Revised Article 13 of Chapter 55 Appraisal Rights (f/k/a Dissenters’ Rights)
Article Date: Tuesday, February 14, 2012
Written By: John R. Miller
In 2011, the North Carolina Legislature enacted legislation rewriting Article 13 of Chapter 55, the North Carolina Business Corporation Act. Article 13 governs the rights of shareholders to seek a mandatory purchase of their shares at a judicially determined appraised value in the event of a corporate action (such as a merger) not approved by these shareholders. The resulting law, enacted in June 2011 and effective Oct. 1, 2011, incorporates the updating and other modernizing changes to the Model Business Corporation Act (the “Model Act”) with respect to appraisal rights and makes conforming changes in other provisions of the General Statutes referring to appraisal rights.
The North Carolina Business Corporation Act is based on the Model Act, which is drafted by a committee of the American Bar Association and updated regularly. Many other states have similarly patterned their business corporation statutes on the Model Act. The rewrite of Article 13 was engendered by the Business Law Section, which believes that it is in the best interests of North Carolina for our Legislature to consider and act upon changes to the Model Act in order fully to maintain a greater level of consistency with other states that have similarly based their corporation law statutes on the Model Act. Because Article 13 of Chapter 55 has now been extensively revised and rewritten, a North Carolina business lawyer will need to work through the entire Article 13 in order to fully understand the changes. This article will summarize some of the important revisions but should not serve as a substitute for grappling with the language of the statute itself.
Nomenclature and New Definitions. As the title to this article suggests, the terms “dissent” and “dissenter” have been removed altogether by the new statute. In this context, the term “dissent” is generally imprecise and superfluous. 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.
Article 13 has its own set of definitions, and a number of changes were made in this rewrite. For example, the definition of “fair value,” which is the operative expression for the value of shares to be determined in an appraisal proceeding, represents a new approach to appraisal that incorporates modern valuation methods. N.C.G.S. § 55-13-01(5). The definition of “interest” now specifies the rate of interest on judgments in North Carolina, rather than employing the more complicated and less determinative previous approach of the Business Corporation Act, which specified a rate of interest comparable to that being paid by the corporation on its principal bank loans or, if none, “a rate that is fair and equitable under all the circumstances.” N.C.G.S. § 55-13-01(6).
Corporate Transactions Giving Rise to Appraisal Rights. In keeping with the 1999 Model Act amendments, the new Article 13 narrows somewhat the list of corporate transactions giving rise to appraisal rights. N.C.G.S. § 55-13-02. Amendments to the articles of incorporation no longer automatically trigger appraisal rights (with the exception of the 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, appraisal rights may be available to the shareholders of a corporation whose assets are acquired, but appraisal is no longer available for dispositions in the course of dissolution. In addition, a corporation is authorized to include a provision in its articles of incorporation eliminating or limiting appraisal rights for any class or series of preferred shares.
At the same time, however, the new statute permits appraisal rights to be made available by article or bylaw provision or by simple board resolution for any merger, share exchange, disposition of assets, or amendment to the articles for which statutory appraisal rights are not provided. N.C.G.S. § 55-13-02(a) (5). Thus, amended Article 13 permits a degree of private ordering for a corporation to voluntarily provide appraisal rights in various transactions. This flexibility in the corporation law is consistent with the trend in laws governing other business entities, such as limited liability companies, to allow the owners to structure their relationship according to their own design.
The new law also reflects the evolution of corporation law – it provides appraisal rights in certain corporate conversions and takes account of the availability of shareholder action by consent, which was not available when the current Business Corporation Act was enacted.
Voting and Non-Voting Shares. Perhaps the most significant change in Article 13 is that the new statute gives the right of appraisal in certain fundamental transactions only to voting shareholders, consistent with the Model Act and the laws of many other states. The former North Carolina Article 13 provided a right of appraisal for all shares, whether voting or nonvoting, in the case of a merger, share exchange, or sale or exchange of assets. The laws of a majority of states, however, do not provide nonvoting shareholders with the right of appraisal. See, e.g., Ala. § 10-2B-13.02; 2009 Cal. Stat. 1300; N.Y. Business Corp. Law § 910; Model Bus. Corp. Act § 13.02(a) (1) (1999). The Model Act’s official commentary argued that the “linkage between voting and appraisal rights is justified because the right to a shareholder vote is a good proxy for assessing the seriousness of the change contemplated by the corporate action.” Model Bus. Corp. Act § 13.01 Cmt. 1 (1999) (but see discussion below of a recent change in the Model Act). Further, including nonvoting shareholders increases the cost of satisfying the appraisal demands of dissatisfied shareholders, and the cost may even get so high as to cause the transaction to be cancelled, either because of the cost of satisfying the appraisal demands or because of unfavorable accounting or tax treatment. Extending the right to nonvoting shareholders may even deter valuable transactions, making them inefficient for the parties involved and leading to unnecessary litigation. The contrary view is that a shareholder should not be forced to “continue in an altered enterprise not acceptable to” such shareholder, and thus that the shareholder’s ability to exit and be compensated for his or her shares should exist regardless of whether the shareholder could have voted on the corporate change to begin with. Levy, “Rights of Dissenting Shareholders to Appraisal and Payment,” 15 Cornell L.Q. 420, 428 (1930).
