Black-letter propositions
- 01
A director must discharge the duties of the office in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably believes to be in the best interests of the corporation.
- 02
A director may rely on information, opinions, reports, or statements prepared or presented by officers or employees the director reasonably believes reliable and competent, by legal counsel, public accountants, or other experts on matters within their competence, or by a committee of which the director is not a member that merits confidence.
- 03
A director cannot rely on such information if the director has actual knowledge about the matter that makes the reliance unwarranted.
- 04
A director is not liable for any action or failure to act if the director performed the duties of the office in compliance with the statutory standard, and the duties of a director weighing a change of control are not different and the standard of care is not higher.
- 05
A director's personal liability for monetary damages for breach of a duty may be limited or eliminated only to the extent the articles of incorporation permit under the statute, and a director may be entitled to indemnification.
- 06
A conflict-of-interest transaction is a transaction with the corporation in which a director has a direct or indirect interest, and it is not voidable by the corporation solely because of the interest if the material facts and the interest were disclosed and the board or a committee approved it, or the disinterested shareholders approved it after disclosure, or the transaction was fair to the corporation.
- 07
A director has an indirect interest when another entity in which the director has a material financial interest or is a general partner, or of which the director is a director, officer, or trustee, is a party to the transaction.
- 08
Board approval of a conflict-of-interest transaction requires the affirmative vote of a majority of the directors who have no direct or indirect interest, and a quorum for that purpose exists if a majority of the disinterested directors vote.
- 09
Shares owned or voted by an interested director may not be counted in the shareholder vote that cleanses a conflict-of-interest transaction.
- 10
An officer with discretionary authority must act in good faith, with the care of an ordinarily prudent person in a like position, and in a manner the officer reasonably believes to be in the corporation's best interests, and may rely on officers, employees, counsel, and accountants but not on a committee.
- 11
No distribution may be made if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business, or its total assets would be less than its total liabilities plus any preferential rights on dissolution of superior shareholders.
- 12
A director who votes for or assents to a distribution made in violation of the statute or the articles is personally liable to the corporation for the excess if it is established that the director did not perform the duties in compliance with the general standard, and is entitled to contribution from other liable directors and to reimbursement from shareholders who accepted the distribution knowing it was unlawful.
- 13
A proceeding for an unlawful distribution is barred unless commenced within three years after the date the effect of the distribution was measured.
- 14
A shareholder may not commence a derivative proceeding until a written demand has been delivered to the corporation and 90 days have passed, unless the demand was rejected earlier or irreparable injury would result from waiting, and the shareholder must have been a shareholder when the act occurred and must fairly and adequately represent the corporation's interests.
Use this attack sequence under time
Frame the issue
Identify whether the person is a director or an officer with discretionary authority and state the three-part standard.
Resolve the next checkpoint
Ask whether the person relied on a source the statute allows and whether the person actually knew something that made reliance unwarranted.
Resolve the next checkpoint
If a director has a personal interest in a transaction, test each of the three ways to save it: disinterested board approval, disinterested shareholder approval, and fairness.
Resolve the next checkpoint
For a dividend or repurchase, apply both the inability-to-pay-debts test and the assets-less-than-liabilities test as of the date the effect is measured.
Resolve the next checkpoint
Identify who is liable for an unlawful distribution, the contribution and reimbursement rights, and the three-year limit.
Finish the conclusion
For a suit on behalf of the corporation, check demand, the 90-day wait, and standing.
Common wrong turns
- A director's good-faith reliance on counsel or accountants is protected only if the matter is within their competence and the director has no actual knowledge that makes reliance unwarranted.
- A conflict-of-interest transaction survives if it was fair to the corporation even without disinterested approval, so fairness is an independent path.
- The votes of an interested director's shares are not counted to cleanse a transaction by shareholder approval.
- A director is liable for an unlawful distribution only if the director did not comply with the standard of conduct, so an ordinarily prudent reliance defeats liability.
- The three-year period runs from the date the effect of the distribution was measured, not from discovery.
