Blount v. Taft
246 S.E.2d 763, 1978 N.C. LEXIS 1014, 295 N.C. 472 (1978)
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Rule of Law:
When a shareholders' agreement is embodied within the corporate bylaws, it is subject to the amendment procedures provided for in those same bylaws. A general provision in the bylaws allowing for amendment by majority vote will apply to all bylaws, including those that function as shareholders' agreements, unless the agreement explicitly provides for a different amendment procedure.
Facts:
- Eastern was a close corporation with its stock held by three families.
- On August 20, 1971, all shareholders of Eastern unanimously voted to adopt a complete set of corporate bylaws.
- Section 7 of these bylaws established a three-member executive committee, with one member from each family, and required the unanimous consent of this committee for the employment of any individual.
- The same set of bylaws contained Section 4, which authorized the amendment, repeal, or rewrite of the bylaws by an affirmative vote of a majority of the stockholders.
- Sometime after August 20, 1971, a majority of the stockholders voted to amend Section 7, removing the unanimous consent requirement for hiring decisions.
Procedural Posture:
- The minority shareholders (plaintiffs) filed a lawsuit against the majority shareholders (defendants) in the trial court.
- The trial court concluded that Section 7 was a shareholders’ agreement under G.S. 55-73(b) and could not be amended for ten years without the unanimous consent of all shareholders.
- The defendants (appellees) appealed the trial court's decision to the North Carolina Court of Appeals.
- The Court of Appeals reversed the judgment of the trial court, finding in favor of the defendants.
- The Supreme Court of North Carolina then reviewed the decision of the Court of Appeals.
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Issue:
Does a unanimously adopted bylaw provision that functions as a shareholders' agreement remain subject to a separate bylaw provision, adopted at the same time, that allows for amendment of the bylaws by a majority vote?
Opinions:
Majority - Sharp, C.J.
Yes, a unanimously adopted bylaw provision that functions as a shareholders' agreement remains subject to a separate bylaw provision that allows for amendment by a majority vote. Bylaws unanimously enacted by all shareholders are also shareholders' agreements, but when parties choose to embody their agreement within the bylaws, they are presumed to have intended for the standard rules of bylaw amendment to apply. The court reasoned that all bylaws adopted contemporaneously must be construed together as a single contract. Here, the shareholders unanimously agreed to both Section 7 (the unanimity requirement for hiring) and Section 4 (the majority vote for amendment) at the same time. Since there was no language in Section 7 or elsewhere exempting it from the amendment provision in Section 4, the court concluded the parties intended for Section 7 to be amendable by a majority vote. If shareholders wish to protect a specific provision from amendment by majority rule, they must explicitly state this intention within the agreement or bylaws.
Analysis:
This decision clarifies the intersection of contract law and corporate governance, particularly for close corporations in North Carolina. It establishes that the placement of a shareholders' agreement within the corporate bylaws subjects it to the procedural rules governing those bylaws, including amendment provisions. The ruling serves as a crucial practice pointer for attorneys, emphasizing that special protections for minority shareholders, such as veto rights, must be explicitly shielded from general amendment clauses. Future courts will likely require clear and unambiguous language to deviate from standard corporate norms of majority rule, placing the burden on the drafters of corporate documents to insulate specific provisions from change.
