amendments exchanging, classifying, reclassifying, or cancelling any part of a corporation’s shares, whether or not previously issued.

(4) Amendments limiting or cancelling the right of holders of a class of shares to receive dividends, whether or not the dividends or rights to receive the dividends had accumulated or accrued in the past.

(5) Amendments creating new classes of shares whether superior or inferior to shares already outstanding, or changing the designations of shares, or the preferences, limitations, or rights of classes of shares, whether or not previously issued.

(6) Amendments dividing a class of shares into series and authorizing the directors to fix the relative rights and preferences of a class or series.

(7) Amendments changing the voting rights of outstanding shares, including elimination of the power to vote cumulatively or assigning multiple or fractional votes per share, or denying the power to vote entirely to classes of shares, whether or not previously issued.

This listing is partial and illustrative only.

A provision in the articles of incorporation is subject to amendment under section 10.01 even though the provision is described, referred to, or stated in a share certificate, information statement, or other document issued by the corporation that reflects provisions of the articles of incorporation. The only exception to this unlimited power of amendment is section 6.27, which provides that share transfer restrictions may not be imposed by amendment on shares that were previously issued without the consent of the holder.

Section 10.01 relates only to amendments to articles of incorporation. It does not relate to the impairment of obligations of a corporation to its shareholders based upon contracts independent of the articles of incorporation. An amendment permitted by this section may constitute a breach of such a contract or of a contract between the shareholders themselves. A shareholder with contractual rights (or who otherwise is concerned about possible onerous amendments) may obtain complete protection against these amendments only by establishing procedures in the articles of incorporation or bylaws that limit the power of amendment without his consent. In appropriate cases, a shareholder may be able to enjoin an amendment that constitutes a breach of a contract.

Minority shareholders are protected from the power of the majority to impose onerous or objectionable amendments by two basic devices: the right to vote on amendments by separate voting groups (section 10.04) and the right to dissent under chapter 13. In addition, courts have held that a decision by majority shareholders to exercise the powers granted by this section in a way that is arguably detrimental or unfair to minority interests may be examined by a court under its inherent equity power to review transactions for good faith and fair dealing. McNulty v. W. & J. Sloane, 184 Misc. 835, 54 N.Y.S.2d 253 (Sup. Ct. 1945); Kamena v. Janssen Dairy Corp., 133 N.J.Eq. 214, 31 A.2d 200, 203 (1943), aff’d, 134 N.J.Eq. 359, 35 A.2d 894 (1944) (where the court stated that it “is more a question of fair dealing between the strong and the weak than it is a question of percentages or proportions of the votes favoring the plan”). See also Teschner v. Chicago Title & Trust Co., 59 Ill.2d 452, 322 N.E.2d 54, 57 (1974), where the court, in upholding a transaction that had a reasonable business purpose, relied partially on the fact that there was “no claim of fraud or deceptive conduct . . . [or] that the exchange offer was unfair or that the price later offered for the shares was inadequate.”

Because of the broad power of amendment contained in this section, it is unnecessary and undesirable to make any reference to, or reserve, an express power to amend in articles of incorporation.

North Carolina Commentary

This section broadly authorizes a corporation to amend its articles of incorporation to include any provision required or permitted in the articles of incorporation. Former G.S. 55-99 contained a “laundry list” of permissive amendments.

Legal Periodicals.

For note on unanimous approval of corporate bylaws and creation of shareholder agreements, see 1 Campbell L. Rev. 153 (1979).

For article, “Using Alternative Dispute Resolution Techniques To Settle Conflicts Among Shareholders Of Closely Held Corporations,” see 22 Wake Forest L. Rev. 105 (1987).

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

CASE NOTES

Editor’s Note. —

The cases below were decided under prior law.

Amendment Operates Prospectively. —

Whether the law itself makes an amendment, or confers the power of amendment on the corporation, the amendment will not be construed to operate retrospectively to the detriment of rights already vested under the old charter. Patterson v. Durham Hosiery Mills, 214 N.C. 806, 200 S.E. 906, 1939 N.C. LEXIS 433 (1939).

A charter amendment requiring consent of three fourths in interest of the preferred stockholders to the issuing of bonds or securities of prior or equal rank is prospective in effect, and does not constitute a waiver of the right to the declaration of accrued, accumulated dividends, when earned, by permitting the interposing of new preferred stock by agreement of three fourths of the preferred stockholders, nor does legislative authority to amend the charter extend to authority to defeat the vested right to the declaration of such dividends by amendment of the charter. Patterson v. Durham Hosiery Mills, 214 N.C. 806, 200 S.E. 906, 1939 N.C. LEXIS 433 (1939).

Subscriber Released by Fundamental Change. —

Any fundamental change in the charter of a corporation relieves a nonassenting subscriber from liability upon his stock. First Nat'l Bank v. City of Charlotte, 85 N.C. 433, 1881 N.C. LEXIS 291 (1881).

§ 55-10-02. Amendment by board of directors.

Unless the articles of incorporation provide otherwise, a corporation’s board of directors may adopt any of the following amendments to the corporation’s articles of incorporation without shareholder approval:

  1. Reserved for future codification purposes.
  2. To delete the names and addresses of the initial directors.
  3. To delete the name and address of the initial registered agent or registered office, if a statement of change is on file with the Secretary of State.
  4. If the corporation has only one class of shares outstanding, to do any of the following:
    1. Change each issued and unissued authorized share of the class into a greater number of whole shares of the class.
    2. Increase the number of authorized shares of the class to the extent necessary to permit the issuance of shares as a share dividend.
  5. To change the corporate name.
  6. To reflect a reduction in authorized shares pursuant to G.S. 55-6-31(b) when the corporation has acquired its own shares and the articles of incorporation prohibit the reissue of the acquired shares.
  7. To delete a class of shares from the articles of incorporation, as a result of the operation of G.S. 55-6-31(b), when there are no remaining authorized shares of the class because the corporation has acquired all authorized shares of the class and the articles of incorporation prohibit the reissue of the acquired shares.
  8. To make any other change expressly permitted by this Chapter to be made without shareholder approval.

History. 1893, c. 380; 1899, c. 618; 1901, c. 2, ss. 28, 29, 30, 37; 1903, c. 510; Rev., ss. 1174, 1175, 1178; C.S., ss. 1130, 1131; 1925, c. 118, ss. 1, 2a; 1927, c. 142; 1931, c. 243, ss. 4, 5; 1933, c. 100, ss. 7, 8; 1941, c. 97, s. 5; G.S., ss. 55-30, 55-31; 1953, c. 54; c. 119, ss. 1, 2; 1955, c. 1371, s. 1; 1959, c. 1316, s. 25; 1973, c. 469, s. 30; 1989, c. 265, s. 1; 2005-268, s. 13; 2021-106, s. 4(a).

Official Comment

The amendments described in clauses (1) through (6) are so routine and “housekeeping” in nature as not to require action by shareholders. None affects substantive rights in any meaningful way. For example, section 10.02(1) authorizes amendments by the board of directors to extend the duration of a corporation that was formed at a time when limited duration was required by law. The extension normally will be in the form of an amendment to delete all reference to the duration of the corporation, which automatically makes the duration perpetual. See section 3.02. Similarly, sections 10.02(2) and (3) authorize the board of directors to delete the names of initial directors, or the name and address of the initial registered agent and registered office, set forth in the original articles if that information is obsolete. Section 10.02(4) authorizes the board of directors to change each issued and unissued share of an outstanding class of shares into a greater number of whole shares if the corporation has only that class of shares outstanding. All shares of the class being changed must be treated identically under this clause. Section 10.02(5) authorizes minor name changes without shareholder approval.

Section 10.02(6) recognizes that other sections of the Model Act expressly permit other amendments to be made by the board of directors without prior shareholder approval. Examples of these include section 6.02 (creation of series of shares pursuant to authority already granted in the articles) and section 6.31 (cancellation of reacquired shares if the articles provide they are not to be reissued).

Amendments provided for in this section may be included in restated articles of incorporation under section 10.07 or in articles of merger under chapter 11.

North Carolina Commentary

This section authorizes the board of directors to adopt certain “housekeeping” amendments to the articles of incorporation without shareholder action. Under former G.S. 55-100(b), shareholder action was required for all amendments after the initial issuance of shares. Subdivision 10.02(1) of the Model Act, relating to an amendment to extend the duration of a corporation if it was incorporated at a time when limited duration was required by law, was omitted, because limited duration has not been required by North Carolina law.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended to reflect (i) the relocation to this section from G.S. 55-6-31 of the provision authorizing a board of directors to amend articles of incorporation to reflect a reduction in authorized shares when the corporation is prohibited from reissuing acquired shares and (ii) the addition of a provision authorizing a board of directors to amend the articles of incorporation to increase the number of authorized shares as necessary to permit a share dividend if the corporation has only one class of shares outstanding.

Supplemental North Carolina Commentary (2021)

Effective October 1, 2021, this section is amended to authorize a board of directors to change the corporation’s name without shareholder action.

Editor’s Note.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2005-268, s. 13, effective October 1, 2005, in the introductory language, substituted “any of the following” for “one or more” and “approval” for “action”; made minor stylistic changes in subdivisions (1) through (3) and (5); rewrote subdivision (4); added subdivisions (5a) and (5b); and in subdivision (6), substituted “Chapter” for “act” and “approval” for “action.”

Session Laws 2021-106, s. 4(a), effective October 1, 2021, rewrote subdivisions (4) and (5).

CASE NOTES

Shareholders’ Prior Authorization of Stock. —

Share exchange in the merger of two banks did not violate the law when one bank issued a class of preferred stock, representing 39.9 percent of the bank’s aggregate voting rights, in exchange for shares of the other bank’s common stock because the shareholders had previously authorized the preferred stock. Ehrenhaus v. Baker, 216 N.C. App. 59, 717 S.E.2d 9, 2011 N.C. App. LEXIS 2161 (2011).

§ 55-10-03. Amendment by board of directors and shareholders.

  1. If a corporation has issued shares, an amendment to the articles of incorporation shall be adopted pursuant to this section. Except as provided in G.S. 55-14A-01, the proposed amendment must be adopted by the board of directors.
  2. Except as provided in G.S. 55-7-31(f), 55-10-02, 55-10-07, and 55-14A-01, after adopting the proposed amendment the board of directors shall submit the amendment to the shareholders for their approval. The board of directors shall also transmit to the shareholders a recommendation that the shareholders approve the amendment, unless one of the following circumstances exist, in which event the board of directors shall communicate the basis for not recommending approval of the amendment to the shareholders at the time it submits the amendment to the shareholders:
    1. The board of directors determines that, because of conflict of interest or other special circumstances, it should not make a recommendation that the shareholders approve the amendment.
    2. G.S. 55-8-26 applies.
  3. The board of directors may condition its submission of the amendment to the shareholders on any basis.
  4. If the amendment must be approved by the shareholders and the approval is to be given at a meeting, the corporation must notify each shareholder in accordance with G.S. 55-7-05, whether or not the shareholder is entitled to vote, of the meeting of shareholders at which the amendment is to be submitted for approval. The notice of meeting must state that the purpose, or one of the purposes, of the meeting is to consider the amendment and the notice must contain or be accompanied by a copy or summary of the amendment. If the amendment is required to be approved by the shareholders and the approval is to be obtained through action without meeting, the corporation must notify shareholders if required by G.S. 55-7-04(d).
  5. Unless this Chapter, the articles of incorporation, a bylaw adopted by the shareholders, or the board of directors (acting pursuant to subsection (c)) require a greater vote or a vote by voting groups, the amendment to be adopted must be approved by all of the following:
    1. A majority of the votes entitled to be cast on the amendment by any voting group with respect to which the amendment would create appraisal rights.
    2. The votes required by G.S. 55-7-25 and G.S. 55-7-26 by every other voting group entitled to vote on the amendment.

History. 1893, c. 380; 1899, c. 618; 1901, c. 2, ss. 28, 29, 30, 37; 1903, c. 510; Rev., ss. 1174, 1175, 1178; C.S., ss. 1130, 1131; 1925, c. 118, ss. 1, 2a; 1927, c. 142; 1931, c. 243, ss. 4, 5; 1933, c. 100, ss. 7, 8; 1941, c. 97, s. 5; G.S., ss. 55-30, 55-31; 1953, c. 54; c. 119, ss. 1, 2; 1955, c. 1371, s. 1; 1959, c. 1316, s. 25; 1973, c. 469, s. 30; 1989, c. 265, s. 1; 1991, c. 645, s. 8; 2000-140, s. 101(b); 2005-268, s. 14; 2011-347, s. 5; 2013-153, s. 8; 2018-45, s. 14.

Official Comment

Significant amendments to articles of incorporation must be approved by the shareholders after being proposed by the board of directors. When proposing an amendment, the board of directors must make a recommendation to the shareholders that the amendment be approved, unless it determines that because of conflict of interest or other special circumstances it should make no recommendation. If the board of directors so determines, it must describe the conflict or circumstance, and communicate the basis for its determination, when presenting the proposed amendment to the shareholders.

Section 10.03(c) codifies existing practice by expressly permitting the board of directors to submit an amendment to the shareholders on a conditional basis. This power of the board of directors does not alter the balance of power between the board of directors and shareholders since the board of directors may always withhold its approval entirely and not submit an amendment. Examples of conditions commonly imposed are that the amendment not be approved unless (1) a favorable vote by a specified proportion (larger than ordinarily required) of the shareholders is obtained, (2) no more than a specified fraction of the shareholders file written dissents, or (3) a class or series of shares must approve the amendment as a separate voting group. These conditions may be used, for example, to discourage unwise depletion of corporate assets by the adoption of the amendment. The board of directors is not limited to conditions of these types, however, and may condition the submission on any basis.

The vote of shareholders needed to approve an amendment depends in part on the voting groups entitled to vote separately on the amendment and in part on whether any of those voting groups would be entitled to dissenters’ rights if the amendment were adopted. See section 10.04. However, section 10.03(e) itself establishes a dual requirement for approval by shareholders of each voting group depending on the nature of the amendment: under section 7.25 and 7.26 a majority of the votes cast affirmatively and negatively on the amendment at a meeting at which a quorum is present is necessary to approve most amendments; but if the amendment would give rise to dissenters’ rights under chapter 13, section 10.03(e) requires that it be approved by a majority of the votes of the outstanding shares of each voting group that will have dissenters’ rights if the amendment were adopted, and by the vote required by sections 7.25 and 7.26 by other voting groups that are entitled to vote on the amendment. This increased voting requirement reflects the importance of these proposals. Of course, the articles of incorporation may specify a greater quorum or voting requirement for a voting group to approve an amendment of any type. See section 7.27.

The articles of incorporation or the board of directors may require that a proposed amendment be approved by a class or series of shares voting as a separate voting group; such a requirement may only be in addition to that otherwise required by section 10.04 of this Act.

North Carolina Commentary

This section continues the usual procedure under former G.S. 55-100(b) for adoption of amendments to the articles of incorporation by action of the board of directors and then by the shareholders. It adds two new features. First, the board of directors must recommend the amendment to the shareholders, unless it determines that, because of conflict of interest or other special circumstances, it should make no recommendation and communicates the basis for its lack of a recommendation to the shareholders. Second, the section specifically authorizes the board of directors to condition its submission of a proposed amendment “on any basis.”

This section omits the Model Act’s requirement that notice of the meeting at which the proposed amendment will be considered and of the proposed amendment itself be given to all shareholders of the corporation whether or not entitled to vote on the proposed amendment. Accordingly, the section continues the procedure under former G.S. 55-100(b)(2) of giving notice only to those shareholders entitled to vote on the proposed amendment.

Under former G.S. 55-100(b)(1), an amendment to the articles of incorporation could be initiated by shareholders entitled to call a shareholders’ meeting. There is no similar procedure in this Act.

A clarifying stylistic change was made to the Model Act’s language in subsection (b) of this section.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is changed to provide that once shares have been issued generally all amendments to the articles of incorporation must be adopted by the board of directors, including those that must be approved by the shareholders. Prior to this change, a board of directors was only required to propose amendments that required shareholder approval.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2005-268, s. 14, effective October 1, 2005, rewrote subsections (a) through (d).

Session Laws 2011-347, s. 5, effective October 1, 2011, substituted “appraisal rights” for “dissenter’s rights” in subdivision (e)(1).

Session Laws 2013-153, s. 8, effective January 1, 2014, in subsection (b), substituted “shall” for “must” twice, and substituted “one of the following circumstances exist, in which event the board of directors shall communicate the basis for not recommending approval of the amendment to the shareholders at the time it submits the amendment to the shareholders” for “the board of directors determines that, because of conflict of interest or other special circumstances, it should not make such a recommendation, in which event the board of directors must communicate the basis for that determination to the shareholders with the amendment” in the second sentence; added subdivisions (b)(1) and (b)(2); added “all of the following” in subsection (e); and made a minor stylistic and punctuation change in subdivision (e)(1).

Session Laws 2018-45, s. 14, effective October 1, 2018, substituted “G.S. 55-7-31(f), 55-10-02,” for “G.S. 55-10-02,” in subsection (b).

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

CASE NOTES

Shareholders’ Prior Authorization of Stock. —

Share exchange in the merger of two banks did not violate the law when one bank issued a class of preferred stock, representing 39.9 percent of the bank’s aggregate voting rights, in exchange for shares of the other bank’s common stock because the shareholders had previously authorized the preferred stock. Ehrenhaus v. Baker, 216 N.C. App. 59, 717 S.E.2d 9, 2011 N.C. App. LEXIS 2161 (2011).

§ 55-10-04. Voting on amendments by voting groups.

  1. The holders of the outstanding shares of a class are entitled to vote as a separate voting group (if shareholder voting is otherwise required by this Chapter) on a proposed amendment if the amendment would:
    1. Increase or decrease the aggregate number of authorized shares of the class;
    2. Effect an exchange or reclassification of all or part of the shares of the class into shares of another class;
    3. Effect an exchange or reclassification, or create the right of exchange, of all or part of the shares of another class into shares of the class;
    4. Change the designation, rights, preferences, or limitations of all or part of the shares of the class;
    5. Change the shares of all or part of the class into a different number of shares of the same class;
    6. Create a new class of shares having rights or preferences with respect to distributions or to dissolution that are prior, superior, or substantially equal to the shares of the class;
    7. Increase the rights, preferences, or number of authorized shares of any class that, after giving effect to the amendment, have rights or preferences with respect to distributions or to dissolution that are prior, superior, or substantially equal to the shares of the class;
    8. Limit or deny an existing preemptive right of all or part of the shares of the class;
    9. Cancel or otherwise affect rights to distributions or dividends that have accumulated but not yet been declared on all or part of the shares of the class; or
    10. Change the corporation into a nonprofit corporation or a cooperative organization.
  2. If a proposed amendment would affect a series of a class of shares in one or more of the ways described in subsection (a), the shares of that series are entitled to vote as a separate voting group on the proposed amendment.
  3. If a proposed amendment that entitles two or more series of shares to vote as separate voting groups under this section would affect those two or more series in the same or a substantially similar way, the shares of all the series so affected must vote together as a single voting group on the proposed amendment.
  4. A class or series of shares is entitled to the voting rights granted by this section although the articles of incorporation provide that the shares are nonvoting shares.

History. 1955, c. 1371, s. 1; 1959, c. 1316, ss. 30, 31; 1969, c. 751, s. 36; 1989, c. 265, s. 1.

Official Comment

A class or series of shares is generally entitled to vote separately as a voting group on any amendment that affects the class or series in the manner described in subdivisions (1) through (9) of section 10.04(a). Shares are entitled to vote as separate voting groups under this section even though they are designated as nonvoting shares in the articles of incorporation, or the articles of incorporation purport to deny them entirely the right to vote on the proposal in question, or purport to allow other classes or series of shares to vote as part of the same voting group. See section 10.04(d). If an amendment would create dissenters’ rights with respect to any class or series of shares, the amendment must be approved by each voting group that would have dissenters’ rights by a majority of all votes entitled to be cast on the amendment, and by other voting groups by the vote required by sections 7.25 and 7.26. See section 10.04(b). All other amendments are subject to the voting requirements generally applicable to voting groups under sections 7.25 and 7.26.

The right to vote by voting groups under section 10.04 is applicable only if “shareholder voting is otherwise required by this Act.” An amendment that does not require shareholder approval, such as the creation of a new series of shares pursuant to authority reserved in the original articles of incorporation (see section 6.02), does not trigger the right to vote by voting groups under this section.

The right to vote as a separate voting group provides a major protection for classes or series of shares with preferential rights or classes or series of limited or nonvoting shares against amendments that are especially burdensome to that class. This section, however, does not make the right to vote by separate voting group dependent on an evaluation of whether the amendment is detrimental to the class or series: if the amendment is one of those described in section 10.04(a), the class or series is automatically entitled to vote as a separate voting group on the amendment. The question whether an amendment is detrimental is often a question of judgment, and approval by the affected class or series is required, irrespective of whether the board or other shareholders believe it is beneficial or detrimental to the affected class or series.

The nine types of changes that give rise to voting by voting groups are essentially the same as in earlier versions of the Model Act, though their number has been reduced based on the conclusion that some of the changes listed in earlier versions were subsumed within other listed changes. Subsections (b) and (c) extend the privilege of voting by separate voting group to one or more series of a class of shares if the series has unique financial or voting provisions and is affected in one or more of the ways described in subsection (a). These subsections must necessarily be phrased in general terms; any significant distinguishing feature of a series, which an amendment affects or alters, should trigger the right of voting by separate voting group for that series.

The application of subsections (b) and (c) may best be illustrated by an example. Assume there is a class of shares with preferential rights comprised of three series, each with different preferential dividend rights. A proposed amendment would reduce the rate of dividend applicable to the “Series A” shares and would change the dividend right of the “Series B” shares from a cumulative to a noncumulative right. The amendment would not affect the preferential dividend right of the “Series C” shares. Both Series A and B would be entitled to vote as separate voting groups on the proposed amendment; the holders of the Series C shares, not directly affected by the amendment, would not be entitled to vote at all unless the shares are otherwise voting shares under the articles of incorporation, in which case they would not vote as a separate voting group but in the voting group consisting of all shares with general voting rights under the articles of incorporation. If the proposed amendment would reduce the dividend right of Series A and change the dividend right of both Series B and C from a cumulative to a noncumulative right, the holders of Series A would be entitled to vote as a single voting group, and the holders of Series B and C would be required to vote together as a single, separate voting group.

Sections 7.25 and 7.26 set forth the mechanics of voting by multiple voting groups.

Section 10.04(d) makes clear that the limited right to vote by separate voting groups provided by section 10.04 may not be narrowed or eliminated by the articles of incorporation. Even if a class or series of shares is described as “nonvoting” and the articles purport to make that class or series nonvoting “for all purposes,” that class or series nevertheless has the limited voting right provided by this section. Section 10.04(d) was included because of the ambiguity that would normally arise whenever a class or series of nonvoting shares is created; no inference of any kind should be drawn from section 10.04(d) as to whether other, unrelated sections of the Model Act may be modified by the provisions in the articles of incorporation.

North Carolina Commentary

This section differs from the Model Act in providing for class voting in the case of a proposed amendment to the articles of incorporation that would change the corporation into a nonprofit corporation or a cooperative organization. With this addition, the instances in which class voting is required under the Act are the same as under former G.S. 55-101.

§ 55-10-05. Amendment before issuance of shares.

If a corporation has not yet issued shares, the board of directors, or if the corporation has no directors, a majority of the incorporators may adopt one or more amendments to the corporation’s articles of incorporation.

History. 1893, c. 380; 1899, c. 618; 1901, c. 2, ss. 28, 29, 30, 37; 1903, c. 510; Rev., ss. 1174, 1175, 1178; C.S., ss. 1130, 1131; 1925, c. 118, ss. 1, 2a; 1927, c. 142; 1931, c. 243, ss. 4, 5; 1933, c. 100, ss. 7, 8; 1941, c. 97, s. 5; G.S., ss. 55-30, 55-31; 1953, c. 54; c. 119, ss. 1, 2; 1955, c. 1371, s. 1; 1959, c. 1316, s. 25; 1973, c. 469, s. 30; 1989, c. 265, s. 1; 1991, c. 645, s. 9.

Official Comment

Section 10.05 provides that, before any shares are issued, amendments may be made by the persons empowered to complete the organization of the corporation. Under section 2.04 the organizers may, at the option of the corporation, be either the incorporators or the initial directors named in the articles of incorporation. An amendment to the articles made at this stage of the formation process should involve a minimum of formality.

North Carolina Commentary

This section continues the procedure under former G.S. 55-100(a) by which the board of directors and incorporators may amend the articles of incorporation before the issuance of shares.

§ 55-10-06. Articles of amendment.

A corporation amending its articles of incorporation shall deliver to the Secretary of State for filing articles of amendment setting forth:

  1. The name of the corporation;
  2. The text of each amendment adopted;
  3. If an amendment provides for an exchange, reclassification, or cancellation of issued shares, provisions for implementing the amendment if not contained in the amendment itself;
  4. The date of each amendment’s adoption;
  5. If an amendment was adopted by the incorporators or board of directors without shareholder action, a statement to that effect and a brief explanation of why shareholder action was not required;
  6. If an amendment was approved by the shareholders, a statement that shareholder approval was obtained as required by this Chapter.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 32; 1989, c. 265, s. 1; 1991, c. 645, s. 10(a).

Official Comment

The articles of amendment must set forth both the amendment itself and the manner in which it was adopted. In the case of an amendment approved by shareholder vote (sections 10.03 and 10.04), the articles must state either the total vote in favor and against the proposal or the undisputed vote for and a statement that this vote was sufficient to adopt the amendment. The latter tally method is permitted because in many situations the precise vote may depend on the resolution of protracted disputes with respect to proxy votes. The filing of the articles of amendment should not be dependent on the resolution of every dispute if it is certain that a sufficient vote has been obtained without considering the disputed votes. In most situations, of course, the precise vote can be readily determined, and when it can the articles should record it.

Section 10.06(a)(3) requires the articles of amendment to contain a statement of the manner in which an exchange, reclassification, or cancellation of issued shares is to be put into effect if not set forth in the amendment itself. This requirement avoids any possible confusion that may arise as to how the amendment is to be put into effect and also permits the amendment itself to be limited to provisions of permanent applicability, with transitional provisions having no long-range effect appearing only in the articles of amendment.

North Carolina Commentary

This section is essentially the same as former G.S. 55-103, except that no special statement is required in the case of an amendment effecting a change in the amount of stated capital and except that no statement is required with respect to dissenters’ rights.

§ 55-10-07. Restated articles of incorporation.

  1. A corporation’s board of directors may restate its articles of incorporation at any time, with or without shareholder approval, to consolidate all amendments into a single document.
  2. The restated articles of incorporation may include one or more new amendments to the articles. If the restated articles of incorporation include a new amendment requiring shareholder approval, it must be adopted and approved as provided in G.S. 55-10-03. The restated articles of incorporation may include a statement of the address of the current registered office and the name of the current registered agent of the corporation, and no other.
  3. Repealed by Session Laws 2005, c. 268, s. 15.
  4. A corporation restating its articles of incorporation shall deliver to the Secretary of State for filing articles of restatement which shall:
    1. Set forth the name of the corporation;
    2. Attach as an exhibit thereto the text of the restated articles of incorporation;
    3. State that the restated articles of incorporation consolidate all amendments into a single document; and
    4. If the restated articles of incorporation contain a new amendment to the articles, include the statements required by G.S. 55-10-06.
  5. Duly adopted restated articles of incorporation supersede the original articles of incorporation and all amendments to the original articles of incorporation.
  6. The Secretary of State may certify restated articles of incorporation as the articles of incorporation currently in effect without including the other information required by subsection (d) of this section.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1991, c. 645, ss. 11, 18; 2005-268, s. 15.

Official Comment

Restated articles of incorporation serve the useful purpose of permitting articles of incorporation that have been amended from time to time to be consolidated into a single document. Such a restatement may also eliminate “historical” or obsolete provisions that have no present relevance.

A restatement of articles of incorporation that does not involve any substantive change in the articles (or that makes only amendments that may be made by the board of directors without shareholder approval) may be approved by the board of directors alone. In order to increase the reliability of restated articles as the definitive governing document of the corporation, section 10.07 authorizes the restated articles of incorporation to be submitted to the shareholders for approval in the same manner as amendments to the articles. If duly submitted to the shareholders, substantive variation between the original articles of incorporation, as amended, and the restated articles becomes academic if the shareholders’ vote is the appropriate one required to amend the articles to the extent of the inconsistency.

Substantive amendments may also be adopted as part of a restatement. If substantive amendments are proposed, the same procedure must be followed as for the adoption of amendments under sections 10.02, 10.03, or 10.05.

If restated articles are submitted to the shareholders, the notice of meeting should identify changes in the articles that may reasonably be viewed as more than mere changes of form.

Section 10.07(e) makes it clear that the restated articles of incorporation supersede the original articles of incorporation and all amendments to them, and section 10.07(f) permits the secretary of state to certify the restatement uncluttered by the information set forth in subsection (e).

North Carolina Commentary

This section is in substance the same as former G.S. 55-105. The procedure for simultaneously amending and restating the articles of incorporation was clarified. The Model Act uses two terms in its comparable section, “restated articles of incorporation” and “restatement,” to refer to the same document. Because the drafters concluded that the use of both could be confusing, they decided to use a single term, “restated articles of incorporation,” and made other conforming and stylistic changes in subsections (c), (d), and (f).

Effect of Amendments.

Session Laws 2005-268, s. 15, effective October 1, 2005, substituted “approval, to consolidate all amendments into a single document” for “action” in subsection (a); deleted former subsection (c) which read: “If the board of directors submits restated articles of incorporation for shareholder action, the corporation shall notify each shareholder entitled to vote, of the proposed shareholders’ meeting in accordance with G.S. 55-7-05. The notice must also (i) state that the purpose, or one of the purposes, of the meeting is to consider the proposed restated articles of incorporation, (ii) contain or be accompanied by a copy of the proposed restated articles of incorporation, and (iii) identify any amendment or other change they would make in the articles”; rewrote subdivision (d)(3) and (d)(4); substituted “to the original articles of incorporation” for “to them” in subsection (e); inserted “of this section” in subsection (f); and made minor stylistic changes throughout.

§ 55-10-08.

Reserved for future codification purposes.

North Carolina Commentary

Section 10.08 of the Model Act has been omitted and is replaced by G.S. 55-14A-01.

§ 55-10-09. Effect of amendment.

An amendment to articles of incorporation does not affect a cause of action existing against or in favor of the corporation, a proceeding to which the corporation is a party, or the existing rights of persons other than shareholders of the corporation. An amendment changing a corporation’s name does not abate a proceeding brought by or against the corporation in its former name.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Under section 10.09, amendments to articles of incorporation do not interrupt the corporate existence and do not abate a proceeding by or against the corporation even though the amendment changes the name of the corporation.

Amendments are effective when filed unless a delayed effective date is elected. See section 1.23.

North Carolina Commentary

This section is in substance the same as former G.S. 55-104.

§§ 55-10-10 through 55-10-19.

Reserved for future codification purposes.

Part 2. Amendment of Bylaws.

§ 55-10-20. Amendment by board of directors or shareholders.

  1. A corporation’s board of directors may amend or repeal the corporation’s bylaws, except to the extent otherwise provided in the articles of incorporation or a bylaw adopted by the shareholders or this Chapter, and except that a bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board of directors if neither the articles of incorporation nor a bylaw adopted by the shareholders authorizes the board of directors to adopt, amend or repeal that particular bylaw or the bylaws generally. The limitations set forth in this subsection on the ability of a corporation’s board of directors to amend or repeal the corporation’s bylaws shall not apply to any amendment to the extent that it is effected pursuant to G.S. 55-7-31(f).
  2. A corporation’s shareholders may amend or repeal the corporation’s bylaws even though the bylaws may also be amended or repealed by its board of directors.

History. 1955, c. 1371, s. 1; 1959, c. 1316, ss. 2, 3; 1973, c. 469, s. 4; 1989, c. 265, s. 1; 2018-45, s. 15.

Official Comment

In the absence of a provision in the articles of incorporation, the power to amend or repeal bylaws is shared by the board of directors and shareholders. Amendment of bylaws by the board of directors is often simpler and more convenient than amendment by the shareholders and avoids the expense of calling a shareholders’ meeting, a cost that may be significant in publicly held corporations. As used in this subchapter, “amendment” includes the adoption of a bylaw on a new subject as well as the alteration of existing bylaws.

Section 10.20(a) provides, however, that the power to amend or repeal bylaws may be reserved exclusively to the shareholders by an appropriate provision in the articles of incorporation. This option may appropriately be elected by a closely held corporation — for example, where control arrangements appear in the bylaws but one shareholder or group of shareholders has the power to name a majority of the board of directors. In such a corporation, the control arrangements may alternatively be placed in the articles of incorporation rather than the bylaws if there is no objection to making them a matter of public record.

Section 10.20(a)(1) provides that the power to amend or repeal the bylaws may be reserved to the shareholders “in whole or part.” This language permits the reservation of power to be limited to specific articles or sections of the bylaws or to specific subjects or topics addressed in the bylaws. It is important that the areas reserved exclusively to the shareholders be delineated clearly and unambiguously.

Section 10.20(a)(2) permits the shareholders to adopt or amend a bylaw and reserve exclusively to themselves the power to amend or repeal it later. This reservation must be expressed in the action by the shareholders adopting or amending the bylaw. This option is also included for the benefit of closely held corporations.

Section 10.20(b) states that the power of shareholders to amend or repeal bylaws exists even though that power is shared with the board of directors. This section makes inapplicable the holdings of a few cases under differently phrased statutes that shareholders do not have a general or residual power to amend bylaws or that the power to amend bylaws may be vested exclusively in the board of directors. Under the Model Act the shareholders always have the power to amend or repeal the bylaws.

Sections 10.21 and 10.22 limit the power of directors to adopt or amend supermajority provisions in bylaws.

North Carolina Commentary

The Model Act was modified to provide that a bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board of directors unless authorized by the articles of incorporation or a bylaw adopted by the shareholders. As modified, this section is consistent with former G.S. 55-16(a)(1).

Effect of Amendments.

Session Laws 2018-45, s. 15, effective October 1, 2018, added the last sentence in subsection (a).

Legal Periodicals.

For article discussing shareholder voting rights, see 71 N.C.L. Rev. 1 (1992).

§ 55-10-21.

Reserved for future codification purposes.

North Carolina Commentary

This section of the Model Act was omitted because the subject is covered in G.S. 55-7-27.

§ 55-10-22. Bylaw increasing quorum or voting requirement for directors or prohibiting a meeting of shareholders solely by remote participation.

  1. A bylaw that fixes a greater quorum or voting requirement for the board of directors or that prohibits a meeting of shareholders solely by means of remote communication may be amended or repealed as follows:
    1. If originally adopted by the shareholders, only by the shareholders, unless amendment or repeal by the board of directors is permitted pursuant to subsection (b) of this section.
    2. If originally adopted by the board of directors, either by the shareholders or by the board of directors.
  2. A bylaw adopted or amended by the shareholders that fixes a greater quorum or voting requirement for the board of directors may provide that it may be amended or repealed only by a specified vote of either the shareholders or the board of directors.
  3. The following applies to a bylaw referred to in subsection (a) of this section.
    1. It shall not be adopted by the board of directors by a vote less than a majority of the directors then in office.
    2. It shall not itself be amended by a quorum or vote of the directors less than the quorum or vote therein prescribed or prescribed by the shareholders pursuant to subsection (b) of this section.

History. 1955, c. 1371, s. 1; 1959, c. 1316, ss. 2, 3; 1973, c. 469, s. 4; 1989, c. 265, s. 1; 2021-162, s. 1(f).

Official Comment

Supermajority provisions relating to the board of directors may appear in the bylaws of the corporation without specific authorization in the articles of incorporation. See section 8.24(a) and (c). Like other bylaw provisions, they may be adopted either by the board of directors or by the shareholders. See section 10.20. Such provisions, further, may be amended or repealed by the board of directors or shareholders as provided in this section. This treatment of supermajority provisions for the board of directors should be contrasted with the treatment of analagous provisions for shareholders which must either be set forth in the articles of incorporation, section 7.27, or included in the bylaws when expressly authorized by the articles, section 10.21, and their adoption, amendment, or repeal must be approved by the shareholders by the vote specified in sections 7.27 and 10.21.

Supermajority provisions relating to the board of directors are usually part of control arrangements in closely held corporations, and section 10.22 is designed with this end in view. Its basic purpose is to ensure that control arrangements negotiated by shareholders for their own protection will not be prematurely terminated by a majority vote of the shareholders or the board of directors. Thus, section 10.22(a)(1) provides that if a supermajority requirement is originally imposed by a bylaw adopted by the shareholders, only the shareholders may amend or repeal it. Further, under section 10.22(b), that bylaw may impose restrictions on the manner in which it may be thereafter amended or repealed by the shareholders. On the other hand, if a supermajority requirement is originally imposed in a bylaw adopted by the board of directors, that bylaw may be amended either by the board of directors or shareholders (see section 10.22(a)(2)), but if it is to be amended by the board of directors, section 10.22(c) requires approval by the supermajority requirement then being imposed or amended, whichever is greater. This requirement is analogous to that imposed on supermajority amendments appearing in the articles of incorporation. See section 7.27. For an example of the application of this language, see the Official Comment to section 7.27.

North Carolina Commentary

The Model Act was modified in this section to conform to the provisions of G.S. 55-7-27.

Editor’s Note.

Session Laws 2021-162, s. 6, provides, in part: “This act is effective when it becomes law [September 20, 2021]. Sections 1, 2, and 3 of this act apply to meetings noticed on or after that date. Remote shareholder, policyholder, and member meetings noticed before the effective date of this act as a result of the state of emergency declared by Executive Order No. 116 on March 10, 2020, and complying with any subsequent executive orders authorizing remote shareholder, policy holder, or member meetings shall be deemed in compliance with this act. ....”

Session Laws 2021-162, s. 5, is severability clause.

Effect of Amendments.

Session Laws 2021-162, s. 1(f), rewrote the section heading and rewrote the section. For effective date and applicability, see editor’s note.

Article 11. Merger and Share Exchange.

§ 55-11-01. Merger.

  1. One or more corporations may merge into another corporation if the board of directors of each corporation adopts and its shareholders (if required by G.S. 55-11-03) approve a plan of merger.
  2. The plan of merger shall set forth all of the following:
    1. The name of each corporation planning to merge and the name of the surviving corporation into which each other corporation plans to merge.
    2. The terms and conditions of the merger.
    3. The manner and basis of converting the shares of each corporation into shares, obligations, or other securities of the surviving or any other corporation, or into cash or other property in whole or part, or of cancelling the shares.
  3. The plan of merger may set forth:
    1. Amendments to the articles of incorporation of the surviving corporation; and
    2. Other provisions relating to the merger.
  4. The provisions of the plan of merger, other than the provisions referred to in subdivisions (b)(1) and (c)(1) of this section, may be made dependent on facts objectively ascertainable outside the plan of merger if the plan of merger sets forth the manner in which the facts will operate upon the affected provisions. The facts may include any of the following:
    1. Statistical or market indices, market prices of any security or group of securities, interest rates, currency exchange rates, or similar economic or financial data.
    2. A determination or action by the corporation or by any other person, group, or body.
    3. The terms of, or actions taken under, an agreement to which the corporation is a party, or any other agreement or document.

History. 1925, c. 77, s. 1; 1939, c. 5; 1943, c. 270; G.S., s. 55-165; 1955, c. 1371, s. 1; 1969, c. 751, s. 37; 1973, c. 469, s. 31; 1989, c. 265, s. 1; 2005-268, s. 16; 2018-45, s. 16.

Official Comment

  1. Statutory mergers
  2. Equivalent nonstatutory transactions

Section 11.01(a) authorizes a statutory merger, to be accomplished by the adoption of a plan of merger under section 11.01(b), approval of the transaction by the shareholders (if required by section 11.03), and filing articles of merger under section 11.05. Upon the effective date of the merger, the surviving corporation becomes vested with all the assets of the disappearing corporations and becomes subject to their liabilities.

Under the Model Act there are virtually no restrictions or limitations on the terms of a statutory merger. Shareholders of the disappearing corporations may receive securities of the surviving corporation, securities of a third corporation, e.g., shares issued by the parent of the surviving or disappearing corporation (which may be publicly traded and marketable while the shares of the surviving or disappearing corporation are not), or cash or other property (a “cash” or “cash-out” merger). Some of the holders of a single class of shares may be required to accept securities or properties while the remaining holders may be compelled to accept different securities, property, or cash. The capitalization of the surviving corporation may be restructured in the merger, or its articles of incorporation may be amended by the articles of merger in any way deemed appropriate. Any other provisions considered necessary or desirable with respect to the merger may be included in the plan of merger.

Merger transactions may give rise to voting by separate voting groups of shareholders under section 11.03(f), and dissenting shareholders may have dissenters’ rights under chapter 13.

Courts have held that merger transactions that are formally authorized by the procedures set forth in this chapter may in some circumstances constitute a breach of duty to minority shareholders where the effect of the transaction is to eliminate them from further equity participation in the enterprise. See McBride, “Delaware Corporate Law: Judicial Scrutiny of Mergers — The Aftermath of Singer v. Magnavox Co. ,” 33 BUS. LAW. 2231 (1978). In Delaware, case law establishes that these transactions must be fully disclosed and entirely fair to the minority shareholders. See Singer v. Magnavox Co. , 380 A.2d 969 (Del. 1977); Weinberger v. UOP, Inc. , 457 A.2d 701 (Del. 1983); Harman v. Masoneilan International, Inc. , 442 A.2d 487 (Del. 1982).

A transaction may have the same economic effect as a statutory merger even though it is cast in the form of a nonstatutory transaction. For example, assets of the disappearing corporations may be sold for consideration in the form of shares of the surviving corporation, followed by the distribution of those shares by the disappearing corporations to their shareholders and their subsequent dissolution. Transactions have sometimes been structured in nonstatutory form for tax reasons or in an effort to avoid some of the consequences of a statutory merger, particularly appraisal rights to dissenting shareholders. Faced with these transactions, a few courts have developed or accepted the “de facto merger” concept which, to some uncertain extent, grants to dissenting shareholders the rights they would have had if the transaction had been structured as a statutory merger. See Folk, “De Facto Mergers in Delaware: Hariton v. Arco Electronics, Inc. ,” 49 VA. L. REV. 1261 (1963). These problems should not occur under the Model Act since the procedural requirements for authorization and consequences of various types of transactions are largely standardized. For example, dissenters’ rights are granted not only in mergers but also in share exchanges, in sales of all or substantially all the corporate assets, and in amendments to articles of incorporation that significantly affect rights of shareholders.

REVISED NORTH CAROLINA COMMENTARY 2018

Article 11 eliminates all references to statutory consolidation because of the infrequent use of the consolidation form of combination, in which all corporate parties to the combination disappear and an entirely new corporation is created, and because, if a new entity is desirable, it may be created before the merger and the disappearing entities may merge into it.

The third sentence of the second paragraph of the “Official Comment” to Section 11.01 of the Model Act indicates that a plan of merger can discriminate among holders of shares of the same class in the kind of property they receive in a merger. The drafters believed that this sentence does not reflect the current law in North Carolina. They believed that the current law does not permit discrimination among the holders of shares of a single class that are similarly situated in the kind of property that can be received in a merger; all the shares of a single class must be treated the same, both in value and kind, for similarly situated shareholders. Therefore, the drafters note their disagreement with this sentence in the “Official Comment.” But see G.S. 55-6-24(b) (which expressly permits discrimination among holders of a single class or series of shares in certain shareholder rights plans).

There are circumstances where shares of a single class are not similarly situated. For example, Corporation A and/r its wholly-owned subsidiaries may own a portion of the shares of common stock of Corporation B, while the remaining shares of common stock of Corporation B are owned by a number of other holders. Corporation A and Corporation B may wish to engage in a merger transaction, pursuant to which Corporation A will acquire all of the shares of Corporation B not already owned by Corporation A and/r its wholly-owned subsidiaries (for example in a triangular merger) and the other holders of Corporation B shares will receive a specified merger consideration for their shares. Under such circumstances, Corporation A (and its wholly-owned subsidiaries) and the other holders of Corporation B stock are not similarly situated and there is no reason for them to be treated the same, so long as all of the other holders are treated equally and do not receive merger consideration that is of lesser value than any received by Corporation A or its wholly-owned subsidiaries. Accordingly, under such circumstances, the plan of merger should properly be able to provide that the shares of Corporation B held by Corporation A and its wholly-owned subsidiaries may be cancelled (and Corporation A and its wholly-owned subsidiaries not receive any merger consideration for such shares) and that the shares held by the other holders of Corporation B shares may receive the specified merger consideration.

This section is not intended to change the current law in North Carolina under which shareholders may elect to receive alternative forms of consideration (e.g. cash or shares) and proration is provided if one of the alternatives is oversubscribed.

Effect of Amendments.

Session Laws 2005-268, s. 16, effective October 1, 2005, added subsection (d).

Session Laws 2018-45, s. 16, effective October 1, 2018, substituted “shall set forth all of the following:” for “must set forth:” in subsection (b); substituted “part, or of cancelling the shares” for “part” in subdivision (b)(3); and made minor stylistic changes throughout subsection (b).

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under prior law.

Statute Controls. —

Where two corporations enter into an agreement for their union and the continuation of business under the name of one with the combined assets of both, the statute controls as to whether there is a merger or a consolidation. Carolina Coach Co. v. Hartness, 198 N.C. 524, 152 S.E. 489, 1930 N.C. LEXIS 398 (1930).

Merger changed the capitalization of a corporation and a corporation’s approval of the merger pursuant to G.S. 55-11-01 to 55-11-10 violated the terms of its option agreement with a consultant who had a five-year option to purchase 50 percent of its shares; the corporation’s principal was also liable for the breach because he voluntarily participated in the merger knowing that it would extinguish the consultant’s stock options, and he was the sole shareholder and director of the corporation. Lee v. Scarborough, 164 N.C. App. 357, 595 S.E.2d 729, 2004 N.C. App. LEXIS 812 (2004).

Breach of Stock Option and Restriction Agreement. —

Trial court properly granted partial summary judgment to a businessman against a shareholder and a corporation because the merger of a company into the corporation without any prior notice to or consent by the businessman resulted in a breach of a stock option and restriction agreement between the businessman and the company and its sole shareholder, as the merger clearly effected a change in the capitalization of the company. Lee v. Scarborough, 162 N.C. App. 674, 592 S.E.2d 43, 2004 N.C. App. LEXIS 259, op. withdrawn, sub. op., 164 N.C. App. 357, 595 S.E.2d 729, 2004 N.C. App. LEXIS 812 (2004).

Shareholder Vote Not Required for Share Exchange. —

Board of directors of a bank was not required to submit a share exchange to the shareholders for a vote when the bank merged with another bank because the transaction was not compulsory on any owners of the acquired shares as they were issued directly to the other bank. There were no prior-owners of the acquired shares, and the other bank provided consideration to the bank in the form of the other bank’s shares. Ehrenhaus v. Baker, 216 N.C. App. 59, 717 S.E.2d 9, 2011 N.C. App. LEXIS 2161 (2011).

§ 55-11-02. Share exchange.

  1. A corporation may acquire all of the outstanding shares of one or more classes or series of another corporation if the board of directors of each corporation adopts and its shareholders (if required by G.S. 55-11-03) approve the exchange.
  2. The plan of exchange must set forth:
    1. The name of the corporation whose shares will be acquired and the name of the acquiring corporation;
    2. The terms and conditions of the exchange;
    3. The manner and basis of exchanging the shares to be acquired for shares, obligations, or other securities of the acquiring or any other corporation or for cash or other property in whole or part.
  3. The plan of exchange may set forth other provisions relating to the exchange.
  4. The provisions of the plan of share exchange, other than the provision required by subdivision (b)(1) of this section, may be made dependent on facts objectively ascertainable outside the plan of share exchange if the plan of share exchange sets forth the manner in which the facts will operate upon the affected provisions. The facts may include any of the following:
    1. Statistical or market indices, market prices of any security or group of securities, interest rates, currency exchange rates, or similar economic or financial data.
    2. A determination or action by the corporation or by any other person, group, or body.
    3. The terms of, or actions taken under, an agreement to which the corporation is a party, or any other agreement or document.
  5. This section does not limit the acquisition of all or part of the shares of one or more classes or series of a corporation through a voluntary exchange or otherwise.

History. 1989, c. 265, s. 1; 2005-268, s. 17.

Official Comment

Section 11.02 establishes a procedure by which a direct exchange of shares for cash or other consideration in corporate combinations may be effected under the same safeguards applicable to statutory mergers or similar transactions. A share exchange under section 11.02 is binding upon all shareholders of the acquired class or series of shares.

It is often desirable to effect a reorganization or combination so that the corporation being acquired does not go out of existence but becomes a subsidiary of the acquiring corporation or holding company, the securities of which are issued as part of the transaction. These objectives often are particularly important in the formation of holding company systems for, or for the acquisition of, insurance companies and banks, but are not limited to these transactions. In the absence of a share exchange procedure, this kind of a transaction often may be accomplished only by the process of a “reverse triangular merger”: the formation of a new subsidiary of the acquiring or holding company, followed by a merger of that subsidiary into the corporation to be acquired in which securities of the new subsidiary’s parent are exchanged for securities of the corporation to be acquired. Section 11.02 provides a straightforward procedure to accomplish the same end.

Under section 11.02, all shares of a particular class or series of shares must be acquired. However, shares of one or more classes or series may be excluded from the plan or may be included on different bases. After the plan is adopted and approved by the shareholders as required by section 11.03, it is binding on all holders of shares of the class or series to be acquired; members of the class or series, however, have the right to dissent under chapter 13.

It is not necessary that a share exchange under section 11.02 be on a share-for-share basis. The consideration for the shares being acquired may be “shares, obligations, or other securities of the acquiring or any other corporation or . . . cash or other property in whole or part.”

Section 11.02(c) is designed to make it clear that the mandatory exchange provided by section 11.02 does not affect the power of corporations to acquire shares by voluntary exchange or otherwise by agreement with the shareholders.

North Carolina Commentary

This section introduces a concept that is new to North Carolina, i.e., a share exchange, which is defined as a transaction by which a corporation becomes the owner of all the outstanding shares of one or more classes of another corporation by an exchange that is compulsory on all owners of the acquired shares.

The same kind of transaction that is accomplished by a share exchange has in the past been accomplished by the process of a “reverse triangular merger,” which is the formation of a new subsidiary of the acquiring company, followed by a merger of that subsidiary into the corporation to be acquired in which the securities of the new subsidiary’s parent are exchanged for securities of the corporation to be acquired.

Effect of Amendments.

Session Laws 2005-268, s. 17, effective October 1, 2005, added subsection (c1); and in subsection (d), substituted “the acquisition of” for “the power of a corporation to acquire” and “a corporation” for “another corporation.”

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

§ 55-11-03. Action on plan.

  1. After adopting a plan of merger or share exchange, the board of directors of each corporation party to the merger, and the board of directors of the corporation whose shares will be acquired in the share exchange, shall submit the plan of merger (except as provided in subsections (g) and (j) of this section and in G.S. 55-11-04) or share exchange for approval by its shareholders.
  2. The following requirements shall be met for a plan of merger or share exchange to be approved:
    1. The board of directors shall recommend that the shareholders approve the plan of merger or share exchange or, in the case of an offer referred to in subdivision (2) of subsection (j) of this section, that the shareholders tender their shares to the offeror in response to the offer, unless one of the following circumstances exist, in which event the board of directors shall communicate to the shareholders the basis for not recommending that the shareholders approve the plan of merger or share exchange or tender their shares to the offeror in response to the offer at the time it submits to the shareholders the plan of merger or share exchange or communicates with the shareholders regarding an offer referred to in subdivision (2) of subsection (j) of this section:
      1. The board of directors determines that, because of a conflict of interest or other special circumstances, it should not make a recommendation that the shareholders approve the plan of merger or share exchange or, in the case of an offer referred to in subdivision (2) of subsection (j) of this section, that the shareholders tender their shares to the offeror in response to the offer.
      2. G.S. 55-8-26 applies.
    2. The shareholders entitled to vote must approve the plan of merger or share exchange.
  3. The board of directors may condition its submission of the proposed merger or share exchange on any basis.
  4. The corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders’ meeting in accordance with G.S. 55-7-05. The notice must state that the purpose, or one of the purposes, of the meeting is to consider the plan of merger or share exchange and contain or be accompanied by a copy or summary of the plan.
  5. Unless this Chapter, the articles of incorporation, a bylaw adopted by the shareholders, or the board of directors (acting pursuant to subsection (c)) require a greater vote, the plan of merger or share exchange to be authorized must 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 and, for the purpose of Article 9 or any provision in the articles of incorporation or bylaws adopted prior to July 1, 1990, a merger shall be deemed to include a share exchange. If any shareholder of a merging corporation has or will have personal liability for any existing or future obligation of the surviving corporation in the merger solely as a result of owning one or more shares in the surviving corporation, then, in addition to the requirements of this subsection, authorization of the plan of merger by the merging corporation shall require the affirmative vote or written consent of that shareholder.
  6. Separate voting by voting groups is required for the following:
    1. On a plan of merger if the plan contains a provision that, if contained in a proposed amendment to articles of incorporation, would require action by one or more separate voting groups on the proposed amendment under G.S. 55-10-04, except where the consideration to be received in exchange for the shares of that group consists solely of cash.
    2. On a plan of share exchange by each class or series of shares to be acquired in the exchange, with each class or series constituting a separate voting group.
  7. Unless the articles of incorporation provide otherwise, approval by the surviving corporation’s shareholders of a plan of merger is not required if all of the following conditions are met:
    1. Except for amendments permitted by G.S. 55-10-02, its articles of incorporation will not be changed.
    2. Each shareholder of the corporation whose shares were outstanding immediately before the effective date of the merger will hold the same shares, with identical preferences, limitations, and relative rights, immediately after the effective date of the merger.
    3. The number of voting shares outstanding immediately after the merger, plus the number of voting shares issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights and warrants issued pursuant to the merger), will not exceed by more than twenty percent (20%) the total number of voting shares of the surviving corporation outstanding immediately before the merger.
    4. The number of participating shares outstanding immediately after the merger, plus the number of participating shares issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights and warrants issued pursuant to the merger), will not exceed by more than twenty percent (20%) the total number of participating shares outstanding immediately before the merger.
  8. As used in subsection (g):
    1. “Participating shares” means shares that entitle their holders to participate without limitation in distributions.
    2. “Voting shares” means shares that entitle their holders to vote unconditionally in elections of directors.
  9. After a plan of merger or share exchange is authorized, but before the articles of merger or share exchange become effective, the plan of merger or share exchange (i) may be amended as provided in the plan of merger or share exchange, or (ii) may be abandoned, subject to any contractual rights, as provided in the plan of merger or share exchange or, if there is no such provision, as determined by the board of directors without further shareholder action.
  10. Unless the articles of incorporation otherwise provide, approval by the corporation’s shareholders of a plan of merger or share exchange is not required if all of the following requirements are met:
    1. The plan of merger or share exchange expressly (i) permits or requires the merger or share exchange to be effected under this subsection and (ii) provides that, if the merger or share exchange is to be effected under this subsection, the merger or share exchange shall be effected as soon as practicable following the satisfaction of the requirement set forth in subdivision (6) of this subsection.
    2. Another party to the merger or share exchange, or a parent of another party to the merger or share exchange, makes an offer to purchase, on the terms provided in the plan of merger or share exchange, any and all of the outstanding shares of the corporation that, absent this subsection, would be entitled to vote on the plan of merger or share exchange, except that the offer may exclude shares of the corporation that are owned at the commencement of the offer by the corporation, the offeror, or any parent of the offeror, or by any wholly owned subsidiary of the corporation, the offeror, or any parent of the offeror.
    3. The offer discloses that the plan of merger or share exchange provides that the merger or share exchange shall be effected as soon as practicable following the satisfaction of the requirement set forth in subdivision (6) of this subsection and that the shares of the corporation that are not tendered in response to the offer shall be treated as set forth in subdivision (8) of this subsection.
    4. The offer remains open for at least 10 days.
    5. The offeror purchases all shares properly tendered in response to the offer and not properly withdrawn.
    6. Any or all of the following types of shares are collectively entitled to cast at least the minimum number of votes on the merger or share exchange that, absent this subsection, would be required by Articles 9 and 11 of this Chapter and by the articles of incorporation of the corporation for the approval of the merger or share exchange by the shareholders and by any other voting group entitled to vote on the merger or share exchange at a meeting at which all shares entitled to vote on the approval were present and voted:
      1. Shares purchased by the offeror in accordance with the offer.
      2. Shares otherwise owned by the offeror or by any parent or wholly owned subsidiary of the offeror.
      3. Shares subject to an agreement to be transferred, contributed, or delivered to the offeror, any parent of the offeror, or any wholly owned subsidiary of the offeror in exchange for stock or other equity interests in the offeror, parent, or subsidiary.
    7. The offeror or a wholly owned subsidiary of the offeror merges with or into, or effects a share exchange in which it acquires shares of, the corporation.
    8. Each outstanding share of each class or series of shares of the corporation that the offeror is offering to purchase in accordance with the offer, and that is not purchased in accordance with the offer, is to be converted in the merger into, or into the right to receive, or is to be exchanged in the share exchange for, or for the right to receive, the same amount and kind of securities, interests, obligations, rights, cash, or other property to be paid or exchanged in accordance with the offer for each share of that class or series of shares that is tendered in response to the offer, except that shares of the corporation that are owned by the corporation or that are described in sub-subdivisions b. and c. of subdivision (6) of this subsection need not be converted into or exchanged for the consideration described in this subdivision.
  11. The following definitions apply in subsection (j) of this section:
    1. Offer. — The offer referred to in subdivision (2) of subsection (j) of this section.
    2. Offeror. — The person making the offer.
    3. Parent. — A person that owns, directly or indirectly, through one or more wholly owned subsidiaries, all of the outstanding shares of or interests in an entity.
    4. Purchased. — Shares tendered in response to an offer are deemed to have been purchased in accordance with the offer at the earliest time as of which (i) the offeror has irrevocably accepted those shares for payment and (ii) either of the following has occurred:
      1. In the case of shares represented by certificates, the offeror, or the offeror’s designated depository or other agent, has physically received the certificates representing those shares.
      2. In the case of shares without certificates, those shares have been transferred into the account of the offeror or its designated depository or other agent, or an agent’s message relating to those shares has been received by the offeror or its designated depository or other agent.
    5. Wholly owned subsidiary of a person. — An entity of or in which that person owns, directly or indirectly, through one or more wholly owned subsidiaries, all of the outstanding shares or other interests.

History. 1925, c. 77, s. 1; 1939, c. 5; 1943, c. 270; G.S., s. 55-165; 1955, c. 1371, s. 1; 1959, c. 1316, s. 37; 1973, c. 469, s. 33; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.17; 1993, c. 552, s. 14; 2005-268, ss. 18, 19, 20; 2013-153, s. 9; 2018-45, s. 17.

Official Comment

  1. Introduction
  2. When surviving corporation shareholder approval is not required
  3. Voting by multiple voting groups
  4. Application of the 20-percent requirement
  5. Abandonment of merger or share exchange

Section 11.03 requires mergers or share exchanges to be approved by the shareholders as follows:

In the case of a merger:

  1. the transaction must always be approved by the shareholders of the disappearing corporation; and
  2. the transaction must be approved by the shareholders of the surviving corporation if the number of voting or participating shares is increased by more than 20 percent as a result of the transaction.

(2) the transaction must be approved by the shareholders of the surviving corporation if the number of voting or participating shares is increased by more than 20 percent as a result of the transaction.

In the case of a share exchange:

(1) the transaction must always be approved by the shareholders of the corporation whose shares are being acquired; and

(2) the transaction need not be approved by the shareholders of the corporation acquiring the shares.

(2) the transaction need not be approved by the shareholders of the corporation acquiring the shares.

Section 11.03 requires the board of directors to propose the plan of merger or sale exchange and then submit the proposal to the shareholders. When proposing a plan of merger or share exchange, the board of directors must make a recommendation to the shareholders that the plan be approved, unless it determines that because of conflict of interest or other special circumstances it should make no recommendation. If the board of directors so determines, it must describe the conflict or circumstances, and communicate the basis for its determination, when presenting the proposed plan of merger or share exchange to the shareholders.

Section 11.03(c) permits the board of directors to condition its submission of a plan of merger or share exchange on any basis; for example, the board may direct that the plan is approved only if it receives a favorable vote of a specified percentage of the disinterested shareholders voting on the plan or that shareholders holding no more than a specified number or percentage of shares file notice of intent to demand payment under chapter 13. See the discussion of conditional submissions in the Official Comment to section 10.03.

A plan of merger or share exchange, to be approved, must be approved by each voting group entitled to vote on the merger by a majority of all the votes entitled to be cast on the plan. This is a greater vote than that required for ordinary matters under section 7.25. The articles of incorporation of either corporation, however, may require a greater vote by one or more voting groups of that corporation, and if the transaction involves an amendment to the articles of incorporation of the surviving corporation which affects the voting requirements for future amendments, the transaction must also be approved by the vote required by section 7.27. See section 11.03(e). In addition, voting by more than one voting group may be required by section 11.03(f) or by the articles of incorporation. Finally, the board of directors may require a greater vote or a vote by voting groups under their power to make conditional submissions to shareholders described above. The articles of incorporation or the board of directors, however, may only require a vote by separate voting groups in addition to that otherwise required by this Act.

Only shareholders who have the right to vote on a merger or share exchange under section 11.03 have the right to dissent and obtain payment for their shares under chapter 13.

Section 11.03(g) describes when approval by the shareholders of the surviving corporation is not required. The theory behind this subsection is that shareholders’ votes should be required only if the transaction fundamentally alters the character of the enterprise or substantially reduces the shareholders’ participation in voting or profit distribution. It is believed that the transactions for which shareholder approval is not required by subsection (g) do not alter the investors’ prospects any more than many other management decisions, and thus should not require a shareholder vote. In particular, the 20 percent requirement of subsections (g)(3) and (4) is broadly consistent with the statutes of several states, including Delaware (20 percent), Michigan (20 percent), and Pennsylvania (15 percent), and also with the New York Stock Exchange requirement that shareholders must be consulted if the number of outstanding shares is to be increased by more than 18.5 percent.

The requirement that shareholders of the surviving corporation in a statutory merger have a right to vote if the increase in the number of shares exceeds 20 percent may be avoided by arranging the transaction in the form of a merger involving a subsidiary of the acquiring corporation or as a share exchange under section 11.02. This anomaly reflects a compromise among basically conflicting points of view.

The 20 percent requirement is applicable only if the corporation has available enough authorized shares to permit it to issue the shares without amending its articles of incorporation to increase authorized capital. If it must amend its articles of incorporation to authorize the shares necessary to complete the transaction, a shareholder vote on the amendment will be necessary in all cases. See section 10.03.

Section 11.03(f)(1) requires voting by voting groups on a plan of merger if the plan contains a provision that “if contained in a proposed amendment to articles of incorporation, would require action by one or more separate voting groups on the proposed amendment.” See section 10.04. Under this provision, voting by voting groups may be required for one or more classes or series of shares of the surviving corporation as well as for one or more classes or series of the disappearing corporation.