The drafters of revised Article 13 concluded that the historical linkage between voting shares and appraisal rights supports the view that the right to vote is an appropriate basis upon which appraisal rights should be granted to a minority stakeholder. Modern business corporations have numerous types of stakeholders and a variety of forms of debt and equity securities with virtually unlimited characteristics, preferences, limitations, and relative rights. Attaching appraisal rights to shares with voting rights seems fitting since the other constituencies of the corporation acquire their interests in the corporation without any right to participate in decisions, i.e., with the risk that their investment may be altered. Moreover, business corporations will retain the right under new Article 13 to provide for appraisal rights of their own choosing through provisions in their articles and bylaws, and resolutions.
Because the Business Corporation Act previously bestowed the appraisal right on all shares, whether voting or nonvoting, in the case of merger, share exchange, or sale exchange of assets and because the new statute provides such rights only to voting shareholders, the appraisal rights of existing nonvoting shares are grandfathered. The new statute provides that a holder of any shares outstanding on the effective date of the Act that are not entitled to vote on a corporate action described in N.C.G.S. § 55-13-02(a) (1) – (3) shall be entitled to appraisal rights to the same extent as holders of voting shares. N.C.G.S. § 55-13-02(d).
It should be mentioned that, after the legislation rewriting Article 13 began to make its way through the legislative apparatus, the ABA unexpectedly reversed course and decided to delink voting and appraisal rights. Comm. on Corporate Laws, “Changes in the Model Business Corporation Act – Proposed Amendments to Permit Limitations on Separate Group Voting Rights on Certain Mergers, to Delink Voting and Appraisal Rights, and to Make Related Changes,” 65 Bus. Law. 1121 (2010). The ABA Committee concluded that the linkage is no longer justified in view of the 2010 change in the Model Act permitting the elimination or limitation of group voting rights for certain classes or series of shares. North Carolina has not yet considered this change to the Model Act or whether appraisal rights should be reinstated for nonvoting shares as a consequence of the potential diminishment of group voting rights. This matter remains for future work of the Business Organizations Committee.
Simplified Procedure for the Exercise of Appraisal Rights. The procedure for the exercise of appraisal rights is modified and simplified somewhat under new Article 13. 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. The statute clarifies the information the corporation is obligated to provide shareholders, and the corporation must deliver a form to shareholders for perfecting appraisal rights. Payment of the corporation’s estimate of fair value will 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. The corporation cannot withhold payment as leverage for the shareholder to accept the corporation’s own estimate of fair value. It must pay its estimate of fair value plus interest without waiting for the conclusion of the appraisal proceeding.
If a shareholder properly makes demand for payment in excess of the amount offered and paid by the corporation, it is the responsibility of the corporation, not the shareholder, to commence the court proceeding. The costs of the proceeding will be assessed against the corporation, except to the extent the court finds that the shareholders demanding appraisal acted arbitrarily, vexatiously, or not in good faith. N.C.G.S. § 55-13-30(e).
Effect of Appraisal Rights upon Other Remedies. The provisions of Article 13 making the appraisal remedy the exclusive remedy for shareholders with appraisal rights with respect to completed corporate transactions have been reorganized, clarified, and modernized under the provisions of the new law. Former N.C.G.S. § 55-13-02(b) made the appraisal remedy the exclusive remedy for shareholders with appraisal rights with respect to completed corporate transactions, excepting only instances where the corporate action is “unlawful” or “fraudulent.” Following 2006 Model Act changes, the new law relocates the exclusivity provisions to a new section, N.C.G.S. § 55-13-40, which is broader than its predecessor since its applicability is no longer limited to shareholders to whom appraisal is available – it applies to any completed corporate transaction of a type described in N.C.G.S. § 55-13-02(a), with certain specified exceptions.
• The exclusivity provisions of new N.C.G.S. § 55-13-40 apply to a
shareholder to whom appraisal is not available pursuant to the
“market out” provisions of new N.C.G.S. § 55-13-02(b), which was
not clear under former N.C.G.S. § 55-13-02(b).
• The coverage of new N.C.G.S. § 55-13-40 is extended to “inter-
ested transactions” (as defined in N.C.G.S. § 55-13-01(5.1)), if cer-
tain procedural safeguards are observed, but not to actions taken
by shareholder consent where nonconsenting shareholders are not
given notice of the transaction before it is completed.
• But new N.C.G.S. § 55-13-40 is narrower than its predecessor in
that it applies only to challenges to the completed corporate action
and leaves to applicable state law the availability of other remedies
and the exclusivity of appraisal.
Conclusion. As mentioned, the new Article 13 of Chapter 55 completely rewrites the law governing appraisal rights in North Carolina’s Business Corporations Act. The main features of this new law are outlined above. The remaining sections of the new law are mainly of a housekeeping nature and constitute conforming changes in other parts of the General Statutes. •
Miller practices with Robinson Bradshaw & Hinson, P.A. in Charlotte. He chaired the Business Organizations Committee that worked on this legislation. Other committee members involved in the Project were Edward W. Wellman Jr., Thomas J. Molony, Stephen M. Lynch and J. Carlton Fleming Jr.
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.