GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 2015

H                                                                                                                                                    1

HOUSE BILL 649

 

 

Short Title:        Amend Corp. Gov/Shareholder Derivative Suits.

(Public)

Sponsors:

Representative Ross (Primary Sponsor).

For a complete list of Sponsors, refer to the North Carolina General Assembly Web Site.

Referred to:

Judiciary II.

April 14, 2015

A BILL TO BE ENTITLED

AN ACT to amend the statutes relating to the procedures in shareholder derivative suits.

The General Assembly of North Carolina enacts:

SECTION 1.  G.S. 55‑7‑40.1 reads as rewritten:

"§ 55‑7‑40.1.  Definitions.

In this Part:

(1)        "Derivative proceeding" means a Complaint. – A civil complaint filed in a derivative proceeding.

(1a)      Derivative proceeding. – A civil suit in the right of a domestic corporation or, to the extent provided in G.S. 55‑7‑47, in the right of a foreign corporation.

(2)        "Shareholder" has Shareholder. – Has the same meaning as in G.S. 55‑1‑40 and includes a beneficial owner whose shares are held in a voting trust or held by a nominee on the beneficial owner's behalf."

SECTION 2.  G.S. 55‑7‑42 reads as rewritten:

"§ 55‑7‑42.  Demand.Demand; rejection of demand.

(a)        No shareholder may commence a derivative proceeding until:

(1)        A written demand has been made upon the corporation to take suitable action; and

(2)        90 days have expired from the date the demand was made unless,unless one of the following applies:

a.         Prior prior to the expiration of the 90 days, the shareholder was notified that the corporation rejected the demand, or unless demand.

b.         The shareholder alleges with particularity, and the court determines, that imminent irreparable injury to the corporation would result by waiting for the expiration of the 90‑day period.

(b)        The failure of the corporation to respond to a demand shall not be deemed to be a decision or acknowledgement that the derivative proceeding is in the best interest of the corporation or should proceed, and such a failure does not compromise or affect any of the rights of the corporation under this Part or other applicable law.

(c)        In the event that the corporation rejects a demand, the corporation shall promptly provide the shareholder written notice of the rejection. The notice must include a summary of the reasons for the rejection of the demand and the identity of the directors of the corporation who approved the rejection of the demand."

SECTION 3.  G.S. 55‑7‑43 reads as rewritten:

"§ 55‑7‑43.  Stay of proceedings.

(a)        If the corporation commences or has commenced an inquiry into the allegations set forth in the a demand or complaint, complaint as permitted by G.S. 55‑7‑44(a)(2) or (3), except for motions and submittals in connection with the inquiry and such discovery as the court may expressly permit pursuant to G.S. 55‑7‑44(a)(2) or (3), the court may shall stay a derivative proceeding for a reasonable time period of time the court deems appropriate.while the corporation completes its inquiry and while the results of the inquiry are presented to and considered by the court.

(b)        The corporation or other defendants in a derivative proceeding may move to dismiss a complaint under G.S. 55‑7‑44(a)(4) or (5) at any time (i) prior to, during, or subsequent to any inquiry by the corporation into the allegations set forth in a demand or complaint, and (ii) either before or after the court's ruling on any motion that may be brought under G.S. 55‑7‑44(a)(2) or (3). If a corporation or any other defendant in a derivative proceeding files a motion to dismiss under G.S. 55‑7‑44(a)(4) or (5), all discovery in the proceeding is stayed until the motion to dismiss is denied, with the exception of any discovery expressly permitted by the court pursuant to G.S. 55‑7‑44(a)(2) or (3).

(c)        Nothing in this section restricts the right of a shareholder to inspect records of the corporation as provided in Article 16 of this Chapter."

SECTION 4.  G.S. 55‑7‑44 reads as rewritten:

"§ 55‑7‑44.  Dismissal.

(a)        The court shall dismiss a derivative proceeding on motion of the corporation if one of the groups specified in subsection (b) or (f) of this section determines in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the derivative proceeding is not in the best interest of the corporation.