Section 11.03(f)(2) requires voting by voting groups in a share exchange, with each class or series of shares that is to be acquired in a share exchange entitled to vote as a separate voting group. This provision protects all classes of shareholders when more than one class or series of shares are being acquired on different terms.

In a merger transaction that involves an increase in shares of more than 20 percent, section 11.03(g) requires a shareholder vote in order to prevent significant dilution without the approval of the shareholders involved. Sections 11.03(g)(3) and (4) separately apply the 20-percent test to increases in the “voting shares” (as defined in section 11.03(h)(2)) and increases in “participating shares” (as defined in section 11.03(h)(1)). If either type of shares is increased by more than 20 percent in the merger transaction, the transaction must be approved by the shareholders.

Under the definitions in subsections (h)(1) and (2), the 20-percent requirement may be applied to shares with preferential rights if they are either voting or fully participating, and to deferred or contingent shares issued as a result of the merger. On the other hand, it is typically not applicable to shares issuable under antidilution clauses to balance share splits or share dividends; these shares would not become issuable “pursuant to the merger,” but by virtue of later corporate action authorizing the split or dividend.

Sections 11.03(g)(3) and (4) only determine when a shareholders’ vote is required; they do not relate to voting by voting groups. Whether or not a class or series of shares is entitled to vote as a separate voting group is determined by section 11.03(f).

Section 11.03(i) makes it clear that the corporations may abandon without shareholder approval a merger or share exchange even though it has been previously approved by the shareholders. Abandonment under this section does not affect contract rights of third parties. The plan, however, may require that abandonments be approved by shareholders before they are effective.

Amended North Carolina Commentary

This section essentially follows the same pattern as former G.S. 55-108 and 55-108.1, except it does not carry forward the provision in former G.S. 55-108(b) allowing nonvoting shareholders to vote on mergers. However, the corporation must give nonvoting shareholders notice of the proposed shareholders’ meeting so that they can act if their rights will be adversely affected. The Model Act’s requirement that notice be given to nonvoting shareholders was retained in this section, in contrast to G.S. 55-10-03, involving shareholders’ meetings to consider amendments to the articles of incorporation, because a proposed merger or share exchange is a fundamental change, whereas most amendments to the articles of incorporation are not. It should be noted that the last sentence in the first section of the Official Comment is not correct for this Act. That sentence indicates that nonvoting shareholders have no right to dissent and obtain payment for their shares in a merger or share exchange. G.S. 55-13-02(a)(1) and (2) give nonvoting shareholders this right.

The Model Act was modified in subsection (b) to conform to changes made in G.S. 55-10-03.

The Model Act was modified in subsection (e) by inserting between the word “incorporation” and the word “or” the words “a bylaw adopted by the shareholders.” This modification continues the existing concept of allowing a bylaw adopted by the shareholders to impose a higher quorum or voting requirement. The subsection was further amended by inserting at the end a clause providing that for purposes of Article 9 or already existing provisions in articles of incorporation or bylaws, a “merger” includes a share exchange.

Subdivision 11.03(f)(1) of the Model Act requires voting by voting groups on a plan of merger if the plan contains a provision that “if contained in a proposed amendment to articles of incorporation, would require action by one or more separate voting groups on the proposed amendment.” Under this provision, voting by voting groups may be required for one or more classes or series of shares of the surviving corporation as well as for one or more classes or series of the disappearing corporation. This provision was modified in subdivision (f)(1) to create an exception where the consideration to be received in exchange for the shares of the voting group consists solely of cash.

The Model Act was modified in subdivision (f)(2) by substituting “to be acquired” for “included.”

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended (i) to require the approval of each shareholder who will have personal liability for any corporate obligation solely as a result of owning shares in the surviving corporation, (ii) to allow articles of incorporation to require shareholder approval of a merger for which G.S. 55-11-03(g) would not otherwise require shareholder approval, and (iii) to allow a plan of merger to be amended if the plan of merger makes provision for amendment.

Supplemental North Carolina Commentary (2018)

Subsections (a) and (b) were amended and subsections (j) and (k) were added, effective October 1, 2018, to permit a public company target to enter into a “two-step” merger agreement, where the first step is a tender offer by the acquiror for the public company shares and the second step is a merger in which the public company shares not tendered are converted into the same merger consideration offered in the tender offer. The provisions are based on 2016 changes to Model Act Subsections 11.04(b) and (j). Appraisal rights generally would not be available with respect to a merger involving public company shares pursuant to G.S. 55-13-02(b)(1), but if the transaction was an interested transaction, appraisal rights would be available pursuant to G.S. 55-13-02(b)(4). Under the “two-step” merger agreement procedure, shareholders who do not tender their shares would have the same rights to seek appraisal under Article 13 of this Chapter that they would in a merger that was approved at a meeting of shareholders.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2005-268, ss. 18 through 20, effective October 1, 2005, in subsection (e) substituted “vote” for “vote or a vote by voting groups” and added the last sentence; rewrote subsection (g) and subdivision (g)(1); made minor stylistic changes in subdivisions (g)(2) and (g)(3); and rewrote subsection (i).

Session Laws 2013-153, s. 9, effective January 1, 2014, substituted “The following requirements shall be met for” for “For” in subsection (b); rewrote subdivision (b)(1); added “of merger or share exchange” in subdivision (b)(2); added “for the following” in subsection (f); and made a minor punctuation change in subdivision (f)(1).

Session Laws 2018-45, s. 17, effective October 1, 2018, substituted “subsections (g) and (j) of this section and in G.S. 55-11-04” for “subsection (g)” in subsection (a); rewrote subdivision (b)(1); and added subsections (j) and (k).

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For recent development, “In re Wachovia Shareholders Litigation: The Case for the Common Benefit Doctrine,” see 84 N.C. L. Rev. 2066 (2006).

CASE NOTES

Failure to comply with the statutory procedures required for a corporate merger constitutes a breach of a director’s fiduciary duty as well as a breach of the majority stockholders’ duty to the minority. Clark v. B.H. Holland Co., 852 F. Supp. 1268, 1994 U.S. Dist. LEXIS 15486 (E.D.N.C. 1994).

Board of directors of a bank was not required to submit a share exchange to the shareholders for a vote when the bank merged with another bank because the transaction was not compulsory on any owners of the acquired shares as they were issued directly to the other bank. There were no prior-owners of the acquired shares, and the other bank provided consideration to the bank in the form of the other bank’s shares. Ehrenhaus v. Baker, 216 N.C. App. 59, 717 S.E.2d 9, 2011 N.C. App. LEXIS 2161 (2011).

§ 55-11-04. Merger between parent corporation and subsidiary or between subsidiaries.

  1. Subject to Article 9, a parent corporation owning shares of a domestic or foreign subsidiary corporation that carry at least ninety percent (90%) of the voting power of each class and series of the outstanding shares of the subsidiary corporation that have the current power to vote in the election of directors may merge the subsidiary into itself or into another such subsidiary without approval of the shareholders of the parent corporation unless the articles of incorporation of the parent corporation require approval of the shareholders or the plan of merger contains one or more amendments to the articles of incorporation of the parent corporation for which shareholder approval is required by G.S. 55-10-03, and without approval of the board of directors or shareholders of the subsidiary corporation unless the articles of incorporation of the subsidiary corporation require approval of the shareholders of the subsidiary corporation, or if the subsidiary is a foreign corporation, approval by the subsidiary’s board of directors or shareholders is required by the laws under which the subsidiary is organized. Subject to Article 9, a parent corporation owning shares of a domestic or foreign subsidiary corporation that carry at least ninety percent (90%) of the voting power of each class and series of the outstanding shares of the subsidiary corporation that have the current power to vote in the election of directors may merge itself into the subsidiary corporation without approval of the board of directors or shareholders of the subsidiary corporation unless the articles of incorporation of the subsidiary corporation provide otherwise, the plan of merger contains one or more amendments to the articles of incorporation of the subsidiary corporation for which shareholder approval is required by G.S. 55-10-03, or, if the subsidiary is a foreign corporation, approval by the subsidiary’s board of directors or shareholders is required by the laws under which the subsidiary is organized. Except as otherwise provided in this subsection, the provisions of G.S. 55-11-01 and G.S. 55-11-03 apply to any merger described in this subsection.
  2. If a merger is consummated without approval of the subsidiary corporation’s shareholders, the surviving corporation shall, within 10 days after the effective date of the merger, notify each shareholder of the subsidiary corporation as of the effective date of the merger, that the merger has become effective.
  3. Repealed by Session Laws 2005, c. 268, s. 21.
  4. Repealed by Session Laws 2005, c. 268, s. 21.
  5. Repealed by Session Laws 2005, c. 268, s. 21.
  6. The provisions of G.S. 55-13-02(b) do not apply to subsidiary corporations that are parties to mergers consummated under this section.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 37; 1973, c. 469, s. 33; 1989, c. 265, s. 1; 1997-485, s. 29; 2005-268, s. 21; 2006-226, s. 16(a); 2013-153, s. 10; 2018-45, s. 18.

Official Comment

Section 11.04(a) defines a “parent” corporation as one that owns at least 90 percent of the outstanding shares of each class of another corporation, and a “subsidiary” corporation as one whose shares are so owned. Section 11.04 permits merger of a subsidiary into its parent corporation upon adoption of a plan of merger by the board of directors of the parent alone. Separate action by the board of directors of the subsidiary is unnecessary because the share ownership of the parent corporation is normally sufficient to permit it to elect or remove the subsidiary’s board of directors.

Further, the merger transaction need not be approved by the shareholders of either corporation. Approval by the shareholders of the subsidiary is meaningless because the parent’s share ownership is sufficient to ensure the plan will be approved. Approval by the parent’s shareholders is also unnecessary because the transaction does not materially change their rights: the ownership of the parent corporation is being changed only from 90 percent indirect ownership to 100 percent direct ownership of the same assets, and no significant amendment of the parent’s articles of incorporation is being made. For the same reason, shareholders of the parent corporation do not have the right to dissent from the transaction under chapter 13.

Minority shareholders of the subsidiary corporation may receive shares, obligations, or other securities of the parent or any other corporation, or cash or other property in whole or in part in exchange for their shares. These shareholders are entitled to 30 days’ notice of the plan of merger before it is effectuated.

Shareholders of the subsidiary corporation have a right to dissent from the merger transaction under chapter 13. Courts have held that in some circumstances such a transaction may constitute a breach of duty owed by the parent corporation to the shareholders of the subsidiary. See Roland International Corp. v. Najjar, 407 A.2d 1032 (Del. 1979).

North Carolina Commentary

This section is substantially different from former G.S. 55-108.1 in that it permits a parent corporation to merge a 90% subsidiary into the parent without a vote of the minority shareholders of the subsidiary; but such minority shareholders would still have a right of dissent and appraisal. See G.S. 55-13-02(a)(1).

The Model Act was modified in this section by adding an introductory phrase to subsection (a) to provide that the section is subject to Article 9, and by specifying “copy or summary” in subsection (d) to parallel subsection (c).

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended (i) to provide that the articles of incorporation of a parent or subsidiary corporation may require shareholder approval for a merger for which this section would otherwise waive such approval, (ii) to waive approval by the subsidiary corporation’s board of directors unless the subsidiary corporation’s articles of incorporation require approval of the subsidiary corporation’s shareholders, and (iii) to require that notice of the merger be given to the subsidiary corporation’s shareholders (if the shareholders are not required to approve the merger) within ten days after the merger instead of providing notice at least 30 days before the merger.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2005-268, s. 21, effective October 1, 2005, rewrote subsections (a) and (b); and deleted subsections (c) through (e).

Session Laws 2006-226, s. 16(a), effective August 10, 2006, substituted “the surviving corporation” for “the parent corporation” in subsection (b).

Session Laws 2013-153, s. 10, effective January 1, 2014, substituted “between parents and subsidiary or between subsidiaries” for “with subsidiary” in the section heading; rewrote subsection (a); and substituted “G.S. 55-13-02(b)” for “G.S. 55-13-02(c)” in subsection (f).

Session Laws 2018-45, s. 18, effective October 1, 2018, inserted “corporation” in the section heading.

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

§ 55-11-05. Articles of merger or share exchange.

  1. After a plan of merger or a plan of share exchange for the acquisition of shares of a domestic corporation has been authorized as required by this Chapter, the surviving or acquiring corporation shall deliver to the Secretary of State for filing articles of merger or share  exchange.In the case of a merger, the articles of merger shall set forth (i) the name and state or country of incorporation of each merging corporation, (ii) the name of the merging corporation that will survive the merger and, if the surviving corporation is not authorized to transact business or conduct affairs in this State, a designation of its mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing address, (iii) any amendments to the articles of incorporation of the surviving corporation provided in the plan of merger if the surviving corporation is a domestic corporation, and (iv) a statement that the plan of merger has been approved by each merging corporation in the manner required by law.In the case of a share exchange, the articles of share exchange shall set forth (i) the name of the corporation whose shares will be acquired, (ii) the name and state or country of incorporation of the acquiring corporation, (iii) a designation of its mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing address if the acquiring corporation is not authorized to transact business or conduct affairs in this State, and (iv) a statement that the plan of share exchange has been approved by the corporation whose shares will be acquired and by the acquiring corporation in the manner required by law.
  2. If the plan of merger or share exchange is amended after the articles of merger or share exchange have been filed but before the articles of merger or share exchange become effective and any statement in the articles of merger or share exchange becomes incorrect as a result of the amendment, the surviving or acquiring corporation shall deliver to the Secretary of State for filing prior to the time the articles of merger or share exchange become effective an amendment to the articles of merger or share exchange correcting the incorrect statement. If the articles of merger or share exchange are abandoned after the articles of merger or share exchange are filed but before the articles of merger or share exchange become effective, the surviving or acquiring corporation shall deliver to the Secretary of State for filing prior to the time the articles of merger or share exchange become effective an amendment reflecting abandonment of the plan of merger or share exchange.
  3. A merger or share exchange takes effect when the articles of merger or share  exchange become effective.
  4. Certificates of merger shall also be registered as provided in G.S. 47-18.1.
  5. In the case of a merger pursuant to G.S. 55-11-07 or a share exchange pursuant to G.S. 55-11-07, references in subsections (a) and (a1) of this section to “corporation” shall include a domestic corporation, a domestic nonprofit corporation, a foreign corporation, and a foreign nonprofit corporation as applicable.

History. 1925, c. 77, s. 1; 1939, c. 5; 1943, c. 270; G.S., s. 55-165; 1955, c. 1371, s. 1; 1967, c. 823, s. 18; 1973, c. 469, s. 34; 1989, c. 265, s. 1; 1991, c. 645, s. 10(b); 2005-268, s. 22; 2006-226, s. 16(b); 2006-259, s. 14.5(a)-(b); 2006-264, s. 44(b).

Official Comment

The articles of merger or share exchange formally make the terms of the transaction a matter of public record and the effective date of the articles is the effective date of their filing unless a delayed effective date is utilized. See section 1.23. The articles of merger or share exchange must describe whether the plan was submitted to the vote of one or more voting groups of the participating corporations entitled to vote separately on the plan, and, if so, either the total vote in favor and against the plan or a statement that the plan was approved by at least the number of undisputed votes required to approve the merger or share exchange by each voting group of each participating corporation entitled to vote separately on the plan.

North Carolina Commentary

Former G.S. 55-109, relating to articles of merger and articles of consolidation, contained a cross-reference to G.S. 47-18.1, requiring the local registration of certificates of merger or consolidation with the register of deeds where title to real property is transferred by operation of law pursuant to the merger or consolidation. A similar cross-reference to G.S. 47-18.1 was therefore added to this section as subsection (c).

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended to delete the requirement that the plan of merger or plan of share exchange be included in the articles of merger or articles of share exchange except that identifying information about the corporations contained in the plan is required to be included in the articles plus, in the case of a merger, any amendments to the articles of incorporation of a surviving domestic corporation that are contained in the plan of merger. Other changes to this section clarify its application to mergers of domestic nonprofit corporations, foreign business corporations, and foreign nonprofit corporations with domestic business corporations and to share exchanges with foreign business corporations. In related changes, provisions requiring certain statements to be included in the articles of merger when a foreign business corporation or foreign nonprofit corporation is the surviving corporation are relocated to this section from G.S. 55-11-07 and 55-11-09, and provisions requiring certain statements to be included in the articles of share exchange when a foreign business corporation is the acquiring corporation are relocated to this section from G.S. 55-11-07.

Editor’s Note.

Session Laws 2006-264, s. 44(b), which amended subsection (d), was repealed by Session Laws 2006-259, s. 14.5(a).

Effect of Amendments.

Session Laws 2005-268, s. 22, effective October 1, 2005, rewrote subsection (a); added subsection (a1); in subsection (b), substituted “when” for “upon the effective date of” and added “become effective”; and added subsection (d).

Session Laws 2006-226, s. 16(b), as amended by Session Laws 2006-259, s. 14.5(b), effective August 10, 2006, substituted “merger pursuant to G.S. 55-11-07 or G.S. 55-11-09, or a share exchange pursuant to G.S. 55-11-07, references in subsections (a) and (a1)” for “merger or share exhange pursuant to G.S. 55-11-07 or G.S. 55-11-09, references in subsections (a) and (b)” in subsection (d).

§ 55-11-06. Effect of merger or share exchange.

  1. When a merger pursuant to G.S. 55-11-01, 55-11-04, 55-11-07, or 55-11-09, or 55-11-20 takes effect:
    1. Each other merging corporation merges into the surviving corporation and the separate existence of each merging corporation except the surviving corporation ceases.
    2. The title to all real estate and other property owned by each merging corporation is vested in the surviving corporation without reversion or impairment.
    3. The surviving corporation has all liabilities of each merging corporation.
    4. A proceeding pending by or against any merging corporation may be continued as if the merger did not occur or the surviving corporation may be substituted in the proceeding for a merging corporation whose separate existence ceases in the merger.
    5. If a domestic corporation survives the merger, its articles of incorporation are amended to the extent provided in the articles of merger.
    6. The shares of each merging corporation that are to be converted into shares, obligations, or other securities of the surviving or any other corporation or into the right to receive cash or other property are thereupon converted, and the former holders of the shares are entitled only to the rights provided to them in the plan of merger or, in the case of former holders of shares in a domestic corporation, any right they may have under Article 13 of this Chapter.
    7. If a foreign corporation or foreign nonprofit corporation survives the merger, it is deemed:
      1. To agree that it will promptly pay to shareholders of any merging domestic corporation exercising appraisal rights the amount, if any, to which they are entitled under Article 13 of this Chapter and otherwise to comply with the requirements of Article 13 as if it were a surviving domestic corporation in the merger.
      2. To agree that it may be served with process in this State in any proceeding for enforcement (i) of any obligation of any merging domestic corporation, (ii) of the appraisal rights of shareholders of any merging domestic corporation under Article 13 of this Chapter, and (iii) of any obligation of the surviving foreign corporation or foreign nonprofit corporation arising from the merger.
      3. To have appointed the Secretary of State as its agent for service of process in any proceeding for enforcement as specified in sub-subdivision b. of this subdivision. Service of process on the Secretary of State shall be made by delivering to, and leaving with, the Secretary of State, or with any clerk authorized by the Secretary of State to accept service of process, duplicate copies of the process and the fee required by G.S. 55-1-22(b). Upon receipt of service of process on behalf of a surviving foreign corporation or foreign nonprofit corporation in the manner provided for in this section, the Secretary of State shall immediately mail a copy of the process by registered or certified mail, return receipt requested, to the surviving foreign corporation or foreign nonprofit corporation. If the surviving foreign corporation or foreign nonprofit corporation is authorized to transact business or conduct affairs in this State, the address for mailing shall be its principal office designated in the latest document filed with the Secretary of State that is authorized by law to designate the principal office, or, if there is no principal office on file, its registered office. If the surviving foreign corporation or foreign nonprofit corporation is not authorized to transact business or conduct affairs in this State, the address for mailing shall be the mailing address designated pursuant to G.S. 55-11-05(a).
  2. When a share exchange for the acquisition of shares of a domestic corporation pursuant to G.S. 55-11-02 or G.S. 55-11-07 takes effect:
    1. The shares of the acquired corporation are exchanged as provided in the plan of share exchange, and the former holders of the shares are entitled only to the exchange rights provided in the plan of share exchange or any right they may have under Article 13 of this Chapter.
    2. If the acquiring corporation is not a domestic corporation, it is deemed to agree that it will promptly pay to shareholders of the acquired corporation exercising appraisal rights the amount, if any, to which they are entitled under Article 13 of this Chapter and otherwise to comply with the requirements of Article 13 as if it were an acquiring domestic corporation in the share exchange.
    3. If the acquiring corporation is not a domestic corporation, the acquiring corporation is deemed:
      1. To agree that it may be served with process in this State in any proceeding for enforcement (i) of the appraisal rights of shareholders of the acquired corporation under Article 13 of this Chapter and (ii) of any obligation of the acquiring corporation arising from the share exchange; and
      2. To have appointed the Secretary of State as its agent for service of process in any proceeding for enforcement as specified in sub-subdivision a. of this subdivision. Service of process on the Secretary of State shall be made by delivering to, and leaving with, the Secretary of State, or with any clerk authorized by the Secretary of State to accept service of process, duplicate copies of the process and the fee required by G.S. 55-1-22(b). Upon receipt of service of process on behalf of an acquiring corporation in the manner provided for in this section, the Secretary of State shall immediately mail a copy of the process by registered or certified mail, return receipt requested, to the acquiring corporation. If the acquiring corporation is authorized to transact business or conduct affairs in this State, the address for mailing shall be its principal office designated in the latest document filed with the Secretary of State that is authorized by law to designate the principal office or, if there is no principal office on file, its registered office. If the acquiring corporation is not authorized to transact business or conduct affairs in this State, the address for mailing shall be the mailing address designated pursuant to G.S. 55-11-05(a).
  3. In the case of a merger pursuant to G.S. 55-11-07 or G.S. 55-11-09 or a share exchange pursuant to G.S. 55-11-07, references in subsections (a) and (b) of this section to “corporation ” shall include a domestic corporation, a domestic nonprofit corporation, a foreign corporation, and a foreign nonprofit corporation as applicable.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-166; 1955, c. 1371, s. 1; 1967, c. 950, s. 1; 1989, c. 265, s. 1; 1999-369, s. 1.7; 2005-268, s. 23; 2006-264, s. 44(c); 2011-347, ss. 6, 7; 2014-102, s. 6(b); 2018-45, s. 19.

Official Comment

Section 11.06 describes the legal consequences of a merger or share exchange on its effective date.

Section 11.06(a) describes the effect of a merger. On the effective date every disappearing corporation that is a party to the merger disappears into the surviving corporation and the surviving corporation automatically becomes the owner of all real and personal property and becomes subject to all liabilities, actual or contingent, of each disappearing corporation. A merger is not a conveyance or transfer, and does not give rise to claims of reverter or impairment of title based on a prohibited conveyance or transfer. See section 11.06(a)(2). Further, all pending litigation is continued; the name of the surviving corporation may, but need not be, substituted for the name of a disappearing corporation that is a party to litigation.

Section 11.06(a)(6) provides that if any shareholders to any party to the merger are to receive different shares or cash or property under the plan of merger, the rights of those shareholders after the articles of merger are filed are limited to their rights under the plan of merger or their rights under chapter 13 of this Act.

The articles of incorporation of the surviving corporation are amended as provided in the plan of merger on the effective date of the merger. See section 11.06(a)(5).

Section 11.06(b) describes the effect of a share exchange. On the effective date, the shareholders of the acquired class of shares cease to be shareholders of the acquired corporation. On that date they are entitled to receive only the consideration provided in the plan of share exchange, or the rights of dissenting shareholders under chapter 13.

North Carolina Commentary

This section is identical to the comparable section of the Model Act, except for a minor modification to subdivision (a)(6). “Cash” in that subdivision was changed to “right to receive cash” and the word “thereupon” was added to clarify the meaning.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is changed to provide that any amendments to the articles of incorporation of a surviving domestic corporation must be set forth in the articles of merger because G.S. 55-11-05 (as amended effective October 1, 2005) no longer requires the plan of merger to be included in the articles of merger. A provision is added stating that the merger does not affect the liability of a shareholder for obligations of a merging corporation incurred prior to the merger. Other amendments to this section clarify its application to mergers of domestic nonprofit corporations, foreign business corporations, and foreign nonprofit corporations with domestic business corporations and to share exchanges with foreign business corporations. In related changes, provisions applying when the surviving corporation in a merger is a foreign business corporation or foreign nonprofit corporation are relocated to this section from G.S. 55-11-07 and 55-11-09, and provisions applying when the acquiring corporation in a share exchange is a foreign business corporation are relocated to this section from G.S. 55-11-07.

Editor’s Note.

This section was amended by Session Laws 2014-102, s. 6(b), in the coded bill drafting format provided by G.S. 120-20.1. However, in the introductory language of subsection (a), the phrase “or 55-11-09” was not struck through on the act to indicate that it had been deleted. The introductory language of subsection (a) has been set out in the form above at the direction of the Revisor of Statutes.

Effect of Amendments.

Session Laws 2005-268, s. 23, effective October 1, 2005, rewrote the section.

Session Laws 2006-264, s. 44(c), effective August 27, 2006, substituted “Each other merging” for “Each merging” at the beginning of subdivision (a)(1).

Session Laws 2011-347, ss. 6 and 7, effective October 1, 2011, in subdivisions (a)(7)a. and (b)(2), deleted “dissenting” preceding “shareholders” and inserted “exercising appraisal rights”; and in subdivisions (a)(7)b. and (b)(3)a., substituted “appraisal rights of shareholders” for “rights of dissenting shareholders.”

Session Laws 2014-102, s. 6(b), inserted “55-11-09, or 55-11-11” in the introductory paragraph of subsection (a). For effective date and applicability, see Editor’s note.

Session Laws 2018-45, s. 19, effective October 1, 2018, substituted “55-11-20” for “55-11-11” in subsection (a).

Legal Periodicals.

For comment, “Beyond Budd Tire: Examing Corporate Successor Liability in North Carolina,” see 30 Wake Forest L. Rev. 889 (1995).

For article, “Legislative Survey: Business & Banking,” see 22 Campbell L. Rev. 253 (2000).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Merger does not create new or additional rights. The surviving corporation is vested with all the rights which each party to the merger could exercise, but only those rights. Good Will Distribs. (N.), Inc. v. Shaw, 247 N.C. 157, 100 S.E.2d 334, 1957 N.C. LEXIS 560 (1957).

Surviving Corporation Succeeds by Operation of Law. —

In the event of a merger between corporations, the surviving corporation succeeds by operation of law to all of the rights, privileges, immunities, franchises and other property of the constituent corporations, without the necessity of a deed, bill of sale, or other form of assignment. Econo-Travel Motor Hotel Corp. v. Taylor, 301 N.C. 200, 271 S.E.2d 54, 1980 N.C. LEXIS 1152 (1980).

Since a surviving corporation succeeded by operation of law to all of the rights and obligations of a constituent corporation under G.S. 55-11-06(a)(2), a company, which had merged with a former employee’s employer, had standing to sue for enforcement of a noncompetition agreement entered into by the employee and his former employer. Philips Elecs. N. Am. Corp. v. Hope, 631 F. Supp. 2d 705, 2009 U.S. Dist. LEXIS 55279 (M.D.N.C. 2009).

Lender’s successor’s evidence, including a letter from the Comptroller of the Currency officially certifying a merger between the successor and the lender, was sufficient to establish the merger. The successor, as the surviving corporation after the merger, succeeded by operation of law to the lender’s status as holder of a note, pursuant to G.S. 55-11-06(a)(2). In re Foreclosure of N.C. Deed of Trust by Carver Pond I L.P., 217 N.C. App. 352, 719 S.E.2d 207, 2011 N.C. App. LEXIS 2488 (2011).

Bank presented sufficient evidence to establish all the required elements of G.S. 45-21.16, because the bank showed that it was the holder of a promissory note through a corporate merger, and a default on the debt. In re Foreclosure of the Deed of Trust from Manning, 228 N.C. App. 591, 747 S.E.2d 286, 2013 N.C. App. LEXIS 813 (2013).

Subcontractor that provided labor, materials, and equipment to a general contractor that built condominium units for an LLC before the LLC declared Chapter 11 bankruptcy was entitled to summary judgment on claims the general contractor filed against the subcontractor because the claims had merged with another subcontractor the general contractor used, and the second subcontractor had assumed responsibility for the first subcontractor’s acts; G.S. 55-11-06 provided that once the first subcontractor merged with the second subcontractor it ceased to exist, and the second subcontractor, as the surviving business, assumed all liabilities of both businesses. New Bern Riverfront Dev. v. Weaver Cooke Constr., LLC, 2014 Bankr. LEXIS 3856 (Bankr. E.D.N.C. Sept. 10, 2014), aff'd, 2016 U.S. Dist. LEXIS 12802 (E.D.N.C. Jan. 28, 2016).

Subcontractor was denied summary judgment on a contractor’s professional negligence claim based on the subcontractor’s allegation that it contracted only to install a post-tension system and that the design was done by another corporation, as the subcontractor and the design corporation merged before the subcontract at issue and, under North Carolina law, the subcontractor, as the surviving corporation, had all of the liabilities of each merging corporation. New Bern Riverfront Dev., LLC v. Weaver Cooke Constr., LLC, 2014 Bankr. LEXIS 4158 (Bankr. E.D.N.C. Sept. 30, 2014), aff'd, 2016 U.S. Dist. LEXIS 26254 (E.D.N.C. Feb. 25, 2016).

Subcontractor that provided labor, materials, and equipment to a general contractor that built condominium units for an LLC before the LLC declared Chapter 11 bankruptcy did not show there were grounds for reconsideration of an order the court issued on September 10, 2014, which granted the subcontractor’s motion for summary judgment on third-party claims the general contractor filed against it because it had merged with another subcontractor the general contractor used, and the second subcontractor had assumed responsibility for the first subcontractor’s acts; the court’s order was correct under G.S. 55-11-06. New Bern Riverfront Dev., LLC v. Weaver Cooke Constr. LLC, 2015 Bankr. LEXIS 768 (Bankr. E.D.N.C. Mar. 12, 2015), aff'd, 2016 U.S. Dist. LEXIS 12802 (E.D.N.C. Jan. 28, 2016).

Application of Statute of Limitations Against Surviving Corporation. —

The six-year statute of limitations of G.S. 1-50 did not apply to an action for fraud arising out of the collapse of the floor of a building where the corporate tenant of the building merged into the corporate plaintiff after the building collapsed. Since the plaintiff succeeded to the rights of the corporate tenant and thus was in possession of the building as tenant at the time of the injury, it came within the exception under G.S. 1-50(5) (see now G.S. 1-50(a)(5). Feibus Co. v. Godley Constr. Co., 301 N.C. 294, 271 S.E.2d 385, 1980 N.C. LEXIS 1175 (1980).

Nevada limited liability company could not amend its suit to allege a tort claim of a North Carolina limited liability company after the Nevada company succeeded to the rights of the North Carolina company following a merger under G.S. 55-11-06(a)(4) as it did not assert its right to file the tort claim before the claim became time-barred under G.S. 1-15(c); the Nevada company’s suit clearly alleged violations of patent rights that had been assigned to it, and did not give notice that the suit was intended to be a re-filing of a malpractice case by the North Carolina company that had been dismissed under G.S. 1A-1, N.C. R. Civ. P. 41. Even if the amendment were allowed, it would not relate back under G.S. 1A-1, N.C. R. Civ. P. 15(c). Revolutionary Concepts, Inc. v. Clements Walker PLLC, 2012 NCBC 14, 2012 NCBC LEXIS 14 (N.C. Super. Ct. Mar. 8, 2012), aff'd in part, 227 N.C. App. 102, 744 S.E.2d 130, 2013 N.C. App. LEXIS 482 (2013).

Successor Not Real Party In Interest. —

Nevada limited liability company did not become the real party in interest under G.S. 1A-1, N.C. Gen. R. Civ. P. 17 to bring a malpractice case previously dismissed by a North Carolina limited liability company after the Nevada company succeeded to the rights of the North Carolina company following a merger under G.S. 55-11-06(a)(4) as the Nevada company did not bring the North Carolina company’s tort claim before they became time-barred under G.S. 1-15(c). Revolutionary Concepts, Inc. v. Clements Walker PLLC, 2012 NCBC 14, 2012 NCBC LEXIS 14 (N.C. Super. Ct. Mar. 8, 2012), aff'd in part, 227 N.C. App. 102, 744 S.E.2d 130, 2013 N.C. App. LEXIS 482 (2013).

Successor’s action could not be converted to action by acquired limited liability company. —

Claim alleging that two attorneys failed to detect and supervise the activities of a patent agent in filing or failing to file documents associated with a patent application and Patent Cooperation Treaty Application was barred by G.S. 57C-3-30 (now repealed) as a Nevada limited liability company did not show that the attorneys were on notice that the employee was in need of supervision or that the attorneys were assigned or accepted responsibility for supervising the patent agent in a member’s absence. Revolutionary Concepts, Inc. v. Clements Walker PLLC, 2012 NCBC 14, 2012 NCBC LEXIS 14 (N.C. Super. Ct. Mar. 8, 2012), aff'd in part, 227 N.C. App. 102, 744 S.E.2d 130, 2013 N.C. App. LEXIS 482 (2013).

Breach of Stock Option and Restriction Agreement. —

Trial court properly granted partial summary judgment to a businessman against a shareholder and a corporation because the merger of a company into a corporation without any prior notice to or consent by the businessman resulted in a breach of a stock option and restriction agreement between the businessman and the company and its sole shareholder, as the merger clearly effected a change in the capitalization of the company. Lee v. Scarborough, 162 N.C. App. 674, 592 S.E.2d 43, 2004 N.C. App. LEXIS 259, op. withdrawn, sub. op., 164 N.C. App. 357, 595 S.E.2d 729, 2004 N.C. App. LEXIS 812 (2004).

Surviving corporation was liable, pursuant to G.S. 55-11-06(a)(3), for a breach of an option agreement by a merged corporation that had given a consultant a five-year option to purchase 50 percent of its shares; because the merger could not have been accomplished without the actions of the sole shareholder and director, who was the only person could vote for and approve the merger, he was also personally liable. Lee v. Scarborough, 164 N.C. App. 357, 595 S.E.2d 729, 2004 N.C. App. LEXIS 812 (2004).

Effect of Merger on Subcontractor. —

In a developer’s negligence action against a subcontractor, the subcontractor was not entitled to summary judgment based on the division of duties between the subcontractor and another company. Based on the merger between the subcontractor and the other company, which occurred before the subcontractor had contracted to perform any work on the project, the subcontractor was responsible for the work of the other company. New Bern Riverfront Dev., LLC v. Weaver Cooke Constr., LLC, 2014 Bankr. LEXIS 4050 (Bankr. E.D.N.C. Sept. 23, 2014).

Statute Did Not Apply. —

Trial court did not err in granting a law firm and attorneys summary judgment on the ground that a corporation did not have standing to assert malpractice claims because the corporation did not acquire the claims as a result of an inventor’s assignment and did not take any action post-merger to assert those claims as the surviving entity of the merger; G.S. 55-11-06(a)(4) did not apply because there were no pending claims asserted against the law firm and attorneys by the corporation at the time of the merger. Revolutionary Concepts, Inc. v. Clements Walker PLLC, 227 N.C. App. 102, 744 S.E.2d 130, 2013 N.C. App. LEXIS 482 (2013).

§ 55-11-07. Merger or share exchange with foreign corporation.

  1. One or more foreign corporations may merge with one or more domestic corporations, and a foreign corporation may enter into a share exchange with a domestic corporation if:
    1. In a merger, the merger is permitted by the law of the state or country under whose law each foreign corporation is incorporated and, to the extent applicable, each domestic or foreign corporation complies with that law in effecting the merger;
    2. In a share exchange, if the corporation whose shares will be acquired is a foreign corporation, the share exchange is permitted by the law of the state or country under whose law the foreign corporation is incorporated and the foreign corporation and the acquiring domestic corporation comply with that law in effecting the share exchange;
    3. The foreign corporation complies with G.S. 55-11-05 if it is the surviving corporation of the merger or acquiring corporation of the share exchange; and
    4. Each domestic corporation complies with the applicable provisions of G.S. 55-11-01 through G.S. 55-11-04 and, if it is the surviving corporation of the merger with G.S. 55-11-05.
  2. Repealed by Session Laws 2005, c. 268, s. 24.
  3. This section does not limit the power of a foreign corporation to acquire all or part of the shares of one or more classes or series of a domestic corporation through a voluntary exchange or otherwise, or the power of a domestic corporation to acquire all or part of the shares of one or more classes or series of a foreign corporation through a voluntary exchange or otherwise.

History. 1925, c. 77, s. 1; 1939, c. 5; 1943, c. 270; G.S., s. 55-165; 1955, c. 1371, s. 1; 1973, c. 469, s. 35; 1989, c. 265, s. 1; 2001-387, ss. 18, 19; 2005-268, s. 24.

Official Comment

Section 11.07 permits mergers or share exchanges between domestic and foreign corporations.

In connection with a plan of merger, the plan must be permitted under the law of the state or country of incorporation of the foreign corporation as well as under the law of the domestic state. The surviving corporation, if it is a foreign corporation, must file articles of merger to accomplish the disappearance of the domestic corporation or corporations, and thereby irrevocably appoints the secretary of state as agent for service of process and agrees to pay dissenters in accordance with chapter 13.

A plan of share exchange, unlike a plan of merger, need not be authorized by the state or country of incorporation of the acquiring foreign corporation. If the domestic law authorizes a compulsory share exchange to acquire a class or series of shares of a domestic corporation, it makes no difference whether the acquiring corporation is foreign or domestic. This kind of transaction does not affect the separate corporate existence of, or impose the liabilities of the disappearing corporation on, the acquiring foreign corporation.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended to provide that if the corporation whose shares are to be acquired in a share exchange is a foreign business corporation, the laws of the state or country of incorporation of the foreign business corporation must permit the share exchange and both the foreign business corporation and the acquiring domestic business corporation must comply with those laws. In the case of a merger involving a foreign business corporation, the merging domestic business corporation must comply with the laws of the state or country of incorporation of the merging foreign business corporation to the extent applicable in addition to the merging foreign business corporation complying with those laws. Other amendments reflect the relocation to G.S. 55-11-05 and 55-11-06 from this section of certain provisions applying if a foreign business corporation is the surviving corporation in a merger or the acquiring corporation in a share exchange.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Effect of Amendments.

Session Laws 2005-268, s. 24, effective October 1, 2005, rewrote the section.

§ 55-11-08. Article 9 to control.

Nothing in this Article shall be construed to modify in any manner the provisions or applicability of Article 9.

History. 1989, c. 265, s. 1.

North Carolina Commentary

This section, which does not appear in the Model Act, was added to clarify that Article 11 does not in any manner modify the provisions of Article 9.

§ 55-11-09. Merger with nonprofit corporation.

  1. One or more domestic or foreign nonprofit corporations may merge with one or more domestic corporations if:
    1. Each domestic nonprofit corporation complies with the applicable provisions of G.S. 55A-11-01 through G.S. 55A-11-03;
    2. In a merger involving one or more foreign nonprofit corporations, the merger is permitted by law of the state or country under whose law each foreign nonprofit corporation is incorporated and, to the extent applicable, each domestic corporation and each domestic or foreign nonprofit corporation complies with that law in effecting the merger;
    3. The domestic or foreign nonprofit corporation complies with G.S. 55-11-05 if it is the surviving corporation; and
    4. Each domestic corporation complies with the applicable provisions of G.S. 55-11-01, 55-11-03, and 55-11-04 and, if it is the surviving corporation, with G.S. 55-11-05.
  2. Repealed by Session Laws 2005, c. 268, s. 25.
  3. This section does not limit the power of a domestic or foreign nonprofit corporation to acquire all or part of the shares of one or more classes or series of a domestic corporation through a voluntary exchange or otherwise.

History. 1995, c. 400, s. 13; 2001-387, ss. 20, 21; 2005-268, s. 25.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended to provide that if any of the merging corporations is a foreign nonprofit corporation, each merging domestic business corporation and any merging domestic nonprofit corporation must comply with the laws of the state or country of incorporation of the foreign nonprofit corporation to the extent applicable in addition to the merging foreign nonprofit corporation complying with those laws. Other amendments reflect the relocation to G.S. 55-11-05 and 55-11-06 from this section of certain provisions applying if a foreign nonprofit corporation is the surviving corporation in the merger.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Effect of Amendments.

Session Laws 2005-268, s. 25, effective October 1, 2005, substituted “and, to the extent applicable, each domestic corporation and each domestic or” for “and each” in subdivision (a)(2); deleted “and, in the case of a foreign nonprofit corporation not authorized to conduct affairs in this State, includes in the articles of merger filed pursuant to G.S. 55-11-05 a designation of the foreign nonprofit corporation’s mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing address” from the end of subdivision (a)(3); and deleted former subsection (b), relating to requirements of a non-profit corporation that is the surviving corporation upon the merger taking effect.

§ 55-11-10. Merger with unincorporated entity.

  1. Repealed by Session Laws 2001-387, s. 22, effective January 1, 2002.
  2. One or more domestic corporations may merge with one or more unincorporated entities and, if desired, one or more foreign corporations, domestic nonprofit corporations, or foreign nonprofit corporations if:
    1. The merger is permitted by the laws of the state or country governing the organization and internal affairs of each other merging business entity; and
    2. Each merging domestic corporation and each other merging business entity comply with the requirements of this section and, to the extent applicable, the laws referred to in subdivision (1) of this subsection.
  3. Each merging domestic corporation and each other merging business entity shall approve a written plan of merger containing all of the following:
    1. For each merging business entity, its name, type of business entity, and the state or country whose laws govern its organization and internal affairs.
    2. The name of the merging business entity that shall survive the merger and, if the surviving business entity is not authorized to transact business or conduct affairs in this State, a designation of its mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing address.
    3. The terms and conditions of the merger.
    4. The manner and basis of converting the interests in each merging business entity into interests, obligations, or securities of the surviving business entity, or into cash or other property in whole or in part, or of cancelling the interests.
    5. If the surviving business entity is a domestic corporation, any amendments to its articles of incorporation that are to be made in connection with the merger.
  4. The plan of merger may contain other provisions relating to the merger.
  5. The provisions of the plan of merger, other than the provisions referred to in subdivisions (1), (2), and (5) of subsection (c) of this section, may be made dependent on facts objectively ascertainable outside the plan of merger if the plan of merger sets forth the manner in which the facts will operate upon the affected provisions. The facts may include any of the following:
    1. Statistical or market indices, market prices of any security or group of securities, interest rates, currency exchange rates, or similar economic or financial data.
    2. A determination or action by the corporation or by any other person, group, or body.
    3. The terms of, or actions taken under, an agreement to which the corporation is a party, or any other agreement or document.
  6. In the case of a domestic corporation, approval of the plan of merger requires that the plan of merger be adopted by its board of directors as provided in G.S. 55-11-03 and, unless shareholder approval is not required under subsection (g) of G.S. 55-11-03, be approved by its shareholders as provided in G.S. 55-11-03. If any shareholder of a merging domestic corporation has or will have personal liability for any existing or future obligation of the surviving business entity solely as a result of holding an interest in the surviving business entity, then in addition to the requirements of the preceding sentence, approval of the plan of merger by the domestic corporation shall require the affirmative vote or written consent of that shareholder. In the case of each other merging business entity, the plan of merger must be approved in accordance with the laws of the state or country governing the organization and internal affairs of that merging business entity.
  7. After a plan of merger has been approved by a domestic corporation but before the articles of merger become effective, the plan of merger (i) may be amended as provided in the plan of merger, or (ii) may be abandoned (subject to any contractual rights) as provided in the plan of merger or, if there is no such provision, as determined by the board of directors without further shareholder action.
  8. After a plan of merger has been approved by each merging domestic corporation and each other merging business entity as provided in subsection (c) of this section, the surviving business entity shall deliver articles of merger to the Secretary of State for filing. The articles of merger shall set forth all of the following:
    1. Repealed by Session Laws 2005, c. 268, s. 27.
    2. For each merging business entity, its name, type of business entity, and the state or country whose laws govern its organization and internal affairs.
    3. The name of the merging business entity that shall survive the merger and, if the surviving business entity is not authorized to transact business or conduct affairs in this State, a designation of its mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing  address.
    4. If the surviving business entity is a domestic corporation, any amendment to its articles of incorporation as provided in the plan of merger.
    5. A statement that the plan of merger has been approved by each merging business entity in the manner required by law.
    6. Repealed by Session Laws 2005, c. 268, s. 27.If the plan of merger is amended after the articles of merger have been filed but before the articles of merger become effective, and any statement in the articles of merger becomes incorrect as a result of the amendment, the surviving business entity shall deliver to the Secretary of State for filing prior to the time the articles of merger become effective an amendment to the articles of merger correcting the incorrect statement. If the articles of merger are abandoned after the articles of merger are filed but before the articles of merger become effective, the surviving business entity shall deliver to the Secretary of State for filing prior to the time the articles of merger become effective an amendment reflecting abandonment of the plan of merger.Certificates of merger shall also be registered as provided in G.S. 47-18.1.
  9. Repealed by Session Laws 2018-45, s. 21, effective October 1, 2018.
  10. Repealed by Session Laws 2018-45, s. 21, effective October 1, 2018.
  11. This section does not apply to a merger that does not include a merging unincorporated entity.

History. 1999-369, s. 1.8; 2000-140, s. 45; 2001-387, ss. 22, 23, 24, 25.; 2005-268, ss. 26, 27, 28; 2007-385, s. 2; 2011-347, ss. 8, 9; 2018-45, ss. 20, 21.

Editor’s Note.

Session Laws 1999-369, s. 1.8 set out present subsection (e1) within subsection (e). The redesignation of this subsection was set out above pursuant to directions from the Revisor of Statutes.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Effect of Amendments.

Session Laws 2005-268, ss. 26 through 28, effective October 1, 2005, added the subsection (c1), (c3) and (c4) designations; added subsection (c2); added “all of the following” at the end of subdivision (d); deleted former subdivision (d)(1), which read: “The plan of merger”; in subdivision (c)(3), substituted “merging” for “surviving” and inserted “that shall survive the merger”; added subdivision (d)(3a); deleted former subdivision (d)(5), which read: “The effective date and time of merger if it is not to be effective at the time of filing of the articles of merger”; rewrote the second paragraph of subsection (d); substituted “articles” for “plan” in subdivision (e)(5); and made minor stylistic changes throughout.

Session Laws 2007-385, s. 2, effective August 19, 2007, substituted “plan of merger” for “articles of merger” in subdivision (e)(6).

Session Laws 2011-347, ss. 8 and 9, effective October 1, 2011, in subdivision (e)(7), deleted “dissenting” preceding “shareholders” and inserted “exercising appraisal rights”; and in subdivision (e1)(1), substituted “appraisal rights of shareholders” for “rights of dissenting shareholders.”

Session Laws 2018-45, ss. 20, 21, effective October 1, 2018, in subsection (c), added “all of the following” to the end of the lead-in language, added “and, if the surviving business entity is not authorized to transact business or conduct affairs in this State, a designation of its mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing address” at the end of subdivision (c)(2), substituted “part, or of cancelling the interests” for “part; and” at the end of subdivision (c)(4), and made minor stylistic changes; and deleted subsections (e) and (e1).

Legal Periodicals.

For article, “Legislative Survey: Business & Banking,” see 22 Campbell L. Rev. 253 (2000).

§ 55-11-11.

Recodified as G.S. 55-11-20 by Session Laws 2018-45, s. 22, effective October 1, 2018.

§ 55-11-12. Merger between parent unincorporated entity and subsidiary corporation or corporations.

  1. Subject to the other provisions of this section and Article 9 of this Chapter, a parent unincorporated entity owning shares of a domestic subsidiary corporation that carry at least ninety percent (90%) of the voting power of each class and series of the outstanding shares of the subsidiary corporation and that have the power to vote in the election of directors at the time of a merger under this section may merge the subsidiary corporation or corporations into itself, or merge itself and one or more subsidiary corporations into another subsidiary corporation, without approval of the board of directors or shareholders of the subsidiary corporation or corporations, unless the articles of incorporation for the subsidiary corporation or corporations require approval of the shareholders of the subsidiary corporation or corporations, if both of the following requirements are met:
    1. The merger is permitted by the laws of the state or country governing the organization and internal affairs of each merging business entity.
    2. Each merging business entity complies with the requirements of this section and, to the extent applicable, the laws referred to in subdivision (1) of this subsection.
  2. If any shareholder of the domestic subsidiary corporation, other than the parent unincorporated entity, has or will have personal liability for any existing or future obligation of the surviving business entity solely as a result of holding an interest in the surviving business entity, then the plan of merger under subsection (a) of this section shall require the affirmative approval, by vote or written consent, of that shareholder.
  3. If the parent unincorporated entity does not own all the outstanding stock of the subsidiary corporation, the surviving business entity shall, within 10 days after the effective date of the merger, notify each shareholder of the subsidiary corporation as of the effective date of the merger, that the merger has become effective.
  4. The surviving business entity shall deliver articles of merger to the Secretary of State for filing. The articles of merger shall set forth all of the following:
    1. For each merging business entity, its name, type of business entity, and the state or country whose laws govern its organization and internal affairs.
    2. The terms and conditions of the merger.
    3. The manner and basis of converting the interests in each merging business entity into interests, obligations, or securities of the surviving business entity, or into cash or other property in whole or in part, or of cancelling the interests.
    4. The name of the merging business entity that shall survive the merger and, if the surviving business entity is not authorized to transact business or conduct affairs in this State, a designation of its mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing address.
    5. If the surviving business entity is a domestic corporation, any amendment to its articles of incorporation as provided in a plan of merger or board resolution.
  5. The provisions of the articles of merger may be made dependent on facts objectively ascertainable outside the articles of merger if the articles of merger set forth the manner in which the facts will operate upon the affected provisions. The facts may include any of the following:
    1. Statistical or market indices, market prices of any security or group of securities, interest rates, currency exchange rates, or similar economic or financial data.
    2. A determination or action by the corporation or by any other person, group, or body.
    3. The terms of, or actions taken under, an agreement to which the corporation is a party, or any other agreement or document.
  6. A merger takes effect when the articles of merger become effective.

History. 2018-45, s. 23.

North Carolina Commentary

Under the North Carolina Business Corporation Act, the general rule is that a North Carolina corporation may merge with another corporation upon approval by the boards of directors and shareholders of each constituent corporation. However, where a parent corporation holds at least 90% of each class of outstanding stock of a subsidiary corporation, the parent corporation and subsidiary corporation may merge without a vote of the board of directors or shareholders of the subsidiary and, where the parent is the surviving corporation of the merger and its articles of incorporation are not being amended in connection with the merger, without a vote of the shareholders of the parent corporation. This simplified merger approval process for 90% or more owned subsidiaries permitted by the North Carolina Business Corporation Act is commonly referred to as a “Short-Form Merger.” This section was added, effective as of October 1, 2018, to extend the Short-Form Merger process to any type of parent business entity.

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Session Laws 2018-45, s. 34, made this section effective October 1, 2018.

§ 55-11-13. Effect of merger with unincorporated entity.

  1. Upon taking effect, a merger pursuant to G.S. 55-11-10 or 55-11-12 shall have all of the following effects:
    1. Each other merging business entity merges into the surviving business entity, and the separate existence of each merging business entity, except the surviving business entity, ceases.
    2. The title to all real estate and other property owned by each merging business entity is vested in the surviving business entity without reversion or impairment.
    3. The surviving business entity has all liabilities of each merging business entity.
    4. A proceeding pending by or against any merging business entity may be continued as if the merger did not occur, or the surviving business entity may be substituted in the proceeding for a merging business entity whose separate existence ceases in the merger.
    5. If a domestic corporation is the surviving business entity, its articles of incorporation shall be amended to the extent provided in the articles of merger.
    6. The interests in each merging business entity that are to be converted into interests, obligations, or securities of the surviving business entity, or into the right to receive cash or other property, are thereupon so converted, and the former holders of the interests are entitled only to the rights provided to them in the plan of merger, resolution, or, in the case of former holders of shares in a domestic corporation, any rights they may have under Article 13 of this Chapter.
    7. If the surviving business entity is not a domestic corporation, the surviving business entity is deemed to agree that it will promptly pay to the shareholders of any merging domestic corporation exercising appraisal rights the amount, if any, to which they are entitled under Article 13 of this Chapter and otherwise to comply with the requirements of Article 13 of this Chapter as if it were a surviving domestic corporation in the merger.
  2. The merger shall not affect the liability or absence of liability of any holder of an interest in a merging business entity for any acts, omissions, or obligations of any merging business entity made or incurred prior to the effectiveness of the merger. The cessation of separate existence of a merging business entity in the merger shall not constitute a dissolution or termination of the merging business entity.
  3. If the surviving business entity is not a domestic limited liability company, a domestic corporation, a domestic nonprofit corporation, or a domestic limited partnership, when the merger takes effect the surviving business entity is deemed to have done both of the following:
    1. Agreed that it may be served with process in this State in any proceeding for enforcement of (i) any obligation of any merging domestic limited liability company, domestic corporation, domestic nonprofit corporation, domestic limited partnership, or other partnership as defined in G.S. 59-36 that is formed under the laws of this State, (ii) the appraisal rights of shareholders of any merging domestic corporation under Article 13 of this Chapter, and (iii) any obligation of the surviving business entity arising from the merger.
    2. Appointed the Secretary of State as its agent for service of process in the proceeding. Service on the Secretary of State of process shall be made by delivering to and leaving with the Secretary of State, or with any clerk authorized by the Secretary of State to accept service of process, duplicate copies of the process and the fee required by G.S. 55-1-22(b). Upon receipt of service of process on behalf of a surviving business entity in the manner provided for in this section, the Secretary of State shall immediately mail a copy of the process by registered or certified mail, return receipt requested, to the surviving business entity. If the surviving business entity is authorized to transact business or conduct affairs in this State, the address for mailing shall be its principal office designated in the latest document filed with the Secretary of State that is authorized by law to designate the principal office or, if there is no principal office on file, its registered office. If the surviving business entity is not authorized to transact business or conduct affairs in this State, the address for mailing shall be the mailing address designated pursuant to G.S. 55-11-10(c)(2) or G.S. 55-11-12(d)(4).

History. 2018-45, s. 23.

Editor’s Note.

Session Laws 2018-45, s. 34, made this section effective October 1, 2018.

§§ 55-11-14 through 55-11-19.

Reserved for future codification purposes.

§ 55-11-20. Merger to effect a holding company reorganization.

  1. The following definitions apply in this section:
    1. “Company official” has the same meaning as in G.S. 57D-1-03.
    2. “Constituent corporation” means the original corporation incorporated under the laws of this State or limited liability company organized under the laws of this State that is a party to a merger that is intended to create a holding company structure under a plan of merger that satisfies the requirements of this section.
    3. “Holding company” means a corporation incorporated under the laws of this State or limited liability company organized under the laws of this State that from its incorporation or organization until consummation of a merger governed by this section was at all times a direct or indirect wholly owned subsidiary of the constituent corporation and whose capital stock is issued in the merger.
    4. “Manager” has the same meaning as in G.S. 57D-1-03.
    5. “Organizational documents” means the articles of incorporation of a corporation or the articles of organization of a limited liability company.
    6. “Surviving entity” means the corporation incorporated under the laws of this State or limited liability company organized under the laws of this State that is the surviving entity in a merger of a constituent corporation with or into a single direct or indirect wholly owned subsidiary of the constituent corporation, which immediately following the merger is a direct or indirect wholly owned subsidiary of the holding company.
  2. Notwithstanding the requirements of G.S. 55-11-03, unless expressly required by its articles of incorporation, no vote of shareholders of a constituent corporation is required to authorize a merger with or into a single direct or indirect wholly owned subsidiary of the constituent corporation if all of the following conditions are satisfied:
    1. The constituent corporation and the direct or indirect wholly owned subsidiary of the constituent corporation are the only constituent entities to the merger.
    2. Each share or fraction of a share of the capital stock of the constituent corporation outstanding immediately prior to the effective time of the merger is converted in the merger into a share or equal fraction of a share of capital stock of a holding company having the same designations, rights, powers, and preferences, and the qualifications, limitations, and restrictions thereof, as the share or fraction of a share of the capital stock of the constituent corporation being converted in the merger.
    3. The holding company and the constituent corporation are both corporations of this State and the direct or indirect wholly owned subsidiary that is the other constituent entity to the merger is a corporation or limited liability company of this State.
    4. The articles of incorporation and bylaws of the holding company immediately following the effective time of the merger contain provisions identical to the articles of incorporation and bylaws of the constituent corporation immediately prior to the effective time of the merger other than provisions, if any, regarding any of the following:
      1. The incorporator or incorporators.
      2. The corporate name.
      3. The registered office and agent.
      4. The initial board of directors and the initial subscribers for shares.
      5. Any provisions contained in any amendment to the articles of incorporation that were necessary to effect a change, exchange, reclassification, subdivision, combination, or cancellation of stock, if the change, exchange, reclassification, subdivision, combination, or cancellation has become effective.
    5. As a result of the merger the constituent corporation or its successor becomes or remains a direct or indirect wholly owned subsidiary of the holding company.
    6. The directors of the constituent corporation become or remain the directors of the holding company upon the effective time of the merger.
    7. Except as provided in subsections (c) and (d) of this section, the organizational documents of the surviving entity immediately following the effective time of the merger contain provisions identical to the articles of incorporation of the constituent corporation immediately prior to the effective time of the merger other than provisions, if any, regarding any of the following:
      1. The incorporator or incorporators.
      2. The corporate or entity name.
      3. The registered office and agent.
      4. The initial board of directors and the initial subscribers for shares.
      5. References to members rather than stockholders or shareholders.
      6. References to interests, units, or other similar terms rather than stock or shares.
      7. References to managers, managing members, or other members of the governing body rather than directors.
      8. Any provisions contained in any amendment to the articles of incorporation that were necessary to effect a change, exchange, reclassification, subdivision, combination, or cancellation of stock, if the change, exchange, reclassification, subdivision, combination, or cancellation has become effective.
    8. The shareholders of the constituent corporation do not recognize gain or loss for United States federal income tax purposes as determined by the board of directors of the constituent corporation.
  3. Notwithstanding the provisions of subdivision (7) of subsection (b) of this section, if the organizational documents of the surviving entity do not contain the following provisions, they shall be amended in the merger to contain provisions requiring all of the following:
    1. Any act or transaction by or involving the surviving entity, other than the election or removal of directors or managers, managing members, or other members of the governing body of the surviving entity, that requires for its adoption under this Chapter or its organizational documents the approval of the shareholders or members of the surviving entity shall, by specific reference to this subsection, require, in addition, the approval of the shareholders of the holding company, or any successor by merger, by the same vote as is required by this Chapter or by the organizational documents of the surviving entity. For purposes of this subdivision, any surviving entity that is not a corporation shall include in the amendment a requirement that the approval of the shareholders of the holding company be obtained for any act or transaction by or involving the surviving entity, other than the election or removal of directors or managers, managing members, or other members of the governing body of the surviving entity, which would require the approval of the shareholders of the surviving entity if the surviving entity were a corporation subject to this Chapter.
    2. Any amendment of the organizational documents of a surviving entity that is not a corporation that would, if adopted by a corporation subject to this Chapter, be required to be included in the articles of incorporation of the corporation shall, by specific reference to this subsection, require, in addition, the approval of the shareholders of the holding company, or any successor by merger, by the same vote as is required by this Chapter or by the organizational documents of the surviving entity.
    3. The business and affairs of a surviving entity that is not a corporation shall be managed by or under the direction of a board of directors, board of managers, or other governing body consisting of individuals who are subject to the same fiduciary duties applicable to, and who are liable for breach of those duties to the same extent as, directors of a corporation subject to this Chapter.
  4. Notwithstanding the provisions of subdivision (7) of subsection (b) of this section, the organizational documents of the surviving entity may be amended in the merger to reduce the number of classes and shares of capital stock or other equity interests or units that the surviving entity is authorized to issue and to eliminate any provision authorized by G.S. 55-8-06.
  5. Neither subsection (c) of this section nor any provision of a surviving entity’s organizational documents required by this section shall be deemed or construed to require approval of the shareholders of the holding company to elect or remove directors or managers, managing members, or other members of the governing body of the surviving entity.
  6. From and after the effective time of a merger adopted by a constituent corporation by action of its board of directors and without any vote of shareholders pursuant to this section, the following provisions apply:
    1. To the extent the restrictions of Articles 9 and 9A of this Chapter applied to the constituent corporation and its shareholders at the effective time of the merger, such restrictions shall apply to the holding company and its shareholders immediately after the effective time of the merger as though it were the constituent corporation.
    2. If the corporate name of the holding company immediately following the effective time of the merger is the same as the corporate name of the constituent corporation immediately prior to the effective time of the merger, the shares of capital stock of the holding company into which the shares of capital stock of the constituent corporation are converted in the merger shall be represented by the stock certificates that previously represented shares of capital stock of the constituent corporation.
    3. To the extent a shareholder of the constituent corporation immediately prior to the merger had standing to institute or maintain derivative litigation on behalf of the constituent corporation, nothing in this section limits or extinguishes that standing.
  7. If a plan of merger is adopted by a constituent corporation by action of its board of directors and without any vote of shareholders pursuant to this section, but otherwise in accordance with G.S. 55-11-01, the secretary or assistant secretary of the constituent corporation shall certify on the plan of merger that the plan has been adopted pursuant to this section and that the conditions specified in subsection (b) of this section have been satisfied. This certification on the plan of merger is not required if a certificate of merger or consolidation is registered in lieu of filing the plan of merger. The plan so adopted and certified shall then be filed and become effective, in accordance with G.S. 55-11-05. That filing is a representation by the person who executes the agreement that the facts stated in the certificate remain true immediately prior to the filing.
  8. Except as otherwise provided in this section:
    1. The provisions of G.S. 55-11-06(a) and G.S. 55-11-06(c) shall apply to any merger effected pursuant to this section.
    2. The provisions of Article 13 of this Chapter shall not apply to any merger effected pursuant to this section.

History. 2014-102, s. 6(a); 2018-45, s. 22.

Editor’s Note.

This section is former G.S. 55-11-11, as recodified by Session Laws 2018-45, s. 22, effective October 1, 2018. The historical citation from the former section has been added to this section as recodified.

Article 11A. Conversions.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Part 1. Conversion to Corporation.

§ 55-11A-01. Conversion.

A business entity, other than a domestic corporation, may convert to a domestic corporation if:

  1. The conversion is permitted by the laws of the state or country governing the organization and internal affairs of the converting business entity; and
  2. The converting business entity complies with the requirements of this Part and, to the extent applicable, the laws referred to in subdivision (1) of this section.

History. 2001-387, s. 17.

§ 55-11A-02. Plan of conversion.

