June 29, 2013

A Summary of Upcoming Changes to North Carolina's Corporate Law

©  Matthew A. Cordell
North Carolina's corporate statute has recently been amended to provide for more efficient ways of structuring transactions and to provide greater clarity on formerly ambiguous points. 

North Carolina's Business Corporation Act is based upon model legislation created by the American Bar Association (ABA), known as the "Model Act."  Manyor even moststates use the Model Act as the basis for their corporate statutes, with each state making deviations from the Model Act as it sees fit.  The Model Act is revised from time to time based upon the consensus of corporate law experts around the country who participate in the ABA.  Leaders of the Business Law Section of the North Carolina Bar Association periodically review the ABA's changes to the Model Act and make recommendations as to whether North Carolina's corporate statute should be amended as well.  Based upon the careful review and recommendation of the Business Law Section leaders, the North Carolina General Assembly has approved, and the Governor has signed in to law, certain improvements to North Carolina's Business Corporation Act. 

Below is a brief summary of those provisions:

·         The first two sections of the legislation modify Article 6 of the current Business Corporation Act to clarify the authority of a board of directors to delegate to officers the authority to issue equity in the company. The board can, of course, prescribe any limitation the officers' authority that it chooses.

·         The next four sections of the legislation clarify the ways in which shareholders meetings can be conducted using newer technology (remote electronic communication). (North Carolina's corporate statutes had been amended in 2001 to allow remote electronic participation in shareholder meetings, but recent changes to the ABA's Model Act provided more complete provisions that are helpful for North Carolina corporations.)
·         The legislation also makes clear that “force-the-vote” provisions are valid and effective. Generally, a board of directors must make a voting recommendation to shareholders before a matter is put to a shareholder vote. However, the newly-enacted provisions make it clear that, if an agreement for a transaction that requires shareholder approval (such as a merger agreement) obligates the board of directors to submit the matter for shareholder approval, the board may do so even if the board later determines that it can no longer recommend that shareholders approve the transaction.
·         The legislation creates a safe harbor enabling corporations to know with certainty that certain sales of assets do not require shareholder approval. Generally, shareholder approval is required for sales of “all or substantially all” of the assets of the corporation outside the ordinary course of business. The term “substantially all” is not defined in the current statute, and therefore corporations and their lawyers are sometimes uncertain whether shareholder approval is mandatory prior to a substantial sale. The revisions attempt to alleviate that uncertainty by providing that a sale will not require shareholder approval if 25% of the business is retained. The test is whether, following the sale, the corporation will retain a continuing business activity that represents 25% of the total assets (as of the most recent FYE) and at least 25% of either (i) income from continuing operations before taxes or (ii) revenues from continuing operations, on a consolidated basis.
·         Finally, the changes would allow sister subsidiaries (corporations that are 90% owned by a common parent corporation) to merge with each other using a “short-form” process. That process would only require the approval of the board of the parent corporation, making it quick and efficient.

The changes become effective on January 1, 2014.  You can read about Senate Bill 239, enacted as Session Law 2013-153, in greater detail here.

The members of the North Carolina Bar Association's Business Law Section who worked on these improvements are to be commended for volunteering their time for this effort.

June 28, 2013

Changes to the Jurisdiction of North Carolina Courts

The dollar amount thresholds that form part of the jurisdictional boundaries of North Carolina's courts (small claims court, district court, and superior court) are changing.

Senate Bill 452, enacted as Session Law 2013-159, increases the thresholds at each level. 

I have been quoted in Triangle Business Journal and in the NC Insider on this development.  You can read about it in those publications.











Advice for Young Lawyers on Email Ethics

Can a lawyer copy another lawyer's client on an email message?  I addressed this question in a column published by the North Carolina Bar Association in The Advocate (the official publication of the Association's now 5,241 young lawyers) on June 28, 2013:

Ask Atticus (An Advice Column for Young Lawyers)

When Sending an E-Mail Message to Opposing Counsel, May I Copy An Opposing Party?

By Matthew A. Cordell

Dear Atticus,
I am negotiating the terms of an agreement on behalf of a client, and the other party’s lawyer routinely copies her client and mine on her e-mail messages. Is this permitted? May I use the “Reply All” function to copy her client on my responses? 

