NCBA Business Law Section 2023 Legislative Update
The Business Law Section of the North Carolina Bar Association was active this past year in proposing certain changes to the North Carolina Business Corporation Act and the North Carolina Charitable Solicitation Statute. Below is a summary of the amendments that were adopted this year.
Legislative Update – North Carolina Business Corporation Act
Recent Amendments to the North Carolina Business Corporation Act
By Heyward Armstrong, Justin Truesdale and Nicholas Zanzot
The North Carolina General Assembly recently passed Senate Bill 477 (the “Act”), which was subsequently signed into law by Governor Roy Cooper on September 29, 2023. The Act provided substantive amendments to the North Carolina Business Corporation Act (the “NCBCA”) that became effective on October 1, 2023.
The Act includes a number of changes to the NCBCA that were recommended by the Business Corporations Committee of the Business Law Section (the “Committee”) and approved as “Association-sponsored legislation” by the NCBA Board of Governors in January 2023. The North Carolina Bar Association is grateful for the endorsement and support of the North Carolina Chamber and thankful to the bill’s primary sponsors, Senators Amy Galey and Brad Overcash, who assisted its successful passage by the General Assembly.
The NCBCA is based upon the Model Business Corporation Act (the “Model Act”), which is the work of the Corporate Laws Committee of the American Bar Association’s Business Law Section. Many of these amendments align the NCBCA with recent changes to the Model Act, as well as selected changes in other jurisdictions.
A summary of the key changes included in the Act is set forth below:
Facilitating the Use of Email and Other Electronic Communications with Shareholders (Part I of the Act)
Prior to the Act
North Carolina General Statutes (“NCGS”) § 55-1-41(c) provided that a corporation may utilize email or other forms of electronic communication for sending notices only if shareholders had previously consented. Additionally, NCGS § 55-16-06 required corporations to provide physical notices to shareholders unless notices sent to the shareholder’s recorded physical address could not be delivered or if a reliable physical address was never provided.
As Amended
The Act amended multiple sections of the NCBCA regarding communications and notices to shareholders in a manner that is generally consistent with the Model Act. In particular, the Act amended NCGS § 55-1-41(c) to allow North Carolina corporations to send notices and other communications to shareholders to the email address recorded in corporate records if the shareholder has not previously objected to email communications. However, a corporation shall stop all electronic communications once it has become aware that two consecutive communications to a particular shareholder have not been delivered. If a corporation chooses to send notices by email or electronic means, NCGS § 55-7-20 now requires the corporation’s shareholders’ list for the applicable shareholders’ meeting to include, among other information, the electronic address used.
The Act also amended NCGS § 55-16-06 to provide that a corporation shall no longer be required to send an otherwise necessary shareholder’s notice if the corporation is not permitted by the shareholder to deliver notice by email or other electronic communications and the shareholder has not provided a reliable address for notices.
The Act also includes related amendments to NCGS § 55-1-40 to facilitate the above changes, including to add the definitions of “email” and “email address” to the NCBCA.
Providing Greater Flexibility for the Use of Written Consent without Meeting (Part II of the Act)
Prior to the Act
NCGS § 55-7-04 previously provided that, unless otherwise set forth in a company’s articles of incorporation, shareholders of a North Carolina corporation may only act by written consent without a meeting if the shareholders provide unanimous written consent. Additionally, the written consents were required to be dated by each shareholder and expired upon the 61st day after the date of signature, unless the corporation previously received enough written consents to take the specified action.
As Amended
The Act amended NCGS § 55-7-04 to change the default rule for corporations incorporated on or after October 1, 2023, with respect to the use of written consents by shareholders without a meeting. As a result of the recent amendments, unless otherwise prohibited by the corporation’s articles of incorporation, shareholders of a North Carolina corporation (other than a corporation that is a public corporation at the time the action is taken) may act by written consent without a meeting if shareholders provide a number of written consents that is not less than the minimum number of votes necessary to authorize or take the action at a meeting.