  1. The converting business entity shall approve a written plan of conversion containing:
    1. The name of the converting business entity, its type of business entity, and the state or country whose laws govern its organization and internal affairs;
    2. The name of the resulting domestic corporation into which the converting business entity shall convert;
    3. The terms and conditions of the conversion; and
    4. The manner and basis for converting the interests in the converting business entity into shares, obligations, or other securities of the resulting domestic corporation or into cash or other property in whole or in part.
  2. The plan of conversion may contain other provisions relating to the conversion.
  3. The provisions of the plan of conversion, other than the provisions required by subdivisions (1) and (2) of subsection (a) of this section, may be made dependent on facts objectively ascertainable outside the plan of conversion if the plan of conversion sets forth the manner in which the facts will operate upon the affected provisions. The facts may include any of the following:
    1. Statistical or market indices, market prices of any security or group of securities, interest rates, currency exchange rates, or similar economic or financial data.
    2. A determination or action by the converting business entity or by any other person, group, or body.
    3. The terms of, or actions taken under, an agreement to which the converting business entity is a party, or any other agreement or document.
  4. The plan of conversion shall be approved in accordance with the laws of the state or country governing the organization and internal affairs of the converting business entity.
  5. After a plan of conversion has been approved as provided in subsection (b) of this section, but before articles of incorporation for the resulting domestic corporation become effective, the plan of conversion may be amended or abandoned to the extent permitted by the laws that govern the organization and internal affairs of the converting business entity.

History. 2001-387, s. 17; 2005-268, s. 29.

Effect of Amendments.

Session Laws 2005-268, s. 29, effective October 1, 2005, added the subsection (a1) designation; and added subsection (a2).

§ 55-11A-03. Filing of articles of incorporation by converting entity.

  1. After a plan of conversion has been approved by the converting business entity as provided in G.S. 55-11A-02, the converting business entity shall deliver articles of incorporation to the Secretary of State for filing. In addition to the matters required or permitted by G.S. 55-2-02, the articles of incorporation shall contain articles of conversion stating:
    1. That the corporation is being formed pursuant to a conversion of a business entity;
    2. The name of the converting business entity, its type of business entity, and the state or country whose laws govern its organization and internal affairs; and
    3. That a plan of conversion has been approved by the converting business entity as required by law.
  2. If the plan of conversion is abandoned after the articles of incorporation have been filed with the Secretary of State but before the articles of incorporation become effective, the converting business entity shall deliver to the Secretary of State for filing prior to the time the articles of incorporation become effective an amendment to the articles of incorporation withdrawing the articles of incorporation.
  3. The conversion takes effect when the articles of incorporation become effective.
  4. Certificates of conversion shall also be registered as provided in G.S. 47-18.1.

History. 2001-387, s. 17.

§ 55-11A-04. Effects of conversion.

When the conversion takes effect:

  1. The converting business entity ceases its prior form of organization and continues in existence as the resulting domestic corporation;
  2. The title to all real estate and other property owned by the converting business entity continues vested in the resulting domestic corporation without reversion or impairment;
  3. All liabilities of the converting business entity continue as liabilities of the resulting domestic corporation;
  4. A proceeding pending by or against the converting business entity may be continued as if the conversion did not occur; and
  5. The interests in the converting business entity that are to be converted into shares, obligations, or other securities of the resulting domestic corporation or into the right to receive cash or other property are thereupon so converted, and the former holders of interests in the converting business entity are entitled only to the rights provided in the plan of conversion.The conversion shall not affect the liability or absence of liability of any holder of an interest in the converting business entity for any acts, omissions, or obligations of the converting business entity made or incurred prior to the effectiveness of the conversion. The cessation of the existence of the converting business entity in its prior form of organization in the conversion shall not constitute a dissolution or termination of the converting business entity.

History. 2001-387, s. 17.

§§ 55-11A-05 through 55-11A-09.

Reserved for future codification purposes.

Part 2. Conversion of Corporation.

§ 55-11A-10. Conversion.

A domestic corporation may convert to a different business entity if:

  1. The conversion is permitted by the laws of the state or country governing the organization and internal affairs of such other business entity; and
  2. The converting domestic corporation complies with the requirements of this Part and, to the extent applicable, the laws referred to in subdivision (1) of this section.

History. 2001-387, s. 17.

§ 55-11A-11. Plan of conversion.

  1. The converting domestic corporation shall approve a written plan of conversion containing all of the following:
    1. The name of the converting domestic corporation.
    2. The name of the resulting business entity into which the domestic corporation shall convert, its type of business entity, and the state or country whose laws govern its organization and internal affairs.
    3. The terms and conditions of the conversion.
    4. The manner and basis for converting the shares of the domestic corporation into interests, obligations, or securities of the resulting business entity or into cash or other property in whole or in part.
  2. The plan of conversion may contain other provisions relating to the conversion.
  3. The provisions of the plan of conversion, other than the provisions required by subdivisions (1) and (2) of subsection (a) of this section, may be made dependent on facts objectively ascertainable outside the plan of conversion if the plan of conversion sets forth the manner in which the facts will operate upon the affected provisions. The facts may include any of the following:
    1. Statistical or market indices, market prices of any security or group of securities, interest rates, currency exchange rates, or similar economic or financial data.
    2. A determination or action by the converting domestic corporation or by any other person, group, or body.
    3. The terms of, or actions taken under, an agreement to which the converting domestic corporation is a party, or any other agreement or document.
  4. The following requirements shall be met for a plan of conversion to be approved:
    1. The board of directors shall recommend to the shareholders that the plan of conversion be approved, unless one of the following circumstances exist, in which event the board of directors shall communicate the basis for not recommending approval of the plan of conversion to the shareholders at the time it submits the plan of conversion to the shareholders:
      1. The board of directors determines that, because of conflict of interest or other special circumstances, it should not make a recommendation that the shareholders approve the plan of conversion.
      2. G.S. 55-8-26 applies.
    2. The shareholders entitled to vote shall approve the plan of conversion.
  5. The board of directors may condition its submission of the proposed conversion on any basis.
  6. The corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders’ meeting in accordance with G.S. 55-7-05. The notice shall state that the purpose, or one of the purposes, of the meeting is to consider the plan of conversion and contain or be accompanied by a copy of the plan.
  7. Unless this Chapter, the articles of incorporation, a bylaw adopted by the shareholders or the board of directors, acting pursuant to subsection (c) of this section, require a greater vote or a vote by voting groups, the plan of conversion to be authorized 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 and, for the purpose of Article 9 of this Chapter or any provision in the articles of incorporation or bylaws adopted prior to January 1, 2002, a conversion shall be deemed to be included within the term “merger”. If any shareholder of the converting domestic corporation has or will have personal liability for any existing or future obligation of the resulting business entity solely as a result of holding an interest in the resulting business entity, then in addition to the requirements of the preceding sentence, approval of the plan of conversion by the domestic corporation shall require the affirmative vote or written consent of that shareholder.
  8. Separate voting by voting groups is required on a plan of conversion if the plan contains a provision that, if contained in a proposed amendment to articles of incorporation, would require action by one or more separate voting groups on the proposed amendment under G.S. 55-10-04, except where the consideration to be received in exchange for the shares of that group consists solely of cash.
  9. After a plan of conversion has been approved by a domestic corporation but before the articles of conversion become effective, the plan of conversion (i) may be amended as provided in the plan of conversion, or (ii) may be abandoned, subject to any contractual rights, as provided in the plan of conversion or, if there is no such provision, as determined by the board of directors without further shareholder action.

History. 2001-387, s. 17; 2005-268, s. 30; 2013-153, s. 11.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2005-268, s. 30, effective October 1, 2005, added the subsection (a1) designation; and added subsection (a2).

Session Laws 2013-153, s. 11, effective January 1, 2014, added “all of the following” in subsection (a); substituted “The following requirements shall be met for” for “For” in subsection (b); rewrote subdivision (b)(1), which formerly read “The board of directors shall recommend the plan of conversion to the shareholders, unless the board of directors determines that because of conflict of interest or other special circumstances it should make no recommendation, in which event the board of directors shall communicate the basis for its lack of recommendation to the shareholders with the plans; and”; added sub-subdivisions (b)(1)a. and (b)(1)b.; added “of conversion” in subdivision (b)(2); and made stylistic and punctuation changes in subsection (a) and subdivisions (a)(1) through (a)(3).

§ 55-11A-12. Articles of conversion.

  1. After a plan of conversion has been approved by the converting domestic corporation as provided in G.S. 55-11A-11, the converting domestic corporation shall deliver articles of conversion to the Secretary of State for filing. The articles of conversion shall state:
    1. The name of the converting domestic corporation;
    2. The name of the resulting business entity, its type of business entity, the state or country whose laws govern its organization and internal affairs, and, if the resulting business entity is not authorized to transact business or conduct affairs in this State, a designation of its mailing address and a commitment to file with the Secretary of State a statement of any subsequent change in its mailing address; and
    3. That a plan of conversion has been approved by the domestic corporation as required by law.
  2. If the domestic corporation is converting to a business entity whose formation, or whose status as a registered limited liability partnership as defined in G.S. 59-32, requires the filing of a document with the Secretary of State, then notwithstanding subsection (a) of this section, the articles of conversion shall be included as part of that document and shall contain the information required by the laws governing the organization and internal affairs of the resulting business entity.
  3. If the plan of conversion is abandoned after the articles of conversion have been filed with the Secretary of State but before the articles of conversion become effective, the converting domestic corporation shall deliver to the Secretary of State for filing prior to the time the articles of conversion become effective an amendment to the articles of conversion withdrawing the articles of conversion.
  4. The conversion takes effect when the articles of conversion become effective.
  5. Certificates of conversion shall also be registered as provided in G.S. 47-18.1.

History. 2001-387, s. 17; 2001-487, s. 62(d).

§ 55-11A-13. Effects of conversion.

  1. When the conversion takes effect:
    1. The converting domestic corporation ceases its prior form of organization and continues in existence as the resulting business entity;
    2. The title to all real estate and other property owned by the converting domestic corporation continues vested in the resulting business entity without reversion or impairment;
    3. All liabilities of the converting domestic corporation continue as liabilities of the resulting business entity;
    4. A proceeding pending by or against the converting domestic corporation may be continued as if the conversion did not occur;
    5. The shares in the converting domestic corporation that are to be converted into interests, obligations, or securities of the resulting business entity or into the right to receive cash or other property are thereupon so converted, and the former shareholders of the converting domestic corporation are entitled only to the rights provided in the plan of conversion or any rights they may have under Article 13 of this Chapter; and
    6. The resulting business entity is deemed to agree that it will promptly pay to the former shareholders of the converting domestic corporation exercising appraisal rights the amount, if any, to which they are entitled under Article 13 of this Chapter and otherwise to comply with the requirements of Article 13 as if it were a domestic corporation.The conversion shall not affect the liability or absence of liability of any shareholder of the converting domestic corporation for any acts, omissions, or obligations of the converting domestic corporation made or incurred prior to the effectiveness of the conversion. The cessation of the existence of the converting domestic corporation in its form of organization as a domestic corporation in the conversion shall not constitute a dissolution or termination of the converting domestic corporation.
  2. If the resulting business entity is not a domestic limited liability company or a domestic limited partnership, when the conversion takes effect the resulting business entity is deemed:
    1. To agree that it may be served with process in this State for enforcement of (i) any obligation of the converting domestic corporation, (ii) the appraisal rights of shareholders of the converting domestic corporation under Article 13 of this Chapter, and (iii) any obligation of the resulting business entity arising from the conversion; and
    2. To have appointed the Secretary of State as its agent for service of process in any proceeding described in subdivision (1) of this subsection. Service on the Secretary of State of any such process shall be made by delivering to and leaving with the Secretary of State, or with any clerk authorized by the Secretary of State to accept service of process, duplicate copies of the process and the fee required by G.S. 55-1-22(b). Upon receipt of service of process on behalf of a resulting business entity in the manner provided for in this section, the Secretary of State shall immediately mail a copy of the process by registered or certified mail, return receipt requested, to the resulting business entity. If the resulting business entity is authorized to transact business or conduct affairs in this State, the address for mailing shall be its principal office designated in the latest document filed with the Secretary of State that is authorized by law to designate the principal office or, if there is no principal office on file, its registered office. If the resulting business entity is not authorized to transact business or conduct affairs in this State, the address for mailing shall be the mailing address designated pursuant to G.S. 55-11A-12(a)(2).

History. 2001-387, s. 17; 2011-347, ss. 10, 11.

Effect of Amendments.

Session Laws 2011-347, ss. 10 and 11, effective October 1, 2011, in subdivision (a)(6), deleted “dissenting” preceding “former shareholders” and inserted “exercising appraisal rights”; and in subdivision (b)(1), substituted “appraisal rights of shareholders” for “rights of dissenting shareholders.”

Article 12. Transfer of Assets.

North Carolina Commentary

The title of this article in the Model Act was broadened to describe better the subject matter of the article, which is the sale, lease, exchange, or mortgage of assets.

§ 55-12-01. Disposition of assets not requiring shareholder approval and mortgage of assets.

  1. A mortgage of or other security interest in all or any part of the property of a corporation may be made by authority of the board of directors without approval of the shareholders, unless otherwise provided in the articles of incorporation or in bylaws adopted by the shareholders.
  2. Unless otherwise provided in the articles of incorporation or in bylaws adopted by the shareholders, a corporation may, on the terms and conditions and for the consideration determined by the board of directors, and without approval by the shareholders, do any of the following:
    1. Sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property in the usual and regular course of business.
    2. Transfer any or all of its property to a corporation or an unincorporated entity all the shares or ownership interests of which are owned by the corporation.
    3. Sell, lease, exchange, or otherwise dispose of any of its property, not in the usual and regular course of business, if the sale, lease, exchange, or other disposition is of less than all, or substantially all, of the corporation’s property. If the sale, lease, exchange, or other disposition would leave the corporation with a continuing business activity that represented at least twenty-five percent (25%) of total assets at the end of the most recently completed fiscal year and at least twenty-five percent (25%) of either (i) income from continuing operations before taxes or (ii) revenues from continuing operations for that fiscal year, in each case of the corporation and its subsidiaries on a consolidated basis, the sale, lease, exchange, or other disposition will conclusively be deemed to be of less than all, or substantially all, of the corporation’s property.

History. 1925, c. 235; 1929, c. 269; 1939, c. 279; G.S., s. 55-26; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2001-508, s. 1; 2013-153, s. 12.

Official Comment

A sale of “all or substantially all” the corporate assets in the regular course of business is governed by section 12.01. Mortgages of all of the corporation’s assets or redeployment of those assets through a wholly owned subsidiary are also covered by section 12.01. All other sales of “all or substantially all” the corporate assets are governed by section 12.02. Dispositions or transfers of property that do not involve “all or substantially all” the property of the corporation are not controlled by statute and may be approved by the board of directors (or authorized corporate officer) in the same manner as any other corporate transaction.

  1. The meaning of “all or substantially all”
  2. Transfers of “all or substantially all” of a corporation’s assets that do not require shareholder approval
    1. Mortgages or pledges
    2. Sales in the usual and regular course of business
    3. Transfers to a subsidiary

The phrase “all or substantially all,” chosen by the draftsmen of the Model Act, is intended to mean what it literally says, “all or substantially all.” The phrase “substantially all” is synonymous with “nearly all” and was added merely to make it clear that the statutory requirements could not be avoided by retention of some minimal or nominal residue of the original assets. A sale of all the corporate assets other than cash or cash equivalents is normally the sale of “all or substantially all” of the corporation’s property. A sale of several distinct manufacturing lines while retaining one or more lines is normally not a sale of “all or substantially all” even though the lines being sold are substantial and include a significant fraction of the corporation’s former business. If the lines retained are viewed only as a temporary operation or as a pretext to avoid the “all or substantially all” requirements, however, the statutory requirements of chapter 12 must be complied with. Similarly, a sale of a plant but retention of operating assets (e.g., machinery and equipment), accounts receivable, good will, and the like with a view toward continuing the operation at another location is not a sale of “all or substantially all” the corporation’s property.

Some court decisions have adopted a narrower construction of somewhat similar statutory language. These decisions should be viewed as resting on the diverse statutory language involved in those cases and should not be viewed as illustrating the meaning of “all or substantially all” intended by the draftsmen of the Model Act.

Section 12.01 describes transfers or dispositions of “all or substantially all” the corporate assets that do not require shareholder approval unless the articles of incorporation require it. These transactions consist of (1) mortgages or pledges of all the corporation’s property, whether or not the loan they secure is in the ordinary course of business, (2) transactions within the usual and regular course of business, and (3) transfers to wholly owned subsidiaries.

Mortgages or pledges of all the corporate assets may be demanded by lenders. They are essentially and substantively different from a sale or other disposition of assets even though they may take the form of a formal transfer of title to the mortgagee for security purposes, or of a dedication of assets to the repayment of indebtedness, as in the case of oil and gas production payments. The corporation remains in possession of the mortgaged property, may continue to use it for corporate purposes, in most cases must continue to manage the property, and may recover full title to the property by discharging the indebtedness.

Most transfers of “all or substantially all” the corporate property (as defined above) are, almost by definition, not in the usual and regular course of business; sales by real estate corporations and by corporations organized to liquidate a business are examples of sales that may be included in this part of section 12.01(a). Typically, sales falling within the usual and regular course of business do not involve the sale of the corporate name or good will.

Section 12.01 provides that a transfer of property to a wholly owned subsidiary does not require a vote of shareholders. This provision, however, may not be used as a device to avoid a vote of shareholders by a multiple-step transaction.

North Carolina Commentary

Subsection (a) is identical to former G.S. 55-112(a) and was substituted for the comparable provision in the Model Act (subdivision 12.01(a)(2)) to avoid an unintended implication that all mortgages or security interests require express approval by the board of directors. Subsection (b) consists of subsection 12.01(a) of the Model Act, except for an introductory phrase taken from former G.S. 55-112(b) and the omission of the Model Act’s subdivision 12.01(a)(2). Because the Model Act’s subsection 12.02(b) serves the same function as the language taken from former G.S. 55-112(b), that subsection was omitted.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2013-153, s. 12, effective January 1, 2014, rewrote the section heading, which formerly read “Sale of assets in regular course of business and mortgage of assets”; added “, do any of the following” in subsection (b); made a minor stylistic and punctuation change in subdivision (b)(1); and added subdivision (b)(3).

Legal Periodicals.

For comment on the disposition of corporate assets, see 43 N.C.L. Rev. 957 (1965).

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

CASE NOTES

Editor’s Note. —

The case below was decided under the Business Corporation Act adopted in 1955.

Noncompliance with Statute as Breach of Duty. —

Failure to conform to the mandates of former G.S. 55-112 constituted a breach of director’s fiduciary duty as well as a breach of the majority stockholders’ duty to the minority. Loy v. Lorm Corp., 52 N.C. App. 428, 278 S.E.2d 897, 1981 N.C. App. LEXIS 2468 (1981).

§ 55-12-02. Disposition of assets requiring shareholder approval.

  1. A corporation may sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property, otherwise than in the usual and regular course of business, on the terms and conditions and for the consideration determined by the corporation’s board of directors, if the board of directors proposes and its shareholders approve the proposed transaction.
  2. The following requirements shall be met for a transaction to be authorized:
    1. The board of directors shall recommend to the shareholders that the proposed transaction be approved unless one of the following circumstances exist, in which event the board of directors shall communicate the basis for not recommending approval of the proposed transaction to the shareholders at the time it submits the proposed transaction to the shareholders:
      1. The board of directors determines that, because of conflict of interest or other special circumstances, it should not make a recommendation that the shareholders approve the proposed transaction.
      2. G.S. 55-8-26 applies.
    2. The shareholders entitled to vote must approve the proposed transaction.
  3. The board of directors may condition its submission of the proposed transaction on any basis.
  4. The corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders’ meeting in accordance with G.S. 55-7-05. The notice must also state that the purpose, or one of the purposes, of the meeting is to consider the sale, lease, exchange, or other disposition of all, or substantially all, the property of the corporation and contain or be accompanied by a description of the transaction.
  5. Unless the articles of incorporation, a bylaw adopted by the shareholders, Article 9 or the board of directors (acting pursuant to subsection (c)) require a greater vote or a vote by voting groups, the transaction to be authorized must be approved by a majority of all the votes entitled to be cast on the transaction.
  6. After a sale, lease, exchange, or other disposition of property is authorized, the transaction may be abandoned (subject to any contractual rights) without further shareholder action.
  7. A transaction that constitutes a distribution is governed by G.S. 55-6-40 and not by this section.

History. 1925, c. 235; 1929, c. 269; 1939, c. 279; G.S., s. 55-26; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2013-153, s. 13.

Official Comment

The scope of the phrase “all or substantially all” is discussed in the Official Comment to section 12.01. All transactions that involve the sale or transfer of “all or substantially all” the corporate property must be approved by the shareholders unless they fall within one of the exceptions of section 12.01.

Section 12.02 requires the board of directors to propose the sale and then submit the proposal to the shareholders. The board of directors must make a recommendation to the shareholders that the transaction be approved, unless the board determines that because of conflict of interest or other special circumstances it should make no recommendation. If the board so determines, it must describe the conflict or circumstances, and communicate the basis for its determination, to the shareholders when it presents the proposed sale.

The proposed sale, to be approved, must receive the vote of a majority of the outstanding votes entitled by the articles of incorporation to be cast on the proposal. This is a greater vote than that required for ordinary matters under section 7.25. Nonvoting classes of shares are not given a statutory right to vote on proposed sales (either as separate voting groups or together with voting shares) by the revised Model Act on the theory that classes or series of shares that are made nonvoting by the articles of incorporation generally did not retain a voice in the areas of business the corporation may engage in the future. The articles of incorporation, however, may stipulate that specified classes or series of shares are entitled to vote by separate voting groups. Thus, in the absence of special provision in the articles of incorporation, only the shares of the corporation entitled to vote generally by the articles of incorporation are entitled to vote on sales of substantially all the assets of the corporation. The articles of incorporation may also specify that a greater percentage of votes is required to approve the proposal than specified in section 12.02.

The board of directors may condition its submission of a proposal to the shareholders under subsection (c) on any basis—for example, on its receiving a certain percentage of shareholders’ affirmative votes or that specified classes or series of shares, voting by separate voting groups, must approve the transaction or on some other basis; see the discussion of conditional submissions in the Official Comment to section 10.03.

The approval of most sales of “all or substantially all” of the corporation’s assets gives rise to dissenters’ rights under chapter 13 to shareholders who are entitled to vote on the transaction and avail themselves of the procedures described in that chapter. Sales subject to section 12.02 that do not give rise to dissenters’ rights even for voting shares include (1) sales pursuant to a court order and (2) sales that require all or substantially all of the net proceeds to be distributed to the shareholders in accordance with their respective interests within one year after the date of sale. See section 13.02. Shares not entitled to vote on the transaction do not have dissenters’ rights by statute; the articles of incorporation may grant those rights or the board of directors may elect to make them available.

Section 12.02(f) authorizes a board of directors to abandon a proposed sale without shareholder approval after it has been previously approved by the shareholders. An abandonment does not affect contractual rights that third persons may have against the corporation.

Certain corporate divisions, often called “spin offs,” “split offs,” or “split ups,” sometimes involve transactions that may be formally characterized as sales of “all or substantially all” the corporate assets when in fact they are only a step in a corporate division that does not give rise to the problem of a major change in corporate direction and therefore does not need shareholder approval. Section 12.02(g) is designed to make clear that transactions like this, which actually constitute a distribution, are not subject to section 12.02. See Siegal, “When Corporations Divide: A Statutory and Financial Analysis,” 79 HARV. L. REV. 534 (1966).

North Carolina Commentary

Article 12 changes the former law by requiring a simple majority of the shares entitled to vote instead of a two-thirds majority of all shares outstanding, whether or not otherwise entitled to vote, for the sale of substantially all of the assets of a corporation.

The Model Act’s subsection 12.02(a) provides that a corporation may sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property “(with or without the good will).” Because the drafters believed that the language in parentheses is unclear and probably adds nothing to the subsection, it was not included in subsection (a).

The Model Act was modified in subsection (b) to conform to changes made in G.S. 55-10-03.

The phrase “a bylaw adopted by the shareholders” was inserted in subsection (e) to preserve the practice under prior law.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2013-153, s. 13, effective January 1, 2014, rewrote the section heading, which formerly read “Sale of assets other than in regular course of business”; substituted “The following requirements shall be met for” for “For” in subsection (b); rewrote subdivision (b)(1), which formerly read “The board of directors must recommend the proposed transaction to the shareholders unless the board of directors determines that because of conflict of interest or other special circumstances it should make no recommendation, in which event the board of directors must communicate the basis for its lack of recommendation to the shareholders with the submission of the proposed transaction; and”; added sub-subdivisions (b)(1)a. and (b)(1)b.; and added “proposed” in subdivision (b)(2).

Legal Periodicals.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

§ 55-12-03. Article 9 to control.

Nothing in this Article shall be construed to modify in any manner the provisions or applicability of Article 9.

History. 1989, c. 265, s. 1.

North Carolina Commentary

This section, which does not appear in the Model Act, was added to clarify that Article 12 does not in any manner modify the provisions of Article 9.

Article 13. Appraisal Rights.

Part 1. Right to Appraisal and Payment for Shares.

§ 55-13-01. Definitions.

In this Article, the following definitions apply:

  1. Affiliate. — A person that directly, or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person or is a senior executive thereof. For purposes of G.S. 55-13-01(7), a person is deemed to be an affiliate of its senior executives.
  2. Beneficial shareholder. — A person who is the beneficial owner of shares held in a voting trust or by a nominee on the beneficial owner’s behalf.
  3. Corporation. — The issuer of the shares held by a shareholder demanding appraisal and, for matters covered in G.S. 55-13-22 through G.S. 55-13-31, the term includes the surviving entity in a merger.
  4. Expenses. — Reasonable expenses of every kind that are incurred in connection with a matter, including counsel fees.
  5. Fair value. — The value of the corporation’s shares (i) immediately before the effectuation of the corporate action as to which the  shareholder asserts appraisal rights, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable, (ii) using customary and current valuation concepts and techniques generally employed for similar business in the context of the transaction requiring appraisal, and (iii) without discounting for lack of marketability or minority status except, if appropriate, for amendments to the articles pursuant to G.S. 55-13-02(a)(5).
  6. Interest. — Interest from the effective date of the corporate action until the date of payment, at the rate of interest on judgments in this State on the effective date of the corporate action.
  7. Interested transaction. — A corporate action described in G.S. 55-13-02(a), other than a merger pursuant to G.S. 55-11-04 or G.S. 55-11-12, involving an interested person and in which any of the shares or assets of the corporation are being acquired or converted. As used in this definition, the following definitions apply:
    1. Interested person. — A person, or an affiliate of a person, who at any time during the one-year period immediately preceding approval by the board of directors of the corporate action met any of the following conditions:
      1. Was the beneficial owner of twenty percent (20%) or more of the voting power of the corporation, other than as owner of excluded shares.
      2. Had the power, contractually or otherwise, other than as owner of excluded shares, to cause the appointment or election of twenty-five percent (25%) or more of the directors to the board of directors of the corporation.
      3. Was a senior executive or director of the corporation or a senior executive of any affiliate thereof, and that senior executive or director will receive, as a result of the corporate action, a financial benefit not generally available to other shareholders as such, other than any of the following:
        1. Employment, consulting, retirement, or similar benefits established separately and not as part of or in contemplation of the corporate action.
        2. Employment, consulting, retirement, or similar benefits established in contemplation of, or as part of, the corporate action that are not more favorable than those existing before the corporate action or, if more favorable, that have been approved on behalf of the corporation in the same manner as is provided in G.S. 55-8-31(a)(1) and (c).
        3. In the case of a director of the corporation who will, in the corporate action, become a director of the acquiring entity, or one of its affiliates, rights and benefits as a director that are provided on the same basis as those afforded by the acquiring entity generally to other directors of the acquiring entity or such affiliate of the acquiring entity.
    2. Beneficial owner. — Any person who, directly or indirectly, through any contract, arrangement, or understanding, other than a revocable proxy, has or shares the power to vote, or to direct the voting of, shares. If a member of a national securities exchange is precluded by the rules of the exchange from voting without instruction on contested matters or matters that may affect substantially the rights or privileges of the holders of the securities to be voted, then that member of a national securities exchange shall not be deemed a “beneficial owner” of any securities held directly or indirectly by the member on behalf of another person solely because the member is the record holder of the securities. When two or more persons agree to act together for the purpose of voting their shares of the corporation, each member of the group formed thereby is deemed to have acquired beneficial ownership, as of the date of the agreement, of all voting shares of the corporation beneficially owned by any member of the group.
    3. Excluded shares. — Shares acquired pursuant to an offer for all shares having voting power if the offer was made within one year prior to the corporate action for consideration of the same kind and of a value equal to or less than that paid in connection with the corporate action.
  8. Preferred shares. — A class or series of shares the holders of which have preference over any other class or series with respect to distributions.
  9. Record shareholder. — The person in whose name shares are registered in the records of the corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with the corporation.
  10. Senior executive. — The chief executive officer, chief operating officer, chief financial officer, or anyone in charge of a principal business unit or function.
  11. Shareholder. — Both a record shareholder and a beneficial shareholder.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 2011-347, s. 1; 2018-45, s. 24.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

  1. Overview
  2. Definitions

Chapter 13 deals with the tension between the desire of the corporate leadership to be able to enter new fields, acquire new enterprises, and rearrange investor rights, and the desire of investors to adhere to the rights and the risks on the basis of which they invested. Contemporary corporation statutes in the United States attempt to resolve this tension through a combination of two devices. On the one hand, through their approval of an amendment to the articles of incorporation, a merger, share exchange or disposition of assets, the majority may change the nature and shape of the enterprise and the rights of all its shareholders. On the other hand, shareholders who object to these changes may withdraw the fair value of their investment in cash through their exercise of appraisal rights.

The traditional accommodation has been sharply criticized from two directions. From the viewpoint of investors who object to the transaction, the appraisal process is criticized for providing little help to the ordinary investor because its technicalities make its use difficult, expensive, and risky. From the viewpoint of the corporate leadership, the appraisal process is criticized because it fails to protect the corporation from demands that are motivated by the hope of a nuisance settlement or by fanciful conceptions of value. See generally Bayless Manning, “The Shareholders’ Appraisal Remedy: An Essay for Frank Coker,” 72 Yale L.J. 223 (1962).

Chapter 13 is a compromise between these opposing points of view. It is designed to increase the frequency with which assertion of appraisal rights leads to economical and satisfying solutions, and to decrease the frequency with which such assertion leads to delay, expense, and dissatisfaction. It seeks to achieve these goals primarily by simplifying and clarifying the appraisal process, as well as by motivating the parties to settle their differences in private negotiations without resort to judicial appraisal proceedings.

Chapter 13 proceeds from the premise that judicial appraisal should be provided by statute only when two conditions co-exist. First, the proposed corporate action as approved by the majority will result in a fundamental change in the shares to be affected by the action. Second, uncertainty concerning the fair value of the affected shares may cause reasonable persons to differ about the fairness of the terms of the corporate action. Uncertainty is greatly reduced, however, in the case of publicly-traded shares. This explains both the market exception described below and the limits provided to the exception.

Appraisal rights in connection with mergers and share exchanges under chapter 11 and dispositions of assets requiring shareholder approval under chapter 12 are provided when these two conditions co-exist. Each of these actions will result in a fundamental change in the shares that a disapproving shareholder may feel was not adequately compensated by the terms approved by the majority. Except for shareholders of a subsidiary corporation that is merged under section 11.05 (the “short-form” merger), only those shareholders who are entitled to vote on a transaction are entitled to appraisal rights. The linkage between voting and appraisal rights is justified because the right to a shareholder vote is a good proxy for assessing the seriousness of the change contemplated by the corporate action. This is especially true where the action triggers group-voting provisions.

Notwithstanding this linkage, amended chapter 13 eliminates appraisal for voting shareholders in several instances where it would have been available under the 1984 Act. Shareholders who are entitled to vote on a corporate action, whether because such shareholders have general voting rights or because group voting provisions are triggered, are not entitled to appraisal if the change will not alter the terms of the class or series of securities that they hold. Thus, statutory appraisal rights are not available for shares of any class of the surviving corporation in a merger or any class of shares that is not included in a share exchange. Appraisal is also not triggered by a voluntary dissolution under chapter 14 because that action does not affect liquidation rights — the only rights that are relevant following a shareholder vote to dissolve.

With the exception of reverse stock splits that result in cashing out some of the shares of a class or series, amended chapter 13 also eliminates appraisal in connection with all amendments to the articles of incorporation. This change in amended chapter 13 does not reflect a judgment that an amendment changing the terms of a particular class or series may not have significant economic effects. Rather, it reflects a judgment that distinguishing among different types of amendments for the purposes of statutory appraisal is necessarily arbitrary and thus may not accurately reflect the actual demand of shareholders for appraisal in specific instances. Instead, amended chapter 13 permits a high degree of private-ordering by delineating a list of transactions for which the corporation may voluntarily choose to provide appraisal and by permitting a provision in the articles of incorporation that eliminates, in whole or in part, statutory appraisal rights for preferred shares.

Chapter 13 also is unique in its approach to appraisal rights for publicly-traded shares. Approximately half of the general corporation statutes in the United States provide exceptions to appraisal for publicly-traded shares, on the theory that it is not productive to expose the corporation to the time, expense and cash drain imposed by appraisal demands when shareholders who are dissatisfied with the consideration offered in an appraisal-triggering transaction could sell their shares and obtain cash from the market. This exception to appraisal is generally known as the “market-out” and is referred to here as the “market exception.” Opponents of the market exception argue that it results in unfairness where neither the consideration offered in connection with the transaction nor the market price reflects the fair value of the shares, particularly if the corporate decision-makers have a conflict of interest.

Chapter 13 seeks to accommodate both views by providing a market exception that is limited to those situations where shareholders are likely to receive fair value when they sell their shares in the market after the announcement of an appraisal-triggering transaction. For the market exception to apply under chapter 13, there must first be a liquid market. Second, unique to chapter 13, the market exception does not apply in specified circumstances where the appraisal-triggering action is deemed to be a conflict-of-interest transaction.

Section 13.01 contains specialized definitions applicable only to chapter 13.

Beneficial shareholder

The definition of “beneficial shareholder” means a person who owns the beneficial interest in shares; “shares” is defined in section 1.40(22) to include, without limitation, a holder of a depository receipt for shares. Similar definitions are found in section 7.40(2) (derivative proceedings) and section 16.02(f) (inspection of records by a shareholder). In the context of chapter 13, beneficial shareholder means a person having a direct economic interest in the shares. The definition is not intended to adopt the broad definition of beneficial ownership in SEC Rule 13d-2, which includes persons with a right to vote or dispose of the shares even though they have no economic interest in them. However, section 13.02(b)(5) includes the concept of the right to vote in determining whether the event represents a conflict transaction that renders the market exception unavailable.

Corporation

The definition of “corporation”” in section 13.01(3) includes, for purposes of the post-transaction matters covered in section 13.22 through 13.31, a successor entity in a merger where the corporation is not the surviving entity. The definition does not include a domestic acquiring corporation in a share exchange or disposition of assets because the corporation whose shares or assets were acquired continues in existence in both of these instances and remains responsible for the appraisal obligations. Whether a foreign corporation or other form of domestic or foreign entity is subject to appraisal rights in connection with any of these transactions depends upon the corporation or other applicable law of the relevant jurisdiction.

Fair value

Subsection (i) of the definition of “fair value” in section 13.01(4) makes clear that fair value is to be determined immediately before the effectuation of the corporate action, rather than, as is the case under most state statutes that address the issue, the date of the shareholders’ vote. This comports with the purpose of this chapter to preserve the shareholder’s prior rights as a shareholder until the effective date of the corporate action, rather than leaving the shareholder in an ambiguous state with neither rights as a shareholder nor perfected appraisal rights. The corporation and, as relevant, its shares are valued as they exist immediately before the effectuation of the corporate action requiring appraisal. Accordingly, section 13.01(4) permits consideration of changes in the market price of the corporation’s shares in anticipation of the transaction, to the extent such changes are relevant. Similarly, in a two-step transaction culminating in a merger, the corporation is valued immediately before the second step merger, taking into account any interim changes in value. Cf. Cede & Co. v. Technicolor, Inc. , 684 A.2d 289 (Del. 1996).

The definition of “fair value” in section 13.01(4) makes several changes from the prior version. The 1984 Model Act’s definition of “fair value” was silent on how fair value was to be determined, except for a concluding clause that excluded from the valuation “any appreciation or depreciation in anticipation of the corporate action, unless exclusion would be inequitable.” The Official Comment provided that the section left to the courts “the details by which ‘fair value’ is to be determined within the broad outlines of the definition.” While the logic of the prior Official Comment continues to apply, the exclusionary clause in the prior Model Act definition, including the qualification for cases where the exclusion would be inequitable, has been deleted. Those provisions have not been susceptible to meaningful judicial interpretation and have been set aside in favor of the broader concept in subsection (ii).

The new formulation in paragraph (ii), which is patterned on section 7.22 of the Principles of Corporate Governance promulgated by the American Law Institute, directs courts to keep the methodology chosen in appraisal proceedings consistent with evolving economic concepts and adopts that part of section 7.22 which provides that fair value should be determined using “customary valuation concepts and techniques generally employed . . . for similar businesses in the context of the transaction requiring appraisal.” Subsection (ii) adopts the accepted view that different transactions and different contexts may warrant different valuation methodologies. Customary valuation concepts and techniques will typically take into account numerous relevant factors, including assigning a higher valuation to corporate assets that would be more productive if acquired in a comparable transaction but excluding any element of value attributable to the unique synergies of the actual purchaser of the corporation or its assets. For example, if the corporation’s assets include undeveloped real estate that is located in a prime commercial area, the court should consider the value that would be attributed to the real estate as commercial development property in a comparable transaction. The court should not, however, assign any additional value based upon the specific plans or special use of the actual purchaser.

Modern valuation methods will normally result in a range of values, not a particular single value. When a transaction falls within that range, “fair value” has been established. Absent unusual circumstances, it is expected that the consideration in an arm’s-length transaction will fall within the range of “fair value” for purposes of section 13.01(4). Section 7.22 of the ALI Principles of Corporate Governance also provides that in situations that do not involve certain types of specified conflicts of interest, “the aggregate price accepted by the board of directors of the subject corporation should be presumed to represent the fair value of the corporation, or of the assets sold in the case of an asset sale, unless the plaintiff can prove otherwise by clear and convincing evidence.” That presumption has not been included in the definition of “fair value” in section 13.01(4) because the framework of defined types of conflict transactions which is a predicate for the ALI”s presumption is not contained in the Model Act. Nonetheless, under section 13.01(4), a court determining fair value should give great deference to the aggregate consideration accepted or approved by a disinterested board of directors for an appraisal-triggering transaction.

Subsection (iii) of the definition of “fair value” establishes that valuation discounts for lack of marketability or minority status are inappropriate in most appraisal actions, both because most transactions that trigger appraisal rights affect the corporation as a whole and because such discounts give the majority the opportunity to take advantage of minority shareholders who have been forced against their will to accept the appraisal-triggering transaction. Subsection (iii), in conjunction with the lead-in language to the definition, is also designed to adopt the more modern view that appraisal should generally award a shareholder his or her proportional interest in the corporation after valuing the corporation as a whole, rather than the value of the shareholder’s shares when valued alone. If, however, the corporation voluntarily grants appraisal rights for transactions that do not affect the entire corporation — such as certain amendments to the articles of incorporation — the court should use its discretion in applying discounts if appropriate. As the introductory clause of section 13.01 notes, the definition of “fair value” applies only to chapter 13. See the Official Comment to section 14.34 which recognizes that a minority discount may be appropriate under that section.

Interest

The definition of “interest” in section 13.01(5) is included to apprise the parties of their respective rights and obligations. The right to receive interest is based on the elementary consideration that the corporation, rather than the shareholder demanding appraisal, has the use of the shareholder’s money from the effective date of the corporate action (when those shareholders who do not demand appraisal rights have the right to receive their consideration from the transaction) until the date of payment. Section 13.01(5) thus requires interest to be paid at the rate of interest on judgments from the effective date of the corporate action until the date of payment. The specification of the rate of interest on judgments, rather than a more subjective rate, eliminates a possible issue of contention and should facilitate voluntary settlements. Each state determines whether interest is compound or simple.

Senior executive

The definition of “senior executive” in section 13.01(8) encompasses the group of individuals in control of corporate information and the day-to-day operations. An employee of a subsidiary organization is a “senior executive” of the parent if the employee is “in charge of a principal business unit or function” of the parent and its subsidiaries on a combined or consolidated basis.

Shareholder

The definition of “shareholder” in section 13.01(9) for purposes of chapter 13 differs from the definition of that term used elsewhere in the Model Act. Section 1.40(21) defines “shareholder” as used generally in the Act to mean only a “record shareholder”; that term is specifically defined in section 13.01(7). Section 13.01(9), on the other hand, defines “shareholder” to include not only a “record shareholder” but also a “beneficial shareholder,” a term that is itself defined in section 13.01(2). The specially defined terms “record shareholder” and “beneficial shareholder” appear primarily in section 13.03, which establishes the manner in which beneficial shareholders, and record shareholders who are acting on behalf of beneficial shareholders, perfect appraisal rights. The word “shareholder” is used generally throughout chapter 13 in order to permit both record and beneficial shareholders to take advantage of the provisions of this chapter, subject to their fulfilling the applicable requirements of this chapter.

North Carolina Commentary

The reference in the definition of “fair value” (in subdivision (3)) to “the effectuation of the corporate action” means the actual merger or other transaction that will occur after the shareholders vote on the transaction.

Subdivision 13.01(4) of the Model Act fixes the interest on fair value at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. This section differs from that provision in fixing the statutory “legal rate” as a floor and allows the court more flexibility in fixing a fair interest rate by providing that it should be fair and equitable under the circumstances and that the rate currently paid by the corporation on its principal bank loans, if any, is just one of those circumstances.

Editor’s Note.

Session Laws 2011-347, s. 21, provides: “The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the Official Comments to the 2002 Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Session Laws 2011-347, s. 1, effective October 1, 2011, rewrote the Article 13 heading and the Part 1 heading.

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, rewrote the section.

Session Laws 2018-45, s. 24, effective October 1, 2018, substituted “G.S. 55-11-04 or G.S. 55-11-12” for “G.S. 55-11-04” in subdivision (7).

Legal Periodicals.

For article, “The Exclusivity of the Appraisal Remedy Under the New North Carolina Business Corporation Act: Deciding the Standard of Review for Cash-Out Mergers,” see 69 N.C.L. Rev. 501 (1991).

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For article, “Legislative Survey: Business & Banking,” see 22 Campbell L. Rev. 253 (2000).

§ 55-13-02. Right to appraisal.

  1. In addition to any rights granted under Article 9 of this Chapter, a shareholder is entitled to appraisal rights and to obtain payment of the fair value of that shareholder’s shares, in the event of any of the following corporate actions:
    1. Consummation of a merger to which the corporation is a party if either (i) shareholder approval is required for the merger by G.S. 55-11-03 or would be required but for the provisions of G.S. 55-11-03(j), except that appraisal rights shall not be available to any shareholder of the corporation with respect to shares of any class or series that remain outstanding after consummation of the merger or (ii) the corporation is a subsidiary and the merger is governed by G.S. 55-11-04 or G.S. 55-11-12.
    2. Consummation of a share exchange to which the corporation is a party as the corporation whose shares will be acquired, except that appraisal rights shall not be available to any shareholder of the corporation with respect to any class or series of shares of the corporation that is not exchanged.
    3. Consummation of a disposition of assets pursuant to G.S. 55-12-02.
    4. An amendment of the articles of incorporation (i) with respect to a class or series of shares that reduces the number of shares of a class or series owned by the shareholder to a fraction of a share if the corporation has an obligation or right to repurchase the fractional share so created or  (ii) changes the corporation into a nonprofit corporation or cooperative organization.
    5. Any other amendment to the articles of incorporation, merger, share exchange, or disposition of assets to the extent provided by the articles of incorporation, bylaws, or a resolution of the board of directors.
    6. Consummation of a conversion to a foreign corporation pursuant to Part 2 of Article 11A of this Chapter if the shareholder does not receive shares in the foreign corporation resulting from the conversion that (i) have terms as favorable to the shareholder in all material respects and (ii) represent at least the same percentage interest of the total voting rights of the outstanding shares of the corporation as the shares held by the shareholder before the conversion.
    7. Consummation of a conversion of the corporation to nonprofit status pursuant to Part 2 of Article 11A of this Chapter.
    8. Consummation of a conversion of the corporation to an unincorporated entity pursuant to Part 2 of Article 11A of this Chapter.
  2. Notwithstanding subsection (a) of this section, the availability of appraisal rights under subdivisions (1), (2), (3), (4), (6), and (8) of subsection (a) of this section shall be limited in accordance with the following provisions:
    1. Appraisal rights shall not be available for the holders of shares of any class or series of shares that are any of the following:
      1. A covered security under section 18(b)(1)(A) or (B) of the Securities Act of 1933, as amended.
      2. Traded in an organized market and has at least 2,000 shareholders and a market value of at least twenty million dollars ($20,000,000) (exclusive of the value of shares held by the corporation’s subsidiaries, senior executives, directors, and beneficial shareholders owning more than ten percent (10%) of such shares).
      3. Issued by an open-end management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, and may be redeemed at the option of the holder at net asset value.
    2. The applicability of subdivision (1) of this subsection shall be determined as of (i) the record date fixed to determine the shareholders entitled to receive notice of, and to vote at, the meeting of shareholders to act upon the corporate action requiring appraisal rights or, in the case of an offer made pursuant to G.S. 55-11-03(j), the date of the offer, or (ii) the day before the effective date of the corporate action if there is no meeting of shareholders and no offer made pursuant to G.S. 55-11-03(j).
    3. Subdivision (1) of this subsection shall not be applicable and appraisal rights shall be available pursuant to subsection (a) of this section for the holders of any class or series of shares who are required by the terms of the corporate action requiring appraisal rights to accept for such shares anything other than cash or shares of any class or any series of shares of any corporation, or any other proprietary interest of any other entity, that satisfies the standards set forth in subdivision (1) of this subsection at the time the corporate action becomes effective.
    4. Subdivision (1) of this subsection shall not be applicable and appraisal rights shall be available pursuant to subsection (a) of this section for the holders of any class or series of shares where the corporate action is an interested transaction.
  3. Notwithstanding any other provision of this section, the articles of incorporation as originally filed or any amendment to the articles may limit or eliminate appraisal rights for any class or series of preferred shares with respect to any corporate action, except that (i) no limitation or elimination shall be effective if the class or series does not have the right to vote separately as a voting group, alone or as part of a group, on the corporate action or if the corporate action is an amendment to the articles of incorporation that changes the corporation into a nonprofit corporation or a cooperative organization, and (ii) any limitation or elimination contained in an amendment to the articles of incorporation that limits or eliminates appraisal rights for any shares that are outstanding immediately prior to the effective date of the amendment, or that the corporation is or may be required to issue or sell thereafter pursuant to any conversion, exchange, or other right existing immediately before the effective date of the amendment, shall not apply to any corporate action that becomes effective within one year of that date if the corporate action would otherwise afford appraisal rights.
  4. Repealed by Session Laws 2018-45, s. 25, effective October 1, 2018.

History. 1925, c. 77, s. 1; c. 235; 1929, c. 269; 1939, c. 279; 1943, c. 270; G.S., ss. 55-26, 55-167; 1955, c. 1371, s. 1; 1959, c. 1316, ss. 30, 31; 1969, c. 751, ss. 36, 39; 1973, c. 469, ss. 36, 37; c. 476, s. 193; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.18; 1991, c. 645, s. 12; 1997-202, s. 1; 1999-141, s. 1; 2001-387, s. 26; 2003-157, s. 1; 2011-347, ss. 1, 22(c); 2018-45, s. 25.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

  1. Transactions Requiring Appraisal Rights
  2. Market Exception to Appraisal Rights
  3. Appraisal Rights in Conflict Transactions
  4. Elimination of Appraisal Rights for Preferred Shares
  5. Exclusivity of Appraisal Rights

Section 13.02(a) establishes the scope of appraisal rights by identifying those transactions which afford this right. In view of the significant degree of private ordering permitted by section 13.02(a)(5), the scope of statutory appraisal provided is somewhat narrower than that provided in the 1984 Model Act. As discussed in the first section of the Official Comment to section 13.01, statutory appraisal is made available only for corporate actions that will result in a fundamental change in the shares to be affected by the action and then only when uncertainty concerning the fair value of the affected shares may cause reasonable differences about the fairness of the terms of the corporate action. The transactions that satisfy both of these criteria are:

  1. A merger pursuant to section 11.04 or a short-form merger pursuant to section 11.05. Holders of any class or series that is to be exchanged or converted in connection with a merger under section 11.04 are entitled both to a vote under section 11.04(f) and to appraisal under section 13.02(a)(1). Although shareholders of a subsidiary that is a party to a merger under section 11.05 are not entitled to a vote, they are entitled to appraisal under 13.02(a)(1) because their interests will be extinguished by the merger. Section 13.02(a)(1)(i) denies appraisal rights to any class or series of shares in the surviving corporation if such class or series remains outstanding.
  2. A share exchange under section 11.03 if the corporation is a party whose shares are being acquired in the exchange. Consistent with the treatment in section 13.02(a)(1) of mergers requiring shareholder approval, subsection (2) provides appraisal only for those shares that will be exchanged.
  3. A disposition of assets requiring shareholder approval under section 12.02. Minimally, shareholders of all classes or series of the corporation that are generally entitled to vote on matters requiring shareholder approval will be entitled to assert appraisal rights. Whether shares of a class or series that do not have general voting rights will be entitled to vote on the asset disposition and thus become entitled to appraisal rights depends on the form of the transaction disposing of the corporation’s assets. In the usual form of this transaction, which is governed by chapter 12, the acquirer purchases substantially all of the assets and assumes substantially all of the liabilities of the corporation, which then liquidates pursuant to a plan of dissolution approved by the shareholders as part of the transaction and distributes the consideration received from the acquirer to its shareholders. If the transaction provides a non-voting class of preferred with its liquidation preference, there is no change in the contractual terms of the preferred and it is entitled neither to vote nor to appraisal rights. By the same token, a preferred class cannot be required to accept any consideration different from that called for in its liquidation preference without amending the terms of the class. For example, a plan that called for the preferred to accept securities of the acquirer in lieu of its cash liquidation preference would trigger both group voting and appraisal rights on behalf of the class. In the unusual event that the asset disposition plan contemplated that the corporation would continue in existence, the terms of a nonvoting class would not have been changed as a result of the transaction, and appraisal rights would not be available. As provided in section 12.02(g), a disposition of assets by a corporation in the course of dissolution under chapter 14 is governed by that chapter, not chapter 12, and thus does not implicate appraisal rights.
  4. Amendments to the articles of incorporation that effectuate a reverse stock split which reduces the number of shares that a shareholder owns of a class or series to a fractional share if the corporation has the obligation or right to repurchase the fractional share so created. The reasons for granting appraisal rights in this situation are similar to those granting such rights in cases of cash-out mergers, as both transactions could compel affected shareholders to accept cash for their investment in an amount established by the corporation. Appraisal is afforded only for those shareholders of a class or series whose interest is so affected.
  5. Any other merger, share exchange, disposition of assets or amendment to the articles to the extent the articles, bylaws, or a resolution of the board of directors grants appraisal rights to a particular class or series of stock. A corporation may voluntarily wish to grant to the holders of one or more of its classes or series of shares appraisal rights in connection with these important transactions whenever the Act does not provide statutory appraisal rights. The grant of appraisal rights may satisfy shareholders who might, in the absence of appraisal rights, seek other remedies. Moreover, in situations where the existence of appraisal rights may otherwise be disputed, the voluntary offer of those rights under this section may avoid litigation. Obviously, an express grant of voluntary appraisal rights under section 13.02(a)(5) is intended to override any of the exceptions to the availability of appraisal rights in section 13.02(a). Any voluntary grant of appraisal rights by the corporation to the holders of one or more of its classes or series of shares will thereby automatically make all of the provisions of chapter 13 applicable to the corporation and such holders regarding this corporate action.
  6. A domestication in which the shares held by a shareholder are reclassified in a manner that results in the shareholder holding shares either with terms that are not as favorable in all materials respects or representing a smaller percentage of the total outstanding voting rights in the corporation as those held before the domestication. Appraisal rights are not provided if the shares of a shareholder are otherwise reclassified so long as the foregoing restrictions are satisfied.
  7. A conversion to nonprofit status pursuant to subchapter 9C. Such a conversion involves such a fundamental change in the nature of the corporation that appraisal rights are provided to all of the shareholders.
  8. A conversion of the corporation to an unincorporated entity pursuant to subchapter 9E. As with the previous type of transaction, this form of conversion is so fundamental that appraisal rights are provided to all of the shareholders.

Chapter 13 provides a limited exception to appraisal rights for those situations where shareholders can either accept the consideration offered in the appraisal-triggering transaction or can obtain the fair value of their shares by selling them in the market. This provision is predicated on the theory that where an efficient market exists, the market price will be an adequate proxy for the fair value of the corporation’s shares, thus making appraisal unnecessary. Furthermore, after the corporation announces an appraisal-triggering action, the market operates at maximum efficiency with respect to that corporation’s shares because interested parties and market professionals evaluate the offer and competing offers may be generated if the original offer is deemed inadequate.

Moreover, the market exception reflects an evaluation that the uncertainty, costs and time commitment involved in any appraisal proceeding are not warranted where shareholders can sell their shares in an efficient, fair and liquid market. For these reasons, approximately half of the states have enacted market exceptions to their appraisal statutes.

For purposes of this chapter, the market exception is provided for a class or series if two criteria are met: the market in which the class or series is traded must be “liquid” and the value of the shares established by the appraisal-triggering event must be “reliable.” Liquidity is defined in section 13.02(b)(1) and requires the class or series of stock to satisfy either of two requirements: the class or series is either listed on the New York Stock Exchange or the American Stock Exchange or is designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc.; or, although not so listed or designated, the class or series has at least 2,000 record or beneficial shareholders, provided that using both concepts does not result in duplication. In this instance, the outstanding class or series must also have a market value of at least $20 million, excluding the value of shares held by the corporation’s subsidiaries, senior executives, directors and beneficial shareholders owning more than 10 percent of the class or series.

Because section 13.02(b)(3) excludes from the market exception those transactions that require shareholders to accept anything other than cash or securities that also meet the liquidity tests of section 13.02(b)(1), shareholders are assured of receiving either appraisal rights, cash from the transaction, or shares or other proprietary interests in the survivor entity that are liquid. Section 13.02(b)(2) provides that the corporation generally must satisfy the requirements of section 13.02(b)(1) on the record date for a shareholder vote on the appraisal-triggering transaction. For purposes of subsection 13.02(a)(1)(ii), the requirements of section 13.02(b)(1) must be met as of the day before the corporate action becomes effective.

The premise of the market exception is that the market must be liquid and the valuation assigned to the relevant shares must be “reliable.” Section 13.02(b)(1) is designed to assure liquidity. For purposes of these provisions, section 13.02(b)(4) is designed to assure reliability by recognizing that the market price of, or consideration for, shares of a corporation that proposes to engage in a section 13.02(a) transaction may be subject to influences where a corporation’s management, controlling shareholders or directors have conflicting interests that could, if not dealt with appropriately, adversely affect the consideration that otherwise could have been expected. Section 13.02(b)(4) addresses two groups of conflict transactions: those in clause (i), which involve controlling shareholders; and those in clause (ii), which involve senior executives and directors.

Section 13.02(b)(4)(i) covers two possible conflict situations: subsection (A) covers the acquisition or exchange of shares or assets of the corporation by a shareholder or an affiliate of the shareholder that could be considered controlling by virtue of ownership of a substantial amount of voting stock (20 percent); and subsection (B) covers the acquisition or exchange of shares or assets of the corporation by an individual or group, or by an affiliate of such individual or group, that has the ability to exercise control, through contract, stock ownership, or some other means, over at least one fourth of the board’s membership. The definition of “beneficial owner” in section 13.02(b)(5) serves to identify possible conflict situations by deeming each member of a group that agrees to vote in tandem to be a beneficial owner of all the voting shares owned by the group. In contrast, the term “beneficial shareholder,” as defined in section 13.01(2), is used to identify those persons entitled to appraisal rights. The last portion of subsection (A) recognizes that an acquisition effected in two steps (a tender offer followed by a merger) within one year, where the two steps are either on the same terms or the second step is on terms that are more favorable to target shareholders, is properly considered a single transaction for purposes of identifying conflict transactions, regardless of whether the second-step merger is governed by sections 11.04 or 11.05.

Section 13.02(b)(4)(ii) covers the acquisition or exchange of shares or assets of the corporation by a person, or an affiliate of a person, who is, or in the year leading up to the transaction was, a senior executive or director of the corporation. The section eliminates the market exception for management buyouts because participation in the buyout group is itself “a financial benefit not available to other shareholders as such.” The market exception is also not available for transactions involving other types of economic benefits (in addition to benefits afforded to shareholders generally, as such) afforded to senior executives (as defined in section 13.01(8)) and directors in specified conflict situations, unless specific objective or procedural standards are met. Section 13.01(1) specially defines the term “affiliate” for purposes of section 13.02(b)(4) to include an entity of which a person is a senior executive. Due to this specialized definition, if a senior executive of the corporation is to continue and is to receive enumerated employment and other financial benefits after the transaction, the availability of the market exception will depend on meeting one of the three conditions specified in clauses (A), (B) and (C) of section 13.02(b)(4)(ii).

First, under section 13.02(b)(4)(ii)(A), the market exception is not lost if financial benefits that result from the transaction consist of employment, consulting, retirement or similar benefits established separately and not in contemplation of the transaction. For example, if an individual has an arrangement under which benefits will be triggered on a “change of control,” such as accelerated vesting of options, retirement benefits, deferred compensation and similar items, or is afforded the opportunity to retire or leave the employ of the enterprise with more favorable economic results than would be the case absent a change of control, the existence of these arrangements would not disqualify the transaction from the market exception if the arrangements had been established as a general condition of the individual’s employment or continued employment, rather than in contemplation of the particular transaction. Second, under section 13.02(b)(4)(ii)(B), if such arrangements are established as part of, or as a condition of, the transaction, the market exception will not be lost if the arrangements are either not more favorable than those already in existence or, if more favorable, are approved by “qualified” directors ( i.e. , meeting the standard of independence specified in section 8.62(d)), in the same manner as is provided for conflicting interest transactions generally with the corporation under section 8.62. This category would include arrangements with the corporation which have been negotiated as part of, or as a condition of, the transaction or arrangements with the acquiring company or one or more of its other subsidiaries. The third situation, delineated in section 13.02(b)(4)(ii)(C), addresses a person who is a director of the issuer and, in connection with the transaction, is to become a director of the acquiring entity or its parent, or to continue as a director of the corporation when it becomes a subsidiary of the acquiring entity. In this situation, the market exception is not lost as long as that person will not be treated more favorably as a director than are other persons who are serving in the same director positions.

Section 13.02(c) permits the corporation to eliminate or limit appraisal rights for the holders of one or more series or classes of preferred shares. The operative provisions may be set forth in the corporation’s articles of incorporation as originally filed or in any amendment thereto, but any such amendment will not become effective for one year with respect to outstanding shares or shares which the corporation is or may be required to issue or sell at some later date pursuant to any rights outstanding prior to such amendment becoming effective. Shareholders who have not yet acquired, or do not have a right to acquire from the corporation, any shares of preferred stock, should have the ability either not to acquire any shares of preferred stock or to have appraisal rights granted or restored for such shares, if such shareholders so desire, before purchasing them. In contrast, because the terms of common shares are rarely negotiated, section 13.02 does not permit the corporation to eliminate or limit the appraisal rights of common shares.

With two exceptions, section 13.02(d) provides that the appraisal is the exclusive remedy for corporate action that has been completed. The theory underlying this section is that when a majority of shareholders has approved a corporate change, the corporation should be permitted to proceed even if a minority considers the change unwise or disadvantageous. The very existence of the appraisal remedy recognizes that shareholders may disagree about the value of consequences of a corporate action and that some may hold such strong views that they will want to vindicate them in a judicial proceeding. Since a judicial proceeding is insulated from the dynamics of an actual negotiation, it is not surprising that the two processes could produce different valuations. Accordingly, if such a proceeding results in an award of additional consideration to the shareholders who pursued appraisal, no inference should be drawn that the judgment of the majority was wrong or that compensation is now owed to shareholders who did not seek appraisal. Thus, an exclusivity principle is generally justified. Nevertheless, there may be exceptional circumstances where the process by which the corporate action was approved was so flawed that it is appropriate to provide more general relief on behalf of all affected shareholders. Thus, section 13.02(d)(1) does not preclude challenges to serious procedural defects in approving the action, such as a failure to obtain the votes required by statute or by the corporation’s own articles, bylaws, or board resolution authorizing the transaction. Similarly, subsection (2) creates an exception for cases where fraud or material misrepresentation have affected the shareholder vote to such an extent as to have caused the corporate action to be approved mistakenly. The concept of misrepresentation includes the omission of a material fact necessary to make statements made not misleading.

Although section 13.02(d) does not address the question of remedies, such as injunctive relief, that may be available before the corporate action is effected, it should be noted that a complaint based solely on adequacy of consideration is not actionable unless accompanied by credible allegations of wrongdoing. Section 13.02(d) is concerned with challenges only to the corporate action and does not address remedies, if any, that shareholders may have against directors or other persons as a result of the corporate action. See section 8.31 and Official Comment.

Amended North Carolina Commentary

Subdivisions (a)(1), (a)(2), and (a)(3) give a right of dissent for all shares, whether voting or nonvoting, in the case of a merger or sale or exchange of assets; the corresponding provisions in the Model Act give the right of dissent only to voting shareholders.

The right of dissent under this section, however, does not apply in a merger to shares of a corporation when approval by the shareholders of that corporation is not required under G.S. 55-11-03(g) or to shares of a parent corporation in a merger under G.S. 55-11-04. In addition, the right of dissent does not apply in a merger or share exchange to shares that are redeemable by the corporation at the time of the transaction at a price not greater than the cash to be received in exchange for such shares. The Model Act was modified in clause (i) of subdivision (a)(1) to clarify that the absence of a right of dissent applies only to the shares of the corporation covered by G.S. 55-11-03(g) and not to shares of a corporation if approval by its shareholders is required.

The Model Act was also modified in subdivision (a)(3) to provide that a right of dissent will not be available if the sale of property is pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed in cash to the shareholders within one year after the date of the sale. This is different from the Model Act, which requires the sale itself to be in cash. This subdivision thus allows more flexibility in permitting, for example, the sale to be for promissory notes or other property that will be converted to cash for distribution within the one-year period.

The language of the Model Act which excepts from the operation of the section “a limitation by dilution through issuance of shares or other securities with similar voting rights” was eliminated from the end of clause (iv) of subdivision (a)(4). The only reason for this elimination was the drafters’ opinion that the language is unnecessary; if it were necessary, it should also have been added to the end of G.S. 55-10-04(a)(4).

Clause (vi) of subdivision (a)(4), which is not in the Model Act, brings forward the same provisions in former G.S. 55-101(b). However, the drafters decided not to bring forward the unusual provision in former G.S. 55-102(a) that gave a right of dissent to the holders of any class of preferred shares with dividend arrearages if the corporation offered to exchange such shares for shares with a prior preference and that offer was accepted by any of the preferred shareholders. Such a situation may be covered by clause (i) of subdivision (a)(4).

The introductory language of subsection 13.02(a) of the Model Act was modified to provide that the rights provided by this section are in addition to any rights provided by Article 9.

