Court Opinion

ID: 9584618
Source: CourtListenerOpinion
Date Created: 2023-08-21 22:50:45.687768+00
Date Added: 2024-06-11T15:10:31.657578
License: Public Domain

GEER, Judge,
concurring in the result.
I do not agree with the majority opinion’s view that a director does not have a conflict of interest when voting in favor of his or her spouse or child, and I do not agree with that opinion’s analysis of plaintiffs’ claims regarding defendants’ votes. Nonetheless, I concur in the decision to affirm the trial court’s decision granting summary judgment for the following reasons.
Plaintiffs asserted two claims for relief in their amended complaint. First, with respect to votes of the Southern Hosiery Mills, Inc. Board of Directors, plaintiffs asked for a declaratory judgment that the votes of Martha Mullins (wife of Phillip Mullins), Virginia Shehan (daughter of Mr. Mullins), and Peter Menzies (son of Mr. Mullins) “did not (and will not) count in determining matters related to Phillip Mullins or Virginia Shehan.” Second, plaintiffs asserted a shareholder derivative action seeking, on behalf of the company, recovery of payments made to Mr. Mullins or for his benefit.
For the declaratory judgment action, plaintiffs rely exclusively on N.C. Gen. Stat. § 55-8-31 (2005). That statute defines “[a] conflict of interest transaction [as] a transaction with the corporation in which a director of the corporation has a direct or indirect interest.” N.C. Gen. Stat. § 55-8-31(a). The statute defines an “indirect interest,” N.C. Gen. Stat. § 55-8-31(b), but leaves undefined a “direct interest.” Defendants contend — and the majority opinion agrees — that a director does not have a “direct interest” in a transaction even when that transaction benefits his or her spouse or child.
I believe this conclusion is illogical and inconsistent with the general understanding of the corporate world. As the leading commentator on North Carolina corporate law has stated:
The statute does not define a direct interest, but instead leaves the point to common sense. Certainly a director normally would *595be deemed to have a direct interest if he or a member of his immediate family (in the common use of that term) has either a material financial interest in the transaction or a relationship with the other parties to the transaction that reasonably might be expected to affect his judgment in a manner adverse to the corporation. Any other types of direct interest are left to the courts to identify under the particular circumstances.
Russell Robinson, North Carolina Corporation Law § 15.01 (2006) (emphasis added). See also 18 Am. Jur. 2d, Corporations § 1502 (“The rule condemning transactions of corporate officers and directors with the corporation where they represent both themselves and the corporation extends to transactions by, or on behalf of, the spouse or other relative of such officers or directors.”).
I agree with Mr. Robinson that it is a common sense conclusion that a director has a “direct interest” in a transaction when a spouse — with whom he or she lives and may have joint finances — will personally benefit from that transaction. Similarly, I cannot conclude that a director is unbiased with respect to a transaction benefitting his or her child.
Indeed, the Revised Model Business Corporation Act specifically states in comment 5 of the official commentary to section 8.31, the section that was the basis for N.C. Gen. Stat. § 55-8-31: “For purposes of section 8.31 a director should normally be viewed as interested in a transaction if he or the immediate members of his family have a financial interest in the transaction . . . .” Revised Model Bus. Corp. Act § 8.31 cmt. 5 (1985) (emphasis added). I can conceive of no reason to apply a different interpretation to N.C. Gen. Stat. § 55-8-31 than that of the Model Act, especially when the General Assembly would have been fully aware of the Model Act’s commentary when enacting our Business Corporation Act. This interpretation is also consistent with opinions of this Court in analogous situations. See Lowder v. All Star Mills, Inc., 103 N.C. App. 479, 482, 405 S.E.2d 794, 796 (“Jeanne Lowder’s claims arise from and depend on the role of her husband as officer of the corporation. To regard her claims otherwise would be to enable officers of a corporation to defraud their companies and avoid any accounting or detection by acting through their spouses and then allowing a spouse to assert claims.”), disc. review denied, 330 N.C. 119, 409 S.E.2d 595 (1991); cf. City of Asheville v. Morris, 133 N.C. App. 90, 92, 514 S.E.2d 289, 291 (1999) (holding that Civil Service Board members had “interests in the matter” and should have *596recused themselves when one member had a husband and another a son who would be affected by the Board’s decision).
