Blount v. Taft

CLARK, Judge. This appeal presents one issue: Did the trial court err in concluding that Article III, Section 7, of the by-laws adopted on 20 August 1971, was a shareholders’ agreement pursuant to G.S. 55-73 (b) and not a by-law which could be amended, as could other by-laws, by the corporate directors ? The shareholders’ agreement is recognized and approved by the North Carolina Business Corporation Act of 1955, G.S. 55-73(b) providing as follows: “ (b) Except in cases where the shares of the corporation are at the ‘time or subsequently become generally traded in the markets maintained by securities dealers or brokers, no written agreement to which all of the shareholders have actually assented, whether embodied in the charter or bylaws or in any side agreement in writing and signed by all the parties thereto, and which relates to any phase of the affairs of the corporation, whether to the management of its business or division of its profits or otherwise, shall be invalid as between the parties thereto, on the ground that it is an attempt by the parties thereto to treat the corporation as if it were a partnership or to arrange their relationships in a manner that would be appropriate only between partners. Notwithstanding any other provision of this section or of this Chapter, the provisions of G.S. 55-59 (a) shall not apply to such an agreement. A transferee of shares covered by such agreement who acquires them, with knowledge thereof is bound by its provisions.” This statute enables the shareholders of a close corporation by agreement in writing assented to by all to provide for the management and operation of the corporation in a manner similar to a partnership. The statute is phrased in the negative, declaring that such agreement is not invalid as between the parties on grounds that it attempts to treat the corporation as if *630 it were a partnership. It provides for flexibility in judicial treatment; a court may pronounce the shareholders’ agreement invalid for other reasons. With the Business Corporation Act of 1955, North Carolina was recognized as the first state to draft legislation effectively dealing with the unique qualities of close corporations. For discussion of the Act relating to close corporations and shareholders’ agreements, see Latty, “Close Corporations and the New North Carolina Business Corporation Act,” 34 N.C.L.R. 432 (1956) ; 1 O’Neal, Close Corporations, §§ 1.14(a) and 5.16 (1971) ; 6 Cavitch, Business Organizations, §§ 114.01, et seq., (1976). The States of Delaware, Florida, Maryland, Pennsylvania, and South Carolina have enacted statutes identical or similar to G.S. 55-73 (b). We find no cases in North Carolina, or in the other five states which have enacted an identical or a similar statute, that deal directly with G.S. 55-73 (b). In Wilson v. McClenny, 262 N.C. 121, 136 S.E. 2d 569 (1964), and Stein v. Outdoor Advertising, 273 N.C. 77, 159 S.E. 2d 351 (1968), our Supreme Court ruled on matters involving companion provisions of G.S. 55-73 (a) and (c). A shareholders’ agreement is a contract between shareholders which may apply broadly to the rights of the shareholders in conducting the business of the corporation, so long as their purposes are legal and not contrary to public policy. Under G.S. 55-73 (b) the agreement is not invalid, though in violation of other statutes, solely on the grounds that it attempts to treat the corporation as if a partnership. A shareholders’ agreement may not be altered or terminated except as provided by the agreement, or by all the parties, or by operation of law. See 3 Oleck, Modern Corporation Law, §§ 1384-1400 (1958). By providing for a shareholders’ agreement to be incorporated into the by-laws of the corporation, G.S. 55-73 (b) recognizes a distinction between the two and also implies that a shareholders’ agreement exist before it is embodied in the bylaws. Those parts of the Business Corporation Act dealing with by-laws and their amendment, primarily G.S. 55-16, G.S. 55-66, and G.S. 55-28 (d), provide for the amendment of by-laws by a majority of the board of directors then holding office, though initially adopted by the shareholders at its organization meet *631 ing. There is no provision in the Business Corporation Act that the by-laws of a corporation, or any one or more of the by-laws, become a shareholders’ agreement solely because of unanimous adoption thereof by the shareholders. By inference these statutes negate this result. We find that to meet the requirements of G.S. 55-73 (b) for establishing a valid shareholders’ agreement in a close corporation, there must be an agreement in writing of all shareholders ; but the writing may consist of a written provision in the charter or by-laws of the corporation which may be based on an oral agreement which has been embodied therein. We are aware that G.S. 55-73 (b) was intended to supply a legal framework within which partner-like arrangements having a reasonable business purpose could be worked out with substantial assurance of legal validity. While recognizing this intent and the need for judicial flexibility in determining the validity of such agreements, we consider it appropriate to point out that those who have the burden of proving a valid shareholders’ agreement could ease this burden by offering an agreement in writing signed by all shareholders, or if embodied in the charter or by-laws explicit designation therein of a shareholders’ agreement and provision for alteration of the agreement if different from the alteration or amendment provisions applicable to the charter or by-law provisions which are not within the agreement. In applying G.S. 55-73 (b) to the evidence and the issue presented by this appeal, we rely primarily on the transcript (plaintiffs’ Exhibit 3) of the meeting of the shareholders held on 20 August 1971, when the new by-laws of the corporation were adopted by unanimous vote. The transcript is voluminous, and we do not consider verbatim reproduction appropriate in this opinion. It appears from this transcript that the meeting was called primarily to approve a loan in the sum of $250,000 from a bank to the corporation; that since the old by-laws could not be found, new by-laws were prepared prior to meeting in contemplation of a need for them in obtaining the loan and to guide the corporation in its expansion program; that the proposed by-laws were read and suggested changes were made in various sections as needed. When Article III, Section 7, was read, Nelson B. Crisp, daughter of M. K. Blount, Sr., suggested that the Executive Committee consist of one member from each of the Blount, Taft and McGowan families. This was followed *632 by a discussion relating to the power of the Executive Committee, which resulted in apparent agreement on the requirement that the committee report its minutes to the directors and submit actions for ratification to the directors at the next meeting of the board. Thereupon, the reading of the by-laws was resumed. When the reading was completed, Nelson B. Crisp seconded the motion of E. H. Taft, Jr., to adopt the by-laws, but then at the suggestion of M. K. Blount, Sr., offered an amendment to Article III, Section 7, relating to approval of full-time employees by the Executive Committee. After discussion which resulted in apparent approval, the last sentence was added to said Section 7 requiring that the Executive Committee unanimously approve the employment of each individual after interview. The by-laws were then adopted by unanimous vote of the shareholders. At trial Nelson B. Crisp, W. G. Blount, and Marvin K. Blount, Jr., testified for plaintiffs. None recalled any statement made by them or anyone else present at the shareholders’ meeting of 20 August 1971 that any section of the by-laws was a shareholders’ agreement. But Marvin K. Blount, Jr., testified that, though he made no statement at the meeting indicating a shareholders’ agreement, it was his “understanding that the only provision that cannot be changed is Section 7 of Article III which gives to the Executive Committee the exclusive authority to hire and set salaries of employees of the Company.” However, this interpretation was not expressed by Mr. Blount to other shareholders at the 20 August 1971 meeting or at any subsequent time before the institution of this action. The minute book of the corporation, a plaintiffs’ exhibit, reveals that the Blount family had disapproved of the employment of the son of E. H. Taft, Jr., in the late Sixties and had objected to the proposed employment of the son of Ford McGowan. The issue of nepotism reached an impasse in 1969. Neither son was employed by the corporation at the time of the meeting of 20 August 1971. Though it does not appear that the nepotism issue was mentioned by the shareholders at this meeting in discussing Article III, Section 7, it is probable that this issue motivated the Blount family in proposing as an amendment the last sentence of this section, which would give them some control over employment practices. However, assuming that they attach considerable importance to this part of said Section 7, it does not appear that they expressed to other share *633 holders at the meeting, or at any other time, any desire or intention that the so-called amendment be embodied in the by-laws as a shareholders’ agreement. We find that there is no competent evidence to support the conclusions of the trial court that Article III, Section 7, of the by-laws adopted on 20 August 1971 was a valid shareholders’ agreement, which could not be amended as provided by Article VIII, Section 4, of said by-laws or the conclusion that said Section 7 was not validly amended, as were other by-laws, at the meeting of the board of directors on 20 June 1974. The trial court erred in denying the defendants’ motion to dismiss. There remains for disposition defendants’ exception and appeal from the trial court’s order of 2 July 1975, granting plaintiffs’ oral motion, made immediately after trial, for a certified audit of the corporation. Since the order did not provide for payment of the audit by defendants or by the corporation (which was not a party to this action), the defendants are not aggrieved. The appeal from this order is dismissed. The judgment appealed from is vacated. This cause is remanded for hearing and ruling on the matter relating to the certified audit of the corporation and payment therefor, and for entry of judgment dismissing the action. Vacated and remanded. Judges Britt and Parker concur.