By making the appraisal remedy exclusive unless the transaction is “unlawful” or “fraudulent,” subsection (b) effects a change from former G.S. 55-113(b), which provided that such remedy was “in addition to any other right [the shareholder] may have in law or in equity.”

Language was added to the Model Act provision to make it clear that subsection (b) covers a cash merger and that, in determining whether a merger was “unlawful” or “fraudulent,” the same standard applies, regardless of whether the consideration received was cash, other property, or shares of a surviving corporation.

SUPPLEMENTAL NORTH CAROLINA COMMENTARY (2011)

Effective October 1, 2011, this section was amended to limit appraisal rights under subdivision (a)(1), (2) and (3) to voting shares in the case of a merger or share exchange or sale of assets. The prior statute gave a right of appraisal for all shares, whether voting or non-voting, in such transactions. Subdivision (d), which is not in the Model Act, grandfathers the appraisal rights of a shareholder holding shares of a class or series that were issued and outstanding as of the effective date of the Act but that did not as of that date entitle the shareholder to vote on a corporate action described in subdivision (a)(1), (2) or (3) of this section; such shareholder shall be entitled to appraisal rights to the same extent as if such shares did entitle the shareholder to vote on such corporate action.

Corporations are afforded flexibility under Article 13 to deviate from the specified corporate actions that give rise to appraisal rights and the shareholders entitled to such rights. Under subdivision (a)(5) appraisal rights can be extended to any shareholders in connection with any amendment to the articles of incorporation, merger, share exchange or disposition of assets to the extent provided in the articles, bylaws or a resolution of the board of directors.

Supplemental North Carolina Commentary (2018)

Effective as of October 1, 2018, this section was amended to provide appraisal rights to voting and non-voting shareholders on an equal basis, including (i) to minority shareholders of a subsidiary corporation in a short-form merger with an unincorporated parent company under G.S. 55-11-12, and (ii) to non-tendering shareholders in second-step mergers following a tender offer in which offeror gains control under G.S. 55-11-03(j).

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Session Laws 2011-347, s. 22(a) provides: “This section is effective only if Senate Bill 26 of the 2011 Regular Session of the General Assembly becomes law.” Senate Bill 26 did not become law; therefore, the amendments made by Session Laws 2011-347, s. 22(c) and (d), which would have added subdivision (a)(9) and substituted “(8), and (9)” for “and (8)” in subsection (b), did not take effect.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, substituted “appraisal” for “dissent” in the section catchline; and rewrote the section.

Session Laws 2018-45, s. 25, effective October 1, 2018, substituted “Article 9 of this Chapter” for “Article 9” in the lead-in language of subsection (a); in subdivision (a)(1), substituted “or would be required but for the provisions of G.S. 55-11-03(j)” for “and the shareholder is entitled to vote on the merger” near the middle, and added “or G.S. 55-11-12” at the end; in subdivision (a)(2), deleted “if the shareholder is entitled to vote on the exchange” following “acquired” near the middle; deleted “if the shareholder is entitled to vote on the disposition” following “G.S. 55-12-02” in subdivision (a)(3); in subdivision (b)(2), inserted “or, in the case of an offer made pursuant to G.S. 55-11-03(j), the date of the offer” near the middle, added “shareholders and no offer made pursuant to G.S. 55-11-03(j)” at the end, and made minor stylistic changes; rewrote subsection (c); and deleted subsection (d).

Legal Periodicals.

For note as to bad faith of the majority in close corporations, see 35 N.C.L. Rev. 271 (1957).

For article, “The Exclusivity of the Appraisal Remedy Under the New North Carolina Business Corporation Act: Deciding the Standard of Review for Cash-Out Mergers,” see 69 N.C.L. Rev. 501 (1991).

For 1997 legislative survey, see 20 Campbell L. Rev. 389.

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For article, “Legislative Survey: Business & Banking,” see 22 Campbell L. Rev. 253 (2000).

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955.

A statutory appraisal is shareholder’s exclusive remedy to redress what the minority shareholders perceived to be as an inadequate price for their shares. IRA ex rel. Oppenheimer v. Brenner Cos., 107 N.C. App. 16, 419 S.E.2d 354, 1992 N.C. App. LEXIS 633 (1992).

A statutory appraisal is not a dissenting shareholder’s exclusive remedy when the shareholder has presented claims of breach of fiduciary duty, fraud, self-dealing, securities violations, or similar claims based on allegations other than solely the inadequacy of the stock price. IRA ex rel. Oppenheimer v. Brenner Cos., 107 N.C. App. 16, 419 S.E.2d 354, 1992 N.C. App. LEXIS 633 (1992).

When Statutory Appraisal Is Appropriate Remedy. —

A statutory appraisal is a dissenting shareholder’s exclusive remedy when the shareholder challenges only the fair value or price of the stock. IRA ex rel. Oppenheimer v. Brenner Cos., 107 N.C. App. 16, 419 S.E.2d 354, 1992 N.C. App. LEXIS 633 (1992).

Business Court did not err in concluding that dissenters were paid fair value for their shares in a tobacco company that sought judicial appraisal after a merger because the Court utilized various customary and current valuation concepts to determine the fair value of the dissenters’ shares, as was required under N.C. Gen. Stat. § 55-13-01(5). Reynolds Am. Inc. v. Third Motion Equities Master Fund Ltd., 2021-NCSC-162, 379 N.C. 524, 866 S.E.2d 869, 2021- NCSC-162, 2021 N.C. LEXIS 1293 (2021).

Exclusivity of Shareholders’s Remedy. —

Subsection (b) of this section now establishes the exclusivity of a dissenting shareholder’s remedy in challenging a corporation’s actions. The remedy is the exclusive remedy unless the transaction is unlawful or fraudulent. IRA ex rel. Oppenheimer v. Brenner Cos., 107 N.C. App. 16, 419 S.E.2d 354, 1992 N.C. App. LEXIS 633 (1992).

Dissent and appraisal was the exclusive remedy for shareholders aggrieved by the price offered and the method by which the price was set in a cash-out merger of a North Carolina corporation; where a minority shareholder’s complaint centered around an allegation that a corporation’s directors and a buyer had engaged in a course of conduct designed to enable them to buy the shares of the minority at an unfair price, the complaint failed to adequately allege an unlawful or fraudulent transaction, and the complaint was properly dismissed. Osher v. Ridinger, 162 N.C. App. 155, 589 S.E.2d 905, 2004 N.C. App. LEXIS 37 (2004).

Legislative Intent to Increase Available Remedies. —

The language “In addition to any other right he may have in law or equity” in former G.S. 55-113(b) showed that the legislature intended to increase the remedies available to a dissenting shareholder, not to supplant any other remedies that the shareholder might have. Austell v. Smith, 634 F. Supp. 326, 1986 U.S. Dist. LEXIS 25860 (W.D.N.C.), dismissed without op., 801 F.2d 393, 1986 U.S. App. LEXIS 30753 (4th Cir. 1986), dismissed without op., 801 F.2d 393 (4th Cir. 1986), dismissed without op., 801 F.2d 395 (4th Cir. 1986), dismissed without op., 801 F.2d 395 (4th Cir. 1986).

Plaintiffs in derivative shareholders’ action were not required to pursue statutory dissenters’ rights under former G.S. 55-113 (see now Art. 13 of ch. 55) to oppose merger during litigation in order to maintain standing. Subdivision (c) of former G.S. 55-113 would have deprived them of all interest in defendant corporation. Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 1990 N.C. LEXIS 1009 (1990).

Assertion of Claims in Federal Court. —

Pending dissent and appraisal petitions did not bar minority stockholders from asserting damage claims in federal court. Austell v. Smith, 634 F. Supp. 326, 1986 U.S. Dist. LEXIS 25860 (W.D.N.C.), dismissed without op., 801 F.2d 393, 1986 U.S. App. LEXIS 30753 (4th Cir. 1986), dismissed without op., 801 F.2d 393 (4th Cir. 1986), dismissed without op., 801 F.2d 395 (4th Cir. 1986), dismissed without op., 801 F.2d 395 (4th Cir. 1986).

Allegations of Fraud or Misrepresentation. —

Minority shareholder’s allegations failed to state a fraud claim, where they alleged that the majority stockholders intentionally engaged in a course of conduct designed to reduce the value of the corporation’s assets, which would diminish the value of minority shares and thereby allow those shares to be purchased at a reduced price. Werner v. Alexander, 130 N.C. App. 435, 502 S.E.2d 897, 1998 N.C. App. LEXIS 941 (1998).

§ 55-13-03. Assertion of rights by nominees and beneficial owners.

  1. A record shareholder may assert appraisal rights as to fewer than all the shares registered in the record shareholder’s name but owned by a beneficial shareholder only if the record shareholder (i) objects with respect to all shares of the class or series owned by the beneficial shareholder and (ii) notifies the corporation in writing of the name and address of each beneficial shareholder on whose behalf appraisal rights are being asserted. The rights of a record shareholder who asserts appraisal rights for only part of the shares held of record in the record shareholder’s name under this subsection shall be determined as if the shares as to which the record shareholder objects and the record shareholder’s other shares were registered in the names of different record shareholders.
  2. A beneficial shareholder may assert  appraisal rights as to shares of any class or series held on behalf of the shareholder only if the shareholder does both of the following:
    1. Submits to the corporation the record shareholder’s written consent to the assertion of rights no later than the date referred to in G.S. 55-13-22(b)(2)b.
    2. Submits written consent under subdivision (1) of this subsection with respect to all shares of  the class or series that are beneficially owned by the beneficial shareholder.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 2011-347, s. 1.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Section 13.03 addresses the relationship between those who are entitled to assert appraisal rights and the widespread practice of nominee or street name ownership of publicly-held shares. Generally, a shareholder must demand appraisal for all the shares of a class or series which the shareholder owns. If a record shareholder is a nominee for several beneficial shareholders, some of whom wish to demand appraisal and some of whom do not, section 13.03(a) permits the record shareholder to assert appraisal rights with respect to a portion of the shares held of record by the record shareholder but only with respect to all the shares beneficially owned by a single person. This limitation is necessary to prevent abuse by a single beneficial shareholder who is not fundamentally opposed to the proposed corporate action but who may wish to speculate on the appraisal process, as to some of that shareholder’s shares, on the possibility of a high payment. On the other hand, a shareholder who owns shares in more than one class or series may assert appraisal rights for only some but not all classes or series that the shareholder owns. This is permitted because fair treatment of one class or series does not guarantee fair treatment of other classes or series.

Section 13.03(a) also requires a record shareholder who demands appraisal with respect to a portion of the shares held by the record shareholder to notify the corporation of the name and address of the beneficial owner on whose behalf the record shareholder has demanded appraisal rights.

Section 13.03(b) permits a beneficial shareholder to assert appraisal rights directly if the beneficial shareholder submits the record shareholder’s written consent. Although generally the record shareholder is treated as the owner of shares, this section recognizes that sometimes the record shareholders are holding shares on behalf of beneficial shareholders. It would be foreign to the premises underlying nominee and street name ownership to require these record shareholders to forward demands and participate in litigation on behalf of their clients. In order to make appraisal rights effective without burdening record shareholders, beneficial shareholders should be allowed to assert their own claims as provided in this subsection. The beneficial shareholder is required to submit, no later than the date specified in section 13.22(b)(2)(ii), a written consent by the record shareholder to the assertion of appraisal rights to verify the beneficial shareholder’s entitlement and to permit the protection of any security interest in the shares. In practice, a broker’s customer who wishes to assert appraisal rights may request the broker to supply the customer with the name of the record shareholder (which may be a house nominee or a nominee of the Depository Trust Company), and a form of consent signed by the record shareholder. At the same time, the customer may want to obtain certificates for the shares so that they may be deposited pursuant to section 13.23. After the corporation has received the form of consent, the corporation must deal with the beneficial shareholder.

North Carolina Commentary

The drafters did not include the language at the end of subsection 13.03(b)(3) of the Model Act requiring a beneficial owner to dissent with respect to all shares “over which he has power to direct the vote” because they concluded that it could be construed to include shares which that person did not own either as beneficial or record holder but for which he or she was a proxy or could exercise a power of attorney. That result was not deemed desirable.

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, rewrote the section catchline, which formerly read: “Dissent by nominees and beneficial owners”; and rewrote the section.

§§ 55-13-04 through 55-13-19.

Reserved for future codification purposes.

Part 2. Procedure for Exercise of Appraisal Rights.

§ 55-13-20. Notice of appraisal rights.

  1. If any corporate action specified in G.S. 55-13-02(a) is to be submitted to a vote at a shareholders’ meeting, or where no approval of the action is required pursuant to G.S. 55-11-03(j), the meeting notice or, if applicable, the offer made pursuant to G.S. 55-11-03(j), shall state that the corporation has concluded that shareholders are, are not, or may be entitled to assert appraisal rights under this Article. If the corporation concludes that appraisal rights are or may be available, a copy of this Article shall accompany the meeting notice or offer sent to those record shareholders entitled to exercise appraisal rights.
  2. In a merger pursuant to G.S. 55-11-04 or G.S. 55-11-12, the parent corporation shall notify in writing all record shareholders of the subsidiary who are entitled to assert appraisal rights that the corporate action became effective. Notice required under this subsection shall be sent within 10 days after the corporate action became effective and include the materials described in G.S. 55-13-22.
  3. If any corporate action specified in G.S. 55-13-02(a) is to be approved by written consent of the shareholders pursuant to G.S. 55-7-04, then the following shall occur:
    1. Written notice that appraisal rights are, are not, or may be available shall be given to each record shareholder from whom a consent is solicited at the time consent of each shareholder is first solicited and, if the corporation has concluded that appraisal rights are or may be available, shall be accompanied by a copy of this Article.
    2. Written notice that appraisal rights are, are not, or may be available shall be delivered together with the notice to the applicable shareholders required by subsections (d) and (e) of G.S. 55-7-04, may include the materials described in G.S. 55-13-22, and, if the corporation has concluded that appraisal rights are or may be available, shall be accompanied by a copy of this Article.
  4. If any corporate action described in G.S. 55-13-02(a) is proposed, or a merger pursuant to G.S. 55-11-04 or G.S. 55-11-12 is effected, then the notice or offer referred to in subsection (a) or (c) of this section, if the corporation concludes that appraisal rights are or may be available, and the notice referred to in subsection (b) of this section, shall be accompanied by both of the following:
    1. Annual financial statements as described in G.S. 55-16-20(a) of the corporation that issued the shares to be appraised. The date of the financial statements shall not be more than 16 months before the date of the notice. If annual financial statements that meet the requirements of this subdivision are not reasonably available, then the corporation shall provide reasonably equivalent financial information and in any case shall provide a balance sheet as of the end of a fiscal year ending not more than 16 months before the date of the notice, an income statement for that year, and a cash flow statement for that year.
    2. The latest interim financial statements of the corporation, if any.
  5. The right to receive the information described in subsection (d) of this section may be waived in writing by a shareholder before or after the corporate action.

History. 1925, c. 77, s. 1; c. 235; 1929, c. 269; 1939, c. 5; c. 279; 1943, c. 270; G.S., ss. 55-26, 55-165, 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 2002-58, s. 2; 2011-347, s. 1; 2018-45, s. 26; 2021-106, s. 6(g).

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Before a vote is taken on a corporate action, the corporation is required by section 13.20(a) to notify record shareholders that a transaction is proposed and that the corporation has concluded either that appraisal rights are or are not available; alternatively, if the corporation is unsure about the availability of appraisal rights, it may state that appraisal rights may be available. Notice of appraisal rights is needed because many shareholders do not know what appraisal rights they may have or how to assert them. If the corporation has concluded appraisal rights are or may be available, the notice must be accompanied by a copy of this chapter.

Section 13.20(b) provides that notice be given by the parent corporation within ten days after the effective date of a merger of its subsidiary under section 11.05. This notice may be combined with the notice required by section 13.22.

North Carolina Commentary

This section adds to the Model Act’s provisions the 10-day requirement in subsection (b) and the new subsection (c). A similar 10-day requirement is included in G.S. 55-13-22(b) and in section 13.22(b) of the Model Act. The new subsection (c) was adapted from former G.S. 55-113(f), except that the period within which the damage action may be brought was increased from one to three years, thus increasing the burden on the corporation to comply with the statute. The shareholder must bring the damage action “in his own name,” and not as a class or derivative action.

Editor’s Note.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, substituted “appraisal rights” for “dissenters’ rights” in the section catchline; and rewrote the section.

Session Laws 2018-45, s. 26, effective October 1, 2018, in subsection (a), inserted “or where no approval of the action is required pursuant to G.S. 55-11-03(j)” near the beginning, inserted “or, if applicable, the offer made pursuant to G.S. 55-11-03(j)” near the middle, inserted “or offer” near the end, and made minor stylistic changes; in subsection (b), inserted “or G.S. 55-11-12” near the beginning, deleted the former second sentence, which read: “In the case of any other corporate action specified in G.S. 55-13-02(a) with respect to which shareholders of a class or series do not have the right to vote, but with respect to which those shareholders are entitled to assert appraisal rights, the corporation must notify in writing all record shareholders of such class or series that the corporate action became effective.”, and made minor stylistic changes; rewrote former subsection (d) as present subsection (d) and (e); and substituted “subsection (d) of this section” for “this subsection” in present subsection (e).

Session Laws 2021-106, s. 6(g), effective October 1, 2021, substituted “shall” for “must” throughout subsection (c); and rewrote subdivisions (d)(1) and (2).

Legal Periodicals.

For article, “The Exclusivity of the Appraisal Remedy Under the New North Carolina Business Corporation Act: Deciding the Standard of Review for Cash-Out Mergers,” see 69 N.C.L. Rev. 501 (1991).

§ 55-13-21. Notice of intent to demand payment and consequences of voting or consenting.

  1. If a corporate action specified in G.S. 55-13-02(a) is submitted to a vote at a shareholders’ meeting, a shareholder who wishes to assert appraisal rights with respect to any class or series of shares must do the following:
    1. Deliver to the corporation, before the vote is taken, written notice of the shareholder’s intent to demand payment if the proposed action is effectuated.
    2. Not vote, or cause or permit to be voted, any shares of any class or series in favor of the proposed action.
  2. If a corporate action specified in G.S. 55-13-02(a) is to be approved by less than unanimous written consent, a shareholder who wishes to assert appraisal rights with respect to any class or series of shares must satisfy both of the following requirements:
    1. The shareholder must deliver to the corporation, before the proposed action becomes effective, written notice of the shareholder’s intent to demand payment if the proposed action is effectuated, except that the written notice is not required if the notice required by G.S. 55-13-20(c) is given less than 25 days prior to the date the proposed action is effectuated.
    2. The shareholder must not execute a consent in favor of the proposed action with respect to that class or series of shares.
  3. If a corporate action specified in G.S. 55-13-02(a) does not require shareholder approval pursuant to G.S. 55-11-03(j), a shareholder who wishes to assert appraisal rights with respect to any class or series of shares must satisfy both of the following requirements:
    1. The shareholder must deliver to the corporation, before the shares are purchased pursuant to the offer made consistent with subdivision (2) of subsection (j) of G.S. 55-11-03, written notice of the shareholder’s intent to demand payment if the proposed action is effectuated.
    2. The shareholder must not tender, or cause or permit to be tendered, any shares of the class or series in response to the offer.
  4. A shareholder who fails to satisfy the requirements of subsection (a), (b), or (b1) of this section is not entitled to payment under this Article.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 2011-347, s. 1; 2018-45, s. 27.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Section 13.21 applies to all transactions requiring appraisal, except short-form mergers under section 11.05. In the latter case, shareholders of the subsidiary do not vote on the transaction but are nevertheless entitled to appraisal.

Section 13.21(a) requires the shareholder to give notice of an intent to demand payment before the vote on the corporate action is taken. This notice enables the corporation to determine how much of a cash payment may be required. It also serves to limit the number of persons to whom the corporation must give further notice during the remainder of the appraisal process.

In order for a shareholder to remain eligible to demand payment, section 13.21(a)(2) mandates that the shareholder must not vote (or, in the case of a beneficial shareholder, cause or permit to be voted) any shares of any class or series for which the shareholder is demanding appraisal in favor of the proposal.

North Carolina Commentary

This section is substantially the same as section 13.21 of the Model Act with minor clarifying changes.

Supplemental North Carolina Commentary 2018

Effective as of October 1, 2018, this section was amended to facilitate the determination of how much of a cash payment may be required by the exercise of appraisal rights upon closing a corporate action that is approved by shareholder written consent. The amendments provide that the shareholder must provide a notice of intent to demand an appraisal rights payment before the corporate action becomes effective provided notice of the corporate action was given to the shareholder at least 25 days before the effective time. The amendments also provide procedures for exercising appraisal rights to non-tendering shareholders in second-step mergers following a tender offer in which offeror gains control under G.S. 55-11-03(j).

Editor’s Note.

Session Laws 2018-45, s. 33, provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, added “and consequences of voting or consenting” in the section catchline; and rewrote the section.

Session Laws 2018-45, s. 27, effective October 1, 2018, deleted “who is entitled to vote on the corporate action and” following “a shareholder” in the lead-in language of subsection (a); rewrote subsection (b); added subsection (b1); and substituted “subsection (a), (b), or (b1)” for “subsection (a) or (b)” in subsection (c).

§ 55-13-22. Appraisal notice and form.

  1. If a corporate action requiring appraisal rights under G.S. 55-13-02(a) becomes effective, the corporation must deliver a written appraisal notice and form required by subdivision (b)(1) of this section to all shareholders who satisfied the requirements of G.S. 55-13-21. In the case of a merger under G.S. 55-11-04 or G.S. 55-11-12, the parent corporation must deliver a written appraisal notice and form to all record shareholders of the subsidiary who may be entitled to assert appraisal rights.
  2. The appraisal notice must be sent no earlier than the date the corporate action specified in G.S. 55-13-02(a) became effective and no later than 10 days after that date. The appraisal notice must include the following:
    1. A form that specifies the first date of any announcement to shareholders, made prior to the date the corporate action became effective, of the principal terms of the proposed corporate action. If such an announcement was made, the form shall require a shareholder asserting appraisal rights to certify whether beneficial ownership of those shares for which appraisal rights are asserted was acquired before that date. The form shall require a shareholder asserting appraisal rights to certify that the shareholder did not vote for or consent to the transaction.
    2. Disclosure of the following:
      1. Where the form must be sent and where certificates for certificated shares must be deposited, as well as the date by which those certificates must be deposited. The certificate deposit date must not be earlier than the date for receiving the required form under sub-subdivision b. of this subdivision.
      2. A date by which the corporation must receive the payment demand, which date may not be fewer than 40 nor more than 60 days after the date the appraisal notice required under subsection (a) of this section and form are sent. The form shall also state that the shareholder shall have waived the right to demand appraisal with respect to the shares unless the form is received by the corporation by the specified date.
      3. The corporation’s estimate of the fair value of the shares.
      4. That, if requested in writing, the corporation will provide, to the shareholder so requesting, within 10 days after the date specified in sub-subdivision b. of this subdivision, the number of shareholders who return the forms by the specified date and the total number of shares owned by them.
      5. The date by which the notice to withdraw under G.S. 55-13-23 must be received, which date must be within 20 days after the date specified in sub-subdivision b. of this subdivision.
    3. Be accompanied by a copy of this Article.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-485, s. 4; 2001-387, s. 27; 2002-58, s. 3; 2011-347, s. 1; 2018-45, s. 28.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

The purpose of section 13.22 is to require the corporation to provide shareholders with information and a form for perfecting appraisal rights. The content of this notice and form are spelled out in detail to ensure that they accomplish this purpose.

When an action is submitted to the vote of shareholders, the appraisal notice must be sent only to those persons who gave notice of their intention to demand appraisal under section 13.21 and did not vote (or permit or cause to be voted) such shares in favor of the proposed action. In a short-form merger under section 11.05, the notice must be sent to all persons who may be eligible for appraisal rights no earlier than the effective date of the merger and no later than ten days thereafter. In either case, the notice must be accompanied by a copy of this chapter.

The notice must supply a form to be used by the person asserting appraisal rights in order to complete the exercise of those rights. Under section 13.22(b)(2)(ii), the notice must specify the date by which the shareholder’s executed form must be received by the corporation, which date must be at least 40 days but not more than 60 days after the appraisal notice is sent.

Under section 13.22(b)(2)(i), the notice must also specify where and when share certificates must be deposited; the time for deposit may not be set at a date earlier than the date for receiving the required form under section 13.22(b)(2)(ii).

Sections 13.22(b)(1) and (2)(i) require the corporation to specify in the form supplied for demanding payment where the form must be sent as well as the date of the first announcement of the terms of the proposed corporate action. This is the critical date for determining the rights of shareholder-transferees: persons who became shareholders prior to that date are entitled to full appraisal rights, while persons who became shareholders on or after that date are entitled only to the more limited rights provided by section 13.25. See the Official Comments to sections 13.23 and 13.25. The date set forth in the form should be the date the principal terms of the transaction were announced by the corporation to shareholders. This may be the day the terms were communicated directly to the shareholders, included in a public filing with the Securities and Exchange Commission, published in a newspaper of general circulation that can be expected to reach the financial community, or any earlier date on which such terms were first announced by any other person or entity to such persons or sources. Any announcement to news media or to shareholders that relates to the proposed transaction but does not contain the principal terms of the transaction to be authorized at the shareholders’ meeting is not considered to be an announcement for the purposes of section 13.22.

Sections 13.22(b)(2)(iii) and (b)(2)(iv) require the corporation to state its estimate of the fair value of the shares and how shareholders may obtain the number of shareholders and number of shares demanding appraisal rights. The information required by sections 13.22(b)(2)(iii) and (b)(2)(iv) is intended to help shareholders assess whether they wish to demand payment or to withdraw their demand for appraisal, but the information under section 13.22(b)(2)(iv) is required to be sent only to those shareholders from whom the corporation has received a written request. If such request is received, the corporation must respond within ten days after forms are due pursuant to section 13.22(b)(2)(ii). Finally, section 13.22(b)(2)(v) requires the corporation to specify the date by which the shareholder’s notice to withdraw under section 13.23 must be received.

North Carolina Commentary

This section is substantially the same as section 13.22 of the Model Act with minor clarifying changes, except that the specified contents of the form required by subdivision (b)(3) were omitted in light of the changes in G.S. 55-13-25.

Supplemental North Carolina Commentary (2001)

Effective January 1, 2002, subsection (a) was amended in light of changes in G.S. 55-7-04 to permit less than unanimous shareholder action without meeting for corporation other than public corporations and to clarify that a shareholder who consents to action without meeting is not entitled to payment for the shareholder’s shares under this Article.

Editor’s Note.

Session Laws 2001-387, s. 154(a), authorizes the Revisor of Statutes to cause to be printed all explanatory comments of the drafters of the act as the Revisor deems appropriate.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, rewrote the section catchline, which formerly read: “Dissenters’ notice”; and rewrote the section.

Session Laws 2018-45, s. 28, effective October 1, 2018, in subsection (a), substituted “G.S. 55-11-04 or G.S. 55-11-12” for “G.S. 55-11-04,” and deleted the former last sentence, which read: “In the case of any other corporate action specified in G.S. 55-13-02(a) that becomes effective and with respect to which shareholders of a class or series do not have the right to vote but with respect to which such shareholders are entitled to assert appraisal rights, the corporation must deliver a written appraisal notice and form to all record shareholders of such class or series who may be entitled to assert appraisal rights.”

§ 55-13-23. Perfection of rights; right to withdraw.

  1. A shareholder who receives notice pursuant to G.S. 55-13-22 and who wishes to exercise appraisal rights must sign and return the form sent by the corporation and, in the case of certificated shares, deposit the shareholder’s certificates in accordance with the terms of the notice by the date referred to in the notice pursuant to G.S. 55-13-22(b)(2). In addition, if applicable, the shareholder must certify on the form whether the beneficial owner of such shares acquired beneficial ownership of the shares before the date required to be set forth in the notice pursuant to G.S. 55-13-22(b)(1). If a shareholder fails to make this certification, the corporation may elect to treat the shareholder’s shares as after-acquired shares under G.S. 55-13-27. Once a shareholder deposits that shareholder’s certificates or, in the case of uncertificated shares, returns the signed forms, that shareholder loses all rights as a shareholder, unless the shareholder withdraws pursuant to subsection (b) of this section.
  2. A shareholder who has complied with subsection (a) of this section may nevertheless decline to exercise appraisal rights and withdraw from the appraisal process by so notifying the corporation in writing by the date set forth in the appraisal notice pursuant to G.S. 55-13-22(b)(2)e. A shareholder who fails to so withdraw from the appraisal process may not thereafter withdraw without the corporation’s written consent.
  3. A shareholder who does not  sign and return the form and, in the case of certificated shares, deposit that shareholder’s share certificates where required, each by the date set forth in the notice described in G.S. 55-13-22(b) shall not be entitled to payment under this Article.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 2011-347, s. 1.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Section 13.23 permits shareholders to perfect their appraisal rights under subsection (a), subject to their right to withdraw under subsection (b). In the case of a transaction involving a vote by shareholders, returning the executed form and, in the case of certificated shares, depositing the shares are the shareholder’s confirmation of the shareholder’s intention expressed earlier under section 13.21(a) to pursue appraisal rights; in the case of a merger of a subsidiary under section 11.05, it is the shareholder’s first statement of this position.

The shareholder should include on the appraisal form a certification as to whether the date on which the beneficial shareholder acquired beneficial ownership of the shares was before (or on or after) the date the transaction was announced. See section 13.22(b)(1). This information permits the corporation to exercise its right under section 13.25 to defer payment of compensation for certain shares. The corporation may elect to proceed under section 13.25 with respect to those shareholders who fail to make the required certification.

Section 13.23(a) also requires persons with certificated shares who file the required form to deposit their share certificates as directed by the corporation in its appraisal notice. Once a shareholder deposits that shareholder’s shares, that shareholder loses all rights as a shareholder unless the shareholder withdraws from the appraisal process pursuant to section 13.23(b).

With respect to certificated shares, this provision differs from many statutes in that the certificates are deposited for retention, rather than “submitted for notation.” This difference reflects the requirement in section 13.22(b)(2)(i) for deposit only after the corporate action became effective; in contrast, many state statutes require shareholders to send in their certificates in anticipation of the effectuation of the proposed corporate action.

Alternatively, under section 13.23(b), a shareholder may withdraw from the appraisal process by so notifying the corporation in writing by the deadline set forth in the appraisal notice. After that date, however, a shareholder who has complied with the requirements to execute and return the form and, in the case of certificated shares, deposit the share certificates may not withdraw from the process without the corporation’s written consent.

Under section 13.23(c), a shareholder who fails to execute and return the form with respect to the shares of a class or series for which the shareholder is demanding appraisal or does not deposit that shareholder’s share certificates as required by section 13.23(a) loses all rights to pursue appraisal and obtain payment under this chapter. If a beneficial shareholder wishes to assert appraisal rights in place of the record shareholder, the beneficial shareholder must also comply with section 13.03(b).

North Carolina Commentary

This section makes minor changes from subsection 13.22(a) of the Model Act to conform it to the modifications made in G.S. 55-13-25.

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, rewrote the section catchline, which formerly read: “Duty to demand payment”; and rewrote the section.

§ 55-13-24. [Repealed]

Repealed by Session Laws 2011-347, s. 1, effective October 1, 2011.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; repealed by 2011-347, s. 1, effective October 1, 2011.

Editor’s Note.

Former G.S. 55-13-24 pertained to share restrictions.

§ 55-13-25. Payment.

  1. Except as provided in G.S. 55-13-27, within 30 days after the form required by G.S. 55-13-22(b) is due, the corporation shall pay in cash to the shareholders who complied with G.S. 55-13-23(a) the amount the corporation estimates to be the fair value of their shares, plus interest.
  2. The payment to each shareholder pursuant to subsection (a) of this section shall be accompanied by the following:
    1. The following financial information:
      1. Annual financial statements as described in G.S. 55-16-20(a) of the corporation that issued the shares to be appraised. The date of the financial statements shall not be more than 16 months before the date of payment. If annual financial statements that meet the requirements of this sub-subdivision are not reasonably available, the corporation shall provide reasonably equivalent financial information and in any case shall provide a balance sheet as of the end of a fiscal year ending not more than 16 months before the date of payment, an income statement for that year, and a cash flow statement for that year.
      2. The latest interim financial statements, if any.
    2. A statement of the corporation’s estimate of the fair value of the shares. The estimate shall equal or exceed the corporation’s estimate given pursuant to G.S. 55-13-22(b)(2)c.
    3. A statement that the shareholders described in subsection (a) of this section have the right to demand further payment under G.S. 55-13-28 and that if a shareholder does not do so within the time period specified in G.S. 55-13-28, then the shareholder shall be deemed to have accepted payment in full satisfaction of the corporation’s obligations under this Article.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; c. 770, s. 69; 1997-202, s. 2; 2011-347, s. 1; 2021-106, s. 6(h).

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Section 13.24 is applicable both to shareholders who have complied with section 13.23(a), as well as to shareholders who are described in section 13.25(a) if the corporation so chooses. The corporation must, however, elect to treat all shareholders described in section 13.25(a) either under section 13.24 or under section 13.25; it may not elect to treat some shareholders from this group under section 13.24 but treat others under section 13.25. Considerations of simplicity and harmony may prompt the corporation to elect to treat all shareholders under section 13.24.

Section 13.24 changes the relative balance between the corporation and shareholders demanding appraisal by requiring the corporation to pay in cash within 30 days after the required form is due the corporation’s estimate of the fair value of the stock plus interest. Section 13.24(b)(2) requires that estimate to at least equal the corporation’s estimate of fair value given pursuant to section 13.22(b)(2)(iii). Since under section 13.23(a) all rights as a shareholder are terminated with the deposit of that shareholder’s shares, the former shareholder should have immediate use of such money. A difference of opinion over the total amount to be paid should not delay payment of the amount that is undisputed. Thus, the corporation must pay its estimate of fair value, plus interest from the effective date of the corporate action, without waiting for the conclusion of the appraisal proceeding.

Since the former shareholder must decide whether or not to accept the payment in full satisfaction, the corporation must at this time furnish the former shareholder with the information specified in section 13.24(b), with a reminder of the former shareholder’s further rights and liabilities.

North Carolina Commentary

This section differs from the Model Act by requiring the corporation to send its offer of payment, rather than payment itself, to the dissenter upon completion of the transaction or (if the transaction did not need shareholder approval and has been completed) upon receipt of payment demand. Payment is made to the dissenter upon his acceptance of the corporation’s offer in writing. Payment is made to the nonaccepting dissenter at the commencement of the court proceeding under G.S. 55-13-30.

Subdivision (b)(1) was further modified to refer to a “statement of cash flows” instead of a “statement of changes in shareholders’ equity,” in accordance with the provisions of FASB-95.

Editor’s Note.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, rewrote the section.

Session Laws 2021-106, s. 6(h), effective October 1, 2021, in the introductory language of subsection (b) and in subdivision (b)(2), substituted “shall” for “must”; rewrote subdivision (b)(1); and in subdivision (b)(3), substituted “in G.S. 55 13 28” for “therein” and deleted “such” preceding “payment in full satisfaction.”

Legal Periodicals.

For 1997 legislative survey, see 20 Campbell L. Rev. 389.

CASE NOTES

Subsection (b) is Mandatory. —

G.S. 55-13-25(b) made the inclusion of the required information in that subsection mandatory for a payment to be complete; a letter sent to a shareholder by merging banks failed to offer an explanation as to how the fair value of the stock was calculated, so the bank’s proffered payment was incomplete, and the proper date for the determination of the shareholder’s 60-day filing period was the date of the shareholder’s payment demand. Foard v. Avery County Bank, 169 N.C. App. 625, 610 S.E.2d 460, 2005 N.C. App. LEXIS 686 (2005).

§ 55-13-26. [Repealed]

Repealed by Session Laws 2011-347, s. 1, effective October 1, 2011.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; repealed by 2011-347, s. 1, effective October 1, 2011.

Editor’s Note.

Former G.S. 55-13-26 pertained to failure to take action.

§ 55-13-27. After-acquired shares.

  1. A corporation may elect to withhold payment required by G.S. 55-13-25 from any shareholder who was required to but did not certify that beneficial ownership of all of the shareholder’s shares for which appraisal rights are asserted was acquired before the date set forth in the appraisal notice sent pursuant to G.S. 55-13-22(b)(1).
  2. If the corporation elected to withhold payment under subsection (a) of this section, it must, within 30 days after the form required by G.S. 55-13-22(b) is due, notify all shareholders who are described in subsection (a) of this section of the following:
    1. The information required by G.S. 55-13-25(b)(1).
    2. The corporation’s estimate of fair value pursuant to G.S. 55-13-25(b)(2).
    3. That they may accept the corporation’s estimate of fair value, plus interest, in full satisfaction of their demands or demand appraisal under G.S. 55-13-28.
    4. That those shareholders who wish to accept such offer must so notify the corporation of their acceptance of the corporation’s offer within 30 days after receiving the offer.
    5. That those shareholders who do not satisfy the requirements for demanding appraisal under G.S. 55-13-28 shall be deemed to have accepted the corporation’s offer.
  3. Within 10 days after receiving the shareholder’s acceptance pursuant to subsection (b) of this section, the corporation must pay in cash the amount it offered under subdivision (b)(2) of this section to each shareholder who agreed to accept the corporation’s offer in full satisfaction of the shareholder’s demand.
  4. Within 40 days after sending the notice described in subsection (b) of this section, the corporation must pay in cash the amount it offered to pay under subdivision (b)(2) of this section to each shareholder described in subdivision (b)(5) of this section.

History. 2011-347, s. 1.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Section 13.25(a) gives the corporation the option to treat differently shares acquired on or after the date of public announcement of the proposed corporate action; this date is specified by the corporation in its appraisal notice under section 13.22(b)(1). At the corporation’s option, holders of shares acquired on or after this date, or shareholders who fail to certify otherwise under section 13.23(a), are not entitled to immediate payment under section 13.24. Instead, shareholders described in subsection (a) may receive only an offer of payment which is conditioned on their agreement to accept it in full satisfaction of their claim. If the right of unconditional immediate payment were granted as to all after-acquired shares, speculators and others might be tempted to buy shares merely for the purpose of demanding appraisal. Since the function of appraisal rights is to protect investors against unforeseen changes, there is no need to give equally favorable treatment to purchasers who knew or should have known about the proposed changes.

The date used as a cut-off for determining the application of this section is when “the principal terms” of the transaction are first announced to shareholders or to a newspaper of general circulation that can be expected to reach the financial community or included in a public filing with the Securities and Exchange Commission. The cut-off should not be set at an earlier date, such as when the first public statement that the corporate action was under consideration was made, because the goal of this section is to prevent use of appraisal rights as a speculative device after the terms of the transaction are announced. See the Official Comment to section 13.22.

Section 13.25(b) requires the corporation to furnish specified information to all shareholders described in subsection (a) and offer them the option of accepting the corporation’s estimate of fair value plus interest, in full satisfaction of their claims, provided that such shareholders so accept and notify the corporation within ten days of receiving this offer. Within ten days after receiving a shareholder’s acceptance, the corporation must pay that shareholder in cash the stated fair value plus interest.

A shareholder may accept the offered payment in full satisfaction of that shareholder’s claim; alternatively, a shareholder may reject the corporation’s offer and demand a judicial determination under section 13.26 and payment of the amount so determined at the termination of the proceeding. A shareholder who does not satisfy the requirements of section 13.26 shall be deemed to have accepted the corporation’s offer.

North Carolina Commentary

Section 13.27 of the Model Act has been omitted as unnecessary in light of G.S. 55-13-25.

§ 55-13-28. Procedure if shareholder dissatisfied with payment or offer.

  1. A shareholder paid pursuant to G.S. 55-13-25 who is dissatisfied with the amount of the payment must notify the corporation in writing of that shareholder’s estimate of the fair value of the shares and demand payment of that estimate plus interest (less any payment under G.S. 55-13-25). A shareholder offered payment under G.S. 55-13-27 who is dissatisfied with that offer must reject the offer and demand payment of the shareholder’s stated estimate of the fair value of the shares, plus interest.
  2. A shareholder who fails to notify the corporation in writing of that shareholder’s demand to be paid the shareholder’s stated estimate of the fair value, plus interest, under subsection (a) of this section within 30 days after receiving the corporation’s payment or offer of payment under G.S. 55-13-25 or G.S. 55-13-27, respectively, waives the right to demand payment under this section and shall be entitled only to the payment made or offered pursuant to those respective sections.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-202, s. 3; 2011-347, s. 1.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

A shareholder who is not content with the corporation’s remittance under section 13.24, or offer of remittance under section 13.25, and wishes to pursue appraisal rights further must state in writing the amount the shareholder is willing to accept. A shareholder whose demand is deemed arbitrary, unreasonable or not in good faith, however, runs the risk of being assessed litigation expenses under section 13.31. These provisions are designed to encourage settlement without a judicial proceeding.

A shareholder to whom the corporation has made payment (or who has been offered payment under section 13.25) must make a supplemental demand within 30 days after receipt of the payment or offer of payment in order to permit the corporation to make an early decision on initiating appraisal proceedings. A failure to make such demand causes the shareholder to relinquish under section 13.26(b) anything beyond the amount the corporation paid or offered to pay.

North Carolina Commentary

The Model Act was modified in this section to reflect the fact that under G.S. 55-13-25, a dissenter who has not accepted the corporation’s offer has not yet received payment. A dissenter who fails to notify the corporation of his demand under this section resumes the status of a nondissenting shareholder.

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, substituted “with payment or offer” for “with corporation’s payment or failure to perform” in the section catchline; and rewrote the section.

Legal Periodicals.

For 1997 legislative survey, see 20 Campbell L. Rev. 389.

§ 55-13-29.

Reserved for future codification purposes.

Part 3. Judicial appraisal of shares.

§ 55-13-30. Court Action.

  1. If a shareholder makes a demand for payment under G.S. 55-13-28 that remains unsettled, the corporation shall commence a proceeding within 60 days after receiving the payment demand by filing a complaint with the Superior Court Division of the General Court of Justice to determine whether the shareholder complied with the requirements of this Article and is entitled to appraisal rights, and, if so, to determine the fair value of the shares and accrued interest. The shareholder has the burden of proving that the shareholder complied with the requirements of this Article regarding entitlement to appraisal rights. If the superior court determines that a shareholder has not complied with the requirements of this Article, the shareholder is not entitled to appraisal rights, and the court shall dismiss the proceeding as to the shareholder. If the corporation does not commence the proceeding within the 60-day period, the corporation shall pay in cash to each shareholder the amount the shareholder demanded pursuant to G.S. 55-13-28, plus interest.
  2. Repealed by Session Laws 1997-202, s. 4.
  3. The corporation shall commence the proceeding in the appropriate court of the county where the corporation’s principal office, or, if none, its registered office in this State is located. If the corporation is a foreign corporation without a registered office in this State, it shall commence the proceeding in the county in this State where the principal office or registered office of the domestic corporation merged with the foreign corporation was located at the time of the transaction.
  4. The corporation shall make all shareholders, whether or not residents of this State, whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties shall be served with a copy of the complaint. Nonresidents may be served by registered or certified mail or by publication as provided by law.
  5. The jurisdiction of the superior court in which the proceeding is commenced under subsection (b) of this section is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers shall have the powers described in the order appointing them, or in any amendment to it. The shareholders demanding appraisal rights are entitled to the same discovery rights as parties in other civil proceedings. There is no right to a trial by jury.
  6. Each shareholder made a party to the proceeding that is determined by the superior court to have complied with the requirements of this Article and is entitled to appraisal rights is entitled to judgment either (i) for the amount, if any, by which the court finds the fair value of the shareholder’s shares, plus interest, exceeds the amount paid by the corporation to the shareholder for the shareholder’s shares or (ii) for the fair value, plus interest, of the shareholder’s shares for which the corporation elected to withhold payment under G.S. 55-13-27.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-202, s. 4; 1997-485, ss. 5, 5.1; 2011-347, s. 1; 2021-106, s. 5(a).

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Section 13.30 retains the concept of judicial appraisal as the ultimate means of determining fair value. The proceeding is to be commenced by the corporation within 60 days after a timely demand for payment under section 13.26 was received. If the proceeding is not commenced within this period, the corporation must pay the additional amounts demanded by the shareholders under section 13.26. See the Official Comment to section 13.26.

All demands for payment made under section 13.26 are to be resolved in a single proceeding brought in the county in the state where the corporation’s principal office is located or, if it is a foreign corporation, where its registered office is located, or if it has no registered office, where the principal office of the corporation which issued the shares to be appraised was located. All shareholders making section 13.26 demands must be made parties, with service by publication authorized if necessary. Appraisers may be appointed within the discretion of the court. Since the nature of the proceeding is similar to a proceeding in equity or for an accounting, section 13.30(d) provides that there is no right to a jury trial. The final judgment establishes not only the fair value of the shares in the abstract but also determines how much each shareholder who made a section 13.26 demand should actually receive.

North Carolina Commentary

This section differs from the Model Act in several respects. The North Carolina version provides for the court proceeding to be commenced by the dissenter rather than the corporation. At the commencement of the proceeding, the corporation must pay the amount of its offer to the dissenter. A dissenter who does not commence a timely court proceeding may either accept the corporation’s offer or resume his status as a nondissenting shareholder. A dissenter who takes no action resumes the status of a nondissenting shareholder.

Subsection 13.30(b) of the Model Act contains special venue provisions for proceedings under this section. That provision was omitted, and general venue rules apply.

This section expressly provides in subsection (d) that dissenters in a public corporation are not entitled to a jury trial in the appraisal of the ‘fair value” of their shares.

Supplemental North Carolina Commentary (2021)

Even if a particular transaction is one for which appraisal rights are available, the shareholder must satisfy certain requirements set forth in G.S. 55-13-21, G.S. 55-13-22, and G.S. 55-13-23 to be entitled to appraisal rights including (1) providing a notice of intent to demand payment if the proposed transaction is effectuated, (2) not voting in favor of the proposed transaction, and (3) returning a form after the closing of the transaction to perfect appraisal rights, accompanied by any stock certificates in respect of the shareholder’s certificated shares. Despite these statutory requirements for appraisal, the North Carolina Business Court in Reynolds Am. Inc. v. Third Motion Equities Master Fund Ltd., 2019 NCBC 35 (2019) found that it lacked jurisdiction under G.S. 55-13-30 to review each shareholder’s entitlement to appraisal before making a determination on fair value. Effective August 16, 2021, this section is amended to confirm that a court in an appraisal proceeding commenced on or after the effective date, in addition to determining fair value of shares, has jurisdiction to first determine whether a shareholder complied with the requirements set forth in the North Carolina Business Corporation Act so as to be entitled to appraisal rights.

Editor’s Note.

This section was amended by both S.L. 1997-202, s. 4 (amending subsection (a) and repealing subsection (a1)), and S.L. 1997-485, ss. 5 and 5.1 (amending subsections (a), (c), and (d)). The effective date provisions of the two acts differed. S.L. 1997-202 applied to corporate actions to which shareholders could dissent occurring on or after October 1, 1997. S.L. 1997-485, s. 5, applied to proceedings commenced on or after October 1, 1997.

To fill a potential gap between the two acts, S.L. 1997-485, s. 5.1, amended subsection (a), as amended by s. 5 of that act, to read:

“(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the dissenter may commence a proceeding within 60 days after the date of his payment demand under G.S. 55-13-28 by filing a complaint with the Superior Court Division of the General Court of Justice to determine the fair value of the shares and accrued interest. Within 10 days after service upon it of [the] complaint, the corporation shall pay to the dissenter the amount offered by the corporation under G.S. 55-13-25.”

This version of subsection (a) applied to proceedings commenced on or after October 1, 1997, by dissenters to corporate actions that occurred before October 1, 1997.

Session Laws 2021-106, s. 5(b), made the amendments to this section by Session Laws 2021-106, s. 5(a), effective August 16, 2021, and applicable to proceedings commenced on or after that date.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, rewrote the section.

Session Laws 2021-106, s. 5(a), in subsection (a), substituted “that remains” for “which remains”, inserted “whether the shareholder complied with the requirements of this Article and is entitled to appraisal rights, and, if so, to determine”, and added the penultimate sentence; substituted “office, or, if none, its registered office” for “office (or, if none, its registered office) “ in subsection (b); in subsection (c), substituted “shareholders, whether or not residents of this State,” for “shareholders (whether or not residents of this State)” and the second occurrence of “shall” for “must”; substituted “is no” for “shall be no” in subsection (d); and inserted “that is determined by the superior court to have complied with the requirements of this Article and is entitled to appraisal rights” in subsection (e). For effective date and applicability, see editor’s note.

Legal Periodicals.

For 1997 legislative survey, see 20 Campbell L. Rev. 389.

CASE NOTES

Determination of 60-Day Filing Period. —

G.S. 55-13-25(b) made the inclusion of the required information in that subsection mandatory for a payment to be complete; a letter sent to a shareholder by merging banks failed to offer an explanation as to how the fair value of the stock was calculated, so the bank’s proffered payment was incomplete, and the proper date for the determination of the shareholder’s 60-day filing period was the date of the shareholder’s payment demand. Foard v. Avery County Bank, 169 N.C. App. 625, 610 S.E.2d 460, 2005 N.C. App. LEXIS 686 (2005).

§ 55-13-31. Court costs and expenses.

  1. The court in an appraisal proceeding commenced under G.S. 55-13-30 shall determine all court costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess costs against all or some of the shareholders demanding appraisal, in amounts the court finds equitable, to the extent the court finds such shareholders acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.
  2. The court in an appraisal proceeding may also assess the expenses for the respective parties, in amounts the court finds equitable:
    1. Against the corporation and in favor of any or all shareholders demanding appraisal if the court finds the corporation did not substantially comply with the requirements of G.S. 55-13-20, 55-13-22, 55-13-25, or 55-13-27.
    2. Against either the corporation or a  shareholder demanding appraisal, in favor of any other party, if the court finds that the party against whom expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.
  3. If the court in an appraisal proceeding finds that the expenses incurred by any shareholder were of substantial benefit to other shareholders similarly situated and that these expenses should not be assessed against the corporation, the court may direct that the expenses be paid out of the amounts awarded the shareholders who were benefited.
  4. To the extent the corporation fails to make a required payment pursuant to G.S. 55-13-25, 55-13-27, or 55-13-28, the shareholder may sue directly for the amount owed and, to the extent successful, shall be entitled to recover from the corporation all expenses of the suit.

History. 1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 2011-347, s. 1.

OFFICIAL COMMENT TO THE 2002 MODEL BUSINESS CORPORATION ACT

Section 13.31(a) provides a general rule that the costs of the appraisal proceeding should be assessed against the corporation. Nevertheless, the court is authorized to assess these costs, in whole or in part, against all or some of the shareholders demanding appraisal if it concludes they acted arbitrarily, vexatiously, or not in good faith regarding the rights provided by this chapter. Similarly, under section 13.31(b), the court may assess fees and expenses of counsel and experts against the corporation or against all or some of the shareholders demanding appraisal for the reasons stated in this subsection. Under section 13.31(c), if the corporation is not required to pay the counsel fees for the shareholders demanding appraisal, the court may require all shareholders who benefitted from the services of counsel to share in the payment of such fees. The purpose of all these grants of discretion with respect to costs and counsel fees is to increase the incentives of both sides to proceed in good faith under this chapter to attempt to resolve their disagreement without the need of a formal judicial appraisal of the value of shares.

While subsections (a)-(c) allocate costs and expenses in an appraisal proceeding, subsection (d) covers the situation where the corporation was obligated to make payment and did not meet this obligation. In that event, the shareholder may sue the corporation directly for the amount owed. In such an action, subsection (d) requires the court, to the extent the shareholder was successful, to impose all costs and expenses, including counsel fees, on the corporation.

North Carolina Commentary

Subsection (a) of this section differs from the Model Act by providing simply that “the court shall assess the costs as it finds equitable.” This language was adapted from former G.S. 55-113(e). The words “either or” were inserted before “any other” in subdivision (b)(2) to clarify a possible ambiguity.

Effect of Amendments.

Session Laws 2011-347, s. 1, effective October 1, 2011, substituted “expenses” for “counsel fees” in the section catchline; and rewrote the section.

§§ 55-13-32 through 55-13-39.

Reserved for future codification purposes.

Part 4. Other Remedies.

§ 55-13-40. Other remedies limited.

  1. The legality of a proposed or completed corporate action described in G.S. 55-13-02(a) may not be contested, nor may the corporate action be enjoined, set aside, or rescinded, in a legal or equitable proceeding by a shareholder after the shareholders have approved the corporate action.
  2. Subsection (a) of this section does not apply to a corporate action that:
    1. Was not authorized and approved in accordance with the applicable provisions of any of the following:
      1. Article 9, 9A, 10, 11, 11A, or 12 of this Chapter.
      2. The articles of incorporation or bylaws.
      3. The resolution of the board of directors authorizing the corporate action.
    2. Was procured as a result of fraud, a material misrepresentation, or an omission of a material fact necessary to make statements made, in light of the circumstances in which they were made, not misleading.
    3. Constitutes an interested transaction, unless it has been authorized, approved, or ratified by either (i) the board of directors or a committee of the board or (ii) the shareholders, in the same manner as is provided in G.S. 55-8-31(a)(1) and (c) or in G.S. 55-8-31(a)(2) and (d), as if the interested transaction were a director’s conflict of interest transaction.
    4. Was approved by less than unanimous consent of the voting shareholders pursuant to G.S. 55-7-04, provided that both of the following are true:
      1. The challenge to the corporate action is brought by a shareholder who did not consent and as to whom notice of the approval of the corporate action was not effective at least 10 days before the corporate action was effected.
      2. The proceeding challenging the corporate action is commenced within 10 days after notice of the approval of the corporate action is effective as to the shareholder bringing the proceeding.

History. 2011-347, s. 1.

Article 14. Dissolution.

Part 1. Voluntary Dissolution.

§ 55-14-01. Dissolution by incorporators or directors.

  1. The board of directors or, if the corporation has no directors, a majority of the incorporators of a corporation that has not issued shares may dissolve the corporation by delivering to the Secretary of State for filing articles of dissolution that set forth:
    1. The name of the corporation;
    2. The names and addresses of its officers, if any;
    3. The names and addresses of its directors, if any, or if none, the names and addresses of its incorporators;
    4. The date of its incorporation;
    5. That none of the corporation’s shares has been issued;
    6. That no debt of the corporation remains unpaid;
    7. Reserved for future codification purposes; and
    8. That a majority of the incorporators or the board of directors authorized the dissolution.
  2. A corporation is dissolved upon the effective date of its articles of dissolution.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 261/2; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.19.

Official Comment

Section 14.01 provides a simple method of voluntary dissolution for a corporation that has not issued shares or commenced business. These provisions are alternative: a corporation may utilize section 14.01 if it has not issued shares (even though it has commenced business) or if it has issued shares but has not commenced business. Dissolution may be accomplished in either of these situations simply by a majority vote of the incorporators or initial directors. (See section 2.05 and its Official Comment for a discussion of the roles of “incorporators” or “initial directors” in the organization of a corporation.)

This simple method of dissolution is likely to be used by name-holding corporations or by corporations formed for the initiation of a new venture when the reasons for the initial creation of the corporation have been completely realized or will never come to fruition.

The form of articles of dissolution provided in section 14.01 takes account of the fact that a corporation may utilize this section even though it has received capital from the issuance of shares or has incurred liabilities either from the commencement of business without issuing shares or from its organization; hence the articles must state that no debts remain unpaid, and that the net assets of the corporation remaining after winding up have been distributed to the shareholders.

Amended North Carolina Commentary

This section modifies the Model Act in that dissolution by the directors or incorporators is authorized only in the case of a corporation that has not issued shares. In addition, the incorporators are authorized to act only if the corporation has no directors, and the articles of dissolution must identify the officers and directors or, if none, the incorporators.

Subsection (b) was added for clarification; it parallels G.S. 55-14-03(b).

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

§ 55-14-02. Dissolution by board of directors and shareholders.

  1. A corporation’s board of directors may propose dissolution for submission to the shareholders.
  2. The following requirements shall be met for a proposal to dissolve to be adopted:
    1. The board of directors shall recommend to the shareholders that the proposal to dissolve be approved unless one of the following circumstances exist, in which event the board of directors shall communicate the basis for not recommending approval of the proposal to dissolve to the shareholders at the time it submits the proposal to dissolve to the shareholders:
      1. The board of directors determines that, because of conflict of interest or other special circumstances, it should not make a recommendation that the shareholders approve the proposal to dissolve.
      2. G.S. 55-8-26 applies.
    2. The shareholders entitled to vote must approve the proposal to dissolve as provided in subsection (e).
  3. The board of directors may condition its submission of the proposal for dissolution on any basis.
  4. The corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders’ meeting in accordance with G.S. 55-7-05. The notice must also state that the purpose, or one of the purposes, of the meeting is to consider dissolving the corporation.
  5. Unless the articles of incorporation, a bylaw adopted by the shareholders, or the board of directors (acting pursuant to subsection (c)) require a greater vote or a vote by voting groups, the proposal to dissolve to be adopted must be approved by a majority of all the votes entitled to be cast on that proposal.

History. 1901, c. 2, s. 34; Rev., s. 1195; C.S., s. 1182; 1941, c. 195; G.S., s. 55-121; 1951, c. 1005, s. 4; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2013-153, s. 14.

Official Comment

A corporation that has issued shares and commenced business may dissolve voluntarily only with the approval of its shareholders. Section 14.02 requires the board of directors to propose dissolution and then submit the proposal to the shareholders. The board of directors must make a recommendation to the shareholders that the proposal to dissolve be approved, unless it determines that because of conflict of interest or other special circumstances it should make no recommendation. If the board of directors so determines, it must describe the conflict or circumstances, and communicate the basis for its determination, to the shareholders when presenting the proposal to dissolve to the shareholders.

Dissolution, to be approved, must receive the vote of a majority of the outstanding votes entitled by the articles of incorporation to vote on the proposal. This is a greater vote than that required for ordinary matters under section 7.25. Nonvoting classes of shares are not given a statutory right to vote on proposals to dissolve (either as separate voting groups or together with voting shares) by the Revised Model Act on the theory that, upon dissolution, the rights of all classes or series of shares are fixed by the articles of incorporation. The articles of incorporation, however, may stipulate that specified classes or series of shares are entitled to vote by separate voting groups. Thus, in the absence of specific provision in the articles of incorporation, only the shares of the corporation entitled to vote generally by the articles of incorporation are entitled to vote on dissolution. The articles of incorporation may also specify that a greater percentage of votes is required to approve the proposal than is required by section 14.02.

The board of directors may condition its submission of a proposal to the shareholders under subsection (c) on its receiving a specified percentage of the votes of shareholders of one or more classes or series, voting by separate voting groups, or on some other basis. See the discussion of conditional submissions in the Official Comment to section 10.03.

Section 14.04 permits the corporation to revoke the dissolution under the circumstances described.

North Carolina Commentary

This section differs from former G.S. 55-118(a) in that only voting shares are entitled to vote on a proposal to dissolve and, unless otherwise provided in the articles of incorporation, a bylaw adopted by the shareholders, or the resolution of the board of directors approving the dissolution, only a majority of the voting shares is required to adopt the proposal. It should be noted that all shareholders, whether or not entitled to vote, are still entitled to notice of the shareholders’ meeting at which the dissolution proposal will be considered. Under prior law, the board of directors was required to recommend the dissolution; under this section, the board must recommend the dissolution proposal to the shareholders unless it determines that, because of conflict of interest or other special circumstances, it should make no recommendation to the shareholders. In addition, the board of directors may now condition its submission of a dissolution proposal “on any basis.”

The language of the Model Act was modified in subsection (b) to conform to changes made in G.S. 55-10-03.

Under former G.S. 55-117, a corporation could be dissolved by written consent of all of the shareholders, without action by the board of directors. This provision was not brought forward.

Editor’s Note.

Session Laws 2013-153, s. 15 provides: “The Revisor of Statutes may cause to be printed all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Effect of Amendments.

Session Laws 2013-153, s. 14, effective January 1, 2014, substituted “The following requirements shall be met for” for “For” in subsection (b); rewrote subdivision (b)(1), which formerly read “The board of directors must recommend dissolution to the shareholders unless the board of directors determines that because of conflict of interest or other special circumstances it should make no recommendation, in which event the board of directors must communicate the proposal and the basis for its lack of recommendation to the shareholders; and”; and added sub-subdivisions (b)(1)a. and (b)(1)b.

CASE NOTES

Editor’s Note. —

The cases below were decided under prior law.

Statute Settles Question as to When Dissolution Allowed. —

Former G.S. 55-121 settled the question formerly much mooted in the courts as to whether, and under what circumstances, a corporation could be dissolved by the stockholders, when no time was fixed for its duration, upholding and extending this power of voluntary dissolution as established by the better considered decisions on the subject. White v. Kincaid, 149 N.C. 415, 63 S.E. 109, 1908 N.C. LEXIS 366 (1908).

Part of Every Charter. —

The provision of the statute enters into every charter, and unless otherwise enacted by the legislature, every stockholder takes and holds his stock subject to the power of voluntary dissolution, by resolution of the directors concurred in by two thirds in interest of the stockholders. White v. Kincaid, 149 N.C. 415, 63 S.E. 109, 1908 N.C. LEXIS 366 (1908).

Directors Are Trustees in Dissolution Proceedings. —

The directors of a corporation in proceedings for dissolution are trustees in the sense that they must act faithfully in their judgment for the benefit of the corporation and in furtherance of its interest, and not for the purpose of unjustly oppressing the holders of the minority stock, or to attain their own personal ends. White v. Kincaid, 149 N.C. 415, 63 S.E. 109, 1908 N.C. LEXIS 366 (1908).

Motive for Dissolution Generally Immaterial. —

When a corporation lawfully proceeds to wind up its affairs in accordance with the statute, the motive prompting the act, however reprehensible or malicious, is not, as a rule, relevant to the inquiry; and the courts will not undertake to interfere with the honest exercise of discretionary powers vested by statute in the management of a corporation, however unwise or improvident it may seem in a given instance. White v. Kincaid, 149 N.C. 415, 63 S.E. 109, 1908 N.C. LEXIS 366 (1908).

Liquidation to Escape Judgment. —

An attempted liquidation by a corporation, to escape judgment for the refund of money wrongfully distributed, is in fraud of creditors. Chatham v. Mecklenburg Realty Co., 180 N.C. 500, 105 S.E. 329, 1920 N.C. LEXIS 122 (1920).

Suits Pending Dissolution. —

Where it appears in an action that the indebtedness sought to be recovered was claimed to be due a corporation, and that the suit was instituted by the individual stockholders, a judgment as of nonsuit is properly entered, though proceedings in dissolution of the corporation were being had under the statute, the proper party plaintiff being the corporation or a receiver appointed therefor. Worthington v. Gilmers, Inc., 190 N.C. 128, 129 S.E. 153, 1925 N.C. LEXIS 25 (1925).

§ 55-14-03. Articles of dissolution.

  1. At any time after dissolution is authorized pursuant to G.S. 55-14-02, the corporation may dissolve by delivering to the Secretary of State for filing articles of dissolution setting forth:
    1. The name of the corporation;
    2. The names and addresses of its officers;
    3. The names and addresses of its directors;
    4. The date dissolution was authorized;
    5. A statement that shareholder approval was obtained as required by this Chapter.
    6. Repealed by Session Laws 1991, c. 645, s. 10(c).
  2. A corporation is dissolved upon the effective date of its articles of dissolution.
  3. For purposes of this Chapter, a dissolved corporation is a corporation whose articles of dissolution have become effective and includes a successor entity to which the remaining assets of the corporation are transferred subject to its liabilities for purposes of a liquidation.