Worked example
The board of a North Carolina corporation approves a purchase of land from a company owned by one of its directors after that director discloses the ownership, and the disinterested directors vote for it. Separately, the board pays a dividend that leaves the corporation unable to pay its debts as they come due, after relying on a financial statement that the chief financial officer had told two directors was false.
The land purchase is not voidable solely because of the director's interest, because the material facts and the interest were disclosed and a majority of the disinterested directors approved it, and the transaction would also be safe if it was fair. The dividend is unlawful because it leaves the corporation unable to pay its debts, and the two directors who knew the statement was false cannot rely on it, so they did not comply with the standard of conduct and are liable for the excess, with contribution from the other directors who could be held liable.
Practice this topic
Director and officer standards
North Carolina General Statutes section 55-8-30 requires a director to act in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably believes to be in the best interests of the corporation, and it lets a director rely on reliable and competent officers or employees, on counsel and accountants within their expertise, and on a committee that merits confidence, unless the director has actual knowledge that makes reliance unwarranted.
The statute adds that a director is not liable for action taken in compliance with the standard, that the duties of a director considering a change of control are no different and the standard of care no higher, and that personal liability for monetary damages may be limited or eliminated only as the articles are authorized to do so.
North Carolina General Statutes section 55-8-42 states the same three-part standard for an officer with discretionary authority and the same reliance rule, except that an officer may not rely on a committee, and it also provides that an officer may be entitled to indemnification.
Conflict-of-interest transactions
North Carolina General Statutes section 55-8-31 defines a conflict-of-interest transaction as a transaction with the corporation in which a director has a direct or indirect interest, and provides that it is not voidable by the corporation solely because of the interest if the material facts and the interest were disclosed or known to the board or a committee and it approved or ratified the transaction, if they were disclosed or known to the shareholders entitled to vote and they approved it, or if the transaction was fair to the corporation.
The statute counts a director as having an indirect interest when an entity in which the director has a material financial interest or is a general partner, or of which the director is a director, officer, or trustee, is a party to the transaction, and it requires the vote of a majority of the directors who have no interest, with shares owned or controlled by an interested director not counted in a shareholder vote.
Distributions and derivative suits
North Carolina General Statutes section 55-6-40 bars a distribution if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than its total liabilities plus the amount needed to satisfy superior preferential rights on dissolution, and it lets the board rely on financial statements prepared on reasonable accounting principles and values assets at book value or a reasonable fair valuation.
North Carolina General Statutes section 55-8-33 makes a director who votes for or assents to an unlawful distribution personally liable for the excess if the director did not comply with the standard of conduct, gives the director contribution from other liable directors and reimbursement from shareholders who took the distribution knowing it was unlawful, and bars the claim after three years from the date the effect was measured.
North Carolina General Statutes sections 55-7-41 and 55-7-42 require a derivative plaintiff to have been a shareholder at the time of the act and to represent the corporation fairly and adequately, and to deliver a written demand and wait 90 days unless the demand is rejected or irreparable injury would result.
Frequently asked questions
What is the controlling rule for director and officer duties, conflict-of-interest transactions, and unlawful distributions under the north carolina business corporation act?+
State the director's standard and the reliance rule, test the conflict-of-interest transaction under the three safe harbors, and apply the distribution limits and the liability, contribution, and reimbursement rules.
What standard of care applies to a North Carolina director?+
The care of an ordinarily prudent person in a like position, in good faith and in a manner reasonably believed to be in the corporation's best interests, under North Carolina General Statutes section 55-8-30.
When may a director rely on a report or an expert?+
When the director reasonably believes the source is reliable and competent and the director has no actual knowledge that makes reliance unwarranted, under section 55-8-30.
How can a transaction with a director be saved from being voidable?+
By disclosure and approval by disinterested directors or disinterested shareholders, or by showing the transaction was fair to the corporation, under section 55-8-31.
When is a distribution unlawful in North Carolina?+
When the corporation could not pay its debts as they come due afterward, or its assets would be less than liabilities plus superior preferences, under section 55-6-40.
How long does a claim for an unlawful distribution last?+
Three years from the date the effect of the distribution was measured, under North Carolina General Statutes section 55-8-33.