Regards, 
Conflicted in Charlotte

June 24, 2013

North Carolina Has a New Limited Liability Company (LLC) Statute


Photo credit: nickwheeleroz / Foter.com / CC BY-NC-SA
Last week Governor McCrory signed a new limited liability company (LLC) statute passed by the North Carolina General Assembly.  Chapter 57C of the General Statutes, which formerly governed LLCs, was replaced by a new Chapter 57D

The intent of the statute is now made explicit:  "The purpose of this Chapter is to provide a flexible framework under which one or more persons may organize and manage one or more businesses as they determine to be appropriate with minimum prescribed formalities or constraints.   It is the policy of this Chapter to give the maximum effect to the principle of freedom of contract and the enforceability of operating agreements." 

Changes include the following:
  • Rights and duties of parties under the LLC Act can be modified or waived by an agreement.
  • Members' rights to access certain company information are spelled out in the statute, as are limitations.
  • The statute expressly allows for the appointment of "officials" besides Managers (e.g., President), and the officials need not also be Managers.
  • Provisions regarding contributions and distributions have been simplified.
  • The statute makes explicit the possibility of a distinction between a purely economic interest in an LLC and a Membership interest (which confers authority).
  • Oral amendments to an operating agreement will not be enforceable if the operating agreement requires that amendments be in writing.
  • Oral agreements between parties to an operating agreement would not affect any inconsistent written provision in the operating agreement to the detriment of non-parties to the operating agreement that relied on the written operating agreement.
  • In the event of a conflict between the operating agreement and the articles of organization, the operating agreement would prevail as to parties to the operating agreement and company officials, and the articles of organization would prevail as to anyone else who reasonably relied on the filed document.
  • Provisions relating to low-profit LLCs were deemed unnecessary and deleted.
  • Specific items governing out-of-state LLCs were made consistent with the treatement of out-of-state corporations under the Business Corporation Act.
  • LLC ownership interests are exempted from provisions of Article 9 of the Uniform Commercial Code that could adversely affect the interest of other members.
(The list is not exhaustive.)  The new statute becomes effective on January 1, 2014, and will apply to existing LLCs.  You can read the full text here.
 
 


June 20, 2013

An Update on Disparate Impact and the Fair Housing Act

I've previously written about the use of "disparate impact theory" by the Department of Housing and Urban Development (HUD) under the Fair Housing Act.  This week, the United States Supreme Court has consented to hear the case of Mount Holly, N.J. v. Mt. Holly Gardens Citizens in Action, Inc. regarding whether disparate impact claims are enforceable under the Fair Housing Act. 

By way of reminder, a simplistic way of explaining disparate impact theory is as follows:  Disparate impact theory is a legal argument that allows the government (or a plaintiff) to show discrimination based on differing outcomes for different classes of people, regardless of whether the methods used were themselves discriminatory.  In other words, if the results affect protected classes of people differently, discrimination can be presumed.  No proof of intent to discriminate is required.  Disparate impact theory is controversial because it could allow the government to punish people (or plaintiffs to hold them liable) for discrimination even when those people had no intent to discriminate.

The Court’s decision will be closely watched, because it could affect a number of other disparate impact cases currently in progress as well as the approach of various agencies,  For example, the Consumer Financial Protection Bureau (CFPB) has asserted that disparate impact theory can be used to demonstrate a violation of the Equal Credit Opportunity Act (ECOA) and Reg. B (which applies to lending broadly--not merely mortgage lending).   It is possible that the Supreme Court’s decision could reach beyond the Fair Housing Act and could affect the validity of the CFPB's position on the ECOA.

You can read the briefs filed and follow the case here. (Note that the Court's consent to hear the arguments--called a "writ of certiorari"--is limited to Question 1.)

June 16, 2013

What Do Small Businesses Want From Their Banks?

Recent survey results indicate that community banks, long proud of their high customer satisfaction rates, may be losing the edge on larger institutions.  However, there appear to be opportunities for banks of all sizes to significantly improve customer satisfaction.