History. 1901, c. 2, s. 34; Rev., s. 1195; C.S., s. 1182; 1941, c. 195; G.S., s. 55-121; 1951, c. 1005, s. 4; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1991, c. 645, s. 10(c); 2005-268, s. 31.

Official Comment

The act of filing the articles of dissolution makes the decision to dissolve a matter of public record and establishes the time when the corporation must begin the process of winding up and cease carrying on its business except to the extent necessary for winding-up. The articles of dissolution must describe the manner in which the proposal to dissolve was submitted to the shareholders and describe the vote taken.

Under the Model Act, articles of dissolution may be filed at the commencement of winding-up or at any time thereafter. This is the only filing required for voluntary dissolution; no filing is required to mark the completion of winding-up since the existence of the corporation continues for certain purposes even after the business is wound up and the assets remaining after satisfaction of all creditors are distributed to the shareholders. No time limit for filing the articles is specified, and it often may be desirable to postpone filing until winding up is far along or even complete.

A corporation is dissolved on the date the articles of dissolution are effective. After this date the corporation is referred to as a “dissolved corporation,” although its existence continues under section 14.05 for purposes of winding up.

North Carolina Commentary

Articles of dissolution are the only required filing under this Act, and a corporation is dissolved on the effective date of its articles of dissolution. There is no filing comparable to the certificate of completed liquidation required under former G.S. 55-121. Articles of dissolution may be filed at any time after dissolution is authorized.

This section modifies the Model Act by providing that the articles of dissolution shall contain the names and addresses of the corporation’s officers and directors, so that creditors and other interested parties can identify the persons responsible for winding up the affairs of the corporation. Minor clarifying changes were also made in subsection (a).

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section adds a definition of “dissolved corporation” for purposes of the North Carolina Business Corporation Act.

Effect of Amendments.

Session Laws 2005-268, s. 31, effective October 1, 2005, added subsection (c).

§ 55-14-04. Revocation of dissolution.

  1. A corporation may revoke its dissolution within 120 days after its effective date.
  2. Revocation of dissolution must be authorized in the same manner as the dissolution was authorized unless an authorization under G.S. 55-14-02 permitted revocation by action of the board of directors alone, in which event the board of directors may revoke the dissolution without shareholder action.
  3. After the revocation of dissolution is authorized, the corporation may revoke the dissolution by delivering to the Secretary of State for filing articles of revocation of dissolution, together with a copy of its articles of dissolution, that set forth:
    1. The name of the corporation;
    2. The effective date of the dissolution that was revoked;
    3. The date that the revocation of dissolution was authorized;
    4. If the corporation’s board of directors (or incorporators) revoked the dissolution, a statement to that effect;
    5. If the corporation’s board of directors revoked a dissolution authorized by the shareholders, a statement that revocation was permitted by action by the board of directors alone pursuant to that authorization; and
    6. If shareholder action was required to revoke the dissolution, the information required by G.S. 55-14-03(a)(3) or (4) with respect to the revocation.
  4. Revocation of dissolution is effective upon the effective date of the articles of revocation of dissolution.
  5. When the revocation of dissolution is effective, it relates back to and takes effect as of the effective date of the dissolution and the corporation resumes carrying on its business as if dissolution had never occurred, subject to the rights of any person who reasonably relied to his prejudice upon the filing of the articles of dissolution.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Voluntary dissolution may be revoked within 120 days of the effective date of the dissolution. Because of the importance and finality of dissolution, the decision to revoke dissolution generally requires shareholder authorization (unless the dissolution was approved solely by the initial directors or incorporators under section 14.01). Section 14.04(b), however, contemplates that the board of directors may revoke dissolution if it is granted that authority in advance by the shareholders when approving the dissolution. Such authorization is often included in proposals to dissolve that are contingent upon the effectuation of another transaction, such as a sale of corporate assets not in the ordinary course of business.

Certain other action requiring shareholder approval may be revoked by the board of directors without express shareholder approval. (See sections 11.03 and 12.02). By contrast, dissolution under section 14.04 may not be revoked by the board of directors without approval of the shareholders.

Articles of revocation of dissolution must be filed to reflect the decision to resume the business of the corporation. The information required in these articles parallels the information required in the original articles of dissolution.

The effect of articles of revocation of dissolution is to eliminate the requirement that the corporation cease to conduct its business except as part of the winding-up process and permit it to resume its business without limitation and as if dissolution had never occurred.

North Carolina Commentary

Under former G.S. 55-120(a), a corporation could revoke its dissolution at any time prior to the filing of the certificate of completed liquidation. Since the provision for filing a certificate of completed liquidation has not been brought forward, this section provides that any revocation must occur within 120 days after the effective date of the dissolution.

Minor clarifying changes to the Model Act were made in subsections (a) and (b).

Subsection (e) changes former G.S. 55-120(b) by providing that the revocation relates back to the effective date of the dissolution as if the dissolution had never occurred. The Model Act was modified, however, to provide that the relation back rule is subject to the rights of any person who reasonably relied to his prejudice upon the filing of the articles of dissolution.

Former G.S. 55-120(c) expressly provided for a shareholder’s suit to cancel articles of dissolution containing false statements. Although this Act contains no similar provision, such a suit could continue to be brought under general principles.

Editor’s Note.

Subdivision (a)(4) of G.S. 55-14-03, referred to in subdivision (c)(6) of this section, was repealed by Session Laws 1991, c. 645, s. 10(c).

§ 55-14-05. Effect of dissolution.

  1. A dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs, including:
    1. Collecting its assets;
    2. Disposing of its properties that will not be distributed in kind to its shareholders;
    3. Discharging or making provision for discharging its liabilities;
    4. Distributing its remaining property among its shareholders according to their interests; and
    5. Doing every other act necessary to wind up and liquidate its business and affairs.
  2. Dissolution of a corporation does not:
    1. Transfer title to the corporation’s property;
    2. Prevent transfer of its shares or securities, although the authorization to dissolve may provide for closing the corporation’s share transfer records;
    3. Subject its directors or officers to standards of conduct different from those prescribed in Article 8;
    4. Change quorum or voting requirements for its board of directors or shareholders; change provisions for selection, resignation, or removal of its directors or officers or both; or change provisions for amending its bylaws;
    5. Prevent commencement of a proceeding by or against the corporation in its corporate name;
    6. Abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution; or
    7. Terminate the authority of the registered agent of the corporation.
  3. After the end of the tax year in which dissolution occurs, a dissolved corporation is not subject to the annual franchise tax unless it engages in business activities not appropriate to winding up and liquidating its business and affairs as permitted by subsection (a).

History. 1955, c. 1371, s. 1; 1973, c. 469, ss. 39, 40; c. 476, s. 193; 1989, c. 265, s. 1.

Official Comment

Section 14.05(a) provides that dissolution does not terminate the corporate existence but simply requires the corporation thereafter to devote itself to winding up its affairs and liquidating its assets; after dissolution, the corporation may not carry on its business except as may be appropriate for winding-up.

The Model Act uses the term “dissolution” in the specialized sense described above and not to describe the final step in the liquidation of the corporate business. This is made clear by section 14.05(b), which provides that chapter 14 dissolution does not have any of the characteristics of common law dissolution, which treated corporate dissolution as analogous to the death of a natural person and abated lawsuits, vested equitable title to corporate property in the shareholders, imposed the fiduciary duty of trustees on directors who had custody of corporate assets, and revoked the authority of the registered agent. Section 14.05(b) expressly reverses all of these common law attributes of dissolution and makes clear that the rights, powers, and duties of shareholders, the directors, and the registered agent are not affected by dissolution and that suits by or against the corporation are not affected in any way.

North Carolina Commentary

The consequences of filing articles of dissolution under this Act remain the same as under former G.S. 55-114(b). Subdivision (b)(2) expressly permits the dissolution proposal to provide for closing of the corporation’s share transfer records, a procedure that was not specifically addressed under prior law.

Subsection (c) brings forward the provision of former G.S. 55-114(c), under which a dissolved corporation was not subject to franchise tax unless it engaged in business activities not appropriate to winding up and liquidating its business.

Legal Periodicals.

For article, “Close Corporation Shareholder Reasonable Expectations: The Larger Context,” see 22 Wake Forest L. Rev. 41 (1987).

For article, “The Statutory Protection Of Minority Shareholders in the United Kingdom,” see 22 Wake Forest L. Rev. 81 (1987).

For article, “Using Alternative Dispute Resolution Techniques to Settle Conflicts Among Shareholders of Closely Held Corporations,” see 22 Wake Forest L. Rev. 105 (1987).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Dissolution does not terminate the corporation’s existence nor its amenability to suit. Baker v. Rushing, 104 N.C. App. 240, 409 S.E.2d 108, 1991 N.C. App. LEXIS 1018 (1991).

Effect of Dissolution on Pending Action. —

Where a corporation has been served with summons and has filed answer, the action against it does not abate upon its subsequent dissolution. Lertz v. Hughes Bros., 208 N.C. 490, 181 S.E. 342, 1935 N.C. LEXIS 58 (1935).

Magistrate’s order denying defendant employer’s motions to extend time on three discovery matters based on the employer’s dissolution was contrary to law as the employer’s existence did not end at the employer’s dissolution, which was but the first part of the winding up and termination process; defending a lawsuit was one of the limited activities allowed a company in dissolution to continue the winding up process. Miceli v. KBRG of Statesville, LLC, 2008 U.S. Dist. LEXIS 61169 (W.D.N.C. July 23, 2008).

Effect of Temporary Suspension of Charter Under G.S. 105-230. —

Allegations in the complaint to the effect that plaintiff corporation’s charter was temporarily suspended under G.S. 105-230 less than a year prior to the institution of the action did not disclose that the corporation did not have legal capacity to institute the action. Mica Indus., Inc. v. Penland, 249 N.C. 602, 107 S.E.2d 120, 1959 N.C. LEXIS 397 (1959).

A corporation could not bring suit to enforce a contract entered into during a period of revenue suspension. South Mecklenburg Painting Contractors v. Cunnane Group, Inc., 134 N.C. App. 307, 517 S.E.2d 167, 1999 N.C. App. LEXIS 743 (1999).

Effect of Dissolution on Power to File Bankruptcy. —

Administrative dissolution of North Carolina corporation pursuant to G.S. 55-14-05 does not strip the corporation of the power and ability to file a Chapter 7 bankruptcy because G.S. 55-14-05 allows dissolved corporations to retain their corporate existence for the purpose of engaging in activities to wind up their business and liquidate their assets and the filing of a Chapter 7 bankruptcy is an obvious way to liquidate those assets; thus, a motion to dismiss for lack of jurisdiction filed by a defendant against which the debtor corporation had filed an adversary proceeding was properly denied and overruled. Saslow v. Times Oil Corp., 2007 Bankr. LEXIS 439 (Bankr. M.D.N.C. Feb. 6, 2007).

Failure to Reinstate Suspended Charter. —

When a corporation’s charter is suspended pursuant to G.S. 105-230, the same may be reinstated within five years upon payment of fees and taxes due; and if the charter is not so reinstated within five years, then liquidation of corporate assets is as provided in G.S. 105-232. Raleigh Swimming Pool Co. v. Wake Forest Country Club, 11 N.C. App. 715, 182 S.E.2d 273, 1971 N.C. App. LEXIS 1621 (1971).

Standing to Maintain Action on Contract Where Articles Suspended. —

A corporation whose articles of incorporation were suspended under G.S. 105-230 for failure to pay taxes had standing under former G.S. 55-114(b) to maintain an action to recover the amount due on a contract. Raleigh Swimming Pool Co. v. Wake Forest Country Club, 11 N.C. App. 715, 182 S.E.2d 273, 1971 N.C. App. LEXIS 1621 (1971).

Property Does Not Revert or Escheat. —

Upon the dissolution or extinction of a corporation for any cause, the real property conveyed to it in fee does not revert to the original grantors or their heirs, and its personal property does not escheat to the State; and this is so whether or not the duration of the corporation was limited by its charter or general statute. Wilson v. Leary, 120 N.C. 90, 26 S.E. 630, 1897 N.C. LEXIS 20 (1897).

How Assets Distributed. —

When the receiver has collected the assets, he is required to pay all the debts, if the funds are sufficient, and if the funds are not sufficient, to distribute the same ratably, among all the creditors who prove their claims. When the court of equity, through its receiver, takes charge of the assets, they are to be distributed pro rata among the creditors, subject to such priorities as have already accrued. Merchants Nat'l Bank v. Newton Cotton Mills, 115 N.C. 507, 20 S.E. 765, 1894 N.C. LEXIS 263 (1894).

Creditors Come Before Stockholders. —

A corporation cannot settle with its members, by the application of assets to the retirement or redemption of the stock of the shareholders, until it has first settled and discharged all its liabilities, and any agreement among the shareholders looking to such arrangement will be void as to creditors. Heggie v. People's Bldg. & Loan Ass'n, 107 N.C. 581, 12 S.E. 275, 1890 N.C. LEXIS 111 (1890).

Automatic bankruptcy stay did not apply to preclude a creditor from enforcing its security interest in a vehicle titled in a corporation wholly owned by bankruptcy debtors, since dissolution of the corporation prior to the bankruptcy petition did not transfer the vehicle to the debtors and the vehicle was thus not property of the bankruptcy estate. In re Anderson, 2017 Bankr. LEXIS 63 (Bankr. E.D.N.C. Jan. 10, 2017).

When Bondholders Are General Creditors. —

Where payment of interest on bonds issued to preferred stockholders in reorganization of corporation was not restricted to payment out of earnings, but, on the contrary, the obligation was fixed and certain in the payment of interest out of assets of the corporation, this made and constituted the holders of such bonds under North Carolina statutory law general creditors. Bemis Hardwood Lumber Co. v. United States, 117 F. Supp. 851, 1954 U.S. Dist. LEXIS 4629 (W.D.N.C. 1954).

Acquisition of New Property Not Incident to Winding Up. —

While former G.S. 55-114(b) provided that a dissolved corporation continued to function for the limited purpose of winding up its affairs, the acquisition of new property was not incident to the winding up process. Piedmont & W. Inv. Corp. v. Carnes-Miller Gear Co., 96 N.C. App. 105, 384 S.E.2d 687, 1989 N.C. App. LEXIS 935 (1989).

Property Transferred While Winding Up Affairs. —

Trial court erred in declaring that a homeowners association was the fee simple owner of a strip of land because quitclaim deeds conveyed the developer’s interest in the strip to a corporation; even if the developer was under revenue suspension, it could transfer its property while winding up its affairs, and since the corporation was de facto when the deed was signed and the developer transferred corporate property pursuant to winding up its affairs, it acquired the interest the developer had. Le Oceanfront, Inc. v. Lands End of Emerald Isle Ass'n, 238 N.C. App. 405, 768 S.E.2d 15, 2014 N.C. App. LEXIS 1337 (2014).

Assignment of Rights Under Declaration. —

Dissolved corporation’s rights under a declaration were not validly assigned to developers because (1) an assignment recorded after the dissolution was unrelated to winding up, and (2) the assignment’s stated retroactive date was after the dissolution was effective and dissolution articles were recorded. Landover Homeowners Ass'n v. Sanders, 244 N.C. App. 429, 781 S.E.2d 488, 2015 N.C. App. LEXIS 1033 (2015).

Certificate of Completed Liquidation Not Required. —

Unlike prior law, a dissolved corporation is not required to file a certificate of completed liquidation. North Carolina ex rel. Howes v. Peele, 876 F. Supp. 733, 1995 U.S. Dist. LEXIS 2003 (E.D.N.C. 1995).

Company’s failure to file a certificate of completed liquidation or to send or publish notice of dissolution, did not trigger the two-year “survival” period nor did its corporate existence cease; thus, the company was an existing entity to which the current North Carolina Business Corporation Act applied. North Carolina ex rel. Howes v. Peele, 876 F. Supp. 733, 1995 U.S. Dist. LEXIS 2003 (E.D.N.C. 1995).

Trial Court Acted Contrary to Statute. —

By failing to account for the corporation’s liabilities and incorrectly calculating the total net worth of the companies, the trial court acted contrary to the statute and misapprehended the facts or misapplied the law, which were valid grounds for relief, plus this could also be considered a valid ground for amendment, despite the lack of an objection raised at trial, because it concerned an error of law arising for the first time in the order; the granting of the motion to amend was affirmed. Baker v. Tucker, 239 N.C. App. 273, 768 S.E.2d 874, 2015 N.C. App. LEXIS 131 (2015).

§ 55-14-06. Known claims against dissolved corporation.

  1. A dissolved corporation may dispose of the known claims against it by following the procedure described in this section.
  2. The dissolved corporation shall notify its known claimants in writing of the dissolution at any time after its effective date. The written notice must:
    1. Describe information that must be included in a claim;
    2. Provide a mailing address where a claim may be sent;
    3. State the deadline, which may not be fewer than 120 days from the effective date of the written notice, by which the dissolved corporation must receive the claim; and
    4. State that the claim will be barred if not received by the deadline.
  3. A claim against the dissolved corporation is barred:
    1. If the corporation does not receive the claim by the deadline from a claimant who received written notice under subsection (b); or
    2. If a claimant whose claim was rejected by written notice from the dissolved corporation does not commence a proceeding to enforce the claim within 90 days from the date of receipt of the rejection notice.
  4. For purposes of this section, “claim” does not include a contingent liability or a claim based on an event occurring after the effective date of dissolution.

History. 1955, c. 1371, s. 1; 1973, c. 469, ss. 39, 40; c. 476, s. 193; 1989, c. 265, s. 1.

Official Comment

Sections 14.06 and 14.07 provide a new and simplified system for handling known and unknown claims against a dissolved corporation, including claims based on events that occur after the dissolution of the corporation. Section 14.06 deals solely with known claims while section 14.07 deals with unknown or subsequently arising claims. A claim is a “known” claim even if it is unliquidated (see section 14.06(d)); a claim that is contingent or has not matured so that there is no immediate right to bring suit is not a “known” claim.

Known claims are handled in section 14.06 through a process of written notice to claimants; the written notice must contain the information described in section 14.06(b). Section 14.06(c) then provides fixed deadlines by which claims are barred under various circumstances, as follows:

  1. If a claimant receives written notice satisfying section 14.06(b) but fails to file the claim by the deadline specified by the corporation, the claim is barred by section 14.06(c)(1).
  2. If a claimant receives written notice satisfying section 14.06(b) and files the claim as required:
    1. but the corporation rejects the claim, the claimant must commence a proceeding to enforce the claim within 90 days of the rejection or the claim is barred by section 14.06(c)(2); or
    2. if the corporation does not act on the claim or fails to notify the claimant of the rejection, the claimant is not barred by section 14.06(c) until the corporation notifies the claimant.
  3. If the corporation publishes notice under section 14.07, a claimant who was not notified in writing is barred unless he commences a proceeding within five years after publication of the notice.
  4. If the corporation does not publish notice, a claimant who was not notified in writing is not barred by section 14.06(c) from pursuing his claim.
    1. but the corporation rejects the claim, the claimant must commence a proceeding to enforce the claim within 90 days of the rejection or the claim is barred by section 14.06(c)(2); or
    2. if the corporation does not act on the claim or fails to notify the claimant of the rejection, the claimant is not barred by section 14.06(c) until the corporation notifies the claimant.

(2) If a claimant receives written notice satisfying section 14.06(b) and files the claim as required:

(3) If the corporation publishes notice under section 14.07, a claimant who was not notified in writing is barred unless he commences a proceeding within five years after publication of the notice.

(4) If the corporation does not publish notice, a claimant who was not notified in writing is not barred by section 14.06(c) from pursuing his claim.

(ii) if the corporation does not act on the claim or fails to notify the claimant of the rejection, the claimant is not barred by section 14.06(c) until the corporation notifies the claimant.

(3) If the corporation publishes notice under section 14.07, a claimant who was not notified in writing is barred unless he commences a proceeding within five years after publication of the notice.

(4) If the corporation does not publish notice, a claimant who was not notified in writing is not barred by section 14.06(c) from pursuing his claim.

These principles, it should be emphasized, do not lengthen statutes of limitation applicable under general state law. Thus claims that are not barred under the foregoing rules — for example, if the corporation does not act on a claim — will nevertheless be subject to the general statute of limitations applicable to claims of that type.

Even though the directors are not trustees of the assets of a dissolved corporation (see section 14.05(b)(3)), they must discharge or make provision for discharging all of the corporation’s known liabilities before distributing the remaining assets to the shareholders. See sections 14.05(a)(3) and (4). See also sections 6.40 and 8.33.

North Carolina Commentary

This section provides a dissolved corporation with a new procedure for dealing expeditiously with “known claims.” However, the procedure is permissive and, unlike former G.S. 55-119, notice to creditors and newspaper publication are not mandatory.

The language of the Model Act was modified in subsection (c) for greater clarity. A requirement that claim rejection notices be in writing was also added.

§ 55-14-07. Unknown and certain other claims against dissolved corporation.

  1. A dissolved corporation may also publish notice of its dissolution and request that persons with claims against the corporation present them in accordance with the notice.
  2. The notice must:
    1. Be published one time in a newspaper of general circulation in the county where the dissolved corporation’s principal office (or, if none in this State, its registered office) is or was last located;
    2. Describe the information that must be included in a claim and provide a mailing address where the claim may be sent; and
    3. State that a claim against the corporation will be barred unless a proceeding to enforce the claim is commenced within five years after the publication of the notice.
  3. If the dissolved corporation publishes a newspaper notice in accordance with subsection (b), the claim of each of the following claimants is barred unless the claimant commences a proceeding to enforce the claim against the dissolved corporation within five years after the publication date of the newspaper notice:
    1. A claimant who did not receive written notice under G.S. 55-14-06;
    2. A claimant whose claim was timely sent to the dissolved corporation but not acted on;
    3. A claimant whose claim is contingent or based on an event occurring after the effective date of dissolution.

History. 1955, c. 1371, s. 1; 1973, c. 469, ss. 39, 40; c. 476, s. 193; 1989, c. 265, s. 1.

Official Comment

Earlier versions of the Model Act did not recognize the serious problem created by possible claims that might arise long after the dissolution process was completed and the corporate assets distributed to shareholders. Most of these claims were based on personal injuries occurring after dissolution but caused by allegedly defective products sold before dissolution, but they also involved negligence for which the statute of limitations did not begin to run until the negligence was discovered (e.g., a surgical instrument left inside the patient). The application of the Model Act provision (and of the state dissolution statutes phrased in different terms) to this problem led to confusing and inconsistent results. See generally Friedlander and Gilbert, “Post Dissolution Liabilities of Shareholders and Directors for Claims Against Dissolved Corporations,” 31 VAND. L. REV. 1363 (1978). The problems raised by this type of litigation are intractable: on the one hand, the application of a mechanical two-year limitation period to a claim for injury that occurs after the period has expired involves obvious injustice to the plaintiff. On the other hand, to permit these suits generally makes it impossible ever to complete the winding up of the corporation, make suitable provision for creditors, and distribute the balance of the corporate assets to the shareholders.

In some circumstances a tort law concept of transferee liability, sometimes characterized as “de facto merger,” has been applied to allow plaintiffs incurring post dissolution injuries to bring suit against the person that acquired the corporate assets. See the Official Comment to section 11.01. Some courts have refused to apply this doctrine, particularly when the purchaser of the corporate assets has not continued the business of the dissolved corporation. In these cases, the remedy of the plaintiff is limited to claims against the dissolved corporation and its shareholders receiving assets pursuant to the dissolution.

The solution adopted in section 14.07 is to continue the liability of a dissolved corporation for subsequent claims for a period of five years after it publishes notice of dissolution. It is recognized that a five year cut-off is itself arbitrary, but it is believed that the great bulk of post dissolution claims will arise during this period. This provision is therefore believed to be a reasonable compromise between the competing considerations of providing a remedy to injured plaintiffs and providing a period of repose after which dissolved corporations may distribute remaining assets free of all claims and shareholders may receive them secure in the knowledge that they may not be reclaimed.

Directors must generally discharge or make provision for discharging all of the corporation’s liabilities before distributing the remaining assets to the shareholders. See the Official Comment to section 14.06. But section 14.07 does not contemplate that liquidating distributions to shareholders will be deferred until all possible claims are barred under section 14.07. Many claims covered by this section are of a type for which provision may be made by the purchase of insurance or by the setting aside of a portion of the assets, thereby permitting prompt distributions in liquidation. Claimants, of course, may always have recourse to the remaining assets of the dissolved corporation. See section 14.07(d)(1). Further, where unexpected claims arise after distributions have been made to shareholders in liquidation, section 14.07(d)(2) authorizes recovery against the shareholders receiving the earlier distributions. The recovery, however, is limited to the smaller of the recipient shareholder’s pro rata share of the claim or the total amount of assets received as liquidating distributions by the shareholder from the corporation. The provision ensures that claimants seeking to recover distributions from shareholders will try to recover from the entire class of shareholders rather than concentrating only on the larger shareholders and protects the limited liability of shareholders.

North Carolina Commentary

This section is new to North Carolina law and operates as a statute of repose for claims asserted against a dissolved corporation that elects to comply with its procedural requirements. The section applies primarily to contingent and unknown liabilities of a corporation, but may also apply to known claims with respect to which notice is not given pursuant to G.S. 55-14-06.

Subsection 14.07(d) of the Model Act is not included in this section but is incorporated in substance into G.S. 55-14-08.

§ 55-14-08. Enforcement of claims.

  1. A claim under G.S. 55-14-06 or G.S. 55-14-07 may be enforced:
    1. Against the dissolved corporation, to the extent of its undistributed assets, including coverage under any applicable insurance policy, or
    2. Except as provided in G.S. 55-14-09(d), if the assets have been distributed in liquidation, against a shareholder of the dissolved corporation to the extent of the shareholder’s pro rata share of the claim or the corporate assets distributed to the shareholder in liquidation, whichever is less, but a shareholder’s total liability for all claims under this section may not exceed the total amount of assets distributed to the shareholder.
  2. Nothing in G.S. 55-14-06 or G.S. 55-14-07 shall extend any applicable period of limitation.

History. 1955, c. 1371, s. 1; 1973, c. 469, ss. 39, 40; 1989, c. 265, s. 1; 2005-268, s. 32.

North Carolina Commentary

This section contains the substance of subsection 14.07(d) of the Model Act and was added for the purpose of setting forth provisions applicable to claims covered by either G.S. 55-14-06 or G.S. 55-14-07. The language of the Model Act was modified in subdivision (a)(1) to make clear that undistributed assets of a dissolved corporation include coverage under any applicable insurance policy.

Under subdivision (a)(2), a claim may be enforced against a shareholder to the extent of the lesser of his pro rata share thereof or the corporate assets distributed to him in liquidation. In no event may a shareholder’s total liability under this section exceed the total amount of assets distributed to him in liquidation. This subdivision, unlike former G.S. 55-54, makes a shareholder liable regardless of whether the distribution to him was made at a time when the corporation was unable to meet its obligations and regardless of whether he knew that the distribution violated this Act.

This section does not bring forward the provision in former G.S. 55-32(1) allowing creditors to enforce certain specified statutory liabilities in direct actions against directors. However, substantially the same relief should be available to creditors in insolvency proceedings and through attachment or similar procedures.

Supplemental North Carolina Commentary (2005)

Effective October 1, 2005, this section is amended to reflect that the liability of shareholders of a dissolved corporation may be limited by G.S. 55-14-09, which is added to the North Carolina Business Corporation Act effective October 1, 2005.

Effect of Amendments.

Session Laws 2005-268, s. 32, effective October 1, 2005, in subdivision (a)(2), inserted “Except as provided in G.S. 55-14-09(d)” and substituted “the shareholder’s” for “his” once and “the shareholder” for “him” twice.

CASE NOTES

Enforcement Under Subdivision (a)(2). —

If the corporation does not avail itself of protection against claims, a claim may be enforced under subdivision (a)(2); this enforcement provision makes a shareholder liable regardless of whether the distribution was made at a time when the corporation was unable to meet its obligations and regardless of whether shareholder knew that the distribution violated this Act. North Carolina ex rel. Howes v. Peele, 876 F. Supp. 733, 1995 U.S. Dist. LEXIS 2003 (E.D.N.C. 1995).

Because shareholder distributee liability contemplates a monetary claim, as it provides for enforcement to the extent of assets received in liquidation, this form of enforcement is not possible when the claim is for injunctive relief; because an order to abate a nuisance is a form of injunctive relief, shareholder distributee liability is not an appropriate basis upon which to order president of company to abate the nuisance. North Carolina ex rel. Howes v. Peele, 876 F. Supp. 733, 1995 U.S. Dist. LEXIS 2003 (E.D.N.C. 1995).

§ 55-14-09. Court proceedings.

  1. A dissolved corporation that has published a notice under G.S. 55-14-07 may file an application with the superior court of the county where the dissolved corporation’s principal office, or its registered office if the corporation does not have a principal office in this State, is located for a determination of the amount and form of security to be provided for payments of claims that are contingent or have not been made known to the dissolved corporation or that are based on an event occurring after the effective date of dissolution but that, based on the facts known to the dissolved corporation, are reasonably estimated to arise after the effective date of dissolution. Provisions need not be made for any claim that is or is reasonably anticipated to be barred under G.S. 55-14-07(c).
  2. Within 10 days after the filing of the application, notice of the proceeding shall be given by the dissolved corporation to each claimant holding a contingent claim whose contingent claim is shown on the records of the dissolved corporation.
  3. The court may appoint a guardian ad litem to represent all claimants whose identities are unknown in any proceeding brought under this section. The reasonable fees and expenses of the guardian, including all reasonable expert witness fees, shall be paid by the dissolved corporation.
  4. Provision by the dissolved corporation for security in the amount and the form ordered by the court under subsection (a) of this section shall satisfy the dissolved corporation’s obligations with respect to claims that are contingent, have not been made known to the dissolved corporation, or are based on an event occurring after the effective date of dissolution, and the claims shall not be enforced against a shareholder who received assets in liquidation.

History. 2005-268, s. 33.

§§ 55-14-10 through 55-14-19.

Reserved for future codification purposes.

Part 2. Administrative Dissolution.

§ 55-14-20. Grounds for administrative dissolution.

The Secretary of State may commence a proceeding under G.S. 55-14-21 to dissolve administratively a corporation if:

  1. The corporation does not pay within 60 days after they are due any penalties, fees, or other payments due under this Chapter;
  2. The corporation is delinquent in delivering its annual report;
  3. The corporation is without a registered agent or registered office in this State for 60 days or more;
  4. The corporation does not notify the Secretary of State within 60 days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued;
  5. The corporation’s period of duration stated in its articles of incorporation expires; or
  6. The corporation knowingly fails or refuses to answer truthfully and fully within the time prescribed in this Chapter interrogatories propounded by the Secretary of State in accordance with the provisions of this Chapter.

History. 1989, c. 265, s. 1; 1993, c. 552, s. 15; 1997-475, s. 6.4.

Official Comment

Involuntary dissolution in earlier versions of the Model Act required judicial order upon suit filed by the state attorney general. In the comment to section 95 of the 1969 Model Act, this decision was explained on the basis that the Model Act “provides for judicial review in protection of rights that might otherwise be lost.” This position, however, was not generally accepted — in 1982 only three jurisdictions limited involuntary dissolution to judicial action — with all other jurisdictions permitting administrative dissolution for a variety of reasons, usually including a failure to pay franchise taxes and often including failure to file annual reports or otherwise comply with similar requirements of the corporation statutes. Some of these administrative dissolution statutes appear in the tax statutes rather than the corporation statutes of the states.

The experience in most states has been that administrative dissolution, or the threat thereof, is an effective enforcement mechanism for a variety of statutory obligations. Judicial dissolution is inappropriate for many of these violations because of its cost and the diversion of limited legal resources, particularly since most violations reflect the abandonment of the corporation by its owners.

The advantages of administrative dissolution in these circumstances are compelling: it not only reduces the number of records maintained by the secretary of state, but also avoids further wasteful attempts to compel compliance by the abandoned corporations and returns the corporate name promptly to the status of available names. Therefore, the revised Model Act includes, in sections 14.20 through 14.23, a model provision for the administrative dissolution of corporations in certain limited circumstances. These circumstances are set forth in section 14.20 and closely parallel provisions found in most state statutes on this subject.

North Carolina Commentary

Administrative dissolution by the Secretary of State, which is new to the corporate law of North Carolina, provides the Secretary of State with a simple, inexpensive method of enforcing this Act.

The Model Act provides in subdivision 14.20(1) for administrative dissolution by the Secretary of State upon nonpayment of any taxes or penalties imposed by law, including franchise taxes. This provision conflicts with the provisions of G.S. 105-230 through 105-232, which empower the Secretary of Revenue to cancel a corporate franchise for nonpayment of taxes. Accordingly the scope of subdivision (1) of this Act is restricted to failure to pay penalties, fees, or other payments due under this Act.

Subdivision (5) provides for administrative dissolution upon expiration of the period of duration stated in the corporation’s articles of incorporation. Under former G.S. 55-115, a corporation that continued to conduct business after the expiration of its period of duration could at any time amend its charter to extend or perpetuate its period of existence. This provision was not brought forward.

§ 55-14-21. Procedure for and effect of administrative dissolution.

  1. If the Secretary of State determines that one or more grounds exist under G.S. 55-14-20 for dissolving a corporation, he shall mail the corporation written notice of his determination.
  2. If the corporation does not correct each ground for dissolution or demonstrate to the reasonable satisfaction of the Secretary of State that each ground determined by the Secretary of State does not exist within 60 days after notice is mailed, the Secretary of State shall administratively dissolve the corporation by signing a certificate of dissolution that recites the ground or grounds for dissolution and its effective date. The Secretary of State shall file the original of the certificate and mail a copy to the corporation.
  3. The provisions of G.S. 55-14-05, 55-14-06, and 55-14-07 apply to a corporation administratively dissolved.
  4. The administrative dissolution of a corporation does not terminate the authority of its registered agent.

History. 1989, c. 265, s. 1.

Official Comment

Many failures to comply with statutory requirements that may give rise to administrative dissolution under section 14.20 occur because of oversight or inadvertence by responsible corporate officers of corporations that are continuing in business. Such failures are usually corrected promptly when brought to the corporation’s attention. Sections 14.21(a) and (b) therefore provide a mandatory notice by the secretary of state to each corporation subject to administrative dissolution and a 60-day grace period following the notice before the certificate of administrative dissolution may be filed.

In most instances, the issue whether the corporation is subject to administrative dissolution will not be controverted. If a corporation is administratively dissolved, it may petition the secretary of state for reinstatement under section 14.22 and, if this is denied, it may appeal to the courts under section 14.23.

North Carolina Commentary

The provisions of the Model Act were modified in subsections (a) and (b) by providing that all notices by the Secretary of State under the administrative dissolution provisions shall be given by mail. Subsection (c) was altered to clarify that the general provisions of G.S. 55-14-05, 55-14-06, and 55-14-07 apply to a corporation that is administratively dissolved.

§ 55-14-22. Reinstatement following administrative dissolution.

  1. A corporation administratively dissolved under G.S. 55-14-21 may apply to the Secretary of State for reinstatement. The application must:
    1. Recite the name of the corporation and the effective date of its administrative dissolution; and
    2. State that the ground or grounds for dissolution either did not exist or have been eliminated.
    3. Reserved.
    4. Repealed by Session Laws 1995, c. 539, s. 6.
  2. If, at the time the corporation applies for reinstatement, the name of the corporation is not distinguishable from the name of another entity authorized to be used under G.S. 55D-21, then the corporation must change its name to a name that is distinguishable upon the records of the Secretary of State from the name of the other entity before the Secretary of State may prepare a certificate of reinstatement.
  3. If the Secretary of State determines that the application contains the information required by subsection (a) of this section, that the information is correct, and that the name of the corporation complies with G.S. 55D-21 and any other applicable section, the Secretary of State shall cancel the certificate of dissolution and prepare a certificate of reinstatement that recites the Secretary of State’s determination and the effective date of reinstatement, file the original of the certificate, and mail a copy to the corporation.
  4. When the reinstatement is effective, it relates back to and takes effect as of the date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred, subject to the rights of any person who reasonably relied to his prejudice upon the certificate of dissolution.

History. 1989, c. 265, s. 1; 1995, c. 539, ss. 6, 7; 1996, 2nd Ex. Sess., c. 17, s. 15.1(b); 1997-200, ss. 1, 2(b); 1997-485, s. 1; 2001-390, s. 7; 2001-413, ss. 7, 7.1.

Official Comment

Section 14.22 provides a two-year period during which a corporation may seek reinstatement following administrative dissolution. This section may apply when a corporation through inadvertence or a failure to maintain a registered agent fails to receive or respond to the predissolution notice of default required by section 14.21. A corporation that is reinstated pursuant to this section resumes carrying on its business as before dissolution.

In order to be eligible for reinstatement, a corporation must comply with all statutory requirements at the time it seeks reinstatement. It must establish, for example, that all taxes have been paid and that its name is available when it files the application for reinstatement.

North Carolina Commentary

Subdivision 14.22(a)(3) of the Model Act requires applications under this section to state that the corporation’s name meets the requirements of G.S. 55-4-01. The addition of subsection (g) to G.S. 55-4-01, however, rendered this requirement unnecessary, and it was omitted.

Subsection (b) modifies the corresponding provision of the Model Act to allow the Secretary of State simply to mail a copy of the certificate of reinstatement to the corporation.

Subsection (c) provides that the reinstatement, upon becoming effective, relates back to the effective date of the administrative dissolution as if dissolution had never occurred. The Model Act was modified, however, so that the relation back rule is subject to the rights of any person who reasonably relied to his prejudice on the administrative dissolution. Cf. G.S. 105-230 and 105-231 (any act performed or attempted during suspension of a corporation’s charter is invalid and of no effect).

Legal Periodicals.

For 1997 legislative survey, see 20 Campbell L. Rev. 389.

§ 55-14-23. Appeal from denial of reinstatement.

  1. If the Secretary of State denies a corporation’s application for reinstatement following administrative dissolution, he shall serve the corporation under G.S. 55D-33 with a written notice that explains the reason or reasons for denial.
  2. The corporation may appeal the denial of reinstatement to the Superior Court of Wake County within 30 days after service of the notice of denial is perfected. The appeal is commenced by filing a petition with the court and with the Secretary of State requesting the court to set aside the dissolution. The petition shall have attached to it copies of the Secretary of State’s certificate of dissolution, the corporation’s application for reinstatement, and the Secretary of State’s notice of denial. No service of process on the Secretary of State is required except for the filing of the petition as set forth in this subsection. The appeal to the superior court shall be determined by a judge of the superior court upon such further evidence, notice and opportunity to be heard, if any, as the court may deem appropriate under the circumstances. The corporation shall have the burden of establishing that it is entitled to reinstatement.
  3. Upon consideration of the petition and any response made by the Secretary of State, the court may, prior to entering final judgment, order the Secretary of State to reinstate the dissolved corporation or may take other action the court considers appropriate.
  4. The court’s final decision may be appealed as in other civil proceedings.

History. 1989, c. 265, s. 1; 2001-358, ss. 5A(a), 47(d); 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Official Comment

Section 14.23 provides for an appeal from a decision by the secretary of state denying a petition for reinstatement. The court with jurisdiction over an appeal should be specified, and states adopting this section of the Model Act should specify who has the burden of proof on appeal and the standard for judicial review. See the Official Comment to section 1.26.

North Carolina Commentary

This section modifies the Model Act to clarify the procedures for appealing from a denial by the Secretary of State of a corporation’s application for reinstatement following administrative dissolution. Under subsection (b) the corporation has the burden of establishing that it is entitled to reinstatement.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, ss. 5A(a) and 47(d), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, in subsection (a) substituted “G.S. 55D-33” for “G.S. 55-5-04”; and in subsection (b), added the fourth sentence, and inserted “by a judge of the superior court” in the fifth sentence.

§ 55-14-24. Inapplicability of Administrative Procedure Act.

The Administrative Procedure Act shall not apply to any proceeding or appeal provided for in G.S. 55-14-20 through 55-14-23.

History. 1989, c. 265, s. 1.

North Carolina Commentary

This section does not appear in the Model Act.

§§ 55-14-25 through 55-14-29.

Reserved for future codification purposes.

Part 3. Judicial Dissolution.

§ 55-14-30. Grounds for judicial dissolution.

The superior court may dissolve a corporation:

  1. In a proceeding by the Attorney General if it is established that (i) the corporation obtained its articles of incorporation through fraud; or (ii) the corporation has, after written notice by the Attorney General given at least 20 days prior thereto, continued to exceed or abuse the authority conferred upon it by law;
  2. In a proceeding by a shareholder if it is established that (i) the directors or those in control of the corporation are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock; (ii) liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder; (iii) the shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired; (iv) the corporate assets are being misapplied or wasted; or (v) a written agreement, whether embodied in the articles of incorporation or separate therefrom, entitles the complaining shareholder to liquidation or dissolution of the corporation at will or upon the occurrence of some event which has subsequently occurred, and all present shareholders, and all subscribers and transferees of shares, either are parties to such agreement or became a shareholder, subscriber or transferee with actual notice thereof;
  3. In a proceeding by a creditor if it is established that (i) the creditor’s claim has been reduced to judgment and the execution on the judgment returned unsatisfied; or (ii) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent; or
  4. In a proceeding by the corporation to have its voluntary dissolution continued under court supervision.

History. Code, ss. 604, 605, 619, 668, 669, 694; 1889, c. 533; 1901, c. 2, ss. 61, 62, 73; Rev., ss. 1196, 1198, 1203, 1204; C.S., ss. 1185, 1187, 1195; G.S., ss. 55-124, 55-126, 55-134; 1955, c. 1371, s. 1; 1959, c. 1316, s. 26; 1989, c. 265, s. 1.

Official Comment

Section 14.30 provides grounds for the judicial dissolution of corporations at the request of the state, a shareholder, a creditor, or a corporation which has commenced voluntary dissolution. This section states that a court “may” order dissolution if a ground for dissolution exists. Thus there is discretion on the part of the court as to whether dissolution is appropriate even though grounds exist under the specific circumstances.

  1. Involuntary dissolution by state
  2. Involuntary dissolution by shareholders
    1. Deadlock
    2. Abuse of power

Section 14.30(1) preserves longstanding and traditional provisions authorizing the state to seek to dissolve involuntarily a corporation by judicial decree. While this power has been exercised only rarely in recent years, this right of the state involves a policing action that provides a means by which the state may ensure compliance with, and nonabuse of, the fundamentals of corporate existence. Section 14.30(1) limits the power of the state in this regard to grounds that are reasonably related to this objective.

The legality of proposed corporations or of proposed actions has sometimes been tested by the secretary of state’s refusal to accept documents for filing. The role of the secretary of state in reviewing documents for filing has been restricted by the Model Act (see section 1.25 and its Official Comment). It is intended that suits under this subchapter will replace those actions.

Section 14.31(2) provides for involuntary dissolution at the suit of a shareholder under circumstances involving deadlock or significant abuse of power by controlling shareholders or directors.

Dissolution because of deadlock is available if there is a deadlock at the directors’ level but only if (1) the shareholders are unable to break the deadlock and (2) either “irreparable injury” to the corporation is being threatened or suffered or the business and affairs “can no longer be conducted to the advantage of ” the shareholders. This language closely follows the earlier versions of the Model Act except that the requirement of “irreparable injury” has been relaxed to some extent. Dissolution because of deadlock at the directors’ level is not dependent on the lapse of time during which the deadlock continues.

Dissolution is also available because of deadlock at the shareholders’ level if the shareholders are unable to elect directors over a two-year period. This remedy is particularly important in small or family-held corporations in which share ownership may be divided on a 50-50 basis or a super majority provision (including possibly a requirement of unanimity) may effectively prevent the election of any directors. Dissolution under section 14.30(2)(iii) is not dependent on irreparable injury or misconduct by the directors then in office; if injury or misconduct is present, a deadlocked shareholder may proceed under another clause of section 14.30(2).

A shareholder may sue for involuntary dissolution upon proof either that those in control of the corporation are acting illegally, oppressively, or fraudulently (section 14.30(2)(ii)) or that the corporate assets are being misapplied or wasted (section 14.30(2)(iv)). The application of these grounds for dissolution to specific circumstances obviously involves judicial discretion in the application of a general standard to concrete circumstances. The court should be cautious in the application of these grounds so as to limit them to genuine abuse rather than instances of acceptable tactics in a power struggle for control of a corporation.

3. Dissolution by creditors

Creditors may obtain involuntary dissolution only when the corporation is insolvent and only in the limited circumstances set forth in section 14.30(3). Typically, a proceeding under the federal Bankruptcy Act is an alternative in these situations.

4. Dissolution by corporation

A corporation that has commenced voluntary dissolution may petition a court to supervise its dissolution. Such an action may be appropriate to permit the orderly liquidation of the corporate assets and to protect the corporation from a multitude of creditors’ suits or suits by dissatisfied shareholders.

North Carolina Commentary

Subdivision (1) brings forward the 20-day notice requirement of former G.S. 55-122 for proceedings by the Attorney General.

Under former G.S. 55-125(a)(2), a deadlock resulting from special provisions or arrangements designed to create veto power among shareholders was not grounds for judicial dissolution. Under subdivision (2) of this section, deadlock is grounds for dissolution, even if it results from special provisions or arrangements.

Clause (ii) of subdivision (2), brought forward from former G.S. 55-125(a)(4), is substituted for the Model Act’s standard of “illegal, oppressive, or fraudulent” conduct.

Clause (v) of subdivision (2), brought forward from former G.S. 55-125(a)(3), is added to the Model Act’s provisions to make agreements to liquidate specifically enforceable.

The Model Act requirement that a creditor must show that the corporation is insolvent in order to be entitled to judicial dissolution is omitted.

Legal Periodicals.

For comment discussing alternative remedies to dissolution for the deadlocked corporation, see 51 N.C.L. Rev. 815 (1973).

For note discussing rights of minority shareholders in closed corporations in light of Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983), see 62 N.C.L. Rev. 999 (1984).

For note discussing fulfillment of shareholders’ expectations in close corporations in light of Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983), see 20 Wake Forest L. Rev. 505 (1984).

For article, “Close Corporation Shareholder Reasonable Expectations: The Larger Context,” see 22 Wake Forest L. Rev. 41 (1987).

For article, “The Statutory Protection Of Minority Shareholders In The United Kingdom,” see 22 Wake Forest L. Rev. 81 (1987).

For note, “Minority Shareholders’ Rights in the Close Corporation Under the New North Carolina Business Corporation Act,” see 68 N.C.L. Rev. 1109 (1990).

CASE NOTES

Editor’s Note. —

Most of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

For historical background of former G.S. 55-125, relating to power of courts to liquidate and decree involuntary dissolution, see Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Statute vests broad equitable powers in the trial court in determining whether a corporation should be involuntarily dissolved. W & H Graphics, Inc. v. Hamby, 48 N.C. App. 82, 268 S.E.2d 567, 1980 N.C. App. LEXIS 3188 (1980).

Power of Court Absent Statute. —

As a general rule, the court would have no power, absent statutory direction, to order the dissolution of a corporation simply on the grounds that there was deadlock or dissension among the directors or stockholders. Ellis v. Civic Imp., Inc., 24 N.C. App. 42, 209 S.E.2d 873, 1974 N.C. App. LEXIS 1924 (1974), cert. denied, 286 N.C. 412, 211 S.E.2d 794, 1975 N.C. LEXIS 1200 (1975).

Power of Court to Protect Rights of Complaining Shareholder. —

Former G.S. 55-125(a)(4) and G.S. 55-125.1 give the trial court plenary power to frame whatever order it sees fit to protect the rights of a complaining shareholder. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Finding Required Under Former G.S. 55-125(a)(1). —

Under former G.S. 55-125(a)(1), irreconcilable deadlock of the directorate or shareholders was not sufficient basis for an order of liquidation without a supported finding or conclusion that the shareholders were so deadlocked that its business could no longer be conducted with advantage to all the shareholders. Ellis v. Civic Imp., Inc., 24 N.C. App. 42, 209 S.E.2d 873, 1974 N.C. App. LEXIS 1924 (1974), cert. denied, 286 N.C. 412, 211 S.E.2d 794, 1975 N.C. LEXIS 1200 (1975).

Deadlock in Management of Corporate Affairs. —

Where plaintiff and defendant were the only directors, because they could not agree when the corporation should borrow money, the corporation could not borrow money at all; therefore, there was sufficient evidence to support a finding of deadlock in the management of the corporation’s affairs. Foster v. Foster Farms, Inc., 112 N.C. App. 700, 436 S.E.2d 843, 1993 N.C. App. LEXIS 1251 (1993).

No Limitation Regarding Duration of Effects of Deadlock. —

Subsection (2) allows the court to order an involuntary corporate dissolution due to director deadlock, without limitation as to the duration or specific effects of the deadlock. Benchmark Carolina Aggregates, Inc. v. Martin Marietta Materials, Inc., 125 N.C. App. 666, 482 S.E.2d 27, 1997 N.C. App. LEXIS 219 (1997).

Showing Required Under Former G.S. 55-125(a)(4). —

When the power of the court in the exercise of its equitable jurisdiction was invoked to liquidate and decree involuntary dissolution under former G.S. 55-125(a)(4), there had to be a showing that the liquidation was reasonably necessary for the protection of the rights or interests of the complaining shareholder. Dowd v. Charlotte Pipe & Foundry Co., 263 N.C. 101, 139 S.E.2d 10, 1964 N.C. LEXIS 781 (1964).

Sufficient Allegations Under Former G.S. 55-125(a)(4). —

The superior court had authority, in the exercise of its discretion, under former G.S. 55-125(a)(4), to order the liquidation of a corporation upon application of a stockholder alleging that the corporation had been operating at a loss and that to allow it to continue operations would deplete its assets and seriously damage the stockholders. Royall v. Carr Lumber Co., 248 N.C. 735, 105 S.E.2d 65, 1958 N.C. LEXIS 396 (1958).

Showing Required for Relief Under Former G.S. 55-125.1(b). —

Former G.S. 55-125.1(b), relating to relief as an alternative to dissolution, did not require a complaining shareholder to show bad faith, mismanagement or wrongful conduct, but only real harm. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Applicability to Cooperative Organized with Capital Stock. —

United States District Court for the Eastern District of North Carolina, Western Division, predicted that the Supreme Court of North Carolina would hold that G.S. 55-14-30 governed plaintiffs’ judicial dissolution claim because the Cooperative was organized with capital stock, and thus the nonprofit corporation judicial dissolution statute did not apply. Speaks v. U.S. Tobacco Coop., Inc., 486 F. Supp. 3d 974, 2020 U.S. Dist. LEXIS 168529 (E.D.N.C. 2020).

In a suit wherein plaintiffs sought judicial dissolution of a cooperative, plaintiffs failed to state a claim that the tobacco cooperative’s actions were wasteful as plaintiffs did not allege that any action the tobacco cooperative employed to vertically integrate resulted in an unreasonable exchange of the tobacco cooperative’s assets. Speaks v. U.S. Tobacco Coop., Inc., 486 F. Supp. 3d 974, 2020 U.S. Dist. LEXIS 168529 (E.D.N.C. 2020).

Mandatory Buy-Out Rights. —

Mandatory buy-out rights under subsection (d) of G.S. 55-14-31 apply only to dissolutions granted under subdivision (2)(ii) of this section. Foster v. Foster Farms, Inc., 112 N.C. App. 700, 436 S.E.2d 843, 1993 N.C. App. LEXIS 1251 (1993).

Trial court adequately protected a terminated corporate director’s reasonable expectations as a complaining shareholder because the court awarded the director, pursuant to the provisions of the stockholders’ agreement between the parties, a designated sum of money, under the agreement, in exchange for the director’s shares in the corporation. Harris v. Testar, Inc., 243 N.C. App. 33, 777 S.E.2d 776, 2015 N.C. App. LEXIS 736 (2015).

Corporation Is the Necessary Defendant. —

The necessary defendant in an action for involuntary dissolution of a corporation under the statute is the corporation itself; shareholders and directors may, but need not be, made parties defendant unless relief is sought against them personally. W & H Graphics, Inc. v. Hamby, 48 N.C. App. 82, 268 S.E.2d 567, 1980 N.C. App. LEXIS 3188 (1980).

Directors Are Proper Parties to Shareholder’s Suit. —

Directors are proper parties to a suit to dissolve the corporation upon the complaint of one shareholder, even though no relief is sought against them personally. Dowd v. Charlotte Pipe & Foundry Co., 263 N.C. 101, 139 S.E.2d 10, 1964 N.C. LEXIS 781 (1964).

They May Be Joined or Become Parties on Own Application. —

The implication in the statute is that directors and other interested shareholders may be made, or, on their own application, may become parties to a complaining shareholder’s action to liquidate and dissolve the corporation. Certainly, the directors are not improper parties. Dowd v. Charlotte Pipe & Foundry Co., 263 N.C. 101, 139 S.E.2d 10, 1964 N.C. LEXIS 781 (1964).

Joinder of Suit for Failure to Declare Dividends with Cause of Action for Liquidation. —

A stockholder in a corporation may sue the corporation, and join its directors as defendants, for failure to declare adequate dividends from the corporation’s earnings, and may join therewith a second cause of action for liquidation and involuntary dissolution of the corporation based upon bad faith management in suppressing dividends and in deflating the value of the corporation’s assets, thus precluding the plaintiff stockholder from obtaining either a fair dividend or a fair market for his stock. Dowd v. Charlotte Pipe & Foundry Co., 263 N.C. 101, 139 S.E.2d 10, 1964 N.C. LEXIS 781 (1964).

Discretion in Grant of Relief. —

When a shareholder brought suit seeking relief under former G.S. 55-125(a)(4) and G.S. 55-125.1, he had the burden of proving that his “rights or interests” as a shareholder were being contravened. However, once the shareholder had established this, the trial court, in deciding whether to grant relief, had to exercise its equitable discretion, and consider the actual benefit and injury to all of the shareholders resulting from dissolution or other possible relief. To hold otherwise would allow a plaintiff to demand at-will dissolution of a corporation or a forced buy-out of his shares or other relief at the expense of the corporation and without regard to the rights and interests of the other shareholders. Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

The determination of relief, liquidation or otherwise, is within the superior court’s equitable discretion. Lowder v. All Star Mills, Inc., 75 N.C. App. 233, 330 S.E.2d 649, 1985 N.C. App. LEXIS 3636 (1985).

Involuntary dissolution under former G.S. 55-125 was not the exclusive remedy in this State, because under former G.S. 55-125.1 the court had broad discretion to grant any kind of relief it deemed appropriate as an alternative to dissolving a corporation. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Need for Judicial Intervention Determined Case-by-Case. —

The circumstances which give rise to relief under the involuntary dissolution statutes are so infinitely varied that courts must determine if judicial intervention is necessary on a case-by-case basis. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Trial court was required to rule on a shareholder’s application to dissolve a corporation under G.S. 55-14-30(2) because the allegations of the complaint were sufficient to allege the existence of at least two statutory grounds for dissolution. Marzec v. Nye, 203 N.C. App. 88, 690 S.E.2d 537, 2010 N.C. App. LEXIS 502 (2010).

It is the trial court’s duty to review all the evidence to determine whether fairness and the equities warrant judicial intervention. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

For analysis a trial court to be applied in resolving suits brought under former G.S. 55-125(a)(4) and 55-125.1, see Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

In a determination of whether to order dissolution or other relief under former G.S. 55-125(a)(4), the complaining shareholder had to show that: (1) He had one or more substantial reasonable expectations known or assumed by the other participants; (2) the expectation has been frustrated; (3) the frustration was not the shareholder’s fault and was in large part beyond his control; and (4) under all of the circumstances of the case, the shareholder was entitled to some form of equitable relief. Lowder v. All Star Mills, Inc., 75 N.C. App. 233, 330 S.E.2d 649, 1985 N.C. App. LEXIS 3636 (1985).

Order of Dissolution Upheld. —

The trial court did not abuse its discretion in ordering dissolution of a closely-held corporation where the reasonable expectations of a minority shareholder and former vice-president with 38% of the shares, that he would receive fair market value for his shares after his company compensation was cut off, and of his grandson, that he would have a share in the management of the company after he was elected director, were frustrated by the majority shareholders, did not result from any fault of their own, and only judicial dissolution could safeguard those expectations. Royals v. Piedmont Elec. Repair Co., 137 N.C. App. 700, 529 S.E.2d 515, 2000 N.C. App. LEXIS 497 (2000).

Insufficient Grounds for Dissolution. —

Where the trial court failed to make any of the findings required under Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983), but simply found that liquidation was reasonably necessary for the protection of the interests of the complaining shareholder, the trial court’s findings of fact were not sufficient to support its conclusion that grounds for dissolution existed. Foster v. Foster Farms, Inc., 112 N.C. App. 700, 436 S.E.2d 843, 1993 N.C. App. LEXIS 1251 (1993).

Trial court properly concluded that a decree of judicial dissolution of a corporation was not justified where a shareholder had received substantial dividends, dissolution would have harmed the rights and interests of the other shareholders, and nothing prevented the shareholder form selling her shares or interest. Brady v. Van Vlaanderen, 261 N.C. App. 1, 819 S.E.2d 561, 2018 N.C. App. LEXIS 798 (2018).

Dissolution Not Required. —

Neither dissolution pursuant to G.S. 55-14-30(2)(ii) nor redemption of shares of a deceased minority shareholder pursuant to G.S. 55-14-31(d) was required because there was no showing that any subjective expectation of the deceased of the share redemption was known or assumed by the other shareholders and concurred in by them. High Point Bank & Trust Co. v. Sapona Mfg. Co., 212 N.C. App. 148, 713 S.E.2d 12, 2011 N.C. App. LEXIS 966 (2011).

Shareholder Need Only Show That “Fairness” Compels Dissolution. —

Subdivision (a)(4) of former G.S. 55-125, which authorized liquidation, not when there was “oppression,” but when it was reasonably necessary for the protection of the complaining shareholder, required the complaining shareholder only to show that basic “fairness” compelled dissolution. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E.2d 249, 1982 N.C. App. LEXIS 2841 (1982), aff'd in part, modified, 309 N.C. 279, 307 S.E.2d 551, 1983 N.C. LEXIS 1394 (1983).

Order of Liquidation and Dissolution Upheld. —

It was reasonable for the court to conclude that the complaining shareholder, who began working for corporation in 1955 and worked continuously until he was abruptly fired in 1978, had a reasonable expectation that his employment would continue. Since the controlling officer-director misappropriated corporate opportunities, and since the majority of the stockholders aligned themselves with this officer-director, the court did not abuse its discretion in ordering liquidation and dissolution. Lowder v. All Star Mills, Inc., 75 N.C. App. 233, 330 S.E.2d 649, 1985 N.C. App. LEXIS 3636 (1985).

As to involuntary liquidation under former statutes, see also Asheville Div. No. 15 v. Aston, 92 N.C. 578, 1885 N.C. LEXIS 263 (1885); Simmons v. Norfolk & Baltimore Steamboat Co., 113 N.C. 147, 18 S.E. 117, 1893 N.C. LEXIS 33 (1893); Greenleaf v. Land & Lumber Co., 146 N.C. 505, 60 S.E. 424, 1908 N.C. LEXIS 251 (1908); Bank of Andrews v. Gudger, 212 F. 49, 1914 U.S. App. LEXIS 2055 (4th Cir. 1914); Lasley v. Walnut Cove Mercantile Co., 179 N.C. 575, 103 S.E. 213, 1920 N.C. LEXIS 293 (1920); Jones v. A. & W.R.R., 193 N.C. 590, 137 S.E. 706, 1927 N.C. LEXIS 411 (1927).

As to necessity for service on shareholders in suit under former statute for dissolution of corporation, see Glod v. Castle Hayne Growers & Shippers, Inc., 239 N.C. 304, 79 S.E.2d 396, 1954 N.C. LEXIS 343 (1954).

§ 55-14-31. Procedure for judicial dissolution.

  1. Venue for a proceeding to dissolve a corporation lies in the county where a corporation’s principal office (or, if none in this State, its registered office) is or was last located.
  2. It is not necessary to make shareholders parties to a proceeding to dissolve a corporation unless relief is sought against them individually.
  3. A court in a proceeding brought to dissolve a corporation may issue injunctions, appoint a receiver with all powers and duties the court directs, take other action required to preserve the corporate assets wherever located, and carry on the business of the corporation.
  4. In any proceeding brought by a shareholder under G.S. 55-14-30(2)(ii) in which the court determines that dissolution would be appropriate, the court shall not order dissolution if, after such determination, the corporation elects to purchase the shares of the complaining shareholder at their fair value, as determined in accordance with such procedures as the court may provide.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 26; 1973, c. 469, s. 41; 1989, c. 265, s. 1.

Official Comment

Section 14.31 designates the attorney general as the officer to bring suits for involuntary dissolution by the state. The county or counties where these suits must be commenced should be specified; it typically is either the state capital or the county in which the corporation’s principal office is located. See the Official Comment to section 1.26. Suits brought for judicial dissolution under other subdivisions of section 14.30 must be brought where the corporation’s principal office is located or, if not located in this state, where its registered office is or was last located.

North Carolina Commentary

Subsection (a) of this section was rewritten to provide a uniform venue for dissolution proceedings, whether instituted by the Attorney General, by a shareholder, or by a creditor.

Legal Periodicals.

For note, “Minority Shareholders’ Rights in the Close Corporation Under the New North Carolina Business Corporation Act,” see 68 N.C.L. Rev. 1109 (1990).

CASE NOTES

Mandatory buy-out rights under subsection (d) of this section apply only to dissolutions granted under subdivision (2)(ii) of G.S. 55-14-30. Foster v. Foster Farms, Inc., 112 N.C. App. 700, 436 S.E.2d 843, 1993 N.C. App. LEXIS 1251 (1993).

Reasonable Expectations of Shareholder. —

Trial court adequately protected a terminated corporate director’s reasonable expectations as a complaining shareholder because the court awarded the director, pursuant to the provisions of the stockholders’ agreement between the parties, a designated sum of money, under the agreement, in exchange for the director’s shares in the corporation. Harris v. Testar, Inc., 243 N.C. App. 33, 777 S.E.2d 776, 2015 N.C. App. LEXIS 736 (2015).

Redemption of Shares Not Required. —

Neither dissolution pursuant to G.S. 55-14-30(2)(ii) nor redemption of shares of a deceased minority shareholder pursuant to G.S. 55-14-31(d) was required because there was no showing that any subjective expectation of the deceased of the share redemption was known or assumed by the other shareholders and concurred in by them. High Point Bank & Trust Co. v. Sapona Mfg. Co., 212 N.C. App. 148, 713 S.E.2d 12, 2011 N.C. App. LEXIS 966 (2011).

§ 55-14-32. Receivership.

