The Chair’s Comments: A Word from Stephen M. Lynch
Article Date: Tuesday, February 15, 2011
At its January 2011 meeting, the Bar Association’s Board of Governors approved two bills drafted by members of the Business Law Section, with the goal of having these bills enacted in the 2011 legislative session. While these bills have been posted to our section’s website for some time, I thought it would be helpful to summarize them for you.
The first bill, entitled a “Bill to Provide that Reciprocal Attorneys’ Fees Provisions in Business Contracts are Valid and Enforceable,” is the product of a broad task force of section members that undertook to draft a bill to permit commercial parties, that provide in their contracts for the mutual recovery of attorneys’ fees in the event of litigation, to enforce that aspect of their agreement. That group’s work was further refined as members of the Litigation, Antitrust & Trade Regulation and Labor & Employment sections of the Bar Association provided additional perspectives on the bill. The leadership committee of Business Law Section drafting group included Kenny Greene, Mark Griffith, Bill Gwyn, Stephen Later, and Steve Peterson.
As developed by case law, the general rule in North Carolina is that attorneys’ fees are not awarded to a prevailing party enforcing a contract unless such an award is authorized by statute, even if the contract expressly provides for the recovery of attorneys’ fees. The traditional rationale for this rule was based on the public policy objective of protecting parties with less bargaining power or a lower level of sophistication. The historic result of application of the general rule has not necessarily supported that rationale. In addition, North Carolina has an existing statutory exception (N.C.G.S. § 6-21.2) that validates contractual provisions for reimbursement of attorneys fees of the prevailing party for contracts that qualify as a promissory note, conditional sale contract, or other “evidence of indebtedness.” The North Carolina cases that have interpreted this statute have concluded that “an evidence of indebtedness” as defined by this statute includes guaranty agreements, personal services contracts being enforced by the party seeking payment for services rendered, and equipment leases being enforced by the lessor. Much of this case law interpreting “evidence of indebtedness” is ambiguous and in certain instances contradictory. The North Carolina rule that a prevailing party may not recover attorneys’ fees unless authorized by statute is a minority rule among the states.
The bill would validate “reciprocal attorneys’ fees provisions” in “business contracts” governed by North Carolina law and allow the presiding judge or arbitrator to award “reasonable attorneys’ fees” in accordance with the terms and conditions of such attorneys’ fees provisions in the business contract. The bill specifically excludes from its coverage consumer contracts, employment agreements, and a contract to which the government or a governmental agency is a party. A “consumer contract” is defined as a contract entered into by one or more consumers primarily for personal, family or household purposes. An “employment contract” is defined to mean a contract between an individual and another party regarding the provision of personal services by the individual, regardless of whether the arrangement is in the nature of an employer-employee or principal-independent contractor relationship.
“Reciprocal attorneys’ fees provisions” are defined to mean provisions in a business contract by which each signatory to the contract agrees, upon the terms and subject to the conditions set forth in the contract that are made applicable to all parties, to pay or reimburse the other parties for attorneys’ fees and expenses incurred by reason of any suit, action, proceeding, or arbitration involving the business contract.
The bill would direct the presiding judge or arbitrator to award reasonable attorneys’ fees and expenses in accordance with the provisions of the business contract. A list of 13 non-exclusive factors to be used in determining reasonableness are included in the bill. They are: (1) the amount in controversy and the results obtained; (2) the reasonableness of the time and labor expended, and the billing rates charged, by the attorneys; (3) the novelty and difficulty of the questions raised in the action; (4) the skill required to perform properly the legal services rendered; (5) the relative economic circumstances of the parties; (6) settlement offers made prior to the institution of the action; (7) offers of judgment pursuant to Rule 68 and whether judgment finally obtained was more favorable than such offers; (8) whether a party unjustly exercised superior economic bargaining power in the conduct of the action; (9) the timing of settlement offers; (10) the amounts of settlement offers as compared to the verdict; (11) the extent to which the party seeking attorneys fees prevailed in the action; (12) the amount of attorneys’ fees awarded in similar cases; and (13) the terms of the business contract. The bill makes clear that the reasonableness of a fee shall not be governed by any statutory presumption or provision in the business contract providing for a stated percentage of the amount of such attorneys’ fees, or the amount recovered in other cases in which the business contract contains reciprocal attorneys’ fees provisions, though the amount of awards in similar cases may be among the factors considered.