An Aite Group study entitled ‘Community Banks: Maximizing the Small Business Opportunity’ indicated one-third of community banks' (defined as less than $5 billion in assets) small business customers (defined as less than $10 million in revenue) were "extremely satisfied" with their bank. (2011)  Only 17% of the biggest four banks' small business customers gave the same response--a significant difference.  However, "super regional" banks (<$50B) had the exact same percentage of "extremely satisfied" customers as community banks, indicating super regional banks are doing as well as community banks in pleasing small business customers. 

Greenwich Associates has published results of a survey of small- and mid-sized companies entitled ‘Businesses Seek the Human Touch from Their Banks’ indicating the importance of relationship managers to community banks.  Seventy percent of small businesses and 84% of mid-sized companies interact with their banks most frequently via the Internet. However, both small- and mid-sized businesses cite their relationship manager as the most important point of contact with their bank--more important than online banking by a wide margin.  The importance of relationship managers has increased among both categories of customers since a similar survey was conducted in 2009.  Greenwich has explained it as follows: “Before the start of the crisis, it was easy for companies to put their bank relationships on auto-pilot, with direct interactions initiated by companies mainly in connection with important events like loan applications, and with banks reaching out mainly in connection with new product sales. Today, companies need help solving broader business problems, and our data shows that they have stepped up interactions with bank relationship managers as part of that effort.”  However, only a third of small businesses, and a minority of mid-sized businesses, report their banks have provided needed advice on how to manage cash flow.

The results of the J.D Power & Associates 2013 U.S. Retail Banking Satisfaction Study shows that overall customer satisfaction with banks has improved significantly in the past year, though the gains are largely attributable to improvements made by big banks.
Customer satisfaction in 2013...has increased by 10 index points from 2012. The largest increase in satisfaction is in the big banks segment, which has improved in 2013 by 16 points from 2012.... While as a group big banks have historically trailed smaller banks in satisfying customers by a fair margin, the satisfaction gap between big banks vs. midsize...and regional...banks has narrowed year over year.
Another survey by J.D Power & Associates, the U.S. Small Business Banking Satisfaction Study, finds that while overall satisfaction among small business customers has increased, the level of satisfaction continues to trail that among consumers.  One bright spot is the fact that strong relationships with a primary point of contact can make a big difference:
[S]atisfaction is much higher among small business banking customers who have an account manager who they perceive "completely" understands their business than among those with an account manager who they perceive only "partially" or does "not at all" understand their business.... Among customers who have an account manager who "completely" understands their business, 47% say they "definitely will" continue to use that bank and 53% say they "definitely will not" switch banks. In comparison, among customers who say their account manager does not "completely" understand their business or who are not assigned an account manager, 19% say they "definitely will" remain with the same bank and 25% "definitely will not" switch.

Bank of America commissioned a small business survey, conducted by Braun Research in 2013, which found that only 40% of small business owners see their bankers as a source of financial advice.  Accountants, other owners, family, and financial advisors were more likely to be sought for financial advice than bankers.  (Bankers beat lawyers by just 4%, which is striking given that lawyers typically charge for such advice and bankers typically provide it for no additional fee.)  

Photo credit: Office Now / Foter.com / CC BY
The basic lesson is this: One key way in which banks of all sizes can distinguish themselves from their competitors is to add value by providing their small business customers access to the (often considerable) business experience of individual commercial bankers.  This can be as simple as encouraging borrowers to use their banker as a sounding board for the borrower's business ideas or as robust as helping a borrower plan for efficient cash flow.

Of course, bankers must be careful not to hold themselves out as business consultants or provide any assurances to borrowers, as this can result in lender liability. (But that's another post!)  








Credit: My interest in this topic was piqued by Serge Milman, the Principal Partner of San Francisco, CA based SFO Consultants which provides consulting services to financial institutions.  He has commented on this topic in his blog Optirate.



June 12, 2013

How to Appeal an OCC Decision: The (New) Basics

Photo credit: MBisanz
The Office of the Comptroller of the Currency (OCC), the primary regulator of federally-chartered banks, has issued a bulletin summarizing the revised process for appealing an OCC decision or action.  