  1. A court in a judicial proceeding brought to dissolve a corporation may appoint one or more receivers to wind up and liquidate, or to manage, the business and affairs of the corporation. The court shall hold a hearing, after notifying all parties to the proceeding and any interested persons designated by the court, before appointing a receiver. The court appointing a receiver has exclusive jurisdiction over the corporation and all of its property wherever located.
  2. The court may appoint an individual or a domestic or foreign corporation (authorized to transact business in this State) as a receiver. The court may require the receiver to post bond, with or without sureties, in an amount the court directs.
  3. The court shall describe the powers and duties of the receiver in its appointing order, which may be amended from time to time. Such powers may include without limitation the power:
    1. To dispose of all or any part of the assets of the corporation wherever located, at a public or private sale, if authorized by the court;
    2. To sue and defend in his own name as receiver of the corporation in all courts of this State; and
    3. To exercise all of the powers of the corporation, through or in place of its board of directors or officers, to the extent necessary to manage the affairs of the corporation in the best interests of its shareholders and creditors.
  4. Reserved for future codification purposes.
  5. The court from time to time during the receivership may order compensation paid and expense disbursements or reimbursements made to the receiver and his counsel from the assets of the corporation or proceeds from the sale of the assets.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1.

Official Comment

Section 14.32 preserves provisions from earlier versions of the Model Act authorizing the appointment of a receiver, and adds authority to appoint a custodian as an alternative, for a corporation in a judicial dissolution proceeding. In many states, general statutes or rules of court regulate the appointment of receivers or custodians and define their duties. Section 14.32 is designed to supplement these general provisions and grant the court power to take the steps it considers necessary to resolve the internal corporate problem or to effect liquidation of the corporation in an efficient manner.

North Carolina Commentary

Because there is no established body of law in North Carolina on appointment of custodians in these circumstances, this section and G.S. 55-14-31 differ from the Model Act in omitting all references to custodians and custodianship. The provisions of subsection (c) describing the powers that may be given to a receiver were rewritten to provide greater clarity.

Legal Periodicals.

For article on North Carolina receivership statutes applicable to insolvent debtors, see 17 Wake Forest L. Rev. 745 (1981).

§ 55-14-33. Decree of dissolution.

  1. If after a hearing the court determines that one or more grounds for judicial dissolution described in G.S. 55-14-30 exist, it may enter a decree dissolving the corporation and specifying the effective date of the dissolution, and the clerk of the court shall deliver a certified copy of the decree to the Secretary of State, who shall file it.
  2. After entering the decree of dissolution, the court shall direct the winding up and liquidation of the corporation’s business and affairs in accordance with G.S. 55-14-05 and the notification of claimants in accordance with G.S. 55-14-06 and G.S. 55-14-07. The corporation’s name becomes available for use by another entity as provided in G.S. 55D-21.

History. 1955, c. 1371, s. 1; 1959, c. 1316, s. 26; 1967, c. 823, s. 19; 1969, c. 965, s. 1; 1973, c. 469, s. 42; 1989, c. 265, s. 1; 2001-358, s. 19; 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Official Comment

A court decree ordering that a corporation be dissolved involuntarily has the same legal effect as articles of dissolution. Section 14.33 requires that the secretary of state receive and file a copy of the decree. Thereafter the corporation’s business and affairs are to be wound up as provided in sections 14.05, 14.06, and 14.07.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, s. 19, effective January 1, 2002, and applicable to documents submitted for filing on or after that date, added the last sentence to subsection (b).

CASE NOTES

Trial court was not required to hold hearing on valuation of the corporation’s stocks and assets prior to entering its dissolution order as any specific problems regarding implementation of the dissolution order, including valuation of the corporation’s assets, can be brought to the attention of the trial court by motion as the problems arise. Foster v. Foster Farms, Inc., 112 N.C. App. 700, 436 S.E.2d 843, 1993 N.C. App. LEXIS 1251 (1993).

§§ 55-14-34 through 55-14-39.

Reserved for future codification purposes.

Part 4. Miscellaneous.

§ 55-14-40. Disposition of amounts due to unavailable shareholders and creditors.

Upon liquidation of a corporation, the portion of the assets distributable to a creditor or shareholder who is unknown or cannot be found shall be disposed of in accordance with Chapter 116B.

History. 1947, c. 613; c. 621, s. 1; G.S., s. 55-132; 1955, c. 1371, s. 1; 1971, c. 1135, s. 4; 1979, 2nd Sess., c. 1311, s. 6; 1989, c. 265, s. 1.

Official Comment

Section 14.40 is a deposit provision, not an escheat provision. It does not provide for ultimate disposition of unclaimed funds. Rather, it permits a corporation that has dissolved to pay over for safekeeping to the state treasurer (or other appropriate state official with statutory authority to receive such funds) funds belonging to a creditor, claimant, or shareholder who cannot be found.

The handling and ultimate disposition of unclaimed funds by the state treasurer or other appropriate state official is to be determined by state law other than the Model Act.

North Carolina Commentary

This section brings forward former G.S. 55-130 and incorporates the provisions of Chapter 116B of the General Statutes (Escheats and Abandoned Property).

Legal Periodicals.

For comment on escheat of intangible property, see 2 Wake Forest Intra. L. Rev. 100 (1966).

Article 14A. Reorganization.

§ 55-14A-01. Fundamental changes in reorganization proceedings.

  1. Whenever a plan of reorganization of a corporation is confirmed by decree or order of a court of competent jurisdiction in proceedings for the reorganization of such corporation pursuant to the provisions of any applicable statute of the United States relating to reorganization of corporations, the corporation may put into effect and carry out such plan and the decrees and orders of the court relative thereto and may take any action provided in such plan or directed by such decrees and orders without further action by its directors or shareholders. Such action may be taken, as may be directed by such decrees or orders, by the trustee or trustees of such corporation appointed in the reorganization proceedings, or by designated officers of the corporation, or by a master or other representative appointed by the court, with like effect as if taken by unanimous action of the directors and shareholders of the corporation. In particular and without limiting the generality or effect of the foregoing, such corporation may:
    1. Amend its articles of incorporation or bylaws, or both, so long as the articles of incorporation and bylaws as amended contain only such provisions as might be lawfully contained therein at the time of making such amendment;
    2. Constitute or reconstitute and classify or reclassify its board of directors, and name, constitute or appoint directors and officers in place of or in addition to all or any of the directors or officers then in office;
    3. Make any change in its capital accounts or in any or all of its outstanding shares or other securities, or cancel any or all of such outstanding shares or other securities;
    4. Dissolve and liquidate;
    5. Effect a merger or share exchange;
    6. Transfer all or part of its assets;
    7. Change its registered office or registered agent, or both;
    8. Authorize the issuance of bonds, debentures or other obligations of the corporation, whether or not convertible into shares of any class or bearing warrants or other evidences of optional rights to purchase or subscribe for shares of any class, and fix the terms and conditions thereof.
  2. Any articles of amendment, statement of change of registered office or registered agent, articles of restatement, articles of merger or share exchange, articles of conversion, articles of dissolution, or any other document appropriate to complete any action permitted by this section shall be executed and filed in accordance with the provisions of this Chapter on behalf of the corporation by such person or persons as may be authorized to take such action pursuant to subsection (a) of this section. The document shall set forth the statements required by this Chapter to be included in the document, except any statement that the action taken by the document was adopted by the incorporators or board of directors or was approved by the shareholders, and also shall set forth:
    1. The date of the court’s order or decree approving the action.
    2. The title of the reorganization proceeding in which the order or decree was entered.
    3. A statement that the court had jurisdiction of the proceeding under a federal statute of the United States.
  3. No action taken under this section shall give rise to any appraisal rights, except as provided in the plan of reorganization.
  4. This section does not apply after entry of a final decree in the reorganization proceeding even though the court retains jurisdiction of the proceeding for limited purposes unrelated to consummation of the reorganization plan.

History. 1973, c. 469, s. 38; 1989, c. 265, s. 1; 2005-268, s. 34; 2011-347, s. 12.

North Carolina Commentary

This section brings forward, with minor conforming changes, former G.S. 55-113.1. Its provisions are more complete than those of the corresponding section of the Model Act, section 10.08. Subsection 10.08(d) of the Model Act, however, was substituted for subsection (d) of the former statute.

Effect of Amendments.

Session Laws 2005-268, s. 34, effective October 1, 2005, rewrote subsection (b).

Session Laws 2011-347, s. 12, effective October 1, 2011, substituted “appraisal rights” for “dissenters’ rights” in subsection (c).

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

Article 15. Foreign Corporations.

Part 1. Certificate of Authority.

§ 55-15-01. Authority to transact business required.

  1. A foreign corporation may not transact business in this State until it obtains a certificate of authority from the Secretary of State.
  2. Without excluding other activities which may not constitute transacting business in this State, a foreign corporation shall not be considered to be transacting business in this State solely for the purposes of this Chapter, by reason of carrying on in this State any one or more of the following activities:
    1. Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof or the settlement of claims or disputes;
    2. Holding meetings of its directors or shareholders or carrying on other activities concerning its internal affairs;
    3. Maintaining bank accounts or borrowing money in this State, with or without security, even if such borrowings are repeated and continuous transactions;
    4. Maintaining offices or agencies for the transfer, exchange, and registration of its securities, or appointing and maintaining trustees or depositories with relation to its securities;
    5. Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where such orders require acceptance without this State before becoming binding contracts;
    6. Making or investing in loans with or without security including servicing of mortgages or deeds of trust through independent agencies within the State, the conducting of foreclosure proceedings and sale, the acquiring of property at foreclosure sale and the management and rental of such property for a reasonable time while liquidating its investment, provided no office or agency therefor is maintained in this State;
    7. Taking security for or collecting debts due to it or enforcing any rights in property securing the same;
    8. Transacting business in interstate commerce;
    9. Conducting an isolated transaction completed within a period of six months and not in the course of a number of repeated transactions of like nature;
    10. Selling through independent contractors;
    11. Owning, without more, real or personal property.
  3. Reserved for future codification purposes.
  4. Foreign insurance companies that are licensed by the Commissioner of Insurance are not required to obtain a certificate of authority from the Secretary of State.
  5. The following foreign corporations are not required to obtain a certificate of authority from the Secretary of State:
    1. A nonresident business solely performing disaster-related work in this State during a disaster response period at the request of a critical infrastructure company. The definitions and provisions of G.S. 166A-19.70A apply to this subdivision.
    2. A person issued a temporary license by the Department of Revenue under G.S. 105-449.69A to import, export, distribute, or transport motor fuel in this State in response to a disaster declaration.

History. 1901, c. 2, s. 93; Rev., s. 1193; 1915, c. 196, s. 1; C.S., s. 1180; G.S., s. 55-117; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.20; 1993, c. 552, s. 16; 2019-187, s. 1(b).

Official Comment

A state may prescribe the terms and conditions upon which a foreign corporation is permitted to transact business within the state, subject, of course, to the restrictions of the United States Constitution. Chapter 15 requires that a foreign corporation seeking to transact business within the state must (1) obtain a certificate of authority from the secretary of state and (2) maintain a registered office and appoint a registered agent within the state.

Section 15.01(a) states the basic requirement that a foreign corporation must obtain a certificate of authority before it transacts business within the state. Section 15.05 describes the scope of the privilege obtained by a certificate of authority while section 15.02 describes the consequences of transacting business in the state without first obtaining the certificate of authority.

The Model Act does not attempt to formulate an inclusive definition of what constitutes the transaction of business. Rather, the concept is defined in a negative fashion by section 15.01(b), which states that certain activities do not constitute the transaction of business. In general terms, any conduct more regular, systematic, or extensive than that described in section 15.01(b) constitutes the transaction of business and requires the corporation to obtain a certificate of authority. Typical conduct requiring a certificate of authority includes maintaining an office to conduct local intrastate business, selling personal property not in interstate commerce, entering into contracts relating to the local business or sales, and owning or using real estate for general corporate purposes. But the passive owning of real estate for investment purposes does not constitute transacting business. See section 15.01(b)(9).

The test of “transacting business” defined in a negative way in section 15.01(b) applies only to the question whether the corporation’s contacts with the state are such that it must obtain a certificate of authority. It is not applicable to other questions such as whether the corporation is amenable to service of process under state “long-arm” statutes or liable for state or local taxes. A corporation that has obtained (or is required to obtain) a certificate of authority to transact business under chapter 15 will generally be subject to suit and state taxation in the state, while a corporation that is subject to service of process or state taxation in a state will not necessarily be required to obtain a certificate of authority under chapter 15.

The list of activities set forth in section 15.01(b) is not exhaustive. See section 15.01(c). The list excludes several different types of activities from the definition of “transacting business,” which are discussed below.

  1. Engaging in litigation
  2. Internal affairs of the corporation
  3. Maintaining bank accounts
  4. Interstate transactions
  5. Sales through independent contractors
  6. Creating, acquiring, or collecting debts
  7. Isolated transactions
  8. Other transactions

Section 15.01(b)(1) excludes “maintaining, defending or settling any proceeding.” The word “proceeding” is defined in section 1.40 to include all civil, criminal, administrative, or investigative suits or actions. Thus, a corporation is not “transacting business” solely because it resorts to the courts of the state to recover an indebtedness, enforce an obligation, recover possession of personal property, obtain the appointment of a receiver, intervene in a pending proceeding, bring a petition to compel arbitration, file an appeal bond, or pursue appellate remedies. Similarly, a foreign corporation is not required to obtain a certificate of authority merely because it files a complaint with the state securities commission or other governmental agency or participates in an administrative proceeding within the state.

A corporation does not “transact business” within a state under section 15.01 merely because some of its internal affairs occur within a state. Thus, a corporation may hold meetings of its board of directors or shareholders within a state without first obtaining a certificate of authority (section 15.01(b)(2)). It also may maintain offices or agencies within a state relating solely to the transfer, registration, or exchange of its shares without obtaining a certificate of authority (section 15.01(b)(4)). Other activities relating to the internal affairs of the corporation that do not constitute the transaction of business under section 15.01(b) include having officers or representatives of a corporation who reside within or are physically present in the state; while there, the officers or representatives may make executive decisions relating to the affairs of the corporation without imposing on the corporation the requirement that it obtain a certificate of authority in the state, provided these activities are not so regular and systematic as to cause the residence to be viewed as a business office.

A foreign corporation may maintain a bank account with a bank within the state, make deposits and write checks on the account without obtaining a certificate of authority (section 15.01(b)(3)).

A corporation is not “transacting business” within the meaning of section 15.01(a) if it is transacting business in interstate commerce (section 15.01(b)(10)) or soliciting or obtaining orders that must be accepted outside the state before they become contracts (section 15.01(b)(6)). These limitations reflect the provisions of the United States Constitution that grant to the United States Congress exclusive power over interstate commerce, and preclude states from imposing restrictions or conditions upon this commerce. These sections should be construed in a manner consistent with judicial decisions under the United States Constitution. Under these decisions, a foreign corporation is not required to obtain a certificate of authority even though it sells goods within the state if they are shipped to the purchasers in interstate commerce. A corporation need not obtain a certificate of authority even if it also does work and performs acts within the state incidental to the interstate business, e.g., if it takes or enforces a security interest incidental to these transactions. Nor is it required to obtain a certificate of authority merely because it sends traveling salesmen or solicitors into a state so long as contracts are not made within the state. Similarly, an office may be maintained by a corporation in a state without obtaining a certificate of authority if the office’s functions relate solely to interstate commerce.

Purchases of goods may of course be in interstate commerce as readily as sales. Thus, the purchase of personal property by a foreign corporation for shipment in interstate commerce out of the state does not require the corporation to obtain a certificate of authority.

A foreign corporation does not need to obtain a certificate of authority if it sells goods in the state through independent contractors (section 15.01(b)(5)). These transactions are viewed as transactions by the independent contractors, not by the corporation itself, even though the corporation sets some limits or ground rules for its contractors. If these controls are sufficiently pervasive, however, the corporation may be deemed to be selling for itself in intrastate commerce, and not through the independent contractors, and therefore engaged in the transaction of business in the state.

The mere act of making a loan by a foreign corporation that is not in the business of making loans does not constitute transacting business in the state in which the loan is made. On the same theory a foreign corporation may obtain security for the repayment of a loan, and foreclose or enforce the lien or security interest to collect the loan, without being deemed to be transacting business. See section 15.01(b)(7) and (8). Similarly, a refunding or “roll over” of a loan or its adjustment or compromise does not involve the transaction of business.

The concept of “transacting business” involves regular, repeated, and continuing business contacts of a local nature. A single agreement or isolated transaction within a state does not constitute the transaction of business if there is no intention to repeat the transaction or engage in similar transactions. Since the question is entirely one of fact, section 15.01(b)(10) retains the partially objective test from earlier versions of the Model Act that a transaction completed within 30 days does not constitute “transacting business” if it is not one in the course of “repeated transactions of a like nature.” A continuing transaction that is not completed within 30 days will likely require obtaining a certificate of authority, whether or not it is one of a number of repeated transactions, but that issue is not addressed by the Model Act. The 30-day provision is, in other words, a “safe harbor” for not requiring a certificate of authority.

Section 15.01(c) makes clear that the list of transactions in section 15.01(b) is not exhaustive. Among the large number of other transactions which do not give rise to the requirement that a certificate of authority be obtained are the ownership of all the shares of stock in a corporation that is engaged in local business within the state or as a limited partner in a limited partnership engaged in local business, or taking ministerial actions such as filing financing statements or registering trademarks.

Amended North Carolina Commentary

The Model Act was modified in subsection (a) by adding the words “under this Chapter or under Chapter 55A of the General Statutes.”

The activities listed in the Model Act as not constituting the transaction of business appear to be narrower in certain respects than the activities listed in former G.S. 55-131(b). Subsection (b), which applies solely for purposes of this Act and not for purposes of determining whether there is in personam jurisdiction over a foreign corporation, brings forward former G.S. 55-131(b) with the addition of subdivisions 15.01(b)(5) and (9) from the Model Act as subdivisions (b)(10) and (11). The substitution rendered the Model Act’s text in subsection 15.01(c) unnecessary, and it was omitted.

Subsection (d) was added to bring forward the provisions of former G.S. 55-131(c) in a revised, clarified version.

Editor’s Note.

Session Laws 2019-187, s. 3, made subsection (e), as added by Session Laws 2019-187, s. 1(b), effective August 1, 2019, and applicable to disaster declarations on or after that date.

Effect of Amendments.

Session Laws 2019-187, s. 1(b), added subsection (e). For effective date and applicability, see editor’s note.

Legal Periodicals.

For comment on the duty to register the transfer of investment securities, see 44 N.C.L. Rev. 854 (1966).

For article, “Foreign Corporation Laws: The Loss of Reason,” see 47 N.C.L. Rev. 1 (1968).

For article on modern statutory approaches to service of process outside the State, see 49 N.C.L. Rev. 235 (1971).

For article, “Foreign Corporations in North Carolina: The ‘Doing Business’ Standards of Qualification, Taxation, and Jurisdiction,” see 16 Wake Forest L. Rev. 711 (1980).

For article, “State Anti-Takeover Legislation: The Second and Third Generations,” see 23 Wake Forest L. Rev. 77 (1988).

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

CASE NOTES

Analysis

I.General Consideration

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Matter of Comity Only. —

A corporation of one state may do business in another only by comity of the latter state, when not so permitted by a valid federal statute, as in matters of interstate commerce, and may be prohibited from doing business therein entirely, or may be restricted with conditions made a prerequisite by statute. Lunceford v. Commercial Travelers Mut. Accident Ass'n of Am., 190 N.C. 314, 129 S.E. 805, 1925 N.C. LEXIS 66 (1925). See Wrought Iron Range Co. v. Carver, 118 N.C. 328, 24 S.E. 352, 1896 N.C. LEXIS 54 (1896); Blackwell's Durham Tobacco Co. v. American Tobacco Co., 145 N.C. 367, 59 S.E. 123, 1907 N.C. LEXIS 306 (1907).

Power to Acquire and Sell Land. —

Foreign corporations, having a right under their charters to acquire and sell land, can exercise such right in this State to the same extent that corporations of this State can do so. Barcello v. Hapgood, 118 N.C. 712, 24 S.E. 124, 1896 N.C. LEXIS 122 (1896).

Substituted Service Proper Against Domesticated Foreign Corporation Wherever Cause of Action Arose. —

A foreign corporation which has been duly authorized to do business in this State may be sued in this State by substituted service on the Secretary of State on a cause of action arising either inside or outside the State. Atlantic Coast Line R.R. v. J.B. Hunt & Sons, 260 N.C. 717, 133 S.E.2d 644, 1963 N.C. LEXIS 794 (1963).

II.Transacting or Doing Business Within State
A.In General

Editor’s Note. —

Many of the cases below were decided under former G.S. 55-144 and corresponding prior provisions making the Secretary of State an agent of foreign corporations transacting business without procuring a certificate of authority or after withdrawal, etc., of such certificate, upon whom process in a suit upon a cause of action arising out of such business could be served.

What Constitutes Transacting or Doing Business. —

Transacting business within the State is defined as the transaction within the State of some substantial part of a party’s ordinary business, which must be continuous in the sense that it is distinguished from merely casual or occasional transactions, and must be of such a character as will give rise to some form of legal obligations. Abney Mills v. Tri-State Motor Transit Co., 265 N.C. 61, 143 S.E.2d 235, 1965 N.C. LEXIS 942 (1965).

In Abney Mills v. Tri-State Motor Transit Co., 265 N.C. 61, 143 S.E.2d 235 (1965), “transacting business” was construed as activities in North Carolina which are substantial, continuous and systematic, and regular, as distinguished from casual, single or isolated acts. Bowman v. Curt G. Joa, Inc., 361 F.2d 706, 1966 U.S. App. LEXIS 6038 (4th Cir. 1966).

The expression “doing business in this State” means engaging in, carrying on or exercising, in this State, some of the things, or some of the functions, for which the corporation was created. Radio Station WMFR, Inc. v. Eitel-McCullough, Inc., 232 N.C. 287, 59 S.E.2d 779, 1950 N.C. LEXIS 439 (1950); Troy Lumber Co. v. State Sewing Mach. Corp., 233 N.C. 407, 64 S.E.2d 415, 1951 N.C. LEXIS 314 (1951); Harrington v. Croft Steel Prods., Inc., 244 N.C. 675, 94 S.E.2d 803, 1956 N.C. LEXIS 492 (1956); Worley's Beverages, Inc. v. Bubble Up Corp., 167 F. Supp. 498, 1958 U.S. Dist. LEXIS 3450 (D.N.C. 1958); Abney Mills v. Tri-State Motor Transit Co., 265 N.C. 61, 143 S.E.2d 235, 1965 N.C. LEXIS 942 (1965).

The phrase “doing business in this State” is not susceptible of an all embracing definition, and each case must be decided upon the particular facts therein appearing, the general criteria being that a foreign corporation is doing business in this State if it transacts in this State the business it was created and authorized to do, through representatives in this State, and thus is present in this State through the person of its representatives. Parris v. H.G. Fischer & Co., 219 N.C. 292, 13 S.E.2d 540, 1941 N.C. LEXIS 310 (1941).

Doing business in this State means doing some of the things or exercising some of the functions in this State for which the corporation was created. Spartan Equip. Co. v. Air Placement Equip. Co., 263 N.C. 549, 140 S.E.2d 3, 1965 N.C. LEXIS 1331 (1965); Abney Mills v. Tri-State Motor Transit Co., 265 N.C. 61, 143 S.E.2d 235, 1965 N.C. LEXIS 942 (1965).

The business done by the corporation in this State must be of such nature and character as to warrant the inference that the corporation has subjected itself to the local jurisdiction and is, by its duly authorized officers and agents, present within the State. Canterbury v. Monroe Lange Hardwood Imports, 48 N.C. App. 90, 268 S.E.2d 868, 1980 N.C. App. LEXIS 3217 (1980).

Activities Must Be Substantial and Regular. —

The activities carried on by the corporation in North Carolina must be substantial, continuous, systematic and regular to constitute “transacting business in this State.” Canterbury v. Monroe Lange Hardwood Imports, 48 N.C. App. 90, 268 S.E.2d 868, 1980 N.C. App. LEXIS 3217 (1980).

Mere soliciting or procuring orders through employees or agents, where such orders require acceptance without this State before becoming binding contracts, does not constitute “transacting business” in this State. Schnur & Cohan, Inc. v. McDonald, 220 F. Supp. 9, 1963 U.S. Dist. LEXIS 7356 (M.D.N.C. 1963).

For case in which facts were held to constitute more than “soliciting or procuring orders” requiring acceptance without the State, see Dumas v. Chesapeake & O. Ry., 253 N.C. 501, 117 S.E.2d 426, 1960 N.C. LEXIS 686 (1960).

What Constitutes Within the State. —

A foreign corporation cannot be held to be doing business in a state, and therefore subject to its laws, unless it shall be found as a fact that such corporation has entered the state in which it is alleged to be doing business and there transacted, by its officers, agents or other persons authorized to act for it, the business in which it is authorized to engage by the state under whose laws it was created and organized. The presence within the state of such officers, agents or other persons, engaged in the transaction of the corporation’s business with citizens of the state, is generally held as determinative of the question as to whether the corporation is doing business in the state. Radio Station WMFR, Inc. v. Eitel-McCullough, Inc., 232 N.C. 287, 59 S.E.2d 779, 1950 N.C. LEXIS 439 (1950).

B.Activity Constituting Business Within State

Transacting Business of Domestic Subsidiary in State. —

Where a foreign corporation acquires and holds controlling stock interest in a domestic corporation, and comes into the state where the domestic corporation is created and doing business, and there itself by its officer or officers transacts business of the domestic corporation and manages and controls its internal affairs, then such foreign corporation is doing business within the domestic state and is subject to the jurisdiction of its courts. Abney Mills v. Tri-State Motor Transit Co., 265 N.C. 61, 143 S.E.2d 235, 1965 N.C. LEXIS 942 (1965).

Foreign Corporation with Licensees in State. —

A foreign corporation which received substantial royalties from 14 of 23 licensees located in this State and which adopted a program of sending auditors into the State to examine the books and records of its licensees was engaged in the transaction of business in North Carolina. Throwing Corp. of Am. v. Deering Milliken Research Corp., 302 F. Supp. 487, 1969 U.S. Dist. LEXIS 13136 (M.D.N.C. 1969).

Foreign Banking Corporation. —

A foreign banking corporation which sends its agents here for the purpose of investigating and looking after properties in its capacity as trustee, does business in the State, “doing business in this State” meaning engaging in, carrying on or exercising in this State some of the functions for which the corporation was created. Ruark v. Virginia Trust Co., 206 N.C. 564, 174 S.E. 441, 1934 N.C. LEXIS 245 (1934).

Insurance Business. —

A foreign company acquiring membership of persons in North Carolina for life insurance, without soliciting agents to whom policies are issued, upon a mutual benefit plan and kept in force by the payments of dues, is doing a life insurance business here. Lunceford v. Commercial Travelers Mut. Accident Ass'n of Am., 190 N.C. 314, 129 S.E. 805, 1925 N.C. LEXIS 66 (1925).

The issuance of one or more policies of fire insurance, by a corporation created and existing under the laws of another state, and not authorized to do business in this State, insuring citizens of this State against loss or damage by fire to property situate in this State, the contracts for such policies having been made, and the premiums having been paid in the state in which the foreign corporation had its principal office and place of business, not by or through any agent of such corporation or person authorized to act for it in this State, did not constitute “doing business” in this State of North Carolina within the meaning of these words in the former statute. Ivy River Land & Timber Co. v. National Fire & Marine Ins. Co., 192 N.C. 115, 133 S.E. 424, 1926 N.C. LEXIS 231 (1926).

Appraisal Business. —

Where defendant was in the appraisal business and was soliciting and performing appraisal work in North Carolina, it was thus transacting and performing in this State the business for which it was created. Crabtree v. Coats & Burchard Co., 7 N.C. App. 624, 173 S.E.2d 473, 1970 N.C. App. LEXIS 1748 (1970).

Lessor of Airports. —

Where defendant foreign corporation leased airports to individual defendant and by terms of agreement lessor was to furnish planes, parts, repairs, etc., to provide insurance for airports to be operated in name of corporate defendant, with right to demand that lessee devote full time to business, and to furnish forms for keeping records, that corporation was doing business in this State. Harrison v. Corley, 226 N.C. 184, 37 S.E.2d 489, 1946 N.C. LEXIS 417 (1946).

Sale and Consignment of Jewelry. —

Trial court properly dismissed, pursuant to G.S. 1A-1, N.C. R. Civ. P. 12, plaintiff’s action seeking to recover money allegedly owed to plaintiff by defendants from the sale and consignment of jewelry; pursuant to G.S. 55-15-02, a foreign corporation that transacted business in North Carolina was barred from maintaining an action in any state court unless it had obtained a certificate of authority to transact business prior to trial, plaintiff’s actions of selling and consigning jewelry to North Carolina jewelers constituted transaction of business pursuant to G.S. § 55-15-01(b), the trial court acted within its discretion when it addressed this issue pursuant to G.S. 1A-1, N.C. R. Civ. P. 16 prior to trial because the issue was dispositive of the action, and the trial court was not required by G.S. 55-15-02 to continue the case to allow plaintiff to obtain a certificate of authority. Harold Lang Jewelers, Inc. v. Johnson, 156 N.C. App. 187, 576 S.E.2d 360, 2003 N.C. App. LEXIS 73 (2003).

C.Activity Not Constituting Business Within State

Taking Orders and Delivering Goods in State. —

A foreign corporation which merely takes orders in this State to be transmitted to its home office for acceptance and shipment of its goods into this State by common carrier is not doing business here, but if it transports its goods to this State in its own trucks and thus completes the transaction by making deliveries here, it performs here one of its essential purposes and is doing business here. Harrington v. Croft Steel Prods., Inc., 244 N.C. 675, 94 S.E.2d 803, 1956 N.C. LEXIS 492 (1956).

Mere Incidental Services. —

Mere incidental services not substantially of the character of the business carried on by a foreign corporation are not of such nature as to subject it to the control and regulation of the State law or to invoke State law for its protection. Radio Station WMFR, Inc. v. Eitel-McCullough, Inc., 232 N.C. 287, 59 S.E.2d 779, 1950 N.C. LEXIS 439 (1950); Worley's Beverages, Inc. v. Bubble Up Corp., 167 F. Supp. 498, 1958 U.S. Dist. LEXIS 3450 (D.N.C. 1958).

Ownership or Control of Subsidiary Doing Business in State. —

Generally, it has been held or recognized that the mere ownership or control by a foreign corporation through a majority stock ownership of the stock of another corporation which is doing business within a state, either resident or domesticated, does not, in and of itself, constitute doing business within the state by the foreign corporation for the service of process so as to subject it to the State’s jurisdiction, where the foreign corporation is not created for the very purpose of holding such stock and the two corporations remain distinct entities. Abney Mills v. Tri-State Motor Transit Co., 265 N.C. 61, 143 S.E.2d 235, 1965 N.C. LEXIS 942 (1965).

Employment of Soliciting Agent. —

Where nonresident defendant corporation employed a soliciting agent who took orders and forwarded them to the home office in another state, and the contract in suit was entered into in the state where the home office was situated, the defendant was not doing business in this State. Plott v. Michael, 214 N.C. 665, 200 S.E. 429, 1939 N.C. LEXIS 402 (1939).

While company salesmen did some promotional work, and attempted to create goodwill for their company, and perhaps on occasions rendered engineering service or advice to customers, where their principal and significant duties consisted of soliciting orders for acceptance at the home office, this did not constitute transacting business. Schnur & Cohan, Inc. v. McDonald, 220 F. Supp. 9, 1963 U.S. Dist. LEXIS 7356 (M.D.N.C. 1963).

Sales Representative with Limited Authority. —

Findings that a foreign corporation, engaged in the business of manufacturing certain goods and selling them direct to retail distributors in this State, maintained a sales representative here to aid in promotion of sales to dealer representatives and facilitate sales directly to customers in company with dealer representatives, and an agent to investigate complaints by purchasers, who was without authority to compromise or adjust them, its established procedure being for the customer to return defective merchandise directly to the corporation, and also an agent here to facilitate the collection of delinquent or slow accounts owed by dealer representatives, without evidence that such agent had authority to collect or receive money on behalf of the corporation, were insufficient to support the conclusion that it was doing business in this State. Radio Station WMFR, Inc. v. Eitel-McCullough, Inc., 232 N.C. 287, 59 S.E.2d 779, 1950 N.C. LEXIS 439 (1950).

Foreign Publishing Company Shipping Magazines into State. —

A foreign publishing company which delivers to a common carrier in another state magazines for shipment to a wholesale dealer in this State for resale in this State by the dealer, with provision for credit to the dealer for unsold magazines, and which employs sales promotion representatives who make occasional visits in this State, is not doing business in this State. Putnam v. Triangle Publications, Inc., 245 N.C. 432, 96 S.E.2d 445, 1957 N.C. LEXIS 595 (1957).

Maintaining Lawsuit. —

Trial court did not err in denying the general contractor’s motion to dismiss based on its argument that the judgment creditor had failed to obtain a certificate of authority to do business in North Carolina; the judgment creditor was not required to have obtained a certificate of authority to maintain its lawsuit to collect money it believed it was owed. Quantum Corp. Funding, Ltd. v. B.H. Bryan Bldg. Co., 175 N.C. App. 483, 623 S.E.2d 793, 2006 N.C. App. LEXIS 187 (2006).

Illustrative Cases. —

Trial court erred in concluding that a foreign corporation transacted business in North Carolina and was required to obtain a certificate of authority under G.S. 55-15-01 and G.S. 55-15-02 to bring a lawsuit because the corporation’s interactions with North Carolina consultants and an attorney concerned interstate commerce or the corporation’s internal affairs. Thus, the corporation was not transacting business in North Carolina. Harbin Yinhai Tech. v. Greentree Fin. Group, Inc., 196 N.C. App. 615, 677 S.E.2d 854, 2009 N.C. App. LEXIS 525 (2009).

III.Interstate Commerce

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Test of Interstate Commerce. —

Importation into one State from another is the indispensable element, the test, of interstate commerce; and every negotiation, contract, trade and dealing between citizens of different states, which contemplates and causes such importation, whether it be of goods, persons or information, is a transaction of interstate commerce. Snelling & Snelling, Inc. v. Watson, 41 N.C. App. 193, 254 S.E.2d 785, 1979 N.C. App. LEXIS 2429 (1979).

Not all interstate commerce is sales of goods. Snelling & Snelling, Inc. v. Watson, 41 N.C. App. 193, 254 S.E.2d 785, 1979 N.C. App. LEXIS 2429 (1979).

Sale of services can constitute interstate commerce. Snelling & Snelling, Inc. v. Watson, 41 N.C. App. 193, 254 S.E.2d 785, 1979 N.C. App. LEXIS 2429 (1979).

Franchisor of Employment Agencies Engaged in Interstate Commerce. —

Where plaintiff foreign corporation, a franchisor of employment agencies, maintained no offices in this State, and had no officers or employees residing in this State, and where its activities in this State consisted of: (1) soliciting franchise agreements and promoting sales of its business forms, (2) training and instructing its franchisees and inspecting the premises, books and records of its franchisees, and (3) controlling the business methods of its franchisees to protect its service mark and to ensure an accurate accounting of profits by its franchisees, plaintiff was transacting business in interstate commerce and was not required to obtain a certificate of authority from the Secretary of State as a prerequisite to bringing suit in this State, since plaintiff’s activities were incidental to its interstate franchise contracts and were, therefore, interstate in nature. Snelling & Snelling, Inc. v. Watson, 41 N.C. App. 193, 254 S.E.2d 785, 1979 N.C. App. LEXIS 2429 (1979).

Contracts Dependent on Acceptance by Tennessee Firm. —

G.S. 55-15-01 did not prevent a Korean company from filing an unfair or deceptive practices claim against an employee of a North Carolina corporation employer as the company did not need a certificate of authority in North Carolina under G.S. 55-15-02(a) as all of its contracts were dependent on acceptance without the State of North Carolina by a firm in Tennessee, and the company was conducting business in interstate commerce. Songwooyarn Trading Co v. Sox Eleven, Inc., 213 N.C. App. 49, 714 S.E.2d 162, 2011 N.C. App. LEXIS 1173 (2011).

IV.Effect of Domestication

Editor’s Note. —

The cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Right to Sue and Be Sued. —

Where a foreign corporation has submitted to domestication in this State by filing its certificate of incorporation with the Secretary of State and by otherwise complying with the provisions of the statute, it thereby acquires the right to sue and be sued in the courts of this State as a domestic corporation. Smith-Douglass Co. v. Honeycutt, 204 N.C. 219, 167 S.E. 810, 1933 N.C. LEXIS 363 (1933).

When a foreign corporation complies with the provisions of the statute as to “domestication,” it subjects itself to the laws of this State and acquires in return certain compensating rights and privileges. Among these is the right to sue and be sued in the State courts under the rules and regulations which apply to domestic corporations. Hill v. Atlantic Greyhound Corp., 229 N.C. 728, 51 S.E.2d 183, 1949 N.C. LEXIS 333 (1949).

G.S. 1-80 Does Not Apply. —

A foreign corporation domesticated under the statute may sue and be sued under the rules and regulations which apply to domestic corporations, and is entitled to have an action against it, instituted by a nonresident, removed to the county of its main place of business in this State. In such case G.S. 1-80 does not apply. Hill v. Atlantic Greyhound Corp., 229 N.C. 728, 51 S.E.2d 183, 1949 N.C. LEXIS 333 (1949).

Power to Maintain Action Notwithstanding Charter. —

A corporation incorporated in another state with authority to conduct business in North Carolina, which has complied with the statutes of this State, can maintain an action in the courts of this State although its charter may not authorize it to do business in the state of its incorporation. Troy & N.C. Gold Mining Co. v. Snow Lumber Co., 173 N.C. 593, 92 S.E. 494, 1917 N.C. LEXIS 350 (1917).

Right to Remove to Federal Courts. —

A foreign corporation, by compliance with the statute as to “domestication,” does not lose its right to remove to the federal courts on the ground of diverse citizenship. Southern Ry. v. Allison, 190 U.S. 326, 23 S. Ct. 713, 47 L. Ed. 1078, 1903 U.S. LEXIS 1576 (1903).

For purposes of venue, domesticated foreign corporations are residents of the State. Hill v. Atlantic Greyhound Corp., 229 N.C. 728, 51 S.E.2d 183, 1949 N.C. LEXIS 333 (1949).

Venue of Action Against Domesticated Foreign Corporation. —

Where it was found that defendant was a domesticated foreign corporation doing extensive business in the middle district of North Carolina and maintained warehouses in Salisbury, High Point, Asheboro, Greensboro and Durham from which it distributed in the middle district its products, under both the State law and federal rules of procedure venue was properly placed in the middle district of North Carolina. Graham v. Taylor Biscuit Co., 157 F. Supp. 496, 1957 U.S. Dist. LEXIS 2535 (D.N.C. 1957).

A foreign corporation which duly domesticates in this State is to be treated like a domestic corporation for venue purposes. Moore Golf, Inc. v. Shambley Wrecking Contractors, 22 N.C. App. 449, 206 S.E.2d 789, 1974 N.C. App. LEXIS 2354 (1974).

Neither Property Nor Situs of Debts Removed to State. —

The statute requiring “domestication” enables a plaintiff to get personal service upon a foreign corporation, but does not remove its property to the State nor the situs of its debts created elsewhere. Strause Bros. v. Aetna Fire Ins. Co., 126 N.C. 223, 35 S.E. 471, 1900 N.C. LEXIS 220 (1900).

How Charter Proven. —

The charter of a foreign corporation may be proven in this State by exhibiting a copy duly certified by the Secretary of State of the state in which the corporation was created. Barcello v. Hapgood, 118 N.C. 712, 24 S.E. 124, 1896 N.C. LEXIS 122 (1896).

Regulation of Securities Issued by Foreign Corporation. —

The mere fact that a public utility otherwise subject to the jurisdiction of this State is a foreign corporation does not deprive this State of all supervisory and regulatory powers over securities issued by such a corporation. State ex rel. Utils. Comm'n v. Southern Bell Tel. & Tel. Co., 22 N.C. App. 714, 207 S.E.2d 771, 1974 N.C. App. LEXIS 2427 (1974), aff'd, 288 N.C. 201, 217 S.E.2d 543, 1975 N.C. LEXIS 894 (1975).

As to effect of domestication of insurance company, see Occidental Life Ins. Co. v. Lawrence, 204 N.C. 707, 169 S.E. 636, 1933 N.C. LEXIS 244 (1933).

§ 55-15-02. Consequences of transacting business without authority.

  1. No foreign corporation transacting business in this State without permission obtained through a certificate of authority under this Chapter or through domestication under prior acts shall be permitted to maintain any action or proceeding in any court of this State unless the foreign corporation has obtained a certificate of authority prior to trial.An issue arising under this subsection must be raised by motion and determined by the trial judge prior to trial.
  2. Reserved for future codification purposes.
  3. Reserved for future codification purposes.
  4. A foreign corporation failing to obtain a certificate of authority as required by this Chapter or by prior acts then applicable shall be liable to the State for the years or parts thereof during which it transacted business in this State without a certificate of authority in an amount equal to all fees and taxes which would have been imposed by law upon such corporation had it duly applied for and received such permission, plus interest and all penalties imposed by law for failure to pay such fees and taxes. In addition, the foreign corporation shall be liable for a civil penalty of ten dollars ($10.00) for each day, but not to exceed a total of one thousand dollars ($1,000) for each year or part thereof, it transacts business in this State without a certificate of authority. The Attorney General may bring actions to recover all amounts due the State under the provisions of this subsection.The clear proceeds of civil penalties provided for in this subsection shall be remitted to the Civil Penalty and Forfeiture Fund in accordance with G.S. 115C-457.2.
  5. Notwithstanding subsection (a), the failure of a foreign corporation to obtain a certificate of authority does not impair the validity of its corporate acts or prevent it from defending any proceeding in this State.
  6. The Secretary of State is hereby directed to require that every foreign corporation transacting business in this State comply with the provisions of this Chapter. The Secretary of State is authorized to employ such assistants as shall be deemed necessary in his office for the purpose of enforcing the provisions of this Article and for making such investigations as shall be necessary to ascertain foreign corporations now transacting business in this State which may have failed to comply with the provisions of this Chapter.

History. 1901, c. 2, s. 57; 1903, c. 766; Rev., s. 1194; 1915, c. 263; C.S., s. 1181; 1935, c. 44; 1937, c. 343; 1939, c. 57; G.S., ss. 55-118, 55-120; 1953, c. 1152; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1998-215, s. 117; 1999-151, s. 1.

Official Comment

The purpose of section 15.02 is to induce corporations that are required to obtain a certificate of authority but have not to qualify promptly, without imposing harsh or erratic sanctions. The Model Act rejects the provisions adopted in a few states that make unenforceable intrastate transactions by unqualified corporations or that impose punitive sanctions or forfeitures on nonqualifying corporations. Often the failure to qualify is a result of inadvertance or bona fide disagreement as to the scope of the provisions of section 15.01, which are necessarily imprecise; the imposition of harsh sanctions in these situations is inappropriate. Further, as a matter of state policy it is generally preferable to encourage qualification in case of doubt rather than to impose severe sanctions that may cause corporations to resist obtaining a certificate of authority in doubtful situations.

Section 15.02 closes the courts of the state to suits maintained by corporations which should have but which have not obtained a certificate of authority. However, this sanction is not a punitive one: section 15.02(e) states that the failure of the corporation to qualify does not affect the validity of corporate acts, including contracts. Thus, a contract made by a nonqualified corporation may be enforced by the corporation simply by obtaining a certificate. Further, section 15.02(c) authorizes a court to stay a proceeding to determine whether a corporation should have qualified to transact business and, if it concludes that qualification is necessary, it may grant a further stay to permit the corporation to do so. Thus, the corporation will not be compelled to refile a suit if the corporation qualifies to transact business within a reasonable period. The purpose of these provisions is to encourage corporations to obtain certificates of authority and to eliminate the temptation to raise section 15.02 defenses only after applicable statutes of limitation have run.

Section 15.02(e) does not prevent a foreign corporation that has failed to obtain a certificate of authority from “defending any proceeding.” The distinction between “maintaining” a proceeding under section 15.02(a) and “defending any proceeding” under section 15.02(e) is determined on the basis of whether affirmative relief is sought. A nonqualified corporation may interpose any defense or permissive or mandatory counterclaim to defeat a claimed recovery, but may not obtain an affirmative judgment or decree based on the counterclaim unless it has obtained a certificate of authority.

In addition to closing the courts of the state to a nonqualified foreign corporation, many states impose a penalty equal to all fees and franchise taxes that the foreign corporation would have been liable for if it had qualified to transact business when it was first required to do so. This penalty is usually defined to equal the sum of fees and franchise taxes for each year or part thereof the corporation transacted business in the state without a certificate of authority. Similar provisions appeared in earlier versions of the Model Act, but were modified in the present revision in favor of a specific dollar amount (which each state adopting the revised Model Act should insert in section 15.02(d) for each day and year the foreign corporation fails to qualify. The revised Model Act does not treat liability for taxes.

Section 15.02(b) prevents evasion of section 15.02(a) by an assignment of a claim on which the foreign corporation is barred from bringing suit under section 15.02(a). If the successor has acquired all or substantially all of the assets of the foreign corporation, the successor may maintain suit after it has qualified. In the case of all other assignments, the foreign corporation itself must obtain a certificate of authority before the assignee may maintain suit on the claim. The phrase “all or substantially all” has the meaning set forth in the Official Comment to section 12.01.

North Carolina Commentary

This section substitutes former G.S. 55-154 for the corresponding provisions of the Model Act and adds the Model Act’s scheme of cumulative penalties ($10 per day up to $1,000 per year) for failure to qualify instead of the former statute’s one-time $500 penalty.

Legal Periodicals.

For note on jurisdiction over foreign corporations, see 35 N.C.L. Rev. 546 (1957).

For note on jurisdiction over foreign corporations not qualified to transact business in North Carolina, see 44 N.C.L. Rev. 449 (1966).

For article on modern statutory approaches to service of process outside the State, see 49 N.C.L. Rev. 235 (1971).

For article, “Foreign Corporations in North Carolina: The ‘Doing Business’ Standards of Qualification, Taxation, and Jurisdiction,” see 16 Wake Forest L. Rev. 711 (1980).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Constitutionality. —

Nothing in the United States or North Carolina Constitutions prohibits the State, in the exercise of its police power, from making the transaction of business by a foreign corporation prior to procuring a license an indictable offense. State v. Agey, 171 N.C. 831, 88 S.E. 726, 1916 N.C. LEXIS 192 (1916).

The only restriction of the Constitution is that the license tax must not interfere with interstate commerce or be otherwise invalid. Pittsburg Life & Trust Co. v. Young, 172 N.C. 470, 90 S.E. 568, 1916 N.C. LEXIS 322 (1916).

Contracts Not Avoided by Noncompliance. —

The contracts of a foreign corporation doing business in this State without compliance with the statute as to domestication are not avoided; the penalty alone is enforceable by action as the statute prescribes. Miller v. Howell, 184 N.C. 119, 113 S.E. 621, 1922 N.C. LEXIS 27 (1922). See also G. Ober & Sons Co. v. Katzenstein, 160 N.C. 439, 76 S.E. 476, 1912 N.C. LEXIS 187 (1912).

As to action by State for penalty, see Blackwell's Durham Tobacco Co. v. American Tobacco Co., 144 N.C. 352, 57 S.E. 5, 1907 N.C. LEXIS 150 (1907); G. Ober & Sons Co. v. Katzenstein, 160 N.C. 439, 76 S.E. 476, 1912 N.C. LEXIS 187 (1912).

Effect of Suspension of Certificate of Authority on Corporation’s Capacity to Sue. —

Construction company, which entered into a contract with defendant-homeowner and performed that contract at a time when its certificate of authority was in a state of suspension, could not assert or enforce its rights under the contract, including claims based in equity (i.e., claims based on quantum meruit). Ben Johnson Homes, Inc. v. Watkins, 142 N.C. App. 162, 541 S.E.2d 769, 2001 N.C. App. LEXIS 32, aff'd, 354 N.C. 563, 555 S.E.2d 608, 2001 N.C. LEXIS 1227 (2001).

Attorney General as Party to Declaratory Judgment Action. —

In a proceeding for a declaratory judgment against the Attorney General and the Secretary of State relative to the application of registration provisions to plaintiff, a foreign corporation, the Attorney General was not a real party defendant, but, being charged with the enforcement of the statute, he should be retained as a nominal defendant along with the Secretary of State where the constitutionality of the statute was being challenged. NAACP v. Eure, 245 N.C. 331, 95 S.E.2d 893, 1957 N.C. LEXIS 460 (1957).

A nonqualifying corporation, against which an action is brought in this State, may bring a compulsory counterclaim in that action. E & E Indus., Inc. v. Crown Textiles, Inc., 80 N.C. App. 508, 342 S.E.2d 397, 1986 N.C. App. LEXIS 2208 (1986).

By suing, in a forum of this State, a foreign corporation which has not obtained a certificate of authority before the commencement of the action, a North Carolina corporation effectively waives any protection this section affords it from compulsory counterclaims asserted by the party sued. E & E Indus., Inc. v. Crown Textiles, Inc., 80 N.C. App. 508, 342 S.E.2d 397, 1986 N.C. App. LEXIS 2208 (1986).

Summary Judgment Unavailable. —

Summary judgment for plaintiff was inappropriate where plaintiff lacked authority to maintain an action in North Carolina to enforce the foreign judgment. Leasecomm Corp. v. Renaissance Auto Care, Inc., 122 N.C. App. 119, 468 S.E.2d 562, 1996 N.C. App. LEXIS 195 (1996).

Failure to Raise Issue in Pre-Trial Motion. —

Where the evidence showed that defendants were not misled by plaintiff about its possession of a certificate of authority to transact business in North Carolina, defendants’ failure to raise the issue of plaintiff’s authority to transact business in North Carolina in a motion prior to trial, as required by subsection (a), precluded it from doing so in a motion after trial. Spivey & Self, Inc. v. Highview Farms, Inc., 110 N.C. App. 719, 431 S.E.2d 535, 1993 N.C. App. LEXIS 670 (1993).

Builder’s claim under G.S. 55-15-02(a) that a carpentry company could not bring a breach of contract action against it was waived where it was not raised prior to trial. Accelerated Framing, Inc. v. Eagle Ridge Builders, Inc., 207 N.C. App. 722, 701 S.E.2d 280, 2010 N.C. App. LEXIS 2016 (2010).

Action Barred by Failure to Obtain Certificate of Authority. —

Trial court properly dismissed, pursuant to G.S. 1A-1, N.C. R. Civ. P. 12, plaintiff’s action seeking to recover money allegedly owed to plaintiff by defendants from the sale and consignment of jewelry; pursuant to G.S. 55-15-02, a foreign corporation that transacted business in North Carolina was barred from maintaining an action in any state court unless it had obtained a certificate of authority to transact business prior to trial, plaintiff’s actions of selling and consigning jewelry to North Carolina jewelers constituted transaction of business pursuant to G.S. 55-15-01(b), the trial court acted within its discretion when it addressed this issue pursuant to G.S. 1A-1, N.C. R. Civ. P. 16 prior to trial because the issue was dispositive of the action, and the trial court was not required by G.S. 55-15-02 to continue the case to allow plaintiff to obtain a certificate of authority. Harold Lang Jewelers, Inc. v. Johnson, 156 N.C. App. 187, 576 S.E.2d 360, 2003 N.C. App. LEXIS 73 (2003).

No Certificate of Authority Required. —

G.S. 55-15-01 did not prevent a Korean company from filing an unfair or deceptive practices claim against an employee of a North Carolina corporation employer as the company did not need a certificate of authority in North Carolina under G.S. 55-15-02(a) as all of its contracts were dependent on acceptance without the State of North Carolina by a firm in Tennessee, and the company was conducting business in interstate commerce. Songwooyarn Trading Co v. Sox Eleven, Inc., 213 N.C. App. 49, 714 S.E.2d 162, 2011 N.C. App. LEXIS 1173 (2011).

Action Permitted Where Corporation Obtained Certificate of Authority Prior to Hearing. —

Foreign corporation could enforce a foreign judgment obtained in a South Carolina court against the individuals where the corporation obtained its certificate of authority before the hearing in North Carolina; it was not necessary to obtain the certificate of authority prior to commencing trial in South Carolina. Kyle & Assocs. v. Mahan, 161 N.C. App. 341, 587 S.E.2d 914, 2003 N.C. App. LEXIS 2057 (2003), aff'd, 359 N.C. 176, 605 S.E.2d 142, 2004 N.C. LEXIS 1198 (2004).

Action by Foreign Judgment Creditor Not Barred. —

Trial court did not err in denying the general contractor’s motion to dismiss based on its argument that the judgment creditor had failed to obtain a certificate of authority to do business in North Carolina; the judgment creditor was not required to have obtained a certificate of authority to maintain its lawsuit to collect money it believed it was owed. Quantum Corp. Funding, Ltd. v. B.H. Bryan Bldg. Co., 175 N.C. App. 483, 623 S.E.2d 793, 2006 N.C. App. LEXIS 187 (2006).

Trial court erred in concluding that a foreign corporation transacted business in North Carolina and was required to obtain a certificate of authority under G.S. 55-15-01 and G.S. 55-15-02 to bring a lawsuit because the corporation’s interactions with North Carolina consultants and an attorney concerned interstate commerce or the corporation’s internal affairs. Thus, the corporation was not transacting business in North Carolina. Harbin Yinhai Tech. v. Greentree Fin. Group, Inc., 196 N.C. App. 615, 677 S.E.2d 854, 2009 N.C. App. LEXIS 525 (2009).

§ 55-15-03. Application for certificate of authority.

  1. A foreign corporation may apply for a certificate of authority to transact business in this State by delivering an application to the Secretary of State for filing. The application must set forth:
    1. The name of the foreign corporation or, if its name is unavailable for use in this State, a corporate name that satisfies the requirements of Article 3 of Chapter 55D of the General Statutes;
    2. The name of the state or country under whose law it is incorporated;
    3. Its date of incorporation and period of duration;
    4. The street address, and the mailing address if different from the street address, of its principal office if any, and the county in which the principal office, if any, is located;
    5. The street address, and the mailing address if different from the street address, of its registered office in this State, the county in which the registered office is located, and the name of its registered agent at that office; and
    6. The names and usual business addresses of its current officers.
  2. The foreign corporation shall deliver with the completed application a certificate of existence (or a document of similar import) duly authenticated by the secretary of state or other official having custody of corporate records in the state or country under whose law it is incorporated.
  3. If the Secretary of State finds that the application conforms to law he shall, when all fees have been tendered as prescribed in this Chapter:
    1. Endorse on the application and an exact or conformed copy thereof the word “filed” and the hour, day, month, and year of the filing thereof;
    2. File in his office the application and the certificate of existence (or document of similar import as described in subsection (b) of this section);
    3. Issue a certificate of authority to transact business in this State to which he shall affix the exact or conformed copy of the application; and
    4. Send to the foreign corporation or its representative the certificate of authority, together with the exact or conformed copy of the application affixed thereto.

History. 1901, c. 2, s. 57; 1903, c. 766; Rev., s. 1194; 1915, c. 263; C.S., s. 1181; 1935, c. 44; 1939, c. 57; G.S., s. 55-118; 1953, c. 1152; 1955, c. 1371, s. 1; 1957, c. 979, s. 8; 1969, c. 751, s. 41; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, ss. 12.1(b), 12.21; 2001-358, s. 17; 2001-387, ss. 27A, 169(a), 173, 175(a); 2001-413, s. 6.

Official Comment

  1. Disclosure requirements in general
  2. The application for a certificate of authority

Section 15.03 provides that a foreign corporation seeking a certificate of authority to transact business in the state must file an application that contains the information set forth in this section. These disclosure requirements are supplemented by the requirements of other sections in this chapter—15.04, 15.06, and 15.07—which require amended or supplemental filings in certain circumstances, and by section 16.22, which requires every qualified foreign corporation to file annual reports containing specified information. Generally, the revised Model Act eliminates repetitious filings, so that information need be submitted to the secretary of state in only one document.

The purposes of these disclosure requirements are: (1) to ensure that citizens of the state have adequate information about foreign corporations in their transactions with them; (2) to put them in a status of equality with domestic corporations with respect to information required to be furnished; (3) to facilitate their subjection to the jurisdiction of the state’s courts, thereby removing any disadvantage citizens of the state may have when dealing with them; and (4) to provide readily accessible evidence of their existence. Other statutes relating to franchise taxes and regulatory matters may require a qualified foreign corporation to provide additional information.

The information required to be included in the application for a certificate of authority by section 15.03 is the minimum needed to administer the filing requirements of the Model Act. The application must also be accompanied by a certificate of existence and the filing fee required by section 1.22. A corporation that qualifies to transact business in a state must comply with the requirements of other statutes, including franchise tax and similar statutes. See section 15.05.

Amended North Carolina Commentary

This Act does not bring forward the requirement of former G.S. 55-138(a) that a foreign corporation include in its application the purposes it desires to pursue in this State and information with respect to its capital structure. In addition, the application under this Act is submitted with a certificate of existence or good standing rather than the certified charter documents required under former G.S. 55-138.

Subsection (a) was modified to conform to changes from the Model Act in the address requirement made in G.S. 55-2-02 and G.S. 55-5-02.

Subsection (c) brings forward former G.S. 55-139(b) because the Model Act contains no express requirement that the Secretary of State issue a certificate of authority.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Session Laws 2001-387, s. 154(b), provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

Effect of Amendments.

Session Laws 2001-358, s. 17, effective January 1, 2002, and applicable to documents submitted for filing on or after that date, substituted “G.S. 55D-22” for “G.S. 55-15-06” in subdivision (a)(1).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under prior law.

Instrument Merely Notice of Facts Contained in It. —

The instrument a foreign domesticated corporation is required to file in the office of the Secretary of State is merely notice of facts set forth in it. It is not required for the benefit of the corporation but for the information of the public. And it does not, in and of itself, fix the location of the place of business of the corporation which files the same. Noland Co. v. Laxton Constr. Co., 244 N.C. 50, 92 S.E.2d 398, 1956 N.C. LEXIS 634 (1956).

Effect of Suspension of Certificate of Authority on Corporation’s Capacity to Sue. —

Construction company, which entered into a contract with defendant-homeowner and performed that contract at a time when its certificate of authority was in a state of suspension, could not assert or enforce its rights under the contract, including claims based in equity (i.e., claims based on quantum meruit). Ben Johnson Homes, Inc. v. Watkins, 142 N.C. App. 162, 541 S.E.2d 769, 2001 N.C. App. LEXIS 32, aff'd, 354 N.C. 563, 555 S.E.2d 608, 2001 N.C. LEXIS 1227 (2001).

§ 55-15-04. Amended certificate of authority.

  1. A foreign corporation authorized to transact business in this State must obtain an amended certificate of authority from the Secretary of State if it changes:
    1. Its corporate name;
    2. The period of its duration; or
    3. The state or country of its incorporation.
  2. A foreign corporation may apply for an amended certificate of authority by delivering an application to the Secretary of State for filing that sets forth:
    1. The name of the foreign corporation and the name in which the corporation is authorized to transact business in North Carolina if different;
    2. The name of the state or country under whose law it is incorporated;
    3. The date it was originally authorized to transact business in this State;
    4. A statement of the change or changes being made.Except for the content of the application, the requirements of G.S. 55-15-03 for obtaining an original certificate of authority apply to obtaining an amended certificate under this section.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.22.

Official Comment

Section 15.04 requires a foreign corporation to obtain an amended certificate of authority if it changes its corporate name, its duration, or the state or country of its incorporation. An amendment is not necessary to reflect changes in its principal office address or in its current officers or directors since that information is supplied in the annual report. In addition, section 15.07 requires an immediate filing if the foreign corporation changes its registered office or registered agent within the state.

Other fundamental changes by a foreign corporation do not require amendments to the certificate of authority. The secretary of state will be advised of most of these changes through the annual report. See section 16.22. Thus, a person seeking to obtain current information about a foreign corporation should examine the annual reports of the corporation as well as the application for certificate of authority and amendments to it. This procedure of requiring most changes to be reported in the annual reports rather than as amendments to the certificate of authority should eliminate many unnecessary filings with the secretary of state without reducing the information available through the secretary of state’s office.

§ 55-15-05. Effect of certificate of authority.

  1. A certificate of authority authorizes the foreign corporation to which it is issued to transact business in this State subject, however, to the right of the State to revoke the certificate as provided in this Chapter. A foreign corporation may qualify in this State as executor, administrator, or guardian, or as trustee under the will of any person domiciled in this State at the time of that person’s death only in accordance with applicable provisions of Article 24 of Chapter 53.A foreign corporation qualifying as testamentary trustee or executor under the provisions of this section shall appoint a process agent and file such appointment with the court as required by G.S. 28A-4-2(4).
  2. Except as otherwise provided by this Chapter, a foreign corporation with a valid certificate of authority has the same but no greater rights and has the same but no greater privileges as, and is subject to the same duties, restrictions, penalties, and liabilities now or later imposed on, a domestic corporation of like character.
  3. Reserved for future codification purposes.

History. 1901, c. 2, s. 93; Rev., s. 1193; 1915, c. 196, s. 1; C.S., s. 1180; G.S., s. 55-117; 1955, c. 1371, s. 1; 1969, c. 839; 1985, c. 689, s. 25; 1989, c. 265, s. 1; 2001-263, s. 4.

Official Comment

A certificate of authority authorizes a foreign corporation to transact business in the state subject to the right of the state to revoke the certificate. The privileges of this status are defined in section 15.05(b): a qualified foreign corporation has the same (but no greater) privileges as a domestic corporation.

Section 15.05(b), by granting to qualified foreign corporations all of the rights and privileges enjoyed by a domestic corporation, avoids discrimination that might otherwise be subject to constitutional challenge. On the other hand, section 15.05(b) also contains a restriction or limitation: a qualified foreign corporation is subject to the same restrictions as a domestic corporation, including the same duties, penalties, and liabilities. This latter aspect of section 15.05(b) has declined in importance as states have eliminated unnecessary or outdated restrictions on domestic corporations and, as a consequence of section 15.05(b), on qualified foreign corporations as well. In particular, section 15.05(b) makes section 3.01 (corporate purposes) applicable to a qualified foreign corporation, and grants substantially the same powers to it as are possessed by a domestic corporation.

Section 15.05(c) preserves the judicially developed doctrine that internal corporate affairs are governed by the state of incorporation even when the corporation’s business and assets are located primarily in other states.

North Carolina Commentary

This section brings forward the provisions of former G.S. 55-132(b) relating to the eligibility of a foreign corporation to serve in certain fiduciary capacities.

The Model Act was modified in subsection (b) to clarify that the phrase “Except as otherwise provided in the act” applies to the entire subsection.

This section omits the Model Act’s prohibition in subsection 15.05(c) against regulation by this State of the organizational or internal affairs of a foreign corporation. The extent, if any, to which such regulation is permitted will be determined by the courts on a case-by-case basis.

§ 55-15-06. [Repealed]

Repealed by Session Laws 2001-358, s. 18, effective January 1, 2002.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which repealed this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the repeal of this section by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

§ 55-15-07. Registered office and registered agent of foreign corporation.

Each foreign corporation authorized to transact business in this State must maintain a registered office and registered agent as required by Article 4 of Chapter 55D of the General Statutes and is subject to service on the Secretary of State under that Article.

History. 1901, c. 5; Rev., s. 1243; C.S., s. 1137; G.S., s. 55-38; 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 2000-140, s. 101(c); 2001-358, s. 47(b); 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Official Comment

A foreign corporation that obtains a certificate of authority in a state thereby agrees that it is amenable to suit in the state. Section 15.07 requires every such corporation continuously to maintain a registered office and registered agent within the state upon whom service of process may be made. As is the case with a domestic corporation, the registered office may, but need not be, a business office of the foreign corporation.