The Act also deleted the requirement that written consents be dated by each shareholder. Related to this change, a shareholder’s written consent to take action without a meeting shall expire unless the corporation has, within 60 days following the first date on which a consent for that action is received by the corporation, received unrevoked written consents sufficient to take the action without a meeting.
These changes allow for greater flexibility in using written consents in place of a shareholders’ meeting and are consistent with the current provisions of the Delaware General Corporation Law (the “DGCL”).
Permitting the Board of Directors to Remove Unused Classes of Stock Without a Shareholder Vote for Classes Created by the Board (Part III of the Act)
Prior to the Act
NCGS § 55-10-02(5b) allowed a corporation’s board of directors to amend the articles of incorporation without shareholder approval to delete a class of shares, as a result of the operation of NCGS § 55-6-31(b), when the corporation had acquired all authorized shares of the class, with none remaining outstanding, and the articles of incorporation prohibited the reissuance of the acquired shares. This provision, though beneficial in certain respects, only allowed for the deletion of a class of shares in limited circumstances.
As Amended
The Act amends this provision to also allow a board of directors to amend the articles of incorporation without shareholder approval to delete a class or series of shares when, under NCGS § 55-6-02, the articles of incorporation authorized the board of directors to create the class or series and no shares of the class or rights to acquire shares of the class are outstanding. This amendment is consistent with the current provisions of the DGCL.
Removing the Requirement for Separate Votes by Voting Groups to Create or Increase the Benefits of Shares of an Equal or Senior Class or Series (Part IV of the Act)
Prior to the Act
NCGS § 55-10-04 provided that holders of the outstanding stock of a class were entitled to vote as a separate voting group on amendments to the corporation’s articles of incorporation if, among other situations, the proposed amendment would (1) 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 shareholder’s class, or (2) increase the rights, preferences, or number of authorized shares of any class that, after the amendment’s inclusion, have rights or preferences with respect to distributions or to dissolution that are prior, superior, or substantially equal to the shares of the class. This provision essentially granted current shareholders veto authority over the establishment of equal or superior share classes.
As Amended
The Act amends this provision to allow for restrictions on the rights of the shareholders to stop the proposed amendments in the above-mentioned situations. These restrictions may be included in the original articles of incorporation, in amendments to the articles of incorporation adopted before the issuance of any shares of such class or series, or in amendments to the articles of incorporation approved by a majority of the holders of the class or series. This change will allow for companies to have more flexibility in future equity sales that may affect or be similar to established classes of stock.
Amending the Rights of Shareholders to Inspect a Subsidiary’s Records (Part VI of the Act)
Prior to the Act
NCGS §§ 55-16-01 & 55-16-02 provided that a corporate shareholder may inspect the records of another corporation if the corporation in which the shareholder holds its shares has the power to elect, appoint, or designate a majority of the directors of the other corporation.
As Amended
The Act first amends NCGS § 55-16-01 to provide for the definition of “Subsidiary.” This definition adds to the entities that may be subject to a shareholder records request to include any domestic or foreign corporations (both professional and nonprofit), partnerships, limited partnerships, limited liability partnerships, limited liability companies, business trusts, and joint ventures, if they are directly or indirectly owned, in whole or in part, by the corporation in which the shareholder is a shareholder.
Additionally, in NCGS § 55-16-02, the Act limits the rights of a shareholder to inspect the records of a Subsidiary to only those records (1) over which the corporation (not the subsidiary) has actual possession and control, or (2) that the corporation could obtain through the exercise of control over the subsidiary if the inspection would not constitute a breach of an agreement between the corporation or the Subsidiary and a person not affiliated with the corporation.