Moreover, there is no need, in this case, to decide this issue. According to plaintiffs, N.C. Gen. Stat. § 55-8-31 invalidated any votes by the Mullins shareholders. The plain language of the statute is contrary to this contention. Accordingly, I would simply hold that plaintiffs failed to establish a legal basis for invalidating the votes, regardless whether the Mullins shareholders had a direct or indirect interest in any transactions.
N.C. Gen. Stat. § 55-8-31 never specifically addresses who may vote with respect to a transaction, but instead addresses only the validity of a “conflict of interest transaction.” As the North Carolina commentary to this section states, the statute establishes that “a conflict of interest transaction ‘is not voidable by the corporation solely because of the director’s interest’ if it passes one of the three prescribed tests . . . .” N.C. Gen. Stat. § 55-8-31 commentary (quoting N.C. Gen. Stat. § 55-8-31(a)). Mr. Robinson explains: “[T]he statute has the limited purpose and effect of defining more fully the common-law rule of the voidability of transactions because of a conflict of interest . . . .” Robinson, supra, § 15.01 (emphasis added). See Revised Model Bus. Corp. Act § 8.31 cmt. 1 (“The sole purpose of section 8.31 is to sharply limit the common law principle of automatic voidability . . . .”).
N.C. Gen. Stat. § 55-8-31(a) specifically provides:
A conflict of interest transaction is not voidable by the corporation solely because of the director’s interest in the transaction if any one of the following is true:
(1) The material facts of the transaction and the director’s interest were disclosed or known to the board of directors or a committee of the board of directors and the board of directors or committee authorized, approved, or ratified the transaction;
(2) The material facts of the transaction and the director’s interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction; or
(3)The transaction was fair to the corporation.
*597With respect to the vote by the board of directors addressed in § 55-8-31(a)(l), there must be an “affirmative vote of a majority of the directors on the board of directors (or on the committee) who have no direct or indirect interest in the transaction.” N.C. Gen. Stat.. § 55-8-31(c). The statute adds, however, that “[t]he presence of, or a vote cast by, a director with a direct or indirect interest in the transaction does not affect the validity of any action taken under subsection (a)(1) of this section if the transaction is otherwise authorized, approved, or ratified as provided in that subsection.” Id. (emphases added).
Adopting plaintiffs’ position would effectively negate N.C. Gen. Stat. § 55-8-31(a) and (c). According to plaintiffs, any conflict of interest transaction for which an interested director voted would automatically be invalid if there were not enough disinterested votes to constitute a majority of the directors present. This view, rendering the vote invalid, disregards the description, in § 55-8-31(a), of a “conflict of interest transaction” as only “voidable.” Black’s Law Dictionary 1605 (8th ed. 2004) (emphasis added) defines “voidable” as “describing] a valid act that may be voided rather than an invalid act that may be ratified.” Compare id. 1604 (“Whenever technical accuracy is required, void can be properly applied only to those provisions that are of no effect whatsoever — those that are an absolute nullity.”).
Significantly, under plaintiffs’ view, if a family-run, closely-held corporation had a board of directors composed only of the family members working in the business, no vote could ever be taken on a conflict of interest transaction because all of the votes would be invalidated. Plaintiffs fail to explain how that result can be reconciled with the requirement that “[a]ll corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors . . . .” N.C. Gen. Stat. § 55-8-01(b) (2005). Plaintiffs would, as a practical matter, require that all family-run, closely-held corporations have at least one non-family member on the board of directors. This has never been the law in North Carolina, where such family businesses are not uncommon.
Further, plaintiffs’ approach would eviscerate the portion of the statute providing that a conflict of interest transaction is not even voidable if it is approved by a majority of disinterested directors, is approved by the shareholders, or was fair to the corporation. N.C. Gen. Stat. § 55-8-31 (a)(l)-(3). In light of subsections (a)(2) *598and (a)(3), the General Assembly could not have intended that § 55-8-31, standing alone, preclude any interested director from voting on a transaction.