(b)        Unless a panel is appointed pursuant to subsection (f) of this section, the inquiry and determination shall be made by:

(1)        A majority vote of independent directors present at a meeting of the board of directors if the independent directors constitute a quorum; or

(2)        A majority vote of a committee consisting of two or more independent directors appointed by majority vote of independent directors present at a meeting of the board of directors, whether or not the independent directors constituted a quorum.

(c)        For purposes of this section, none of the following factors by itself shall cause a director to be considered not independent:

(1)        The nomination or election of the director by persons who are defendants in the derivative proceeding or against whom action is demanded;

(2)        The naming of the director as a defendant in the derivative proceeding or as a person against whom action is demanded; or

(3)        The approval by the director of the act being challenged in the derivative proceeding or demand if the act resulted in no personal benefit to the director.

(d)        If a derivative proceeding is commenced after a determination has been made rejecting a demand by a shareholder, the complaint shall allege with particularity facts establishing that the requirements of subsection (a) of this section have not been met. Defendants may make a motion to dismiss a complaint under subsection (a) of this section for failure to comply with this subsection. Prior to the court's ruling on such a motion to dismiss, the plaintiff shall be entitled to discovery only with respect to the issues presented by the motion and only if and to the extent that the plaintiff has alleged such facts with particularity. The preliminary discovery shall be limited solely to matters germane and necessary to support the facts alleged with particularity relating solely to the requirements of subsection (a) of this section.

(e)        If a majority of the board of directors does not consist of independent directors at the time the determination is made, the corporation shall have the burden of proving that the requirements of subsection (a) of this section have been met. If a majority of the board of directors consists of independent directors at the time the determination is made, the plaintiff shall have the burden of proving that the requirements of subsection (a) of this section have not been met.

(f)         The court may appoint a panel of one or more independent persons upon motion of the corporation to make a determination whether the maintenance of the derivative proceeding is in the best interest of the corporation. The plaintiff shall have the burden of proving that the requirements of subsection (a) of this section have not been met.

(a)        The court shall dismiss a derivative proceeding on motion of the corporation or any other defendant in the derivative proceeding in any of the following circumstances:

(1)        A corporation institutes or has instituted its own proceeding to address or seek relief on account of, or with respect to, the events, transactions, or occurrences set forth in the demand or the complaint.

(2)        Prior to the commencement of the derivative proceeding, a majority of the qualified directors of the corporation or a majority of a committee comprised of one or more qualified directors has determined, following a reasonable inquiry, that the institution of a derivative proceeding is not in the best interests of the corporation and rejects the shareholder's demand. If the complaint alleges with particularity facts demonstrating that the determination was not approved either by a majority of the qualified directors or a majority of a committee comprised of one or more qualified directors acting in good faith and after a reasonable inquiry, the court may permit discovery limited to the facts that are alleged with particularity. The court shall dismiss the proceeding if the plaintiff fails to sustain the burden of showing by clear and convincing evidence that the determination was not so approved.

(3)        After commencement of a derivative proceeding, a majority of the qualified directors of the corporation, a majority of a committee comprised of one or more qualified directors, or a majority of a panel appointed by the court under subsection (e) of this section has determined, following a reasonable inquiry, that the maintenance of the derivative proceeding is not in the best interests of the corporation and authorizes the corporation to request dismissal of the derivative proceeding. If in response to the motion requesting dismissal, the plaintiff alleges with particularity facts demonstrating that the determination was not approved by a majority of the qualified directors, a majority of a committee comprised of one or more qualified directors, or a majority of the court‑appointed panel acting in good faith and after a reasonable inquiry, the court may permit discovery limited to the facts that are alleged with particularity. The court shall dismiss the proceeding if the plaintiff fails to sustain the burden of showing by clear and convincing evidence that the determination was not so approved.

(4)        The shareholder has failed to comply with the requirements of G.S. 55‑7‑42(a).

(5)        The court determines that the proceeding should be dismissed for failure to state a claim upon which relief can be granted, or for any other reason enumerated in G.S. 1A‑1, Rule 12.

