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.

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