Section 15.07 is patterned after section 5.01, relating to the registered office and registered agent of a domestic corporation. For a fuller description of the policies underlying section 15.07, see the Official Comment to section 5.01.

North Carolina Commentary

The Model Act was modified to conform the corresponding provisions in G.S. 55-5-01.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, s. 47(b), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, rewrote the section.

Legal Periodicals.

For civil procedure note, “North Carolina Adopts the Stream of Commerce Theory of Jurisdiction: A Step in the Right Direction,” see 20 Wake Forest L. Rev. 737 (1984).

§§ 55-15-08 through 55-15-10. [Repealed]

Repealed by Session Laws 2001-358, s. 47(c), effective January 1, 2002.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which repealed these sections, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the repeal of these sections by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Session Laws 2001-387, s. 28, had amended G.S. 55-15-10. However, s. 155 of c. 387 repealed s. 28, contingent upon the enactment of Session Laws 2001-358. Session Laws 2001-358 was enacted on August 10, 2001.

§§ 55-15-11 through 55-15-19.

Reserved for future codification purposes.

Part 2. Withdrawal.

§ 55-15-20. Withdrawal of foreign corporation.

  1. A foreign corporation authorized to transact business in this State may not withdraw from this State until it obtains a certificate of withdrawal from the Secretary of State.
  2. A foreign corporation authorized to transact business in this State may apply for a certificate of withdrawal by delivering an application to the Secretary of State for filing. The application must set forth:
    1. The name of the foreign corporation and the name of the state or country under whose law it is incorporated;
    2. That it is not transacting business in this State and that it surrenders its authority to transact business in this State;
    3. That the corporation revokes the authority of its registered agent to accept service of process and consents that service of process in any action or proceeding based upon any cause of action arising in this State, or arising out of business transacted in this State, during the time the corporation was authorized to transact business in this State may thereafter be made on such corporation by service thereof on the Secretary of State;
    4. A mailing address to which the Secretary of State may mail a copy of any process served on the Secretary of State under subdivision (3); and
    5. A commitment to file with the Secretary of State a statement of any subsequent change in its mailing address.
  3. If the Secretary of State finds that such application conforms to law, he shall:
    1. Endorse on the application and an exact or conformed copy thereof the word “filed”, and the hour, day, month and year of the filing thereof;
    2. File the application in his office;
    3. Issue a certificate of withdrawal to which he shall affix the exact or conformed copy of the application; and
    4. Send to the foreign corporation or its representative the certificate of withdrawal together with the exact or conformed copy of the application affixed thereto.
  4. After the withdrawal of the foreign corporation is effective, service of process on the Secretary of State in accordance with subsection (b) of this section shall be made by delivering to and leaving with the Secretary of State, or with any clerk authorized by the Secretary of State to accept service of process, duplicate copies of the process and the fee required by G.S. 55-1-22(b). Upon receipt of process in the manner provided in this subsection, the Secretary of State shall immediately mail a copy of the process by registered or certified mail, return receipt requested, to the foreign corporation at the mailing address designated pursuant to subsection (b) of this section.

History. 1955, c. 1371, s. 1; 1973, c. 476, s. 193; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.23; 2001-387, ss. 29, 30.

Official Comment

A foreign corporation that ceases to transact business within a state may withdraw from the state only by obtaining a certificate of withdrawal. A foreign corporation that ceases to transact business in the state but fails to obtain a certificate of withdrawal will continue to be (1) subject to service of process on its registered agent or on its secretary pursuant to section 15.10 and (2) liable for franchise and other taxes under other statutes.

The certificate of withdrawal provided by this section is recognition by the state that the foreign corporation has ceased to transact business in the state.

The application for certificate of withdrawal must appoint the secretary of state as the withdrawing corporation’s agent for service of process in any proceeding based on a cause of action which arose during the time it was authorized to transact business in the state. The application must also set forth a mailing address to which the secretary of state may forward any process received, and the corporation must agree to notify the secretary of state of any change in that address. There is no time limit on the obligation to advise the secretary of state of changes of mailing address. To ensure that the appointment of the secretary of state is unqualified and meets the precise requirements of this section, the secretary of state may require that an application for certificate of withdrawal be on a form prescribed by him. See section 1.21.

Service of process on the secretary of state pursuant to the statements in the application for certificate of withdrawal effects service on the corporation under section 15.20(c). The secretary of state must then mail the process to the corporation at the mailing address specified in the application or in a subsequent communication to the secretary of state advising him of a change in mailing address.

Amended North Carolina Commentary

This section modifies the Model Act in subdivision (b)(3) to clarify and limit the circumstances under which service of process on the Secretary of State is effective with respect to a foreign corporation that has withdrawn from this State. In addition, former G.S. 55-150(d), modified to conform to G.S. 55-15-03(c), was added as subsection (b1), because the Model Act contains no express requirement that the Secretary of State issue a certificate of withdrawal or send the certificate to the foreign corporation or its representative.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

§ 55-15-21. Withdrawal of foreign corporation by reason of a merger, consolidation, or conversion.

  1. Whenever a foreign corporation authorized to transact business in this State ceases its separate existence as a result of a statutory merger or consolidation permitted by the laws of the state or country under which it was incorporated, or converts into another entity as permitted by those laws, the surviving or resulting entity shall apply for a certificate of withdrawal for the foreign corporation by delivering to the Secretary of State for filing a copy of the articles of merger, consolidation, or conversion or a certificate reciting the facts of the merger, consolidation, or conversion, duly authenticated by the Secretary of State or other official having custody of corporate records in the state or country under the laws of which such foreign corporation was incorporated. If the surviving or resulting entity is not authorized to transact business or conduct affairs in this State the articles or certificate must be accompanied by an application that sets forth:
    1. The name of the foreign corporation authorized to transact business in this State, the type of entity and name of the surviving or resulting entity, and a statement that the surviving or resulting entity is not authorized to transact business or conduct affairs in this State;
    2. A statement that the surviving or resulting entity consents that service of process based upon any cause of action arising in this State, or arising out of business transacted in this State, during the time the foreign corporation was authorized to transact business in this State may thereafter be made by service thereof on the Secretary of State;
    3. A mailing address to which the Secretary of State may mail a copy of any process served on the Secretary of State under subdivision (a)(2) of this section; and
    4. A commitment to file with the Secretary of State a statement of any subsequent change in its mailing address.
  2. If the Secretary of State finds that the articles or certificate and the application for withdrawal, if required, conform to law the Secretary of State shall:
    1. Endorse on the articles or certificate and the application for withdrawal, if required, the word “filed” and the hour, day, month and year of the filing thereof;
    2. File the articles or certificate and the application, if required;
    3. Issue a certificate of withdrawal; and
    4. Send to the surviving or resulting entity or its representative the certificate of withdrawal, together with the exact or conformed copy of the application, if required, affixed thereto.
  3. After the withdrawal of the foreign corporation is effective, service of process on the Secretary of State in accordance with subsection (a) of this section shall be made by delivering to and leaving with the Secretary of State, or with any clerk authorized by the Secretary of State to accept service of process, duplicate copies of the process and the fee required by G.S. 55-1-22(b). Upon receipt of process in the manner provided in this subsection, the Secretary of State shall immediately mail a copy of the process by registered or certified mail, return receipt requested, to the surviving or resulting entity at the mailing address designated pursuant to subsection (a) of this section.

History. 1991, c. 645, s. 13; 1999-369, s. 1.9; 2001-387, s. 31.

Editor’s Note.

Session Laws 2001-387, s. 154(b) provides that nothing in this act shall supersede the provisions of Article 10 or 65 of Chapter 58 of the General Statutes, and this act does not create an alternate means for an entity governed by Article 65 of Chapter 58 of the General Statutes to convert to a different business form.

§§ 55-15-22 through 55-15-29.

Reserved for future codification purposes.

Part 3. Revocation of Certificate of Authority.

§ 55-15-30. Grounds for revocation.

  1. The Secretary of State may commence a proceeding under G.S. 55-15-31 to revoke the certificate of authority of a foreign corporation authorized to transact business in this State if:
    1. The foreign corporation is delinquent in delivering its annual report;
    2. The foreign corporation does not pay within 60 days after they are due any penalties, fees, or other payments due under this Chapter;
    3. The foreign corporation is without a registered agent or registered office in this State for 60 days or more;
    4. The foreign corporation does not inform the Secretary of State under G.S. 55D-31 or G.S. 55D-32 that its registered agent or registered office has changed, that its registered agent has resigned, or that its registered office has been discontinued within 60 days of the change, resignation, or discontinuance;
    5. An incorporator, director, officer, or agent of the foreign corporation signed a document he knew was false in any material respect with intent that the document be delivered to the Secretary of State for filing;
    6. The Secretary of State receives a duly authenticated certificate from the secretary of state or other official having custody of corporate records in the state or country under whose law the foreign corporation is incorporated stating that it has been dissolved or disappeared as the result of a merger;
    7. The corporation is exceeding the authority conferred upon it by this Chapter; or
    8. The corporation knowingly fails or refuses to answer truthfully and fully within the time prescribed in this Chapter interrogatories propounded by the Secretary of State in accordance with the provisions of this Chapter.
  2. Nothing herein shall be deemed to repeal or modify any provision of the Revenue Act relating to the suspension of the certificate of authority of foreign corporations for failure to comply with the provisions thereof.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1993, c. 552, s. 18; 1997-475, s. 6.5; 2001-358, s. 47(e); 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Official Comment

Section 15.30 authorizes the administrative revocation of the certificate of authority of a foreign corporation on the grounds specified. Administrative revocation is effective only upon compliance with the procedure specified in section 15.31. A foreign corporation that believes the administrative revocation is unwarranted may obtain judicial review of the secretary of state’s determination pursuant to section 15.32.

If a qualified foreign corporation has dissolved or merged into another corporation, the secretary of state may proceed to revoke its certificate of authority to transact business solely on the basis of a certificate from the secretary of state or other official of the state of incorporation. Section 15.30(6). This subdivision provides a simple and inexpensive method to eliminate the names of corporations that are no longer in existence from the records of the secretary of state, thereby making available the corporate names for use by other entities.

Section 15.30 is patterned after section 14.20, relating to the administrative dissolution of domestic corporations. See the Official Comment to section 14.20 for a fuller description of the policies underlying section 15.30.

North Carolina Commentary

Subdivision (a)(7) was added to the Model Act’s provisions to bring forward the provisions of former G.S. 55-151(a)(7). Subsection (b) was added to avoid any conflict with the procedures set forth in the Revenue Act relating to suspension of the certificate of authority of a foreign corporation.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, s. 47(e), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, substituted “G.S. 55D-31 or G.S. 55D-32” for “G.S. 55-15-08 or G.S. 55-15-09” in subdivision (a)(4).

§ 55-15-31. Procedure for and effect of revocation.

  1. If the Secretary of State determines that one or more grounds exist under G.S. 55-15-30 for revocation of a certificate of authority, he shall mail to the foreign corporation written notice of his determination.
  2. If the foreign corporation does not correct each ground for revocation or demonstrate to the reasonable satisfaction of the Secretary of State that each ground determined by the Secretary of State does not exist within 60 days after notice is mailed, the Secretary of State may revoke the foreign corporation’s certificate of authority by signing a certificate of revocation that recites the ground or grounds for revocation and its effective date. The Secretary of State shall file the original of the certificate and mail a copy to the foreign corporation.
  3. The authority of a foreign corporation to transact business in this State ceases on the date shown on the certificate revoking its certificate of authority.
  4. The Secretary of State’s revocation of a foreign corporation’s certificate of authority appoints the Secretary of State the foreign corporation’s agent for service of process in any proceeding based on a cause of action arising in this State or arising out of business transacted in this State during the time the foreign corporation was authorized to transact business in this State. The Secretary of State shall then proceed in accordance with G.S. 55D-33.
  5. Revocation of a foreign corporation’s certificate of authority does not terminate the authority of the registered agent of the corporation.
  6. The corporation shall not be granted a new certificate of authority until each ground for revocation has been substantially corrected to the reasonable satisfaction of the Secretary of State.

History. 1955, c. 1371, s. 1; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.24; 1991, c. 645, s. 14; 2001-358, s. 47(f); 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Official Comment

The procedure for revocation of a certificate of authority in section 15.31 establishes a simple method of completing the revocation while at the same time ensuring that the foreign corporation is advised of the contemplated action and has an opportunity to contest it in appropriate situations. In most situations, revocation by the secretary of state will not be contested.

After revocation, the secretary of state is appointed the foreign corporation’s agent for service of process; upon receipt of service, the secretary of state must forward the process to the foreign corporation’s principal address, as last reflected in his records. Revocation, however, does not of itself terminate the authority of the foreign corporation’s registered agent, so that process served on that agent by a third person who was unaware of the revocation may be effective.

Section 15.31 is patterned after section 14.21, relating to the administrative dissolution of a domestic corporation. See the Official Comment to section 14.21 for a fuller statement of the policies underlying section 15.31.

North Carolina Commentary

The Model Act was modified to conform to the corresponding provisions in G.S. 55-14-21.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, s. 47(f), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, substituted “G.S. 55D-33” for “G.S. 55-15-10” in subsection (d).

§ 55-15-32. Appeal from revocation.

  1. A foreign corporation may appeal the Secretary of State’s revocation of its certificate of authority to the Superior Court of Wake County within 30 days after the certificate of revocation is mailed to the foreign corporation by the Secretary of State. The appeal is commenced by filing a petition with the court and with the Secretary of State requesting the court to set aside the revocation. The petition shall have attached to it copies of the corporation’s certificate of authority and the Secretary of State’s certificate of revocation. No service of process on the Secretary of State is required except for the filing of the petition as set forth in this subsection. The appeal to the superior court shall be determined by a judge of the superior court upon such further evidence, notice and opportunity to be heard, if any, as the court may deem appropriate under the circumstances. The foreign corporation shall have the burden of establishing that it is entitled to have the revocation set aside.
  2. Upon consideration of the petition and any response made by the Secretary of State, the court may, prior to entering final judgment, order the Secretary of State to set aside the revocation or may take any other action the court considers appropriate.
  3. The court’s final decision may be appealed as in other civil proceedings.

History. 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.25; 2001-358, s. 5A(b); 2001-387, ss. 173, 175(a); 2001-413, s. 6.

Official Comment

A corporation whose certificate of authority is revoked may obtain judicial review of the revocation decision. In the review proceeding the court may summarily order the secretary of state to reinstate the corporation or take other action it deems appropriate.

The court with jurisdiction over an appeal should be specified; it is typically either a court in the state capital or a court in the county in which the corporation’s principal office is located. Moreover, states adopting this section of the Model Act should specify who has the burden of proof on appeal and the standard for judicial review. See the Official Comment to section 1.26.

North Carolina Commentary

The Model Act was modified to conform to the corresponding provisions in G.S. 55-14-22.

Editor’s Note.

Session Laws 2001-358, s. 53, provided that the act, which amended this section, was effective October 1, 2001, and applicable to documents submitted for filing on or after that date. Section 173 of Session Laws 2001-387 changed the effective date of Session Laws 2001-358 from October 1, 2001, to January 1, 2002. Section 6 of Session Laws 2001-413, effective September 14, 2001, added a sentence to s. 175(a) of Session Laws 2001-387, making s. 173 of that act effective when it became law (August 26, 2001). As a result of these changes, the amendment by Session Laws 2001-358 is effective January 1, 2002, and applicable to documents submitted for filing on or after that date.

Effect of Amendments.

Session Laws 2001-358, s. 5A(b), effective January 1, 2002, and applicable to documents submitted for filing on or after that date, in subsection (a), added the fourth sentence, and inserted “by a judge of the superior court” in the fifth sentence.

§ 55-15-33. Inapplicability of Administrative Procedure Act.

The Administrative Procedure Act shall not apply to any proceeding or appeal provided for in G.S. 55-15-30 through 55-15-32.

History. 1989, c. 265, s. 1.

North Carolina Commentary

This section does not appear in the Model Act.

Editor’s Note.

The Administrative Procedure Act, referred to in this section, is codified at Chapter 150B, G.S. 150B-1 et seq.

Article 16. Records and Reports.

Part 1. Records.

§ 55-16-01. Corporate records.

  1. A corporation shall maintain the following records:
    1. Its articles of incorporation as currently in effect.
    2. Its bylaws as currently in effect.
    3. All written communications within the past three years to shareholders generally.
    4. Minutes of all meetings of, and records of all actions taken without a meeting by, its shareholders, its board of directors, and board committees established under section G.S. 55-8-25.
    5. A list of the names and business addresses of its current directors and officers.
    6. Its most recent annual report delivered as required by G.S. 55-16-22.
  2. A corporation shall maintain all annual financial statements prepared for the corporation for its last three fiscal years, or each year of its existence if shorter than three years, and any audit or other reports with respect to the financial statements.
  3. A corporation or its agent shall maintain a record of its current shareholders, in alphabetical order by class of shares showing the number and class of shares held by each shareholder.
  4. A corporation shall maintain accounting records in a form that permits preparation of its financial statements.
  5. A corporation shall maintain the records specified in this section in a manner so that they may be made available for inspection within a reasonable time.

History. 1901, c. 2, ss. 38, 45; Rev., ss. 1180, 1181; C.S., s. 1170; G.S., s. 55-107; 1955, c. 1371, s. 1; 1969, c. 751, s. 14; 1989, c. 265, s. 1; 1997-475, s. 6.6; 2021-106, s. 6(a).

Official Comment to the Model Business Corporation Act, 2016 Revision

  1. Records to be Maintained
  2. Minutes and Related Documents
  3. Financial Statements and Accounting Records
  4. Shareholders’ Lists

Section 16.01(a) requires certain basic records to be maintained by the corporation. The Act does not generally specify how records must be maintained (other than in a manner so that they may be made available for inspection within a reasonable time), where they must be located or, with the exception of section 16.02(a), where they must be available. They may be maintained in one or more offices within or without the state and in some cases, such as shareholder records, may be maintained by agents of the corporation; indeed, in the case of records in intangible form, it may be impossible to determine where they are located.

Section 16.01(a) does not address the amount of detail that should appear in minutes or written actions. Minutes of meetings customarily include the formalities of notice, the time and place of the meeting, those in attendance, and the results of any votes. Minutes of meetings and written actions without a meeting show formal action taken. The extent to which further detail is included is a matter of judgment which may depend upon the circumstances. Section 7.04, which addresses written actions taken by shareholders, requires that written consents by shareholders be delivered to the corporation for filing with corporate records.

The Act does not provide normative standards for the financial statements and accounting records to be prepared or maintained. The financial statements to be maintained under section 16.01(b) are those that the corporation prepares in the operation of its business, including in response to third party requirements. The form of the financial statements prepared by a corporation depends to some extent on the nature and complexity of the corporation’s business and third party requirements such as those governing the preparation and filing of tax returns with applicable tax authorities. To accommodate the needs of the many different types of business corporations that may be subject to these provisions, including closely held corporations, the Act does not require that the corporation prepare and maintain financial statements on the basis of generally accepted accounting principles (“GAAP”) if it is not otherwise required to prepare GAAP financial statements. The Act does not define what accounting records must be maintained or mandate how long they must be maintained. The accounting records to be maintained under section 16.01(c) depend upon the form of the corporation’s financial statements. For example, annual tax returns filed with the relevant taxing authorities may be the only annual financial statements prepared by small businesses operating on a cash basis and, in those instances, the requisite accounting records to be maintained might consist of only a check register, vouchers and receipts.

Section 16.01(d) requires the corporation to maintain such records of its shareholders as will permit it to compile a list of current shareholders when required. These records may vary from stubs from which certificates have been detached in the case of corporations with a few shareholders to elaborate electronic data in the case of large corporations whose shares are publicly traded. The record may be maintained by the corporation or an agent, who traditionally is the transfer agent but may be another agent. A corporation may maintain additional information regarding its shareholders, such as a list of nominees and nonobjecting beneficial owners if its shares are publicly traded.

Revised North Carolina Commentary (2021)

In 2016, Chapter 16 of the Model Act was significantly revised to, among other things, modernize (i) the obligations of corporations to make financial statements available to shareholders, (ii) the maintenance of corporate records, and (iii) shareholder inspection rights. Effective October 1, 2021, G.S. 55-16-01 was revised consistent with the Model Act to provide increased flexibility to corporations and allow for recordkeeping approaches that are in common use (e.g., using technology and electronic storage rather than paper-based practices), while preserving a corporation’s obligation to retain key organizational, governance, financial and accounting records that may be available for shareholder inspection under the North Carolina Business Corporation Act.

One important change is that the corporation will no longer be required to maintain particular records at its principal office. This change reflects the reality that corporations may effectively maintain records in offices either within or outside North Carolina, with agents, or in an electronic format (e.g., a cloud-based solution) in which a physical “location” cannot be determined or described. As amended, G.S. 55-16-01 no longer requires that the relevant records be maintained “in written form or in another form capable of conversion into written form within a reasonable time” but instead simply requires that they be maintained “in a manner that may be made available for inspection within a reasonable time,” which allows records to be maintained in a variety of non-paper formats (including electronically), but ensures that a qualified shareholder entitled to inspect records will have access within a reasonable time.

As holders of a financial interest in a corporation, shareholders generally have the right to review certain records and information maintained by the corporation. These rights are commonly referred to as “inspection rights.” In North Carolina and many other states, as well as in the Model Act, shareholder inspection rights fall into two distinct categories: (1) absolute rights to inspect certain fundamental corporate documents and (2) qualified rights to inspect other documents for a proper purpose. With one exception and in contrast to the Model Act, the North Carolina Business Corporation Act prior to the 2021 amendments granted both absolute and qualified inspection rights only to “qualified shareholders” who have been shareholders of the corporation for at least six months or hold at least five percent of the outstanding shares. This concept was carried forward in the 2021 amendments.

Records subject to absolute rights - such as the corporation’s articles of incorporation, written communications from the corporation to shareholders and minutes of shareholders’ meetings - while not all publicly available, are not likely to contain sensitive information. In contrast, records subject to qualified inspection rights, which include the corporation’s financial statements, accounting records and records of final action taken by the board of directors or a board committee, are much more likely to contain competitively sensitive and potentially proprietary information. Accordingly, while a qualified shareholder may have a genuine interest in reviewing this information, the corporation likewise has a legitimate business interest in protecting its confidentiality and restricting its use.

In recognition of the corporation’s interest, the changes in G.S. 55-16-02(c1) and G.S. 55-16-20(d)(1), respectively, allow corporations to impose reasonable restrictions on the confidentiality, use and distribution of records that are subject to qualified inspection rights or of financial statements being delivered to a shareholder. Similarly, in the event of a court-ordered inspection of records under G.S. 55-16-04 or delivery of financial statements under G.S. 55-16-20(e), the changes to G.S. 55-16-04(c) and G.S. 55-16-20(e)(2), respectively, allow the court to impose reasonable restrictions on the confidentiality, use and distribution of records or of the financial statements by the shareholder. Likewise, G.S. 55-16-04(c) and G.S. 55-16-20(e)(5), respectively, now create an exception to the requirement that the corporation pay the shareholder’s legal expenses of obtaining a court order if the corporation establishes that it refused inspection or to deliver financial statements in good faith because the shareholder was unwilling to agree to reasonable restrictions on confidentiality, use or distribution proposed by the corporation.

Editor’s Note.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2021-106, s. 6(a), effective October 1, 2021, rewrote the section.

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

CASE NOTES

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Separate Books Not Required for Stockholders and Government. —

It is not logical to conclude that the legislature intended to require a corporation to keep two sets of books, one for its stockholders, and the other for the government, if it wished to compute its taxes on a cash receipt basis. Watson v. Watson Seed Farms, Inc., 253 N.C. 238, 116 S.E.2d 716, 1960 N.C. LEXIS 493 (1960).

Effect of Chapter on Accepted Methods of Accounting. —

Where a corporation has kept its books for a number of years according to an accepted method of accounting, which system is sufficient in computing its capital and surplus for franchise tax purposes and its income for income tax on a cash receipt basis, this Chapter does not make mandatory the abandonment of such system or adoption of a new system of accounting by the corporation. Watson v. Watson Seed Farms, Inc., 253 N.C. 238, 116 S.E.2d 716, 1960 N.C. LEXIS 493 (1960).

The provisions of former G.S. 55-37 concerning shareholders’ lists are applicable to savings and loan associations. White v. Smith, 256 N.C. 218, 123 S.E.2d 628, 1962 N.C. LEXIS 435 (1962); Cooke v. Outland, 265 N.C. 601, 144 S.E.2d 835, 1965 N.C. LEXIS 1066 (1965).

When Proceedings May Be Proved by Parol Testimony. —

When it is shown that no minutes were made of a particular meeting, or that they are incomplete, the proceedings may be proved by parol testimony. S & W Realty & Bonded Com. Agency v. Duckworth & Shelton, Inc., 274 N.C. 243, 162 S.E.2d 486, 1968 N.C. LEXIS 755 (1968).

Mandamus to Require Disclosure of Names, Addresses and Holdings of Shareholders. —

Shareholders in a building and loan association were entitled to a writ of mandamus, requiring the association and its officers to provide them an opportunity to inspect the records of the association to ascertain the names, addresses, and number of shares held by each shareholder so that they might solicit proxies for use at shareholders’ meetings. White v. Smith, 256 N.C. 218, 123 S.E.2d 628, 1962 N.C. LEXIS 435 (1962).

Whether Stock Actually Issued in Consideration for Covenant-Not-To-Compete and Other Agreements. —

In a business dispute involving asserted allegations of breach of a covenant-not-to-compete and other claims, a trial court erred by granting defendants summary judgment on the issue of whether there was consideration offered to defendants in exchange for signing the covenant-not-to-compete, confidentiality and non-solicitation agreement, and shareholders’ agreement, as a genuine issue of material fact remained as to whether plaintiff actually issued stock shares promised to defendants, such that they constituted valuable consideration to make the covenant-not-to-compete and confidentiality and non-solicitation agreement valid and enforceable. Kinesis Adver., Inc. v. Hill, 187 N.C. App. 1, 652 S.E.2d 284, 2007 N.C. App. LEXIS 2251 (2007).

Lack of Accountability to Other Shareholders. —

Generally, a lack of accountability to other shareholders would not, by itself, be sufficient grounds to pierce the corporate veil, as former G.S. 55-37 and former G.S. 55-38 would provide an adequate remedy at law to enforce accountability. Dorton v. Dorton, 77 N.C. App. 667, 336 S.E.2d 415, 1985 N.C. App. LEXIS 4377 (1985).

Use in Evidence of Corporate Computer Records. —

Former G.S. 55-37.1 was designed to give broad legislative approval to the use in evidence of corporate computer records. However, in declaring such computer records admissible in evidence, it did not deal with the special problems of reliability created by the use of computers. State v. Springer, 283 N.C. 627, 197 S.E.2d 530, 1973 N.C. LEXIS 1028 (1973).

Former G.S. 55-37.1 authorized the admission of corporate computer records under appropriate safeguards deemed sufficient to render them trustworthy. But it did not, and was not designed to, preclude judicial development of workable standards for the admission of computerized business records generally. State v. Springer, 283 N.C. 627, 197 S.E.2d 530, 1973 N.C. LEXIS 1028 (1973).

Conditions Under Which Printouts Are Admissible. —

Printout cards or sheets of business records stored on electronic computing equipment are admissible in evidence, if otherwise relevant and material, if: (1) The computerized entries were made in the regular course of business, (2) the entries were made at or near the time of the transaction involved, and (3) a proper foundation for such evidence is laid by testimony of a witness who is familiar with the computerized records and the methods under which they were made so as to satisfy the court that the methods, the sources, of information, and the time of preparation render such evidence trustworthy. State v. Springer, 283 N.C. 627, 197 S.E.2d 530, 1973 N.C. LEXIS 1028 (1973); State v. Stapleton, 29 N.C. App. 363, 224 S.E.2d 204, 1976 N.C. App. LEXIS 2478 (1976).

Computer printout evidence may be refuted to the same extent as business records made in books of account. State v. Springer, 283 N.C. 627, 197 S.E.2d 530, 1973 N.C. LEXIS 1028 (1973).

Failure to Lay Foundation for Admission. —

Computer printout referred to in oral testimony is inadmissible where no foundation is laid for its admission and the printout itself is not offered in evidence. State v. Springer, 283 N.C. 627, 197 S.E.2d 530, 1973 N.C. LEXIS 1028 (1973).

Testimony as to contents of computer printout is inadmissible under the best evidence rule. State v. Springer, 283 N.C. 627, 197 S.E.2d 530, 1973 N.C. LEXIS 1028 (1973).

§ 55-16-01.1. Definitions.

In this Article, the following definitions apply:

  1. Reserved.
  2. Reserved.
  3. Qualified shareholder. — A person who has been a shareholder in the corporation for at least six months immediately preceding the shareholder’s demand for inspection of records or who holds at least five percent (5%) of the corporation’s outstanding shares of any class.
  4. Shareholder. — A record shareholder or a beneficial shareholder whose shares are held in a voting trust or by a nominee on the beneficial shareholder’s behalf and whose beneficial ownership is certified to the corporation by that voting trust or nominee.

History. 2021-106, s. 6(b).

North Carolina Commentary

The inspection rights created by G.S. 55-16-02 are limited to “qualified” shareholders as defined in subdivision (3) of this section, a limitation not found in the Model Act. The concept of “qualified shareholder” was brought forward in 1989 in G.S. 55-16-02, with slight modifications, from former G.S. 55-38(a). In contrast to the Model Act, subdivision (4) of this section provides that a beneficial owner who wishes to exercise inspection rights under Article 16 must have their ownership certified to the corporation by the record holder in order to be a “shareholder” for purposes of the inspection rights set forth in G.S. 55-16-02.

Editor’s Note.

Session Laws 2021-106, s. 6(b) enacted this section as G.S. 55-16-01A. It has been renumbered as G.S. 55-16-01.1 at the direction of the Revisor of Statutes.

Session Laws 2021-106, s. 6(j), made this section effective October 1, 2021.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

§ 55-16-02. Inspection of records by shareholders.

  1. A qualified shareholder of a corporation is entitled to inspect and copy, during regular business hours at the corporation’s principal office, any of the records of the corporation described in G.S. 55-16-01(a), excluding minutes of meetings of, and records of actions taken without a meeting by, the corporation’s board of directors and board committees established under G.S. 55-8-25, if the qualified shareholder gives the corporation written notice of the qualified shareholder’s demand at least five business days before the date on which the qualified shareholder wishes to inspect and copy.
  2. A qualified shareholder of a corporation is entitled to inspect and copy, during regular business hours at a reasonable location specified by the corporation, any of the following records of the corporation if the qualified shareholder meets the requirements of subsection (c) of this section and gives the corporation written notice of the qualified shareholder’s demand at least five business days before the date on which the qualified shareholder wishes to inspect and copy:
    1. Records of any final action taken with or without a meeting by the board of directors, or by a committee of the board of directors while acting in place of the board of directors on behalf of the corporation maintained in accordance with G.S. 55-16-01(a).
    2. Accounting records of the corporation.
    3. The record of shareholders maintained in accordance with G.S. 55-16-01(c).
    4. The financial statements of the corporation maintained in accordance with G.S. 55-16-01(b).
  3. A qualified shareholder may inspect and copy the records described in subsection (b) only if all of the following apply:
    1. The qualified shareholder’s demand is made in good faith and for a proper purpose.
    2. The qualified shareholder describes with reasonable particularity the qualified shareholder’s purpose and the records the qualified shareholder desires to inspect.
    3. The records are directly connected with the qualified shareholder’s purpose.
  4. The corporation may impose reasonable restrictions on the confidentiality, use, or distribution of records described in subsection (b) of this section.
  5. The right of inspection granted by this section shall not be abolished or limited by a corporation’s articles of incorporation or bylaws.
  6. This section does not affect any of the following:
    1. The right of a shareholder to inspect records under G.S. 55-7-20 or, if the shareholder is in litigation with the corporation, to inspect the records to the same extent as any other litigant.
    2. The power of a court, independently of this Chapter, to compel the production of corporate records for examination and to impose reasonable restrictions as provided in G.S. 55-16-04(c), so long as, in the case of production of records described in subsection (b) of this section at the request of a qualified shareholder, the qualified shareholder has met the requirements of subsection (c) of this section.
  7. , (g) Repealed by Session Laws 2021-106, s. 6(c), effective October 1, 2021, and applicable to demands for inspection and requests for financial statements received by a corporation on or after that date.
  8. A qualified shareholder of a corporation that has the power to elect, appoint, or designate a majority of the directors of another domestic or foreign corporation or of a domestic or foreign nonprofit corporation, has the inspection rights provided in this section with respect to the records of that other corporation.
    1. Notwithstanding the provisions of this section or any other provisions of this Chapter or interpretations to the contrary, a shareholder of a public corporation has no common law rights to inspect or copy any accounting records of the corporation or any other records of the corporation that may not be inspected or copied by a shareholder of a public corporation as provided in subsection (b) of this section.

A shareholder of a public corporation is not entitled to inspect or copy any accounting records of the corporation or any records of the corporation with respect to any matter which the corporation determines in good faith may, if disclosed, adversely affect the corporation in the conduct of its business or may constitute material nonpublic information at the time the shareholder’s notice of demand to inspect and copy is received by the corporation.

History. 1901, c. 2, ss. 38, 45, 49; Rev., ss. 1179-1181; C.S., ss. 1170, 1172; G.S., ss. 55-107, 55-109; 1955, c. 1371, s. 1; 1965, c. 609; 1973, c. 469, s. 11; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.26; 1993, c. 552, s. 19; 2021-106, s. 6(c).

Official Comment to the Model Business Corporation Act, 2016 Revision

  1. Section 16.02(a)
  2. Section 16.02(b)
  3. Section 16.02(c)
  4. Section 16.02(d)
  5. Section 16.02(e)
  6. Sections 16.02(f) and (g)

Under section 16.02(a), each shareholder is entitled to inspect all documents that deal with the shareholder’s interest in the corporation. The right to inspection includes the right to make copies, as further described in section 16.03. Although some of these documents may also be a matter of public record in the office of the secretary of state, a shareholder should not be compelled to go to a public office that may be physically distant to examine the basic documents relating to the corporation. The “principal office” of the corporation is defined in section 1.40 to be the location of the executive offices of the corporation at its address as set forth by the corporation in its annual report required by section 16.21.

In contrast to the right to inspect minutes of meetings of, and written actions taken without a meeting by, shareholders, a shareholder is entitled to inspect only excerpts of meetings of, and records of written actions taken by, the board of directors and board committees related to the purpose of the inspection. A shareholder is entitled to inspect the record of shareholders under section 16.02(b) without regard to the size or value of the shareholder’s holding. This right is independent of the right to inspect a shareholders’ list under section 7.20.

Section 16.02(c) permits inspection of the financial statements and records described in section 16.02(b) by a shareholder only if the demand is made in good faith and for a “proper purpose.” Although not defined in the Act, “proper purpose” under section 16.02(c) has been defined in case law to involve a purpose that is reasonably relevant to the demanding shareholder’s interest as a shareholder. Section 16.02(c) requires that a shareholder designate “with reasonable particularity” the purpose for the demand and the records he or she desires to inspect. Also, the records demanded must be “directly connected” with that purpose. If disputed by the corporation, the “connection” of the records to the shareholder’s purpose may be determined by a court’s examination of the records.

The reasonable restrictions on the confidentiality, use or distribution of financial statements and records permitted by section 16.02(d) allow for the protection of confidential or proprietary information in the corporation’s records or sensitive matters that might be disclosed in a shareholder inspection. Such restrictions might include, for example, requiring the demanding shareholder to sign a confidentiality and use agreement. A similar provision is found in section 16.04(d) in connection with court ordered inspections.

Section 16.02(e) provides shareholders of a corporation the right to receive from the corporation the notice and other information provided by the corporation to shareholders in connection with a meeting if the record date for voting is subsequent to the record date for notice and the shareholder became entitled to vote after the record date for notice. This provision does not apply to information provided to shareholders by persons other than the corporation.

The prohibition in section 16.02(f) does not apply to a shareholder agreement permissible under section 7.32. No inference should be drawn from the prohibition in section 16.02(f) as to whether other, unrelated sections of the Act may be modified by provisions in the articles of incorporation or bylaws. Section 16.02(g) preserves whatever independent rights of inspection exist under the referenced sources and does not create any rights, either expressly or by implication. A shareholder also has the right to obtain financial statements under section 16.20.

Revised North Carolina Commentary (2021)

Subsection (b) of this section further restricts the inspection rights of shareholders of public corporations in a manner not found in the Model Act, by protecting from inspection the accounting records of such corporations and any other records the disclosure of which the corporation determines in good faith would constitute material nonpublic information.

Editor’s Note.

Session Laws 2021-106, s. 6(j), made the rewriting of this section by Session Laws 2021-106, s. 6(c), effective October 1, 2021, and applicable to demands for inspection and requests for financial statements received by a corporation on or after that date.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2021-106, s. 6(c), rewrote the section. For effective date and applicability, see editor’s note.

CASE NOTES

Editor’s Note. —

Many of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Considerations. —

To determine whether a shareholder’s demand to inspect corporate records meets the requirements of subsection (c) of this section, the trial court must focus upon the demand itself, not upon the shareholder’s subsequent pleadings or motions filed in an attempt to compel inspection under G.S. 55-16-04(b). Parsons v. Jefferson-Pilot Corp., 106 N.C. App. 307, 416 S.E.2d 914, 1992 N.C. App. LEXIS 490 (1992), aff'd in part and rev'd in part, 333 N.C. 420, 426 S.E.2d 685, 1993 N.C. LEXIS 94 (1993).

A beneficial owner of shares is a “shareholder” within the meaning of subdivision (b)(3) when the corporation has obtained a NOBO (non-objecting beneficial owners) list pursuant to 17 C.F.R. § 240.14b-1(c) listing that owner, or when there is a nominee certificate regarding that owner on file with the corporation. Parsons v. Jefferson-Pilot Corp., 106 N.C. App. 307, 416 S.E.2d 914, 1992 N.C. App. LEXIS 490 (1992), aff'd in part and rev'd in part, 333 N.C. 420, 426 S.E.2d 685, 1993 N.C. LEXIS 94 (1993).

Non-objecting beneficial owners who had not filed nominee certificates were not “shareholders” within the meaning of subdivision (b)(3) of this section, and corporation did not have an obligation to obtain and make available to shareholder a list of their names. Parsons v. Jefferson-Pilot Corp., 106 N.C. App. 307, 416 S.E.2d 914, 1992 N.C. App. LEXIS 490 (1992), aff'd in part and rev'd in part, 333 N.C. 420, 426 S.E.2d 685, 1993 N.C. LEXIS 94 (1993).

Common-Law Right of Shareholder to Inspect Records. —

At common law stockholders in private corporations have the right to make reasonable inspection of a corporation’s books to assure themselves of efficient management. White v. Smith, 256 N.C. 218, 123 S.E.2d 628, 1962 N.C. LEXIS 435 (1962).

Right Was Not Abridged but Enlarged by Statute. —

The right of a shareholder to know his associates and the extent of their holdings was not abridged but enlarged by statute. White v. Smith, 256 N.C. 218, 123 S.E.2d 628, 1962 N.C. LEXIS 435 (1962).

Right to Information Is Unqualified. —

Former G.S. 55-37 contained no qualifying language. The language was absolute: the corporation “shall” mail or otherwise deliver a copy of its statement of assets and liabilities to “any” shareholder upon his written request therefor. The motive of the requesting shareholder was irrelevant. Morgan v. McLeod, 40 N.C. App. 467, 253 S.E.2d 339, 1979 N.C. App. LEXIS 2285, cert. denied, 297 N.C. 611, 257 S.E.2d 436, 1979 N.C. LEXIS 1502 (1979).

Stockholders Have Right to Inspect Books. —

Since the stockholders are, in a sense, the beneficial owners of the corporate assets, and thus the persons primarily interested in seeing that the concern is efficiently and profitably managed, they are entitled to inspect the books and records in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors, at least where there are circumstances justifying some suspicion of mismanagement. Cooke v. Outland, 265 N.C. 601, 144 S.E.2d 835, 1965 N.C. LEXIS 1066 (1965).

Club member and shareholder of a corporate country club was entitled to inspect certain records of the country club because the member was a qualified shareholder, as the member had been a shareholder for years, and gave the country club written notice of the member’s demand for inspection at least five business days before the date on which the member demanded to inspect and copy the records. The member also sought to inspect the records for a proper purpose and described the records with reasonable certainty. Erwin v. Myers Park Country Club, Inc., 2021 NCBC 45, 2021 NCBC LEXIS 66 (N.C. Super. Ct. July 27, 2021).

The mere possibility that a shareholder may abuse his right to gain access to corporate information will not be held to justify denial of a legal right, if such right exists in the shareholder. Carter v. Wilson Constr. Co., 83 N.C. App. 61, 348 S.E.2d 830, 1986 N.C. App. LEXIS 2643 (1986).

But Fishing Expedition Is Not Authorized. —

Former G.S. 55-38 did not give a stockholder an absolute right of inspection and examination for a mere fishing expedition, or for a purpose not germane to the protection of his economic interest as a shareholder in the corporation. Cooke v. Outland, 265 N.C. 601, 144 S.E.2d 835, 1965 N.C. LEXIS 1066 (1965); Carter v. Wilson Constr. Co., 83 N.C. App. 61, 348 S.E.2d 830, 1986 N.C. App. LEXIS 2643 (1986).

Proper Purpose. —

Where shareholder demanded to inspect corporate records to determine “any possible mismanagement of the Company or any possible misappropriation, misapplication or improper use of any property or asset of the Company,” shareholder’s stated purpose was proper under subdivision (c)(1) of this section. Parsons v. Jefferson-Pilot Corp., 106 N.C. App. 307, 416 S.E.2d 914, 1992 N.C. App. LEXIS 490 (1992), aff'd in part and rev'd in part, 333 N.C. 420, 426 S.E.2d 685, 1993 N.C. LEXIS 94 (1993).

“Proper” Motive Required for Actual Visit. —

Under former G.S. 55-38(b), the requesting shareholders had to have a “proper purpose” in wanting information. For a shareholder to have the right to actually visit a corporation’s office and possibly disrupt its normal operation by inspecting voluminous books and records of account, the legislature correctly decided that his motives must be “proper.” Morgan v. McLeod, 40 N.C. App. 467, 253 S.E.2d 339, 1979 N.C. App. LEXIS 2285, cert. denied, 297 N.C. 611, 257 S.E.2d 436, 1979 N.C. LEXIS 1502 (1979); Carter v. Wilson Constr. Co., 83 N.C. App. 61, 348 S.E.2d 830, 1986 N.C. App. LEXIS 2643 (1986).

Burden of Proving Improper Purpose. —

The burden of proof rests upon the defendants, if they wish to defeat the shareholder’s demand, to allege and show by facts, if they can, that the shareholder is motivated by some improper purpose. Carter v. Wilson Constr. Co., 83 N.C. App. 61, 348 S.E.2d 830, 1986 N.C. App. LEXIS 2643 (1986).

§ 55-16-03. Scope of inspection right.

  1. A qualified shareholder may appoint an agent or attorney to exercise the qualified shareholder’s inspection and copying rights under G.S. 55-16-02.
  2. The corporation may, if reasonable, satisfy the right of a qualified shareholder to copy records under G.S. 55-16-02 by furnishing to the qualified shareholder copies by photocopy or other means chosen by the corporation, including copies through an electronic transmission.
  3. The corporation may impose a reasonable charge to cover the costs of providing copies of documents to the qualified shareholder, which may be based on an estimate of the costs.
  4. The corporation may comply with a qualified shareholder’s demand to inspect the record of shareholders under G.S. 55-16-02(b)(3) by providing the shareholder with a list of its shareholders that was compiled no earlier than the date of the qualified shareholder’s demand.

History. 1901, c. 2, s. 49; Rev., s. 1179; C.S., s. 1172; G.S., s. 55-109; 1955, c. 1371, s. 1; 1965, c. 609; 1973, c. 469, s. 11; 1989, c. 265, s. 1; 2005-268, s. 35; 2021-106, s. 6(d).

Official Comment to the Model Business Corporation Act, 2016 Revision

Section 16.03(a) provides that the rights of inspection and copying granted to shareholders in section 16.02 may be exercised by agents and attorneys of shareholders appointed by shareholders to conduct such inspection and copying. Providing the corporation with the right to choose among alternative delivery methods for copies in section 16.03(b), including by electronic transmissions, is intended to reduce burdens on the corporation. No consent by the shareholder is required under section 1.41 for the corporation to furnish copies to the shareholder under section 16.03 by electronic transmission.

Section 16.03(c) gives the corporation, at its option and expense, the right to provide a list of its shareholders instead of granting the right of inspection. Such a list must be compiled no earlier than the date of the written demand.

Section 16.03(d) permits the corporation to be reimbursed for the expense of providing copies of documents to a shareholder.

North Carolina Commentary

Former G.S. 55-38 contained no express counterpart to subsections (b), (c) and (d) of this section.

Subsection 16.03 (c) of the Model Act was modified for clarity.

Editor’s Note.

Session Laws 2021-106, s. 6(j), made the rewriting of this section by Session Laws 2021-106, s. 6(d), effective October 1, 2021, and applicable to demands for inspection and requests for financial statements received by a corporation on or after that date.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2005-268, s. 35, effective October 1, 2005, substituted “represented” for “he represents” in subsection (a); substituted “by xerographic or other means, including copies through an electronic transmission if available and so requested by the shareholder” for “made by photographic, xerographic, or other means” in subsection (b); substituted “production, reproduction, or transmission” for “production or reproduction” in subsection (c); and substituted “the shareholder” for “him” in subsection (d).

Session Laws 2021-106, s. 6(d), rewrote the section. For effective date and applicability, see editor’s note.

§ 55-16-04. Court-ordered inspection.

  1. If a corporation does not allow a qualified shareholder who complies with G.S. 55-16-02(a) to inspect and copy any records required by that subsection to be available for inspection, the superior court of the county where the corporation’s principal office, or if none in this State, its registered office, is located may, upon application of the qualified shareholder, summarily order inspection and copying of the records demanded at the corporation’s expense.
  2. If a corporation does not within a reasonable time allow a qualified shareholder who complies with G.S. 55-16-02(b) to inspect and copy the records required by that subsection, the qualified shareholder who complies with G.S. 55-16-02(b) and (c) may apply to the superior court in the county where the corporation’s principal office, or if none in this State, its registered office, is located for an order to permit inspection and copying of the records demanded. The court shall dispose of an application under this subsection on an expedited basis.
  3. If the court orders inspection and copying of the records demanded, it may impose reasonable restrictions on their confidentiality, use, or distribution by the demanding qualified shareholder, and it shall also order the corporation to pay the qualified shareholder’s costs, including reasonable attorneys’ fees, incurred to obtain the order unless the corporation establishes that it refused inspection in good faith due to any of the following:
    1. The corporation had a reasonable basis for doubt about the right of the shareholder to inspect the records demanded.
    2. The corporation required reasonable restrictions on the confidentiality, use, or distribution of the records demanded to which the demanding qualified shareholder had been unwilling to agree.
  4. Repealed by Session Laws 2021-106, s. 6(e), effective October 1, 2021, and applicable to demands for inspection and requests for financial statements received by a corporation on or after that date.

History. 1901, c. 2, s. 49; Rev., s. 1179; C.S., s. 1172; G.S., s. 55-109; 1955, c. 1371, s. 1; 1965, c. 609; 1973, c. 469, s. 11; 1989, c. 265, s. 1; 2021-106, s. 6(e).

Official Comment to the Model Business Corporation Act, 2016 Revision

Section 16.04 provides a judicial remedy if a corporation refuses to grant the right of inspection provided by section 16.02.

If the right of inspection under section 16.02(a) is invoked and the corporation refuses to grant inspection, the shareholder may seek a summary order compelling inspection at the corporation’s expense. A summary order is appropriate since the right of inspection under section 16.02(a) is either automatic or subject only to a determination that the person is in fact a shareholder of the corporation. By contrast, if inspection is demanded under section 16.02(b), a number of matters may be at issue, including the shareholder’s good faith and proper purpose for demands under section 16.02(c) or the reasonableness of the restrictions required by the corporation on the confidentiality, use or distribution of the records. Accordingly, section 16.04(b) directs the court to handle the proceeding “on an expedited basis” instead of in a summary proceeding. The purpose of this phrase is to discourage dilatory tactics to avoid or delay inspection without requiring the court to resolve these issues on a summary basis.

The principal sanction against unreasonable delay or refusal to grant inspection is provided by section 16.04(c), which imposes on the corporation the shareholder’s expenses to obtain the order unless the corporation establishes that it refused inspection in good faith on the grounds specified in section 16.04(c)(1) or (2). For example, a corporation may point to conduct of the shareholder involving improper use of information obtained from the corporation in the past as indicating that reasonable doubt existed as to the shareholder’s present purpose or by showing that the corporation refused inspection because the shareholder had been unwilling to agree to reasonable restrictions on the confidentiality, use or distribution of records demanded under section 16.02(b).

North Carolina Commentary

The sanction for wrongfully withholding records under this section is the payment of the costs and attorneys’ fees of the shareholder, whereas former G.S. 55-38 permitted the court to impose a fine not exceeding $500.

Editor’s Note.

Session Laws 2021-106, s. 6(j), made the rewriting of this section by Session Laws 2021-106, s. 6(e), effective October 1, 2021, and applicable to demands for inspection and requests for financial statements received by a corporation on or after that date.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2021-106, s. 6(e), rewrote the section. For effective date and applicability, see editor’s note.

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Mandamus. —

Under former G.S. 55-38, the writ of mandamus would not be granted for speculative purposes, or to gratify idle curiosity, or to aid a blackmailer, but it could not be denied to the stockholder who sought information for legitimate purposes. Cooke v. Outland, 265 N.C. 601, 144 S.E.2d 835, 1965 N.C. LEXIS 1066 (1965).

Banking Corporations. —

As to applicability of former G.S. 55-38, relating to examination and production of books, records and information, to banking corporations, see G.S. 55-16-02. Cooke v. Outland, 265 N.C. 601, 144 S.E.2d 835, 1965 N.C. LEXIS 1066 (1965).

Lack of Accountability to Other Shareholders. —

Generally, a lack of accountability to other shareholders would not, by itself, be sufficient grounds to pierce the corporate veil, as former G.S. 55-37 and former G.S. 55-38 provided an adequate remedy at law to enforce accountability. Dorton v. Dorton, 77 N.C. App. 667, 336 S.E.2d 415, 1985 N.C. App. LEXIS 4377 (1985).

Attorney’s Fees. —

Trial court properly denied a member’s request for attorney’s fees in relation to an action seeking to inspect the business records of a club, as there was no statutory grounds for fees under G.S. 55-16-04, a fee provision of the parties consent order could not authorize fees in the absence of statutory authority, and the trial court was not required by G.S. 1A-1, N.C. R. Civ. P. 52(a)(1) to make findings of fact regarding the fee award. Carswell v. Hendersonville Country Club, Inc., 169 N.C. App. 227, 609 S.E.2d 460, 2005 N.C. App. LEXIS 538 (2005).

§ 55-16-05. Inspection of records by directors.

  1. A director of a corporation is entitled to inspect and copy the books, records, and documents of the corporation at any reasonable time to the extent reasonably related to the performance of the director’s duties as a director, including duties as a member of a committee, but not for any other purpose or in any manner that would violate any duty to the corporation.
  2. The superior court of the county where the corporation’s principal office, or its registered office if the corporation does not have a principal office in this State, is located may order inspection and copying of the books, records, and documents at the corporation’s expense, upon application of a director who has been refused inspection rights, unless the corporation establishes that the director is not entitled to inspection rights. The court shall dispose of an application under this subsection on an expedited basis.
  3. If an order is issued, the court may include provisions protecting the corporation from undue burden or expense, and prohibiting the director from using information obtained upon exercise of the inspection rights in a manner that would violate a duty to the corporation, and may also order the corporation to reimburse the director for the director’s costs, including reasonable counsel fees, incurred in connection with the application.

History. 2005-268, s. 36.

§ 55-16-06. Exception to notice requirements.

  1. Whenever notice is required to be given under any provision of this Chapter to a shareholder, the notice shall not be required to be given if either of the following applies:
    1. Notice of two consecutive annual meetings, and all notices of meetings during the period between those two consecutive annual meetings, have been sent to the shareholder at the shareholder’s address as shown on the records of the corporation and have been returned undeliverable.
    2. All, but not less than two, payments of dividends on securities during a 12-month period, or two consecutive payments of dividends on securities during a period of more than 12 months, have been sent to the shareholder at the shareholder’s address as shown on the records of the corporation and have been returned undeliverable.
  2. If a shareholder delivers to the corporation a written notice setting forth that shareholder’s current address, the requirement that notice be given to the shareholder shall be reinstated.

History. 2005-268, s. 36.

§§ 55-16-07 through 55-16-19.

Reserved for future codification purposes.

Part 2. Reports.

§ 55-16-20. Financial statements for shareholders.

  1. Upon the written request of a shareholder, a corporation shall deliver, or make available to the requesting shareholder by posting on its website or by other generally recognized means, annual financial statements for the most recent fiscal year of the corporation for which annual financial statements have been prepared for the corporation. If financial statements have been prepared for the corporation on the basis of generally accepted accounting principles for the specified period, the corporation shall deliver or make available those financial statements to the requesting shareholder. If the annual financial statements to be delivered or made available to the requesting shareholder are audited or otherwise reported upon by a public accountant, the report shall also be delivered or made available to the requesting shareholder.
  2. A corporation shall deliver, or make available and provide written notice of availability of, the financial statements required under subsection (a) of this section to the requesting shareholder within five business days of delivery of the written request to the corporation.
  3. A corporation may fulfill its responsibilities under this section by delivering the specified financial statements, or otherwise making them available, in any manner permitted by the applicable regulations of the United States Securities and Exchange Commission.
  4. Notwithstanding the provisions of subsections (a) and (b) of this section, the following apply:
    1. As a condition to delivering or making available financial statements to a requesting shareholder, the corporation may require the requesting shareholder to agree to reasonable restrictions on the confidentiality, use, and distribution of the financial statements.
    2. The corporation may, if it reasonably determines that the shareholder’s request is not made in good faith or for a proper purpose, decline to deliver or make available the financial statements to that shareholder.
  5. If a corporation does not respond to a shareholder’s request for annual financial statements pursuant to this section in accordance with subsection (b) of this section within five business days of delivery of the request to the corporation, the following apply:
    1. The requesting shareholder may apply to the superior court of the county where the corporation’s principal office, or if none in this State, its registered office, is located for an order requiring delivery of or access to the requested financial statements. The court shall dispose of an application under this subsection on an expedited basis.
    2. If the court orders delivery or access to the requested financial statements, it may impose reasonable restrictions on their confidentiality, use, or distribution.
    3. In a proceeding under this subsection, if the corporation has declined to deliver or make available the financial statements because the shareholder had been unwilling to agree to restrictions proposed by the corporation on the confidentiality, use, and distribution of the financial statements, the corporation has the burden of demonstrating that the restrictions proposed by the corporation were reasonable.
    4. In a proceeding under this subsection, if the corporation has declined to deliver or make available the financial statements pursuant to subdivision (d)(2) of this section, the corporation has the burden of demonstrating that it had reasonably determined that the shareholder’s request was not made in good faith or for a proper purpose.
    5. If the court orders delivery or access to the requested financial statements, it shall order the corporation to pay the shareholder’s costs, including reasonable attorneys’ fees, incurred to obtain the court order, unless the corporation establishes that it had refused delivery or access to the requested financial statements because the shareholder had refused to agree to reasonable restrictions on the confidentiality, use, or distribution of the financial statements or that the corporation had reasonably determined that the shareholder’s request was not made in good faith or for a proper purpose.

History. 1901, c. 2, ss. 38, 45, 49; Rev., ss. 1179-1181; C.S., ss. 1170, 1172; G.S., ss. 55-107, 55-109; 1955, c. 1371, s. 1; 1965, c. 609; 1973, c. 469, s. 11; 1989, c. 265, s. 1; 2021-106, s. 6(f).

Official Comment to the Model Business Corporation Act, 2016 Revision

  1. Section 16.20(a)
  2. Section 16.20(d)
  3. Section 16.20(e)

Although section 16.20 requires a corporation, upon the written request of a shareholder, to deliver or make available annual financial statements that have been prepared, it does not require a corporation to prepare financial statements. This recognizes that many small, closely held corporations do not regularly prepare formal financial statements unless required by banks, suppliers or other third parties.

Section 16.20 does not limit the financial statements to be delivered or made available to shareholders to financial statements prepared on the basis of generally accepted accounting principles. Many small corporations have never prepared financial statements on the basis of GAAP. “Cash basis” financial statements (often used in preparing the tax returns of small corporations) do not comply with GAAP. Smaller corporations that keep accrual basis records, and file their federal income tax returns on that basis, frequently do not make the adjustments that may be required to present their financial statements on a GAAP basis. Internally or externally prepared financial statements prepared on the basis of other accounting practices and principles that are reasonable in the circumstances, including tax returns filed with the U.S. Internal Revenue Service (if that is all that is prepared), will suffice for these types of corporations and they may satisfy their obligations under section 16.20 by delivering or making available the requested financial statements in whatever form that they have been prepared for other purposes. If a corporation does prepare financial statements on a GAAP basis for any purpose for the particular year, however, it must send or make available those statements to the requesting shareholder as provided by section 16.20(a).

The last sentence of section 16.20(a) requires that if the financial statements to be delivered or made available have been reported upon by a public accountant, that report must be furnished. Section 16.20(a) refers to a “public accountant.” The same terminology is used in section 8.30 (standards of conduct for directors). In various states different terms are employed to identify those persons who are permitted under the state licensing requirements to act as professional accountants. Phrases like “independent public accountant,” “certified public accountant,” “public accountant,” and others may be used. In adopting the term “public accountant,” the Act uses the words in a general sense to refer to any class or classes of persons who, under the applicable requirements of a particular jurisdiction, are professionally entitled to practice accountancy.

Failure to comply with the requirements of section 16.20 does not adversely affect the existence or good standing of the corporation. Rather, failure to comply gives an aggrieved shareholder rights to compel compliance or to obtain damages, if they can be established, under general principles of law.

A shareholder may also seek access to the financial statements of the corporation through the inspection rights established in section 16.02.

In establishing restrictions with respect to confidentiality, use or distribution that are reasonable under the circumstances, a corporation may consider a number of factors, including the potential competitive harm to the corporation and its other shareholders that could result if the confidential financial information were used to compete with the corporation or disclosed to third parties such as competitors. As provided in section 16.20(d)(2), a corporation may withhold delivery or making available its financial statements to a requesting shareholder if it reasonably determines that the shareholder’s request is not made in good faith and for a proper purpose.

If a corporation fails to comply with section 16.20(b) in a timely manner the judicial remedy of 16.20(e) directs the court to handle the proceeding on an expedited basis to discourage dilatory tactics to avoid or delay delivery or access to financial statements, but does not require the court to resolve these issues on a summary basis. Section 16.20(e), like section 16.04, establishes a sanction against unreasonable delay or refusal to deliver or provide access to financial statements by imposing on the corporation the shareholder’s expenses in obtaining the court’s order unless the corporation can establish that the shareholder had been unwilling to agree to reasonable restrictions on the confidentiality, use or distribution of the requested financial statements or the corporation had reasonably determined that the shareholder’s request was not made in good faith or for a proper purpose.

Revised North Carolina Commentary 2021

Prior to the 2021 amendments, G.S. 55-16-20 required corporations to provide shareholders with annual financial statements that included a balance sheet, income statement, a statement of cash flows, and, if financial statements are regularly prepared in accordance with generally accepted accounting principles (“GAAP”), the annual financial statements were also required to be prepared on a GAAP basis. Annual financial statements that were reported on by a public accountant were also required to include the accountant’s report, and annual financial statements not reported on by a public accountant were required to include a statement of the president (or other person responsible for accounting records) (1) stating the person’s reasonable belief whether the statements were prepared on a GAAP basis, and if not, the basis of preparation and (2) describing any respects in which the statements were prepared on a basis inconsistent with the prior year’s annual financial statements. Prior to the 2021 amendments, G.S. 55-16-20(d) required the corporation to mail the annual financial statements to each shareholder, or provide written notice that the financial statements are available, within one hundred twenty (120) days after the close of each fiscal year (although the failure to do so may not serve as the basis for a claim for damages by a shareholder, unless the failure was in bad faith).

Complying with these extensive requirements imposed a substantial time and resource burden on closely held, small and mid-sized corporations. In recognition of this burden, the Model Act was amended in 2016 to (1) remove the requirement that a corporation regularly prepare financial statements for delivery to shareholders (while retaining a requirement that financial statements be made available on request, as further described below) and (2) eliminate the statutorily-imposed standards for preparation of financial statements. Beyond the reduced burden on corporations, these changes are an acknowledgment that the nature and complexity of a corporation’s business (including the requirements of third parties, like banks, suppliers and taxing authorities) should be the primary driver of the form and presentation of the corporation’s financial statements, rather than a corporate statute.

The 2021 revisions to G.S. 55-16-20 reflect this same approach. Specifically, in lieu of a requirement that the corporation maintain and mail financial statements on an annual basis, the changes to G.S. 55-16-20(a) and (b) require the corporation to make financial statements available within five (5) business days of a qualified shareholder’s request (with flexibility on the method by which they may be made available). Likewise, the changes to G.S. 55-16-20 eliminate the statutory standards for preparation of the financial statements, and the required presidential (or other) statement about the basis of preparation if financial statements are non-GAAP. This approach allows the corporation to determine the form and basis of its financial statements in light of the size, nature and needs of its business, while ensuring that qualified shareholders retain rights of access to key financial information to allow them to monitor and evaluate their investment.

Editor’s Note.

Session Laws 2021-106, s. 6(j), made the rewriting of this section by Session Laws 2021-106, s. 6(f), effective October 1, 2021, and applicable to demands for inspection and requests for financial statements received by a corporation on or after that date.

Session Laws 2021-106, s. 7(a), provides: “The Revisor of Statutes shall cause to be printed, as annotations to the published General Statutes, all relevant portions of the Official Comments to the Model Business Corporation Act and all explanatory comments of the drafters of this act as the Revisor may deem appropriate.”

Effect of Amendments.

Session Laws 2021-106, s. 6(f), rewrote the section. For effective date and applicability, see editor’s note.

§ 55-16-21. [Repealed]

Repealed by Session Laws 2005-268, s. 37, effective October 1, 2005.

Official Comment

Section 16.21 requires two types of financial transactions to be reported to the shareholders with or before the notice of the next meeting of shareholders:

  1. decisions to grant indemnification under chapter 8E;
  2. decisions to issue shares to persons for promissory notes or for promises for future services under section 6.21.

North Carolina Commentary

This section has no counterpart in prior law. The section modifies the Model Act by exempting “public corporations” (i.e., those required to file reports under Section 12 of the Securities Exchange Act of 1934), because they are subject to comprehensive federal disclosure requirements which include indemnification arrangements and material loans or similar transactions with executive officers, directors and five percent shareholders. G.S. 55-8-57 was added to the Model Act’s list in subsection (a), and an exemption was added in subsection (b) for transactions or plans previously approved by the shareholders.