Committee Members Involved in These Amendments
The following are the Committee members who participated in drafting the proposed bill resulting in the Act and/or who represented the North Carolina Bar Association in various committee hearings in the North Carolina General Assembly regarding Senate Bill 477:
Heyward D. Armstrong – Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh
Gregory S. Connor – Connor Law Group, Raleigh
Heath Gilbert – Baucom Claytor
Lisa Crandall – PLG Law, Charlotte
Stephen M. Lynch – Robinson, Bradshaw & Hinson, P.A., Charlotte
Dana S. Robinson – Penwell Boman + Curran
Justin G. Truesdale – Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh
Legislative Update – North Carolina Charitable Solicitation Statute
On September 5, the NC House of Representatives unanimously approved legislation (Senate Bill 429) that makes two important reforms to the state charitable solicitation licensing statute (Chapter 131F of the NC General Statutes). The NC Senate had unanimously approved the bill on May 4. Because the House made no changes to the Senate-approved bill, it was sent to Governor Roy Cooper, who signed it into law on September 14.
The new law is based on recommendations from the Nonprofit Corporations Committee of the Business Law Section and from the North Carolina Center for Nonprofits (the Center). The North Carolina Bar Association and the Center are appreciative of the bill’s legislative champions, particularly Senators Tim Moffitt and Mike Woodard and Representatives Brandon Lofton and Harry Warren.
The following are the substantive changes included in the new law:
Increasing the dollar threshold for exemption from charitable solicitation licensing
The new law exempts more small nonprofits from needing charitable solicitation licenses. Specifically, it amends NCGS § 131F-3(3) to provide for exemption for nonprofits that: (a) receive less than $50,000 in contributions per calendar year; and (b) do not provide compensation to any officer, trustee, organizer, incorporator, fundraiser, or solicitor. This provision took effect on October 1. Previously the dollar amount for the exemption for small nonprofits under NCGS § 131F-3(3) was $25,000. The new $50,000 threshold tracks the current threshold for filing Internal Revenue Service Form 990-N, the streamlined annual information report for small nonprofits that does not require detailed financing reporting.
Additionally, the law amends NCGS § 131F-3(3) to provide more options for the evidence that nonprofits can provide to the NC Secretary of State to demonstrate that their contributions are below the $50,000 threshold. Notably, the statute now permits a nonprofit to demonstrate eligibility for exemption under NCGS § 131F-3(3) by providing a copy of the message confirming its submission of the IRS Form 990-N. This change is significant for small, volunteer-run nonprofits, because it relieves them of the responsibility of completing a more detailed financial form to demonstrate eligibility for exemption from the state charitable solicitation licensing statute.
Extensions of charitable solicitation renewal filing deadlines
The law amends NCGS § 131F-5(c) to make extensions of charitable solicitation renewal filings identical to the automatic filing extensions for IRS Form 990. The IRS currently allows nonprofits to receive an automatic six-month extension of their filing deadline for 990s. Previously, NCGS § 131F-5(c) only grant the NC Secretary of State to extend charitable solicitation deadlines for up to 60 days. This change was effective when the law was enacted on September 14.
NCGS § 131F-6, which is unchanged by the new law, requires nonprofits to include either: (a) a filed copy of their IRS Form 990 (NCGS § 131F-6(a)(9)); or (b) information that is substantively similar to much of the details of the IRS Form 990 (NCGS § 131F-6(a)(3)-(3)). Many 501(c)(3) nonprofits, particularly those whose Forms 990 are prepared by outside accounting firms, require the full six-month extension period to complete and file their Forms 990. Practically, the previous statute that included shorter filing extensions for charitable solicitation renewals than for IRS Forms 990 meant that some nonprofits were unable to file their charitable solicitation paperwork in a timely manner if their Forms 990 could not be completed within 60 days of their original IRS filing deadline. The Center heard from a significant number of nonprofits that reported having gaps in their charitable solicitation licensing most years because of this discrepancy between the federal and state extended filing deadlines.
The law also amends NCGS § 131F-5(c) to clarify that charitable solicitation renewal forms are timely filed if they are postmarked by the filing deadline. This change could help prevent nonprofits from being identified as out of compliance if there are mail delays.