Amendments to the North Carolina Business Corporation Act | What You Need to Know

I.  INTRODUCTION

The North Carolina General Assembly recently approved a number of significant changes to the North Carolina Business Corporation Act (“NCBCA”) which the governor signed into law on June 19, 2013. [1]  The NCBCA, codified in Chapter 55 of the North Carolina General Statutes, is based upon the Model Business Corporation Act (“Model Act”), and the 2013 amendments are intended to update the NCBCA based on changes made to the Model Act. These changes generally clarify existing North Carolina law and conform sections of the NCBCA to the Model Act. This Client Alert describes the NCBCA changes which take effect on January 1, 2014.

II.  CHANGES TO THE NORTH CAROLINA BUSINESS CORPORATION ACT

A.      Delegation of Authority to Officers to Award Equity Compensation

          Because of an unintended ambiguity introduced by amendments adopted to the NCBCA in 2005 and in order to conform North Carolina law to the Model Act, the General Assembly has amended the NCBCA to restore language to the NCBCA clarifying that a board of directors may delegate to officers the authority to make various equity compensation awards, as well as to issue stock rights, non-qualified stock options, warrants and shares, all within limits prescribed by the board.

B.      Safe Harbor for Sale of Less Than "Substantially All" Assets

          In 1999, Section 12.02 of the Model Act was amended to establish a bright-line safe-harbor, which focuses on the business retained by the corporation in determining whether a sale was of all or substantially all of the assets. The changes to the NCBCA adopt the substance of the Model Act’s bright-line test—a sale in which the corporation retains a continuing business that accounts for at least 25% of total assets and at least 25% of either income from continuing operations before taxes or revenues from continuing operations is conclusively deemed to be a sale of less than “all or substantially all” of the assets and therefore would not require shareholder approval. [2]

C.      Permitting Force-the-Vote Provisions

          Force-the-vote provisions obligate a board of directors to submit a matter for shareholder approval even if the board later no longer believes the matter is in the best interests of the shareholders. Force-the-vote provisions have become relatively common in public company merger transactions involving North Carolina corporations. Because the NCBCA does not currently expressly authorize force-the-vote provisions, recent merger agreements have required that if a third party made a superior proposal for the merger target, then the target’s board would determine that the NCBCA “special circumstances” exception in Section 55-11-03(b)(1) of the NCBCA was triggered. In operation, that provision requires the board to determine that because of the special circumstances “it should make no recommendation” and then “must communicate the basis for its lack of recommendation to the shareholders.” There was some concern among corporate lawyers that a court might refuse to enforce a force-the-vote provision in a merger agreement since it arguably required the board to make no recommendation at all—which could be viewed as a significant restriction on the board’s ability to honor its duty of candor to the shareholders. Like the Model Act, the 2013 amendments to the NCBCA expressly authorize force-the-vote provisions and delete the language suggesting that the board “should make no recommendation.” Accordingly, the amendments authorizing force-the-vote provisions will provide the target’s shareholders the opportunity to give an up or down vote on a proposed transaction with full benefit of the target’s board recommendation that it no longer considers the transaction advisable. [3]

D.      Shareholders Meetings by Electronic Remote Communication

          Although the NCBCA previously allowed shareholders, to the extent authorized by the board of directors, to attend meetings by electronic means, amendments to the Model Act contain additional features and provide more comprehensive guidance. Therefore, the General Assembly has amended the NCBCA in a way that retains all of the essential features of current law authorizing electronic shareholder participation and, in addition: (i) allows the board of directors to limit participation by remote communication to certain classes or series of shareholders, and (ii) imposes an obligation on the corporation to implement reasonable measures to (A) verify that each person participating via remote communication is a shareholder and (B) provide shareholders a reasonable opportunity to participate in the meeting via remote communication and to vote on matters submitted to the shareholders. These procedural requirements are intended to approximate as much as possible shareholder participation in person or by proxy, including interacting with management during the meeting, but the NCBCA does not require that every shareholder be able to participate and interact, nor are the procedural requirements intended to expand the rights of shareholders to participate in meetings or otherwise alter the ability of the board of directors or the chair to conduct meetings in a manner that is fair and orderly. [4]

          Additionally, the General Assembly amended the NCBCA to provide that if the board of directors authorizes participation by remote communication for any class or series of shareholders, the notice of shareholder meeting to such class or series of shareholders must describe the means of remote communication to be used. Under the new statute, corporations must still hold shareholder meetings at a physical location. The amended statute permits the board of directors to limit participation by means of remote communication to all shareholders 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.

E.      Short-Form Mergers Among 90% Owned Subsidiaries

          Under the NCBCA, 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 and subsidiary corporations 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 is commonly referred to as a “short-form” merger. The General Assembly has amended the NCBCA to provide a short-form process for mergers between two 90% or more owned subsidiaries (sister corporations), with the only required approval being that of the board of directors of the common parent corporation. [5]

III.  CONCLUSION

While the amendments do not take effect until January 1, 2014, we recommend that North Carolina corporations and shareholders understand their impact as the changes will expand corporate tools for engaging in transactions and clarify certain responsibilities and rights of boards of directors and shareholders. Additionally, corporations may wish to consult their legal advisers regarding whether any portion of the legislation should be taken into account by the corporation now even though not yet effective.

[1]  2013 N.C. Sess. Laws 2013-153 (http://www.ncleg.net/Sessions/2013/Bills/Senate/PDF/S239v5.pdf)

[2]  Even if an asset sale fails one or both of the two prongs of the safe harbor rule, as under current law, it is possible that the transaction nevertheless would be considered a sale of less than substantially all of the company’s assets based upon an evaluation of the specific qualitative and quantitative facts and circumstances of the transaction.

[3]  While force-the-vote provisions are most commonly encountered in mergers, the amended statute also permits force-the-vote provisions in transactions involving amendments to the articles of incorporation, conversion, share exchange, sale of substantially all assets and dissolution.

[4]  For example, many corporations limit or cut-off shareholder comments and, if such practice is fair to shareholders, such practice is permitted under the amended statute.

[5]  Such a transaction could only be accomplished under the short-form procedures under North Carolina law prior to the 2013 amendments by interposing a shell holding company between the parent and the subsidiaries, with the shell holding company then directly owning at least 90% of the outstanding shares of the subsidiaries, and then completing separate short-form mergers of each of those subsidiaries with the intermediate shell holding company.