A national bank may appeal the following OCC supervisory decisions or actions:
  • Examination ratings.
  • Adequacy of the allowance for loan and lease loss methodology.
  • Individual loan ratings.
  • Violations of law.
  • Shared National Credit (SNC) decisions.
  • Fair-lending-related decisions.
  • Licensing decisions.
  • Material supervisory determinations such as matters requiring attention, compliance with enforcement actions, or other conclusions in the report of examination (ROE).  (However, an appeal of ROE conclusions is limited to whether the examiners correctly applied established policies and standards.
The list is not exhaustive.  In contrast, the guidance asserts that a national bank may not appeal the following matters:
  • Appointment of a receiver (FDIC).
  • Preliminary examination conclusions communicated to the bank before a final ROE.
  • Any formal enforcement-related decisions, including decisions to seek the issuance of a formal agreement or a cease-and-desist order; the assessment of a civil money penalty; take prompt corrective action; a safety and soundness order; or formal investigations.
  • Formal and informal rulemakings.
  • Requests for OCC records under the Freedom of Information Act.
Informal appeals are directed to the bank's supervisory office.  Formal appeals are directed to the Ombudsman or the Deputy Controller.  The bulletin describes the appeals process in general terms.  Of course, the guidance does not limit the matters that a federal court can consider; it applies only to the agency's appeals process.

For more information, you can read the entire bulletin here.

June 11, 2013

Understanding Section 1071 of the Dodd-Frank Act and "The Right to Lend Act"

Congressman Robert Pittenger (NC-9th) is introducing a bill this evening entitled "The Right to Lend Act" which is designed to repeal a portion of the Dodd-Frank Act that will require lenders to collect and report information on the race and sex of the owners of business loan applicants. 


Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act and requires a lender to ask a commercial loan applicant for the "race, sex, and ethnicity of the principal owners of the business."  Loan officers cannot ask these questions; the information must be collected by someone who has no lending authority.  The record must also include the specific census tract in which the principal office of the applicant is located, among other things. This information must be segregated from the credit application itself, and must be shielded from access by anyone within the lending organization who has lending authority over the application.  The information will be reported annually to the Consumer Financial Protection Bureau (CFPB), and will be "made available to any member of the public, upon request."  

The CFPB is required to publish regulations implementing the provision (which will be included in the existing "Regulation B"), and it has conceded that Section 1071 will not be enforced until the regulations have been finalized.  In a January 8, 2013 publication, the CFPB indicated the expected date of a proposed rule was "To Be Determined."  Accordingly, a proposal does not seem to be imminent.

Congressman Pittenger is concerned about the regulatory compliance burden Section 1071 will impose on the already straining community banking sector  According to Congressman Pittenger,  "These provisions...duplicate existing protections already covered in the Fair Lending Act and create an unnecessary burden for small businesses.  Banks should make loans based on credit worthiness, not based on the need to check off a box for a Washington bureaucrat.” 

June 7, 2013

15th and 16th Bank Seizures of 2013; FDIC Invokes Rarely-Used Powers

The FDIC announced today that it took over two depository institutions: Mountain National Bank in Sevierville, Tennessee (near Gatlinburg and Pigeon Forge) and 1st Commerce Bank of North Las Vegas, Nevada (yet another failed subsidiary of Capitol Bancorp, Ltd. of Lansing, Michigan).

Photo credit: kenyee / Foter.com / CC BY-NC

The assets and liabilities of Mountain National Bank were transferred to First Tennessee Bank, at an estimated cost to the Deposit Insurance Fund of  $33.5 million.  The deposits and all assets of 1st Commerce Bank were taken by Plaza Bank of Irvine, California.  As of the end of the first quarter, 1st Commerce Bank had approximately $20.2 million in assets and $19.6 million in deposits. The FDIC estimates that cost to the Deposit Insurance Fund from 1st Commerce's failure will be $9.4 million.

Ordinarily, faltering financial institutions are seized by their chartering authority (such as a state banking agency or the Office of the Comptroller of the Currency), which then transfers the assets and liabilities to the FDIC as Receiver.  In the case of 1st Commerce Bank, the FDIC exercised its self-appointment powers granted by Congress through the FDIC Improvement Act of 1991. The FDIC has invoked the power only four times (including this instance).

In this case, the Nevada Financial Institutions Division's attempt to shutter the bank had been stalled by a temporary restraining order obtained by the bank in Clark County District Court in Nevada that had been in place since May 10, 2013.