(b)        A court's decision not to dismiss a derivative proceeding under subdivision (a)(2) of this section does not preclude the corporation from commencing an inquiry into the allegations set forth in a complaint and seeking dismissal thereof as provided in subdivision (a)(3) of this section, nor does it preclude the corporation or any defendant in a derivative proceeding from seeking dismissal under subdivision (a)(4) or (5) of this section.

(c)        An inquiry in response to a demand or complaint may be conducted by directors, officers, employees, attorneys, or agents of the corporation acting at the direction of the corporation, its board of directors or a committee thereof. In determining whether such an inquiry is reasonable, the court shall consider, among other relevant matters, the scope of the inquiry relative to the particularity of the allegations made in the demand or complaint, as the case may be.

(d)        A board of directors may appoint a committee of one or more qualified directors, even though a majority of the board of directors is not comprised of qualified directors, so long as the board of directors acts with approval of a majority of the qualified directors.

(e)        Upon motion by the corporation, the court may appoint a panel of one or more individuals to direct an inquiry and make a determination whether the maintenance of the derivative proceeding is in the best interests of the corporation.

(f)         The following definitions apply in this section:

(1)        Material interest. – An actual or potential benefit or detriment (other than one which would devolve on the corporation or the shareholders generally) that would reasonably be expected to impair the objectivity of a director's judgment when participating in the action to be taken.

(2)        Material relationship. – A familial, financial, professional, employment, or other relationship that would reasonably be expected to impair the objectivity of a director's judgment when participating in the action to be taken.

(3)        Qualified director. – A director of the corporation who, at the time action is taken that relates to this Part, does not have a material interest in the outcome of the proceeding or a material relationship with a person who has such an interest. The presence of one or more of the following circumstances does not automatically prevent a director from being a qualified director:

a.         Nomination or election of the director to the current board by any director who is not a qualified director with respect to the matter (or by any person that has a material relationship with that director), acting alone or participating with others.

b.         Service as a director of another corporation of which a director who is not a qualified director with respect to the matter (or any individual who has a material relationship with that director) is or was also a director.

c.         Status as a named defendant, as a director against whom action is demanded, or as a director who approved the conduct being challenged."

SECTION 5.  G.S. 55‑7‑45(a) reads as rewritten:

"(a)       A derivative proceeding may not be discontinued or settled without the court's approval. If the court determines that a proposed discontinuance or settlement will substantially affect the interests of the corporation's shareholders or a class of shareholders, the court shall direct that notice be given to the shareholders affected. Notice may be provided in any method approved by the court, including, for a public corporation, by publication of a press release through a news release service with national distribution."

SECTION 6.  G.S. 55‑7‑47 reads as rewritten:

"§ 55‑7‑47.  Applicability to foreign corporations.

In any derivative proceeding in the right of a foreign corporation, the matters covered by this Part shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation except for the matters governed by G.S. 55‑7‑43, 55‑7‑45, and 55‑7‑46. The  repose period in G.S. 55‑7‑48(2) applies to a foreign corporation if its principal office is located in North Carolina."

SECTION 7.  G.S. 55‑7‑48 reads as rewritten:

"§ 55‑7‑48.  Suits against directors of public corporations.

In addition to the requirements of this Part, the plaintiff in an action a derivative proceeding brought on behalf of a corporation that is a public corporation at the time of the action against one or more of its directors for monetary damages shall:

(1)        Allege, and it must appear, that each plaintiff has been a shareholder or holder of a beneficial interest in shares of the corporation for at least one year;

(2)        Bring the action within two years of the date of the transaction of which the plaintiff complains; and

(3)        If the court orders, upon motion made by the corporation at any time prior to the final resolution of the proceeding, execute and deposit with the clerk of court a written undertaking with sufficient surety, approved by the court, to indemnify the corporation against any and all expenses reasonably expected to be incurred by the corporation in connection with the proceeding, including attorneys' fees and any expenses arising by way of indemnity. In determining whether to require such an undertaking, the court shall consider whether the derivative proceeding appears to have been commenced or maintained without reasonable cause or for an improper purpose."

SECTION 8.  G.S. 55‑8‑25(b1) is repealed.

SECTION 9.  This act becomes effective October 1, 2015, and applies to demands made and complaints filed on or after that date.