Recent changes to North Carolina corporate law may help make North Carolina even friendlier to businesses by eliminating any perceived advantage other states may have had over North Carolina. These changes are also designed to help attract and retain qualified individuals as officers and directors of North Carolina corporations.
Last year, the General Assembly enacted legislation amending the North Carolina Business Corporation Act (the “NCBCA”). Effective October 1, 2018, the amendments to the NCBCA provide your corporation with additional tools to shield officers and directors from personal liability and ratify defective corporate acts. They also offer shareholders the ability to create more durable voting trusts.
While the amendments cover nine principal topics, three of the changes that will have the most impact on your corporation are discussed below.
Additional Protections for Officers and Directors
North Carolina corporations may now take advance action to limit or eliminate officers’ and directors’ duties regarding business opportunities. The corporate opportunity doctrine, derived from the duty of loyalty owed to the corporation by officers and directors, prohibits officers and directors from “usurping” an opportunity that belongs to the corporation. North Carolina courts require an officer or director who is accused of usurping a corporate opportunity to demonstrate that the transaction was “just and reasonable” to the corporation. To show that the transaction was just and reasonable, the officer or director must show that the opportunity is one that the corporation would not have wanted for itself.
An amendment to the NCBCA now allows North Carolina corporations to include a provision in the articles of incorporation that limits or eliminates, in advance, the duty of a director, officer, or other person to bring specified business opportunities to the corporation. If your business was unable to retain the top-level talent you sought for your board of directors due to the potential director’s concerns about personal liability exposure or conflicts of interest, this amendment will enable you to assuage concerns by amending the articles of incorporation.
Validating “Defective” Corporate Acts
It’s not uncommon for a North Carolina corporation to discover that it failed to observe the required corporate formalities before taking a certain action. This can be a costly mistake. For example, a defective appointment or election of a director can lead to every decision of the board of directors at which the defectively appointed or elected director participated being called into question.
An amendment to the NCBCA now allows North Carolina corporations a non-exclusive, clear mechanism for curing defects in corporate acts through a ratification resolution — which means that actions taken without the proper corporate authority can be retroactively validated. The action required to effectuate a ratification resolution under the NCBCA’s new provisions depends on the corporate act that is being ratified. For example, the resolution must also be adopted by the shareholders if action by the shareholders was required at the date of the occurrence of the defective action. If the defective corporate action required filing an amendment to the corporation’s articles of incorporation, then the corporation must file newly created “Articles of Validation” with the North Carolina Secretary of State. The NCBCA’s new statutory ratification mechanisms are in addition to traditional common law methods of ratification.
Expanding the Lifespan of Voting Trusts
A voting trust is an arrangement in which the shares in a company of one or more shareholders and the corresponding voting rights are legally transferred to a trustee. Historically, voting trusts were viewed unfavorably by legislatures and courts because the owner of the shares did not have the ability to influence the corporation’s decisions by voting those shares. Consequently, the NCBCA imposed an automatic 10-year limit on the duration of voting trusts.
In recent years, courts and legislatures have become less protective of shareholders and less hostile to voting trusts. Reflecting this change, an amendment to the NCBCA removed the automatic 10-year sunset provision. Voting trusts created after October 1, 2018 may now be valid for an unlimited amount of time. Voting trusts in effect before October 1, 2018 are still subject to the 10-year limit unless the trust is amended to extend its duration.
If you would like to place your shares in a North Carolina corporation in a voting trust for a certain period of time, that period of time must be identified in the voting trust document. If you have previously placed shares in a North Carolina company in a voting trust, you’ll want to check the expiration date of the trust and consider whether to set a significantly longer term on the trust when it comes time to renew.
If you are an owner or partner in a North Carolina company, or serve as an officer or on the board of directors, you’ll want to take note of these changes. These changes offer corporate entities more flexibility and the power to attract the top-level talent you’ve always wanted leading your company.
About the author: Kyle Heuser
Kyle Heuser is an attorney at the law firm of Bell, Davis & Pitt. His principal areas of practice are litigation and intellectual property. Kyle graduated magna cum laude from the Wake Forest University School of Law.