§ 55-16-22. Annual report.

  1. Requirement. —  Except as provided in subsections (a1) and (a2) of this section, each domestic corporation and each foreign corporation authorized to transact business in this State shall deliver an annual report directly to the Secretary of State in electronic form or in paper form as prescribed by the Secretary of State under this section.
  2. Insurers. —  Each insurance company subject to the provisions of Chapter 58 of the General Statutes shall deliver an annual report to the Secretary of State.
  3. Professional Corporations Exempt. —  A corporation governed by Chapter 55B of the General Statutes is exempt from this section.
  4. Form; Required Information. —  The annual report required by this section shall be in a form prescribed by the Secretary of State. The Secretary of State shall prescribe the form needed to file an annual report electronically and shall provide this form by electronic means. The annual report shall set forth all of the following:
    1. The name of the corporation and the state or country under whose law it is incorporated.
    2. The street address, and the mailing address if different from the street address, of the registered office, the county in which its registered office is located, and the name of its registered agent at that office in this State, and a statement of any change of such registered office or registered agent, or both.
    3. The address and telephone number of its principal office.
    4. The names, titles, and business addresses of its principal officers.
    5. Repealed by Session Laws 1997-475, s. 6.1, effective January 1, 1998.
    6. A brief description of the nature of its business.
  5. Form; Certain Veteran-Owned Businesses. —  The Secretary of State shall also provide appropriate space and instructions on the annual report form for a domestic corporation or foreign corporation to voluntarily indicate whether or not the corporation is a veteran-owned small business or a service-disabled veteran-owned small business.
  6. Currency of Information. —  Information in the annual report must be current as of the date the annual report is executed on behalf of the corporation.
  7. Due Date. —  An annual report is due by the fifteenth day of the fourth month following the close of the corporation’s fiscal year.
  8. Incomplete Information. —  If an annual report does not contain the information required by this section, the Secretary of State shall promptly notify the reporting domestic or foreign corporation in writing and return the report to it for correction. If the report is corrected to contain the information required by this section and submitted to the Secretary of State within 30 days after the effective date of notice, it is deemed to be timely filed.
  9. Amendments. —  Amendments to any previously filed annual report may be filed with the Secretary of State at any time for the purpose of correcting, updating, or augmenting the information contained in the annual report.
  10. Expired.
  11. Repealed by Session Laws 2017-204, s. 1.13, effective August 11, 2017.
  12. Delinquency. —  If the Secretary of State does not receive an annual report within 60 days of the date the report is due, the Secretary of State may presume that the annual report is delinquent. This presumption may be rebutted by evidence of delivery presented by the filing corporation.

If the information contained in the most recently filed annual report has not changed, a certification to that effect may be made instead of setting forth the information required by subdivisions (2) through (5) of this subsection.

History. 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1066, s. 32(a); 1993, c. 218, s. 2; 1997-475, s. 6.1; 2003-233, s. 3; 2010-31, s. 31.4(a); 2017-90, s. 1(b); 2017-204, s. 1.13; 2019-177, s. 5.

Official Comment

The requirement relating to the annual report that each corporation must submit to the secretary of state has been modified in section 16.22 in an effort to make it a limited information document for use by the secretary of state, members of the general public, and shareholders. The purpose of the annual report is to show the location of the principal office of the corporation, the names and business addresses of its directors and principal officers, the general nature of the corporation’s business, and its capital structure. It permits members of the general public to ascertain the identity of the corporation and communicate directly with it. It also establishes the alternative to the registered office for service of process and related matters. The “principal office” of the corporation is defined as the location of its executive office in section 1.40.

The reference to “principal officers” in section 16.22(a)(4) is intended to simplify reporting requirements of corporations with very large numbers of employees who have some managerial responsibility and who, for business reasons, are designated as officers. The “principal officers” of a corporation include at least the chairman of the board of directors, the chief executive officer, and the officers performing the traditional functions performed by the corporate secretary and treasurer, no matter what their designation.

The annual report is required of both domestic corporations and foreign corporations qualified to transact business in the state. The failure to file the annual report, like the failure to satisfy other mandatory requirements of the Act, is a ground for administrative dissolution or revocation of the certificate of authority to transact business.

North Carolina Commentary

This section requires an annual report to the Secretary of State. The prior North Carolina law contained no such requirement.

This section differs from the Model Act by expressly providing that it will not apply to professional corporations (notwithstanding G.S. 55B-3) and by not requiring disclosure of a corporation’s authorized shares or its outstanding shares. Subdivision (a)(4) adds a requirement that the titles of officers be included in the annual report, so the Model Act requirement for listing directors’ names and business addresses was placed in a separate subdivision (a)(4a). Also, subsection (c) is slightly different from the Model Act in the filing deadlines and in requiring the Secretary of State to distribute forms for the annual report each year. Subsection (e), which is not in the Model Act, allows the filing of amendments to any previously filed annual reports.

Editor’s Note.

The preamble to Session Laws 2017-90, provides: “Whereas, over 770,000 veterans reside across all of North Carolina’s one hundred counties; and

“Whereas, North Carolina proudly has one of the largest veteran populations in the country; and

“Whereas, the number of veterans across our State underscores the importance and impact of the State’s current military base populations to our State and how veterans and their families continue to reside in the State after the conclusion of their military service to further contribute to the State’s workforce and economy; Now, therefore,”

Session Laws 2017-90, s. 6, provides: “In the instructions of the annual report forms, the Office of the Secretary of State and the Department of Revenue may include an explanation that status as a veteran-owned small business or service-disabled veteran-owned small business is being requested to assist the State in documenting the importance and impact of the State’s military population in our communities and on our State and local economies. The Office of the Secretary of State shall submit the first annual report required by G.S. 55-16-22.2, 57D-2-25, and 59-84.5 to the Department of Military and Veterans Affairs no later than March 1, 2019.”

Session Laws 2017-90, s. 7, made subsection (a4), as added by Session Laws 2017-90, s. 1(b), effective January 1, 2018, and applicable to annual reports filed by business entities on or after that date.

Effect of Amendments.

Session Laws 2010-31, s. 31.4(a), effective June 30, 2010, in subsection (c), added “Due Date. —” at the beginning, and substituted “fourth month” for “third month” at the end.

Session Laws 2017-90, s. 1(b), added subsection (a4). For effective date and applicability, see editor’s note.

Session Laws 2017-204, s. 1.13, effective August 11, 2017, added subsection headings throughout the section; in subsection (a), deleted “to the Secretary of Revenue in paper form or, in the alternative,” following “annual report” and inserted “or in paper form”; deleted “domestic” preceding “corporation” in subsection (a2); in the introductory paragraph of subsection (a3), substituted “form prescribed by the Secretary” for “form jointly prescribed by the Secretary of Revenue and the Secretary” in the first sentence, and deleted the former second sentence, which read: “The Secretary of Revenue shall provide the form needed to file an annual report.”; in subsection (c), deleted the former first through third sentences related to due dates for annual reports, and deleted “required to be delivered to the Secretary of State” following “annual report” in the remaining sentence; substituted “submitted” for “delivered” in the second sentence of subsection (d); deleted former subsection (g), related to change of registered office or agent; and, in subsection (h), substituted “60 days” for “120 days” and “report is due” for “return is due” in the first sentence and deleted “by receipt of the annual report from the Secretary of Revenue or” following “rebutted” in the last sentence.

Session Laws 2019-177, s. 5, effective July 26, 2019, inserted the catchlines at the beginning of subsections (a1) and (a4) and deleted “Secretary of Revenue and the” following “The” at the beginning of subsection (a4).

Legal Periodicals.

For 1997 legislative survey on business law, see 20 Campbell L. Rev. 389.

For 1997 legislative survey on taxation, see 20 Campbell L. Rev. 481.

§ 55-16-22.1. [Repealed]

Repealed by Session Laws 1998-228, s. 17, effective December 1, 1999.

§ 55-16-22.2. Report of veteran-owned small businesses and service-disabled veteran-owned small businesses.

Using the information reported pursuant to G.S. 55-16-22(a4), the Secretary of State shall compile summary information on an aggregate basis about the number of veteran-owned small businesses and the number of service-disabled veteran-owned small businesses reporting in this State. The Secretary of State shall annually report this summary information to the Department of Military and Veterans Affairs by March 1 of each year.

History. 2017-90, s. 1(c).

Editor’s Note.

The preamble to Session Laws 2017-90, provides: “Whereas, over 770,000 veterans reside across all of North Carolina’s one hundred counties; and

“Whereas, North Carolina proudly has one of the largest veteran populations in the country; and

“Whereas, the number of veterans across our State underscores the importance and impact of the State’s current military base populations to our State and how veterans and their families continue to reside in the State after the conclusion of their military service to further contribute to the State’s workforce and economy; Now, therefore,”

Session Laws 2017-90, s. 6, provides: “In the instructions of the annual report forms, the Office of the Secretary of State and the Department of Revenue may include an explanation that status as a veteran-owned small business or service-disabled veteran-owned small business is being requested to assist the State in documenting the importance and impact of the State’s military population in our communities and on our State and local economies. The Office of the Secretary of State shall submit the first annual report required by G.S. 55-16-22.2, 57D-2-25, and 59-84.5 to the Department of Military and Veterans Affairs no later than March 1, 2019.”

Session Laws 2017-90, s. 7, made this section effective January 1, 2018, and applicable to annual reports filed by business entities on or after that date.

Article 17. Transition and Curative Provisions.

§ 55-17-01. Applicability of act.

  1. The provisions of this Chapter shall apply to every corporation for profit, and, so far as appropriate, to every corporation not for profit having a capital stock, now existing or hereafter formed, and to the outstanding and future securities thereof, except to the extent the corporation is expressly excepted by this Chapter from its operation or except to the extent that there is other specific statutory provision particularly applicable to the corporation or inconsistent with some provisions of this Chapter, in which case that other provision prevails.
  2. Notwithstanding the provisions of subsection (a) of this section, no corporation not for profit having a capital stock and formed for religious, charitable, nonprofit, social, or literary purposes shall hereafter be formed under this Chapter.

History. 1955, c. 1371, s. 1; 1957, c. 550, s. 1; 1973, c. 469, s. 1; 1989, c. 265, s. 1.

Official Comment

The fundamental principle underlying section 17.01 is that the revised Model Act should ultimately be made fully applicable to all existing business corporations as well as to all new business corporations formed after the effective date of the new statute. It is undesirable to “grandfather” existing corporations under earlier statutes since that results in the permanent coexistence of two different and overlapping systems of corporation law, with resulting confusion. This is particularly true of the revised Model Act, which builds directly on the experience of many years with existing corporation statutes and contains few major substantive changes.

Section 17.01 applies this basic principle in its broadest sense by making the revised Act applicable as of its “effective date” (prescribed in section 17.06) to all domestic corporations formed under general statutes for corporations for profit. This includes all prior general business corporation acts, but not statutes providing for not-for-profit corporations or associations, or corporations formed for the purpose of engaging in a business for which the state has provided a separate incorporation procedure.

Section 17.01 applies the revised Model Act to all corporations to which that application is constitutionally permissible. In view of the universal adoption of “reservation of power” clauses in all states for more than a century, there are very few active business corporations to which this Act will not be applicable under this section.

North Carolina Commentary

The provisions of former G.S. 55-3(a) and (b) were brought forward with modifications as subsections (a) and (b) of this section in lieu of the Model Act’s provisions. In subsection (a) the words “except to the extent the corporation is expressly excepted by this act from its operation” were substituted for the words “unless the corporation is expressly excepted from the operation hereof” in former G.S. 55-3(a) to provide for partial exceptions and to make it clear that the referenced exceptions are only those in the North Carolina Business Corporation Act itself. In subsection (b) the words “not for profit” were inserted after “corporation” to limit the prohibition only to corporations not formed for profit. The term “not for profit” is broader than “nonprofit” and was used in subsection (a) in order to “grandfather” those not for profit corporations having capital stock that were formed prior to the enactment of the Business Corporation Act in 1955.

Legal Periodicals.

For article, “The Creation of North Carolina’s Limited Liability Corporation Act,” see 32 Wake Forest L. Rev. 179 (1997).

For article on the evolution of corporate combination law, see 76 N.C.L. Rev. 687 (1998).

For article, “Silencing the Shareholder’s Voice,” see 80 N.C.L. Rev. 1897 (2002).

CASE NOTES

Editor’s Note. —

Some of the cases below were decided under the Business Corporation Act adopted in 1955 or under prior law.

Pre-existing Corporations. —

The current North Carolina Business Corporation Act applies to corporations existing prior to its enactment. North Carolina ex rel. Howes v. Peele, 876 F. Supp. 733, 1995 U.S. Dist. LEXIS 2003 (E.D.N.C. 1995).

Building and Loan Associations. —

Under former G.S. 55-3, relating to the applicability of Chapter 55, the right to know the names of their associates for the purpose of conducting an effective campaign in preparation for a stockholders’ meeting, was extended to the shareholders of a building and loan association. White v. Smith, 256 N.C. 218, 123 S.E.2d 628, 1962 N.C. LEXIS 435 (1962).

Domestic Banks. —

The provisions of this Chapter are applicable to domestic banks operating in North Carolina. Cooke v. Outland, 265 N.C. 601, 144 S.E.2d 835, 1965 N.C. LEXIS 1066 (1965).

Domestic banking corporations are not expressly excepted from the operation of this Chapter, and there is no “specific statutory provision particularly applicable” to domestic banks operating in North Carolina or inconsistent with some provisions of this Chapter, so as to make such provision prevail. Cooke v. Outland, 265 N.C. 601, 144 S.E.2d 835, 1965 N.C. LEXIS 1066 (1965).

§ 55-17-02. Application to qualified foreign corporations.

A foreign corporation authorized to transact business in this State on July 1, 1990 is subject to this Chapter but is not required to obtain a new certificate of authority to transact business under this Chapter.

History. 1955, c. 1371, s. 1; 1957, c. 979, ss. 18, 19; 1989, c. 265, s. 1.

Official Comment

Section 17.02 makes the revised Model Act applicable on its effective date to all foreign corporations that are qualified to transact business in the state on that date. But these corporations need not refile and obtain new certificates of authority under the Act. While chapter 15 of the revised Model Act may change the rules applicable to foreign corporations in some states, these changes are not of a type that require a transition period. It is therefore recommended that only a single effective date be provided for the application of the Act to foreign corporations and that delayed effective dates for specific provisions in this regard are unnecessary.

§ 55-17-03. Saving provisions.

  1. The existence of corporations formed before July 1, 1990, shall not be impaired by the enactment of this Chapter nor by any change made by this Chapter in the requirements for the formation of corporations nor by any amendment or repeal by this Chapter of the laws under which they were formed or created, and, except as otherwise expressly provided in this Chapter, the repeal of a prior act by this Chapter shall not affect any liability or penalty incurred, under the provisions of such act, prior to the repeal thereof.
  2. Any proceeding or corporate action commenced before July 1, 1990, may be completed in accordance with the law then in effect.
  3. A corporation dissolved by operation of law before July 1, 1990, may wind up and liquidate its business and affairs pursuant to the provisions of Article 14 of this Chapter.

History. 1955, c. 1371, s. 1; 1957, c. 550, s. 1; 1973, c. 469, s. 1; 1989, c. 265, s. 1; 1993, c. 218, s. 1.

Official Comment

The saving provisions of section 17.03 are derived from section 25 of the UNIFORM STATUTORY CONSTRUCTION ACT, which was promulgated by the National Conference of Commissioners on Uniform State Laws in 1965.

North Carolina Commentary

Former G.S. 55-3(c) was brought forward with minor clarifications as subsection (a) in lieu of the Model Act’s provisions, except that subdivision 17.03(a)(4) of the Model Act was rewritten as subsection (b). The broad term “corporate action” was substituted for the words “reorganization, or dissolution” used in the Model Act in order to be sure that it covers all fundamental changes, including mergers.

§ 55-17-04. Severability.

If any provision of this Chapter or its application to any person or circumstance is held invalid by a court of competent jurisdiction, the invalidity does not affect other provisions or applications of the Chapter that can be given effect without the invalid provision or application, and to this end the provisions of the Chapter are severable.

History. 1989, c. 265, s. 1.

§ 55-17-05. Curative statute.

All deeds, conveyances and other instruments executed prior to the effective date of this Chapter and validated by the curative provisions of former G.S. 55-36.1 and former Article 12 of Chapter 55 as they were immediately prior to such effective date shall be valid and effective to the same extent as if those provisions had not been amended or repealed. The provisions of former G.S. 55-36 shall continue to apply to all instruments executed before July 1, 1990, to which that section applied.

History. 1905, c. 316; Rev., s. 1248; 1939, c. 23; 1941, c. 294; 1943, c. 219, s. 11/2; 1947, c. 504, ss. 1, 2; 1949, c. 436; c. 825; 1951, c. 395; C.S., s. 1134; G.S., ss. 55-35, 55-41, 55-41.1, 55-41.2, 55-42, 55-164.1, 55-164.2; 1955, c. 1371, s. 2; 1957, c. 500, s. 2; 1969, c. 953, s. 1; 1971, c. 60; 1977, c. 40, s. 1; 1979, c. 364; 1989, c. 265, s. 1; 1991, c. 647, s. 1.

Official Comment

The Model Act is intended to be a complete substitute for earlier statutes of general applicability to business corporations and it is contemplated that all these statutes should normally be repealed when the revised Model Act is enacted. A few states in the past have retained portions of earlier statutes while enacting integrated codifications of business corporation law. This practice is generally undesirable since it tends to cause unnecessary confusion in determining the applicable law as well as creating possible internal statutory conflicts.

Many states have enacted statutes providing special incorporation and regulatory provisions for corporations engaged in specific businesses, like banking and insurance. These specialized statutes should not be included in the list of statutes repealed by section 17.05. Many of these specialized statutes expressly “borrow” provisions from the general corporation act to fill in gaps or to provide applicable rules when the specialized statute is silent. As a general matter, it would be desirable to ensure that these statutes are amended to refer specifically to the present Act rather than to an earlier statute; an appropriate provision would apply this Act to all these corporations except to the extent the specialized statute expressly provides that a different principle should be applicable.

North Carolina Commentary

This section is a consolidation of the curative provisions in former G.S. 55-36.1 and G.S. 55-157 through 55-164.2.

Editor’s Note.

Former G.S. 55-36.1, relating to certain prior conveyances, provided as follows:

§ 55-36.1 Declaring certain corporate conveyances prior to January 1, 1969, valid.

Any deed, deed of trust, or other conveyance for land in this State made on behalf of a corporation prior to January 1, 1969, where the president or vice-president has appeared before a notary public and the secretary or assistant secretary has attested and placed the corporate seal of such corporation upon the instrument and the instrument was executed by the president or vice-president on behalf of such corporation by its authority duly given and said certificate recites that the secretary or assistant secretary acknowledges the instrument to be the act and deed of the corporation, in the absence of an acknowledgment of the president or vice-president, the instrument and acknowledgment being otherwise regular, is hereby declared to be a good and valid deed or conveyance by such corporation for all purposes, and shall be admitted to probate and registration, and shall pass title to the property therein conveyed to the grantee as fully as if said deed, deed of trust, or other conveyance were executed according to the provisions and forms of law in force in this State at the date of the execution of said deed, deed of trust or other conveyance. (1969, c. 953, s. 1.)

Former Article 12 of Chapter 55, containing various curative provisions, provided as follows:

ARTICLE 12. Curative Provisions. § 55-157 Curative act; amendments prior to 1901.

All amendments to the plan of incorporation of any corporation organized under the provisions of the general laws of North Carolina prior to the passage of the act entitled “An Act to Revise the Corporation Law of North Carolina,” being Chapter 2, Public Laws of 1901, are declared to be valid in all respects, whether such amendments were made in accordance with the provisions of Chapter 380 of the Public Laws of 1893, or in accordance with the provisions of Chapter 2 of the Public Laws of 1901, but no amendment shall be validated by this section unless it is an amendment of such nature as is authorized to be made under the provisions of Chapter 2 of the Public Laws of 1901. (1905, c. 316; Rev., s. 1248; C.S., s. 1134; G.S., s. 55-35; 1955, c. 1371, s. 2.)

§ 55-158 Certain corporate conveyances validated.

All deeds and conveyances of land in this State, made by any corporation of this State prior to January 1, 1971, executed in its corporate name and signed and attested by its proper officers, from which the corporate seal was omitted, shall be good and valid, notwithstanding the failure to attach said corporate seal. (1939, c. 23; 1949, c. 436; G.S., s. 55-41; 1955, c. 1371, s. 2; 1957, c. 500, s. 2; 1971, c. 60.)

§ 55-159 Certain deeds executed by banks validated.

All deeds heretofore executed by banks and attested by the cashier, assistant cashier, secretary or assistant secretary thereof, which deeds are otherwise regular and valid, are hereby validated. (1943, c. 219, s. 11/2; G.S., s. 55-41.1; 1955, c. 1371, s. 2.)

§ 55-160 Certain conveyances of corporations now dissolved validated.

All deeds and conveyances of land in this State, made by any corporation of this State prior to January 1, 1969, executed in its corporate name and signed by either its president, vice-president or secretary, and sealed with the common seal of the corporation, where said corporation has been dissolved for at least seven years, and said deed or conveyance has been on record for at least seven years, shall be good and valid, notwithstanding the failure of one of such officers to sign such instrument. (1949, c. 825; G.S., s. 55-41.2; 1955, c. 1371, s. 2; 1979, c. 364.)

§ 55-161 Conveyances by corporations owned by the United States government.

The Home Owners Loan Corporation and any corporation, the majority of whose stock is owned by the United States government, may convey lands, and/or other property which is transferable by deed which is duly executed by either an officer, manager, or agent of said corporation, sealed with the common seal and has attached thereto a signed and attested resolution under seal of the board of directors of said corporation authorizing the said officer, manager or agent to execute, sign, seal and attest deeds, conveyances and/or other instruments. This section shall be deemed to have been complied with if an attested resolution is recorded separately in the office of the register of deeds in the county where the land lies, which said resolution shall be applicable to all deeds executed subsequently thereto and pursuant to its authority.

All deeds, conveyances or other instruments which have been executed prior to March 15, 1951, in the manner prescribed above, if otherwise sufficient, shall be valid, and shall have the effect to pass the title to the real and/or personal property described therein. (1941, c. 294; 1951, c. 395; G.S., s. 55-42; 1955, c. 1371, s. 2.)

§ 55-162 Validation of amendments to corporate charters extending corporate existence.

In every case where a private corporation, chartered under the general laws of the State of North Carolina, has continued to act and do business as a corporation after the expiration of its period of existence as theretofore fixed in its charter, and has thereafter filed in the office of the Secretary of State an amendment to its charter to extend or renew its corporate existence, such amendment is hereby validated and made effective for all intents and purposes to the same extent and with the same effect as if such amendment had been made within the period of such corporation’s existence as theretofore fixed in its charter. (1947, c. 504, s. 1; G.S., s. 55-164.1; 1955, c. 1371, s. 2.)

§ 55-163 Limitation of actions attacking validity of corporate action on grounds amendment not filed during corporate existence.

No action or proceeding shall be brought or defense or counterclaim pleaded later than one year after the ratification of this Article in which either the continued existence of such corporation or the validity of any of the contracts, acts, deeds, rights, privileges, powers, franchises and titles of such corporation is attacked or otherwise questioned on the grounds that such amendment was not filed within the period of such corporation’s existence as theretofore fixed in its charter. (1947, c. 504, s. 2; G.S., s. 55-164.2; 1955, c. 1371, s. 2.)

§ 55-164 Clarification of intent of G.S. 55-163.

In no event shall the limitation provided in G.S. 55-163 bar any action, proceeding, defense or counterclaim based upon grounds other than those mentioned in G.S. 55-163, unless the grounds set out in G.S. 55-163 are an essential part thereof. (1947, c. 504, s. 3; G.S., s. 55-164.3; 1955, c. 1371, s. 2.)

§ 55-164.1 New corporations organized to succeed to rights in corporate charter forfeited.

Whenever the charter of a corporation created under the laws of the State of North Carolina has, on account of failure to make any report or return or to pay any tax or fee for such length of time as to lose its charter, and where thereafter, under the laws of the State of North Carolina, a new charter is issued, in the same name as the original corporation, and on behalf of the same corporation, such new corporation shall succeed to the same properties, to the same rights as the original corporation before losing its charter on account of neglect hereinbefore mentioned.

Whenever such new corporation shall have been created, under the laws of this State, all the title, rights and emoluments to the property held by the original corporation shall inure to the benefit of the newer corporation and the new corporation shall issue its stock to the stockholders in the defunct corporation, in the same number and with the same par value held by the stockholders of the defunct corporation.

Such new corporation shall have the rights and privileges of maintaining any action or cause of action which the defunct corporation might maintain, bring or defend and to all intents and purposes the new corporation shall take the place of the defunct corporation to the same intent and purposes as if the defunct corporation has never expired by reason of its failure to make the reports hereinbefore referred to. (1959, c. 1316, s. 281/2; 1973, c. 469, s. 45.)

§ 55-164.2 Certain corporate documents acknowledged and recorded before January 1, 1977, validated.

In all cases where a deed, deed of trust or other document executed by a corporation is permitted or required by law to be recorded and said deed, deed of trust or document was properly executed, acknowledged and recorded before January 1, 1977, except the acknowledgment of the officer or officers of the corporation was taken in their individual capacity rather than in their capacity as officers of said corporation, said deed, deed of trust or other document shall be construed to be a deed, deed of trust or other document of the same force and effect as if said acknowledgment was in every way proper. (1977, c. 40, s. 1.)

§ 55-17-99.

TABLES OF COMPARABLE SECTIONS FOR CHAPTER 55 Former to Present

Editor’s Note. — The following table shows G.S. sections from former Chapter 55 and their comparable, new Chapter 55 numbers. Where there is no comparable, new number, the term “None” has been inserted.

tablenum=“=table24” align=“left” =c1 55-24 . . . . . 55-8-01 =c2 55-8-02 =c1 55-25 . . . . . 55-8-03, =c2 55-8-04, =c2 55-8-05 =c1 55-26 . . . . . 55-8-06 =c1 55-27 . . . . . 55-8-07 to 55-8-10 =c1 55-28 . . . . . 55-8-20 to 55-8-24 =c1 55-29 . . . . . 55-8-21, 55-8-20(b) =c1 55-30 . . . . . 55-8-11, 55-8-31 =c1 55-31 . . . . . 55-8-25 =c1 55-32 . . . . . 55-8-33, =c2 55-8-24(d), =c2 55-6-40(d) =c1 55-33 . . . . . None =c1 55-34 . . . . . 55-8-40, 55-8-41, =c2 55-8-43(b), =c2 55-8-44(b) =c1 55-35 . . . . . 55-8-30, 55-8-42 =c1 55-36 . . . . . None =c1 55-36.1 . . . . . 55-17-05 =c1 55-37 . . . . . 55-16-01, 55-16-02, =c2 55-16-20 =c1 55-37.1 . . . . . 55-16-01 =c1 55-38 . . . . . 55-16-02, 55-16-03, =c2 55-16-04, =c2 55-16-20 =c1 55-39 . . . . . None =c1 55-40 . . . . . 55-6-01, 55-6-03 =c1 55-40.1 . . . . . 55-6-21 =c1 55-41 . . . . . 55-6-01 =c1 55-42 . . . . . 55-6-02 =c1 55-43 . . . . . 55-6-20 =c1 55-44 . . . . . 55-6-24 =c1 55-44.1 . . . . . 55-7-21.1 =c1 55-45 . . . . . None =c1 55-46 . . . . . 55-6-21 =c1 55-47 . . . . . None =c1 55-48 . . . . . None =c1 55-49 . . . . . 55-6-40(d) =c1 55-50 . . . . . 55-6-40 =c1 55-51 . . . . . 55-6-23 =c1 55-52 . . . . . 55-6-31, 55-6-40 =c1 55-53 . . . . . 55-6-22 =c1 55-54 . . . . . 55-8-33(b)(2), 55-14-08 =c1 55-55 . . . . . 55-7-40 =c1 55-56 . . . . . 55-6-30 =c1 55-57 . . . . . 55-6-25 =c1 55-58 . . . . . 55-6-04 =c1 55-59 . . . . . 55-7-24 =c1 55-60 . . . . . 55-7-07 =c1 55-61 . . . . . 55-7-01, 55-7-02, =c2 55-7-03 =c1 55-62 . . . . . 55-7-05 =c1 55-63 . . . . . 55-7-04 =c1 55-64 . . . . . 55-7-20 =c1 55-65 . . . . . 55-7-25 =c1 55-66 . . . . . 55-7-25, 55-7-27 =c1 55-67 . . . . . 55-7-21 =c1 55-67(c) . . . . . 55-7-28 =c1 55-68 . . . . . 55-7-22 =c1 55-69 . . . . . 55-7-24(b) =c1 55-70, 55-71 . . . . . None =c1 55-72 . . . . . 55-7-30 =c1 55-73 . . . . . 55-7-31 =c1 55-74 . . . . . None =c1 55-75 . . . . . 55-9-01 =c1 55-76 . . . . . 55-9-02 =c1 55-77 . . . . . 55-9-03 =c1 55-78 . . . . . 55-9-04 =c1 55-79 . . . . . 55-9-05 =c1 55-79.1 to 55-89 . . . . . None =c1 55-90 . . . . . 55-9A-01 =c1 55-91 . . . . . 55-9A-02 =c1 55-92 . . . . . 55-9A-03 =c1 55-93 . . . . . 55-9A-04 =c1 55-94 . . . . . 55-9A-05 =c1 55-95 . . . . . 55-9A-06 =c1 55-96 . . . . . None =c1 55-97 . . . . . 55-9A-07 =c1 55-98 . . . . . None =c1 55-98.1 . . . . . 55-9A-09 =c1 55-99 . . . . . 55-10-01 =c1 55-100 . . . . . 55-10-02, 55-10-03, =c2 55-10-05 =c1 55-101 . . . . . 55-10-04 to 55-13-02 =c1 55-102 . . . . . None =c1 55-103 . . . . . 55-10-06 =c1 55-104 . . . . . 55-10-09 =c1 55-105 . . . . . 55-10-07 =c1 55-106 . . . . . 55-11-01 =c1 55-107 . . . . . None =c1 55-108 . . . . . 55-11-03, 55-13-20 =c1 55-108.1 . . . . . 55-11-03(g), 55-11-04 =c1 55-109 . . . . . 55-11-05 =c1 55-110 . . . . . 55-11-06 =c1 55-111 . . . . . 55-11-07 =c1 55-112 . . . . . 55-12-01, 55-12-02, =c2 55-13-02, =c2 55-13-20 =c1 55-113 . . . . . 55-13-1 to 55-13-3, =c2 55-13-20 to =c2 55-13-26, =c2 55-13-28, =c2 55-13-30, =c2 55-13-31 =c1 55-113.1 . . . . . 55-14A-01 =c1 55-114 . . . . . 55-14-05, 55-14-06, =c2 55-14-07, =c2 55-14-08 =c1 55-115 . . . . . None =c1 55-116 . . . . . 55-14-01 to 55-14-03 =c1 55-117 . . . . . None =c1 55-118 . . . . . 55-14-02, 55-14-03 =c1 55-119 . . . . . 55-14-05 to 55-14-07 =c1 55-119(c) . . . . . 55-13-02 =c1 55-120 . . . . . 55-14-04 =c1 55-121 . . . . . None =c1 55-122 . . . . . 55-14-30 =c1 55-123 . . . . . None =c1 55-124 . . . . . 55-14-31 =c1 55-125 . . . . . 55-14-30, 55-14-31, =c2 55-14-33 =c1 55-125.1 . . . . . 55-14-31 =c1 55-126 . . . . . 55-14-30 =c1 55-127 . . . . . 55-14-32 =c1 55-128 . . . . . None =c1 55-129 . . . . . 55-14-33 =c1 55-130 . . . . . 55-14-40 =c1 55-130.1 . . . . . 55-14-01 =c1 55-131 . . . . . 55-15-01 =c1 55-132 . . . . . 55-15-05 =c1 55-133 to 55-136 . . . . . None =c1 55-137 . . . . . 55-15-06 =c1 55-138 . . . . . 55-15-03 =c1 55-139 . . . . . 55-15-03 =c1 55-140 . . . . . 55-15-05 =c1 55-141 . . . . . 55-15-07 =c1 55-142 . . . . . 55-15-08 =c1 55-143 . . . . . 55-15-10 =c1 55-144 . . . . . 55-15-10 =c1 55-145 . . . . . None =c1 55-146 . . . . . 55-15-10 =c1 55-146.1 to 55-148 . . . . . None =c1 55-149 . . . . . 55-15-04 =c1 55-150 . . . . . 55-15-20 =c1 55-151 . . . . . 55-15-30, 55-15-31 =c1 55-152 . . . . . 55-15-31 =c1 55-153 . . . . . 55-17-02 =c1 55-154 . . . . . 55-15-02 =c1 55-155 . . . . . 55-1-22 =c1 55-156 . . . . . 55-1-22 =c1 55-157 to 55-163 . . . . . 55-17-05 =c1 55-164, 55-164.1 . . . . . None =c1 55-164.2 . . . . . 55-17-05 =c1 55-165 . . . . . 55-1-31 =c1 55-166 . . . . . 55-1-32 =c1 55-167 . . . . . 55-1-33 =c1 55-168 . . . . . 55-1-30 =c1 55-169 . . . . . 55-1-25(d), 55-1-27, =c2 55-1-28(c) =c1 55-170 . . . . . 55-1-21 =c1 55-171 . . . . . None =c1 55-172 . . . . . 55-7-06 to 55-8-23 =c1 55-173 . . . . . None =c1 55-174 . . . . . 55-1-02 =c1 55-175 . . . . . None =te

Present to Former =c1 55-60 . . . . . 55-7-07 =c1 55-61 . . . . . 55-7-01, 55-7-02, =c2 55-7-03 =c1 55-62 . . . . . 55-7-05 =c1 55-63 . . . . . 55-7-04 =c1 55-64 . . . . . 55-7-20 =c1 55-65 . . . . . 55-7-25 =c1 55-66 . . . . . 55-7-25, 55-7-27 =c1 55-67 . . . . . 55-7-21 =c1 55-67(c) . . . . . 55-7-28 =c1 55-68 . . . . . 55-7-22 =c1 55-69 . . . . . 55-7-24(b) =c1 55-70, 55-71 . . . . . None =c1 55-72 . . . . . 55-7-30 =c1 55-73 . . . . . 55-7-31 =c1 55-74 . . . . . None =c1 55-75 . . . . . 55-9-01 =c1 55-76 . . . . . 55-9-02 =c1 55-77 . . . . . 55-9-03 =c1 55-78 . . . . . 55-9-04 =c1 55-79 . . . . . 55-9-05 =c1 55-79.1 to 55-89 . . . . . None =c1 55-90 . . . . . 55-9A-01 =c1 55-91 . . . . . 55-9A-02 =c1 55-92 . . . . . 55-9A-03 =c1 55-93 . . . . . 55-9A-04 =c1 55-94 . . . . . 55-9A-05 =c1 55-95 . . . . . 55-9A-06 =c1 55-96 . . . . . None =c1 55-97 . . . . . 55-9A-07 =c1 55-98 . . . . . None =c1 55-98.1 . . . . . 55-9A-09 =c1 55-99 . . . . . 55-10-01 =c1 55-100 . . . . . 55-10-02, 55-10-03, =c2 55-10-05 =c1 55-101 . . . . . 55-10-04 to 55-13-02 =c1 55-102 . . . . . None =c1 55-103 . . . . . 55-10-06 =c1 55-104 . . . . . 55-10-09 =c1 55-105 . . . . . 55-10-07 =c1 55-106 . . . . . 55-11-01 =c1 55-107 . . . . . None =c1 55-108 . . . . . 55-11-03, 55-13-20 =c1 55-108.1 . . . . . 55-11-03(g), 55-11-04 =c1 55-109 . . . . . 55-11-05 =c1 55-110 . . . . . 55-11-06 =c1 55-111 . . . . . 55-11-07 =c1 55-112 . . . . . 55-12-01, 55-12-02, =c2 55-13-02, =c2 55-13-20 =c1 55-113 . . . . . 55-13-1 to 55-13-3, =c2 55-13-20 to =c2 55-13-26, =c2 55-13-28, =c2 55-13-30, =c2 55-13-31 =c1 55-113.1 . . . . . 55-14A-01 =c1 55-114 . . . . . 55-14-05, 55-14-06, =c2 55-14-07, =c2 55-14-08 =c1 55-115 . . . . . None =c1 55-116 . . . . . 55-14-01 to 55-14-03 =c1 55-117 . . . . . None =c1 55-118 . . . . . 55-14-02, 55-14-03 =c1 55-119 . . . . . 55-14-05 to 55-14-07 =c1 55-119(c) . . . . . 55-13-02 =c1 55-120 . . . . . 55-14-04 =c1 55-121 . . . . . None =c1 55-122 . . . . . 55-14-30 =c1 55-123 . . . . . None =c1 55-124 . . . . . 55-14-31 =c1 55-125 . . . . . 55-14-30, 55-14-31, =c2 55-14-33 =c1 55-125.1 . . . . . 55-14-31 =c1 55-126 . . . . . 55-14-30 =c1 55-127 . . . . . 55-14-32 =c1 55-128 . . . . . None =c1 55-129 . . . . . 55-14-33 =c1 55-130 . . . . . 55-14-40 =c1 55-130.1 . . . . . 55-14-01 =c1 55-131 . . . . . 55-15-01 =c1 55-132 . . . . . 55-15-05 =c1 55-133 to 55-136 . . . . . None =c1 55-137 . . . . . 55-15-06 =c1 55-138 . . . . . 55-15-03 =c1 55-139 . . . . . 55-15-03 =c1 55-140 . . . . . 55-15-05 =c1 55-141 . . . . . 55-15-07 =c1 55-142 . . . . . 55-15-08 =c1 55-143 . . . . . 55-15-10 =c1 55-144 . . . . . 55-15-10 =c1 55-145 . . . . . None =c1 55-146 . . . . . 55-15-10 =c1 55-146.1 to 55-148 . . . . . None =c1 55-149 . . . . . 55-15-04 =c1 55-150 . . . . . 55-15-20 =c1 55-151 . . . . . 55-15-30, 55-15-31 =c1 55-152 . . . . . 55-15-31 =c1 55-153 . . . . . 55-17-02 =c1 55-154 . . . . . 55-15-02 =c1 55-155 . . . . . 55-1-22 =c1 55-156 . . . . . 55-1-22 =c1 55-157 to 55-163 . . . . . 55-17-05 =c1 55-164, 55-164.1 . . . . . None =c1 55-164.2 . . . . . 55-17-05 =c1 55-165 . . . . . 55-1-31 =c1 55-166 . . . . . 55-1-32 =c1 55-167 . . . . . 55-1-33 =c1 55-168 . . . . . 55-1-30 =c1 55-169 . . . . . 55-1-25(d), 55-1-27, =c2 55-1-28(c) =c1 55-170 . . . . . 55-1-21 =c1 55-171 . . . . . None =c1 55-172 . . . . . 55-7-06 to 55-8-23 =c1 55-173 . . . . . None =c1 55-174 . . . . . 55-1-02 =c1 55-175 . . . . . None =te Present to Former =c1 55-108 . . . . . 55-11-03, 55-13-20 =c1 55-108.1 . . . . . 55-11-03(g), 55-11-04 =c1 55-109 . . . . . 55-11-05 =c1 55-110 . . . . . 55-11-06 =c1 55-111 . . . . . 55-11-07 =c1 55-112 . . . . . 55-12-01, 55-12-02, =c2 55-13-02, =c2 55-13-20 =c1 55-113 . . . . . 55-13-1 to 55-13-3, =c2 55-13-20 to =c2 55-13-26, =c2 55-13-28, =c2 55-13-30, =c2 55-13-31 =c1 55-113.1 . . . . . 55-14A-01 =c1 55-114 . . . . . 55-14-05, 55-14-06, =c2 55-14-07, =c2 55-14-08 =c1 55-115 . . . . . None =c1 55-116 . . . . . 55-14-01 to 55-14-03 =c1 55-117 . . . . . None =c1 55-118 . . . . . 55-14-02, 55-14-03 =c1 55-119 . . . . . 55-14-05 to 55-14-07 =c1 55-119(c) . . . . . 55-13-02 =c1 55-120 . . . . . 55-14-04 =c1 55-121 . . . . . None =c1 55-122 . . . . . 55-14-30 =c1 55-123 . . . . . None =c1 55-124 . . . . . 55-14-31 =c1 55-125 . . . . . 55-14-30, 55-14-31, =c2 55-14-33 =c1 55-125.1 . . . . . 55-14-31 =c1 55-126 . . . . . 55-14-30 =c1 55-127 . . . . . 55-14-32 =c1 55-128 . . . . . None =c1 55-129 . . . . . 55-14-33 =c1 55-130 . . . . . 55-14-40 =c1 55-130.1 . . . . . 55-14-01 =c1 55-131 . . . . . 55-15-01 =c1 55-132 . . . . . 55-15-05 =c1 55-133 to 55-136 . . . . . None =c1 55-137 . . . . . 55-15-06 =c1 55-138 . . . . . 55-15-03 =c1 55-139 . . . . . 55-15-03 =c1 55-140 . . . . . 55-15-05 =c1 55-141 . . . . . 55-15-07 =c1 55-142 . . . . . 55-15-08 =c1 55-143 . . . . . 55-15-10 =c1 55-144 . . . . . 55-15-10 =c1 55-145 . . . . . None =c1 55-146 . . . . . 55-15-10 =c1 55-146.1 to 55-148 . . . . . None =c1 55-149 . . . . . 55-15-04 =c1 55-150 . . . . . 55-15-20 =c1 55-151 . . . . . 55-15-30, 55-15-31 =c1 55-152 . . . . . 55-15-31 =c1 55-153 . . . . . 55-17-02 =c1 55-154 . . . . . 55-15-02 =c1 55-155 . . . . . 55-1-22 =c1 55-156 . . . . . 55-1-22 =c1 55-157 to 55-163 . . . . . 55-17-05 =c1 55-164, 55-164.1 . . . . . None =c1 55-164.2 . . . . . 55-17-05 =c1 55-165 . . . . . 55-1-31 =c1 55-166 . . . . . 55-1-32 =c1 55-167 . . . . . 55-1-33 =c1 55-168 . . . . . 55-1-30 =c1 55-169 . . . . . 55-1-25(d), 55-1-27, =c2 55-1-28(c) =c1 55-170 . . . . . 55-1-21 =c1 55-171 . . . . . None =c1 55-172 . . . . . 55-7-06 to 55-8-23 =c1 55-173 . . . . . None =c1 55-174 . . . . . 55-1-02 =c1 55-175 . . . . . None =te Present to Former =c1 55-139 . . . . . 55-15-03 =c1 55-140 . . . . . 55-15-05 =c1 55-141 . . . . . 55-15-07 =c1 55-142 . . . . . 55-15-08 =c1 55-143 . . . . . 55-15-10 =c1 55-144 . . . . . 55-15-10 =c1 55-145 . . . . . None =c1 55-146 . . . . . 55-15-10 =c1 55-146.1 to 55-148 . . . . . None =c1 55-149 . . . . . 55-15-04 =c1 55-150 . . . . . 55-15-20 =c1 55-151 . . . . . 55-15-30, 55-15-31 =c1 55-152 . . . . . 55-15-31 =c1 55-153 . . . . . 55-17-02 =c1 55-154 . . . . . 55-15-02 =c1 55-155 . . . . . 55-1-22 =c1 55-156 . . . . . 55-1-22 =c1 55-157 to 55-163 . . . . . 55-17-05 =c1 55-164, 55-164.1 . . . . . None =c1 55-164.2 . . . . . 55-17-05 =c1 55-165 . . . . . 55-1-31 =c1 55-166 . . . . . 55-1-32 =c1 55-167 . . . . . 55-1-33 =c1 55-168 . . . . . 55-1-30 =c1 55-169 . . . . . 55-1-25(d), 55-1-27, =c2 55-1-28(c) =c1 55-170 . . . . . 55-1-21 =c1 55-171 . . . . . None =c1 55-172 . . . . . 55-7-06 to 55-8-23 =c1 55-173 . . . . . None =c1 55-174 . . . . . 55-1-02 =c1 55-175 . . . . . None =te Present to Former

Editor’s Note. — The following table shows G.S. sections of current Chapter 55 and their comparable, former Chapter 55 sections numbers. Where there is no comparable, former Chapter 55 number, the term “None” has been inserted.

tablenum=“=table24” align=“left” =c1 55-6-02 . . . . . 55-42 =c1 55-6-03 . . . . . 55-40 =c1 55-6-04 . . . . . 55-58 =c1 55-6-20 . . . . . 55-43 =c1 55-6-21 . . . . . 55-40.1, =c2 55-46 =c1 55-6-22 . . . . . 55-53 =c1 55-6-23 . . . . . 55-51 =c1 55-6-24 . . . . . 55-44 =c1 55-6-25 . . . . . 55-57 =c1 55-6-26 to 55-6-28 . . . . . None =c1 55-6-30 . . . . . 55-56 =c1 55-6-31 . . . . . 55-52 =c1 55-6-40 . . . . . 55-50, =c2 55-52 =c1 55-6-40(d) . . . . . 55-32, =c2 55-49 =c1 55-7-01 to 55-7-03 . . . . . 55-61 =c1 55-7-04 . . . . . 55-63 =c1 55-7-05 . . . . . 55-62 =c1 55-7-06 . . . . . 55-172 =c1 55-7-07 . . . . . 55-60 =c1 55-7-20 . . . . . 55-64 =c1 55-7-21 . . . . . 55-67 =c1 55-7-21.1 . . . . . 55-44.1 =c1 55-7-22 . . . . . 55-68 =c1 55-7-23 . . . . . None =c1 55-7-24 . . . . . 55-59 =c1 55-7-24(b) . . . . . 55-69 =c1 55-7-25 . . . . . 55-65, =c2 55-66 =c1 55-7-26 . . . . . None =c1 55-7-27 . . . . . 55-16, =c2 55-66 =c1 55-7-28 . . . . . 55-67(c) =c1 55-7-30 . . . . . 55-72 =c1 55-7-31 . . . . . 55-73 =c1 55-7-40 . . . . . 55-55 =c1 55-8-01, 55-8-02 . . . . . 55-24 =c1 55-8-03 to 55-8-05 . . . . . 55-25 =c1 55-8-06 . . . . . 55-26 =c1 55-8-07 to 55-8-10 . . . . . 55-27 =c1 55-8-11 . . . . . 55-30 =c1 55-8-20 . . . . . 55-28 =c1 55-8-20(b) . . . . . 55-29(c) =c1 55-8-21 . . . . . 55-28, =c2 55-29 =c1 55-8-22 . . . . . 55-28(c) =c1 55-8-23 . . . . . 55-28, =c2 55-172 =c1 55-8-24 . . . . . 55-28(d) =c1 55-8-24(d) . . . . . 55-32(h) =c1 55-8-25 . . . . . 55-31 =c1 55-8-30 . . . . . 55-35 =c1 55-8-31 . . . . . 55-30(b) =c1 55-8-32 . . . . . 55-22 =c1 55-8-33 . . . . . 55-32 =c1 55-8-33(b)(2) . . . . . 55-54 =c1 55-8-40, 55-8-41 . . . . . 55-34 =c1 55-8-42 . . . . . 55-35 =c1 55-8-43(b) . . . . . 55-34(d) =c1 55-8-44(b) . . . . . 55-34(d) =c1 55-8-50, 55-8-51 . . . . . 55-20 =c1 55-8-52 . . . . . 55-20, =c2 55-21 =c1 55-8-53 . . . . . 55-19 =c1 55-8-54 . . . . . 55-20, =c2 55-21 =c1 55-8-55, 55-8-56 . . . . . 55-20 =c1 55-8-57 . . . . . 55-19 =c1 55-8-58 . . . . . None =c1 55-9-01 . . . . . 55-75 =c1 55-9-02 . . . . . 55-76 =c1 55-9-03 . . . . . 55-77 =c1 55-9-04 . . . . . 55-78 =c1 55-9-05 . . . . . 55-79 =c1 55-9A-01 . . . . . 55-90 =c1 55-9A-02 . . . . . 55-91 =c1 55-9A-03 . . . . . 55-92 =c1 55-9A-04 . . . . . 55-93 =c1 55-9A-05 . . . . . 55-94 =c1 55-9A-06 . . . . . 55-95 =c1 55-9A-07 . . . . . 55-97 =c1 55-9A-08 . . . . . None =c1 55-9A-09 . . . . . 55-98.1 =c1 55-10-01 . . . . . 55-99 =c1 55-10-02, 55-10-03 . . . . . 55-100 =c1 55-10-04 . . . . . 55-101 =c1 55-10-05 . . . . . 55-100 =c1 55-10-06 . . . . . 55-103 =c1 55-10-07 . . . . . 55-105 =c1 55-10-09 . . . . . 55-104 =c1 55-10-20 . . . . . 55-16(a) =c1 55-10-22 . . . . . 55-16 =c1 55-11-01 . . . . . 55-106 =c1 55-11-02 . . . . . None =c1 55-11-03 . . . . . 55-108 =c1 55-11-03(g) . . . . . 55-108.1 =c1 55-11-04 . . . . . 55-108.1 =c1 55-11-05 . . . . . 55-109 =c1 55-11-06 . . . . . 55-110 =c1 55-11-07 . . . . . 55-111 =c1 55-11-08 . . . . . None =c1 55-12-01, 55-12-02 . . . . . 55-112 =c1 55-12-03 . . . . . None =c1 55-13-01 . . . . . 55-113 =c1 55-13-02 . . . . . 55-101, =c2 55-112, 55-113, =c2 55-119 =c1 55-13-03 . . . . . 55-113 =c1 55-13-20 . . . . . 55-108, =c2 55-112, 55-113 =c1 55-13-21 to 55-13-26, =c1 55-13-28, 55-13-30, =c1 55-13-31 . . . . . 55-113 =c1 55-14-01 . . . . . 55-116, =c2 55-130.1 =c1 55-14-02 . . . . . 55-118 =c1 55-14-03 . . . . . 55-116, =c2 55-118 =c1 55-14-04 . . . . . 55-120 =c1 55-14-05 to =c1 55-14-07 . . . . . 55-114, =c2 55-119 =c1 55-14-08 . . . . . 55-54, =c2 55-114 =c1 55-14-20 to 55-14-24 . . . . . None =c1 55-14-30 . . . . . 55-122, =c2 55-125, 55-126 =c1 55-14-31 . . . . . 55-124 =c2 to 55-125.1 =c1 55-14-32 . . . . . 55-127 =c1 55-14-33 . . . . . 55-125, =c2 55-129 =c1 55-14-40 . . . . . 55-130 =c1 55-14A-01 . . . . . 55-113.1 =c1 55-15-01 . . . . . 55-131 =c1 55-15-02 . . . . . 55-154 =c1 55-15-03 . . . . . 55-138, =c2 55-139 =c1 55-15-04 . . . . . 55-149 =c1 55-15-05 . . . . . 55-132, =c2 55-140 =c1 55-15-06 . . . . . 55-137 =c1 55-15-07 . . . . . 55-141 =c1 55-15-08 . . . . . 55-142 =c1 55-15-09 . . . . . None =c1 55-15-10 . . . . . 55-143, =c2 55-144, 55-146 =c1 55-15-20 . . . . . 55-150 =c1 55-15-30 . . . . . 55-151 =c1 55-15-31 . . . . . 55-151, =c2 55-152 =c1 55-15-32, 55-15-33 . . . . . None =c1 55-16-01 . . . . . 55-37 =c1 55-16-01(d) . . . . . 55-37.1 =c1 55-16-02 . . . . . 55-37, =c2 55-38 =c1 55-16-03, 55-16-04 . . . . . 55-38 =c1 55-16-20 . . . . . 55-37, =c2 55-38 =c1 55-16-21, 55-16-22 . . . . . None =c1 55-17-01 . . . . . 55-3 =c1 55-17-02 . . . . . 55-153 =c1 55-17-03 . . . . . 55-3 =c1 55-17-04 . . . . . None =c1 55-17-05 . . . . . 55-36.1, =c2 55-157 to =c2 55-163, 55-164.2 =te =c1 55-8-01, 55-8-02 . . . . . 55-24 =c1 55-8-03 to 55-8-05 . . . . . 55-25 =c1 55-8-06 . . . . . 55-26 =c1 55-8-07 to 55-8-10 . . . . . 55-27 =c1 55-8-11 . . . . . 55-30 =c1 55-8-20 . . . . . 55-28 =c1 55-8-20(b) . . . . . 55-29(c) =c1 55-8-21 . . . . . 55-28, =c2 55-29 =c1 55-8-22 . . . . . 55-28(c) =c1 55-8-23 . . . . . 55-28, =c2 55-172 =c1 55-8-24 . . . . . 55-28(d) =c1 55-8-24(d) . . . . . 55-32(h) =c1 55-8-25 . . . . . 55-31 =c1 55-8-30 . . . . . 55-35 =c1 55-8-31 . . . . . 55-30(b) =c1 55-8-32 . . . . . 55-22 =c1 55-8-33 . . . . . 55-32 =c1 55-8-33(b)(2) . . . . . 55-54 =c1 55-8-40, 55-8-41 . . . . . 55-34 =c1 55-8-42 . . . . . 55-35 =c1 55-8-43(b) . . . . . 55-34(d) =c1 55-8-44(b) . . . . . 55-34(d) =c1 55-8-50, 55-8-51 . . . . . 55-20 =c1 55-8-52 . . . . . 55-20, =c2 55-21 =c1 55-8-53 . . . . . 55-19 =c1 55-8-54 . . . . . 55-20, =c2 55-21 =c1 55-8-55, 55-8-56 . . . . . 55-20 =c1 55-8-57 . . . . . 55-19 =c1 55-8-58 . . . . . None =c1 55-9-01 . . . . . 55-75 =c1 55-9-02 . . . . . 55-76 =c1 55-9-03 . . . . . 55-77 =c1 55-9-04 . . . . . 55-78 =c1 55-9-05 . . . . . 55-79 =c1 55-9A-01 . . . . . 55-90 =c1 55-9A-02 . . . . . 55-91 =c1 55-9A-03 . . . . . 55-92 =c1 55-9A-04 . . . . . 55-93 =c1 55-9A-05 . . . . . 55-94 =c1 55-9A-06 . . . . . 55-95 =c1 55-9A-07 . . . . . 55-97 =c1 55-9A-08 . . . . . None =c1 55-9A-09 . . . . . 55-98.1 =c1 55-10-01 . . . . . 55-99 =c1 55-10-02, 55-10-03 . . . . . 55-100 =c1 55-10-04 . . . . . 55-101 =c1 55-10-05 . . . . . 55-100 =c1 55-10-06 . . . . . 55-103 =c1 55-10-07 . . . . . 55-105 =c1 55-10-09 . . . . . 55-104 =c1 55-10-20 . . . . . 55-16(a) =c1 55-10-22 . . . . . 55-16 =c1 55-11-01 . . . . . 55-106 =c1 55-11-02 . . . . . None =c1 55-11-03 . . . . . 55-108 =c1 55-11-03(g) . . . . . 55-108.1 =c1 55-11-04 . . . . . 55-108.1 =c1 55-11-05 . . . . . 55-109 =c1 55-11-06 . . . . . 55-110 =c1 55-11-07 . . . . . 55-111 =c1 55-11-08 . . . . . None =c1 55-12-01, 55-12-02 . . . . . 55-112 =c1 55-12-03 . . . . . None =c1 55-13-01 . . . . . 55-113 =c1 55-13-02 . . . . . 55-101, =c2 55-112, 55-113, =c2 55-119 =c1 55-13-03 . . . . . 55-113 =c1 55-13-20 . . . . . 55-108, =c2 55-112, 55-113 =c1 55-13-21 to 55-13-26, =c1 55-13-28, 55-13-30, =c1 55-13-31 . . . . . 55-113 =c1 55-14-01 . . . . . 55-116, =c2 55-130.1 =c1 55-14-02 . . . . . 55-118 =c1 55-14-03 . . . . . 55-116, =c2 55-118 =c1 55-14-04 . . . . . 55-120 =c1 55-14-05 to =c1 55-14-07 . . . . . 55-114, =c2 55-119 =c1 55-14-08 . . . . . 55-54, =c2 55-114 =c1 55-14-20 to 55-14-24 . . . . . None =c1 55-14-30 . . . . . 55-122, =c2 55-125, 55-126 =c1 55-14-31 . . . . . 55-124 =c2 to 55-125.1 =c1 55-14-32 . . . . . 55-127 =c1 55-14-33 . . . . . 55-125, =c2 55-129 =c1 55-14-40 . . . . . 55-130 =c1 55-14A-01 . . . . . 55-113.1 =c1 55-15-01 . . . . . 55-131 =c1 55-15-02 . . . . . 55-154 =c1 55-15-03 . . . . . 55-138, =c2 55-139 =c1 55-15-04 . . . . . 55-149 =c1 55-15-05 . . . . . 55-132, =c2 55-140 =c1 55-15-06 . . . . . 55-137 =c1 55-15-07 . . . . . 55-141 =c1 55-15-08 . . . . . 55-142 =c1 55-15-09 . . . . . None =c1 55-15-10 . . . . . 55-143, =c2 55-144, 55-146 =c1 55-15-20 . . . . . 55-150 =c1 55-15-30 . . . . . 55-151 =c1 55-15-31 . . . . . 55-151, =c2 55-152 =c1 55-15-32, 55-15-33 . . . . . None =c1 55-16-01 . . . . . 55-37 =c1 55-16-01(d) . . . . . 55-37.1 =c1 55-16-02 . . . . . 55-37, =c2 55-38 =c1 55-16-03, 55-16-04 . . . . . 55-38 =c1 55-16-20 . . . . . 55-37, =c2 55-38 =c1 55-16-21, 55-16-22 . . . . . None =c1 55-17-01 . . . . . 55-3 =c1 55-17-02 . . . . . 55-153 =c1 55-17-03 . . . . . 55-3 =c1 55-17-04 . . . . . None =c1 55-17-05 . . . . . 55-36.1, =c2 55-157 to =c2 55-163, 55-164.2 =te =c1 55-10-01 . . . . . 55-99 =c1 55-10-02, 55-10-03 . . . . . 55-100 =c1 55-10-04 . . . . . 55-101 =c1 55-10-05 . . . . . 55-100 =c1 55-10-06 . . . . . 55-103 =c1 55-10-07 . . . . . 55-105 =c1 55-10-09 . . . . . 55-104 =c1 55-10-20 . . . . . 55-16(a) =c1 55-10-22 . . . . . 55-16 =c1 55-11-01 . . . . . 55-106 =c1 55-11-02 . . . . . None =c1 55-11-03 . . . . . 55-108 =c1 55-11-03(g) . . . . . 55-108.1 =c1 55-11-04 . . . . . 55-108.1 =c1 55-11-05 . . . . . 55-109 =c1 55-11-06 . . . . . 55-110 =c1 55-11-07 . . . . . 55-111 =c1 55-11-08 . . . . . None =c1 55-12-01, 55-12-02 . . . . . 55-112 =c1 55-12-03 . . . . . None =c1 55-13-01 . . . . . 55-113 =c1 55-13-02 . . . . . 55-101, =c2 55-112, 55-113, =c2 55-119 =c1 55-13-03 . . . . . 55-113 =c1 55-13-20 . . . . . 55-108, =c2 55-112, 55-113 =c1 55-13-21 to 55-13-26, =c1 55-13-28, 55-13-30, =c1 55-13-31 . . . . . 55-113 =c1 55-14-01 . . . . . 55-116, =c2 55-130.1 =c1 55-14-02 . . . . . 55-118 =c1 55-14-03 . . . . . 55-116, =c2 55-118 =c1 55-14-04 . . . . . 55-120 =c1 55-14-05 to =c1 55-14-07 . . . . . 55-114, =c2 55-119 =c1 55-14-08 . . . . . 55-54, =c2 55-114 =c1 55-14-20 to 55-14-24 . . . . . None =c1 55-14-30 . . . . . 55-122, =c2 55-125, 55-126 =c1 55-14-31 . . . . . 55-124 =c2 to 55-125.1 =c1 55-14-32 . . . . . 55-127 =c1 55-14-33 . . . . . 55-125, =c2 55-129 =c1 55-14-40 . . . . . 55-130 =c1 55-14A-01 . . . . . 55-113.1 =c1 55-15-01 . . . . . 55-131 =c1 55-15-02 . . . . . 55-154 =c1 55-15-03 . . . . . 55-138, =c2 55-139 =c1 55-15-04 . . . . . 55-149 =c1 55-15-05 . . . . . 55-132, =c2 55-140 =c1 55-15-06 . . . . . 55-137 =c1 55-15-07 . . . . . 55-141 =c1 55-15-08 . . . . . 55-142 =c1 55-15-09 . . . . . None =c1 55-15-10 . . . . . 55-143, =c2 55-144, 55-146 =c1 55-15-20 . . . . . 55-150 =c1 55-15-30 . . . . . 55-151 =c1 55-15-31 . . . . . 55-151, =c2 55-152 =c1 55-15-32, 55-15-33 . . . . . None =c1 55-16-01 . . . . . 55-37 =c1 55-16-01(d) . . . . . 55-37.1 =c1 55-16-02 . . . . . 55-37, =c2 55-38 =c1 55-16-03, 55-16-04 . . . . . 55-38 =c1 55-16-20 . . . . . 55-37, =c2 55-38 =c1 55-16-21, 55-16-22 . . . . . None =c1 55-17-01 . . . . . 55-3 =c1 55-17-02 . . . . . 55-153 =c1 55-17-03 . . . . . 55-3 =c1 55-17-04 . . . . . None =c1 55-17-05 . . . . . 55-36.1, =c2 55-157 to =c2 55-163, 55-164.2 =te =c1 55-14A-01 . . . . . 55-113.1 =c1 55-15-01 . . . . . 55-131 =c1 55-15-02 . . . . . 55-154 =c1 55-15-03 . . . . . 55-138, =c2 55-139 =c1 55-15-04 . . . . . 55-149 =c1 55-15-05 . . . . . 55-132, =c2 55-140 =c1 55-15-06 . . . . . 55-137 =c1 55-15-07 . . . . . 55-141 =c1 55-15-08 . . . . . 55-142 =c1 55-15-09 . . . . . None =c1 55-15-10 . . . . . 55-143, =c2 55-144, 55-146 =c1 55-15-20 . . . . . 55-150 =c1 55-15-30 . . . . . 55-151 =c1 55-15-31 . . . . . 55-151, =c2 55-152 =c1 55-15-32, 55-15-33 . . . . . None =c1 55-16-01 . . . . . 55-37 =c1 55-16-01(d) . . . . . 55-37.1 =c1 55-16-02 . . . . . 55-37, =c2 55-38 =c1 55-16-03, 55-16-04 . . . . . 55-38 =c1 55-16-20 . . . . . 55-37, =c2 55-38 =c1 55-16-21, 55-16-22 . . . . . None =c1 55-17-01 . . . . . 55-3 =c1 55-17-02 . . . . . 55-153 =c1 55-17-03 . . . . . 55-3 =c1 55-17-04 . . . . . None =c1 55-17-05 . . . . . 55-36.1, =c2 55-157 to =c2 55-163, 55-164.2 =te