Starting with § 55-8-31(a)(l), contrary to the precise language of § 55-8-31(c) that a vote cast by an interested director “does not affect the validity of any action taken under subsection (a)(1),” plaintiffs’ arguments suggest that such a vote could invalidate the transaction. For example, N.C. Gen. Stat. § 55-8-24(c) (2005) provides that “[i]f a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors unless the articles of incorporation or bylaws require the vote of a greater number of directors.”1 With a three-member board of directors, composed of two interested directors and one disinterested director, no action could be taken with respect to a conflict of interest transaction because a majority of the directors present would be required to abstain from voting. Although § 55-8-31(c) has been amended to provide that a single disinterested voter could ratify the transaction under § 55-8-31(a)(l), that provision would never come into play because the transaction could never be authorized in the first instance. See N.C. Gen. Stat. § 55-8-31 commentary (“Effective October 1, 2005, subsection (c) is amended to remove the limitation that a conflict of interest transaction may not be approved by a single disinterested director.”).
The other two subsections, (a)(2) and (a)(3), would likewise be stripped of any efficacy by plaintiffs’ approach. Plaintiffs would require that the majority voting for a conflict of interest transaction be composed of only disinterested directors. Otherwise, according to plaintiffs, the transaction would be invalid as not properly approved by the board of directors. Yet, subsections (a)(2) and (a)(3) specifically allow for a transaction to stand — despite the lack of necessary disinterested voting directors — if it was properly approved by the shareholders or if the transaction was fair to the corporation.
In short, I can find nothing in the North Carolina Business Corporation Act that supports plaintiffs’ request for a declaratory judgment that the Mullins family directors’ votes “did not (and will not) count *599in determining matters related to Phillip Mullins or Virginia Shehan.” For that reason, I would affirm the trial court’s order entering judgment on plaintiffs’ first claim for relief.2
Plaintiffs’ second claim for relief — a derivative action seeking repayment of funds paid to or on behalf of Phillip Mullins — rests on an assumption that the votes approving those payments were ineffective because family members of Mr. Mullins voted to approve the transactions. Plaintiffs seek return of all such “unauthorized payments.” My rejection of plaintiffs’ first claim for relief, therefore, necessarily results in the conclusion that the trial court properly granted summary judgment on the second claim for relief.
I believe that the transactions challenged by plaintiffs were “not voidable by the corporation,” N.C. Gen. Stat. § 55-8-31(a), if they “[were] fair to the corporation,” N.C. Gen. Stat. § 55-8-31(a)(3).3 Plaintiffs did not allege anywhere in their amended complaint that any of the challenged payments were unfair. Since the only .question presented by the amended complaint is whether the payments were “unauthorized,” there was no issue before the court regarding the fairness of the transactions to the corporation. Without any dispute over the fairness of the transactions, those transactions cannot be voided, and there is no basis for obtaining recovery of the funds from Mr. Mullins’ estate. I, therefore, agree that the trial court properly entered summary judgment on the second claim for relief.

. Notably, the commentary to the Revised Model Act states that “[t]he approval mechanisms” set forth in subsection (c) (addressing disinterested director approval) and subsection (d) (addressing shareholder approval) “relate only to the elimination of [the] automatic rule of voidability and do not address the manner in which the transactions must be approved under other sections of this Act.” Revised Model Bus. Corp. Act § 8.31 cmt. 1 (emphasis added).

. I, therefore, see no reason to address the majority opinion’s view that no transaction was involved. But see Fulton v. Talbert, 255 N.C. 183, 184, 120 S.E.2d 410, 411 (1961) (applying conflict of interest principles under former law to “contracts fixing the amount and method of paying compensation for services to be rendered” by officers).

. The parties do not dispute that subsections (a)(1) and (a)(2) of N.C. Gen. Stat. § 55-8-31 are not applicable.