Congress had conferred upon the FDIC the power to seize an insured depository institution even without the consent of the chartering authority out of fear that the state regulators might be slow to act when the FDIC needed to respond quickly to protect the Deposit Insurance Fund.  In this case, the state regulator's delay was directly attributable to a state court order.




June 6, 2013

Clarifying the Community Lending Enhancement and Regulatory Relief ("CLEAR") Act



kozumel / Foter.com / CC BY-ND
The Community Lending Enhancement and Regulatory Relief Act (CLEAR Act) is a bill introduced by Representative Blaine Luetkemeyer of Missouri designed to relieve regulatory burdens on community banks.
 
The bill was introduced on April 25, 2013 with 14 cosponsors, which include North Carolina's own Walter B. Jones.  
 
Based on my reading of the CLEAR Act, it is intended to:  
  • better enable holding companies with less than $5 billion is assets to pay a corporate dividend;
  • exempt institutions with less than $10 billion in assets from the escrow requirements of Section 129D(c) of TILA;
  • expand the Qualified Mortgage safe harbor for institutions with less than $10 billion in assets,
  • exempt institutions that have not changed their privacy practices from annual privacy notice delivery requirements,
  • require a cost-benefit analysis before any new accounting principle or change in accounting principles;
  • exempt depository institutions with less than $10 billion in assets from the Sarbanes-Oxley Act’s  requirement that management provide an attestation regarding internal controls. (It is not clear that holding companies would be affected.)
  • direct the CFPB to create exemptions from the mortgage servicing regulations for institutions that service 20,000 or fewer mortgage loans; and
  • ease OFAC compliance concerns in ACH transactions.
You can read the full CLEAR Act here

Since it was first introduced on April 25, the CLEAR Act has been before the House Financial Services Committee. 

 

Don't Miss It! Jim Creekman Will Facilitate Discussion with Panel of Regulators at NCBA Annual Convention


I am eagerly anticipating a great discussion with the regulator panel moderated by my colleague Jim Creekman on Tuesday at the North Carolina Bankers Association's Annual Convention. 

Jim will be quizzing representatives from the OCC, Federal Reserve Bank of Richmond, FDIC, NCCOB and CFPB on a variety of hot topics.  The panel will include the following:
  - Tony Bland, Deputy Comptroller for the Northeastern District, Office of the Comptroller of the Currency (New York, NY)

- Jennifer Burns, Senior Vice President, Federal Reserve Bank of Richmond (Virginia)

- Jim Carley, Southeast Regional Director of the Consumer Financial Protection Bureau (Washington D.C.)
- Tom Dujenski, Regional Director of the Federal Deposit Insurance Corporation (Atlanta, GA)
- Ray Grace, North Carolina Commissioner of Banks

The 90-minute panel session should be informative and engaging.  You will not want to miss it if you have the opportunity to attend the Annual Convention.  More information regarding the Annual Convention can be found here.


Ray Grace Confirmed as NC Banking Commissioner

Photo by Matt Cordell
Ray Grace has finally been confirmed as North Carolina's Commissioner of Banks.

After former Commissioner Joseph A. Smith, Jr., resigned effective February 16, 2012, then-Governor Beverly Purdue appointed Grace, then Deputy Commissioner, to serve as Acting Commissioner until a new Commissioner could be nominated and confirmed.  Under the banking statute in effect at the time, Governor Purdue was required to submit the name of a permanent successor to the General Assembly within four weeks. She nominated Ray Grace by the end of the month.  However, as I predicted back in February of 2012, the confirmation process took much, much longer. 

Governor McCrory nominated Acting Commissioner Grace more than a year later, in March of 2013.  The Senate approved on May 15, 2013, and the House approved today, June 6, 2013.  (The Resolution can be viewed here.)

Commissioner Grace will serve a term that is set to expire on March 31, 2015. 

After serving in the Vietnam War from 1966 to 1969, Commissioner Grace attened Niagara University until 1973.  He began his career at NCCOB as an examiner trainee on July 1, 1974, and rose through the ranks in the subsequent 39 years.

Congratulations, Mr. Commissioner.