The bill does not attempt to repeal the existing laws of the State of the North Carolina with respect to the recovery of attorneys’ fees in those instances where the business contract is also a note, conditional sale contract or other evidence of indebtedness coming within the purview of NCGS § 6-21.2. In those instances, the party may elect to recover under either statute but not both.
The bill provides that this change in the law would not apply retroactively. Rather, it would be prospective only and would apply to attorneys’ fees provisions in business contracts entered into after the bill is enacted.
The second bill substantially revises Article 13 of Chapter 55 which governs the appraisal rights of shareholders of a North Carolina corporation to obtain a judicially-determined cash payment for their shares in the event of a merger or other specified transaction or event. The changes to Article 13 proposed to be effected by the bill are based on changes to the Model Business Corporation Act since the 1989 rewrite of the North Carolina Business Corporation Act, which was based on the Model Act as it then existed. One immediate change is of nomenclature: the terms “dissent” and “dissenter” would be removed altogether by the bill because a shareholder with appraisal rights is not required to dissent but simply cannot vote in favor of, or consent to, the transaction giving rise to appraisal rights.
In keeping with the Model Act changes, this bill narrows somewhat the list of corporate transactions giving rise to appraisal rights. Amendments to the articles of incorporation would no longer trigger appraisal rights, other than an amendment to effect a reverse stock split, and appraisal rights are available only for holders of shares that are converted or exchanged in a merger or share exchange.
Subject to the “market out” exception for certain publicly held corporations, appraisal rights may be available to the shareholders of a corporation whose assets are acquired, but appraisal would not be available if the dispositions were in the course of the dissolution of the corporation. In addition, a corporation would be authorized to include a provision in its articles of incorporation eliminating or limiting appraisal rights for any class or series of preferred stock. The bill would permit appraisal rights to be made available by inclusion of such a provision in the articles of incorporation or the bylaws or by simple board resolution with respect to any merger, share exchange, disposition of assets, or amendment to the articles of incorporation for which statutory appraisal rights are not provided.
The bill would provide a right of appraisal in certain fundamental transactions only to voting shareholders and not to the holders of nonvoting shares, consistent with the Model Act and the laws of a substantial majority of other states. The current North Carolina statute provides a right of appraisal for all shares, whether voting or nonvoting, in the case of a merger, share exchange or sale of substantially all assets. Because Article 13 presently grants appraisal rights to holders of voting and nonvoting shares, the bill would grandfather the rights of holders of shares of a class or series that were issued and outstanding as of the date of the enactment of the bill with respect to a subsequent merger, share exchange or sale of substantially all assets.
The bill would also narrow the “market out” exception that denies appraisal rights to shareholders of certain publicly held corporations. The bill would restore appraisal rights in instances where the transaction qualifies as an “interested transaction.” An interested transaction could include, for example, a management-led buyout of the corporation or a merger with an entity controlled by a holder of 20% or more of the corporation’s voting shares.
The procedure for the exercise of appraisal rights would be modified and simplified under the bill. Under the new procedure, the shareholder’s notice to demand payment must be sent no earlier than the date the corporate action became effective and no later than ten days after such date. Payment of the corporation’s estimate of fair value would be due within 30 days of the shareholder’s perfection of appraisal rights even if the shareholder is not satisfied with the corporation’s payment offer. If a shareholder properly makes demand for payment in excess of the amount offered and paid by the corporation, it would be the responsibility of the corporation to commence the court proceeding rather than the shareholder.
In addition, the provisions of Article 13 making the appraisal remedy the exclusive remedy for shareholders with appraisal rights with respect to completed corporate transactions would be reorganized, clarified, and modernized.
The primary group within the Business Organization Committee that drafted this bill was comprised of Carlton Fleming, Jr., John Miller, Tom Molony, and Ward Wellman, who is the current Chair of the committee. I thank this group, and the team that worked on the attorneys’ fee bill, for their contribution of time and skills to improve the laws of our state (and also for their preparation of summaries of these bills, which made the drafting of this column much easier than you would otherwise suspect).
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.