March 2010

I’m not sure we’ve ever had the opportunity to describe a Business Court opinion as "epic" before, but here we are.  On Friday, in State v. Custard, the Court delivered a 70-page, 4-appendix opinion that’s the corporate governance equivalent of The Ten Commandments or Ben-HurIn addition to a thorough discussion of directors’ duties under North Carolina and Delaware law, the opinion answers four previously unanswered questions posed in the Robinson on North Carolina Corporation Law treatise that occupies a prominent shelf in every North Carolina business lawyer’s library.

Custard was a breach of fiduciary duty case brought by the Commissioner of Insurance as the liquidator of Commercial Casualty Insurance Company of North Carolina ("CCIC") against three directors of CCIC.  To make a long story short, CCIC focused on "artisan" liability insurance policies for small contractors and tradesmen in California.  For a period of time, it also offered non-standard auto policies in North Carolina and redomesticated itself from Georgia to North Carolina in 2001, thus becoming subject to NCDOI regulation.  In hindsight, CCIC set its premiums too low and wrote too many policies.  As the Court tactfully phrased it, "CCIC’s growth outperformed the Company’s ability to generate policyholder surplus."  It became insolvent in 2004.

Key points from Judge Tennille’s opinion include:

Continue Reading Business Court Blockbuster: If You Only Read One Corporate Governance Case This Year, Make It This One

If you have exchanged three-page letters with opposing counsel and held a short teleconference with dueling soliloquies on the scope of discovery relevance, you probably have complied with the meet & confer requirement that is a prerequisite to filing a motion to compel under North Carolina Rule 37 and any motion or objection related to discovery

Valuing a closely held business is often a debate over hypothetical dollars, particularly when the company’s sole asset is unproven technology.  The Business Court confronted such a situation recently in Vernon v. Cuomo.

The company in question developed a new technology with potential widespread medical application:  silicone-free syringes, which would enable syringes (especially of high-priced

What’s the difference between a patent holder who suffers harm from third-party infringement and a patent holder who suffers harm from his own attorney’s malpractice?  The latter can pursue his claim in state court, according to a March 9 Business Court decision.

In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the inventor of an "automated

[Ed. note:  The following article was written by Mack Sperling before his unplanned leave.  Although releasing it today is less timely than is Mack’s custom, the issues involved in the case are still of interest to businesses and business lawyers.  Any errors or shortcomings in the article are attributable to your substitute bloggers.]

On February 16, in Lynn v. Lynn, the Court of Appeals interpreted provisions of a Shareholders Agreement requiring the corporation to repurchase a shareholder’s "restricted shares" upon his death, with the purchase to be funded by the proceeds of a life insurance policy on the shareholder.

The trial court had found the Agreement to be ambiguous, and had considered a variety of extrinsic evidence in determining the ownership of the shares in question.  The Court of Appeals found no ambiguity, ruled that it had been error to consider the extrinsic evidence, but it nevertheless reached the same result as to ownership.

Background

A father (James) and his two sons (Greg and Kenneth) formed a corporation, James Lynn & Sons, Inc. Eventually, the father owned 51% and the sons each owned 24.5% of the company’s stock.

In 1993, the shareholders and their wives entered into a shareholders’ agreement requiring that upon death, each shareholder would sell his "restricted" shares back to the corporation for an amount equivalent to the face amount of a life insurance policy on his life, with the face amount to be adjusted annually. The corporation was to own the policies.

The sons kept life insurance in place, paid for by the company, which increased over time from $75,000 to $375,000. The corporation paid the premiums, though the brothers had the policies issued in their names as opposed to them being owned by the corporation.  They named their wives as beneficiaries of the policies. The father didn’t maintain insurance, due to expense, but upon his death in 1997 his executor sold his shares to the sons in a transaction referencing the Shareholders Agreement.

Later, the sons adjusted their ownership interests with Kenneth becoming the 55% majority owner and Greg holding a 45% interest.

Then it got interesting. Greg and his wife got divorced, and were involved in heated litigation over the equitable distribution of their property. Greg’s wife sued Kenneth, as majority shareholder, to establish that the shares of the company were subject to equitable distribution.

Kenneth then died unexpectedly.  His shares went to his estate.  The insurance proceeds went to his wife.  Greg’s ex-wife said that 100% of the shares were now subject to her equitable distribution claim.  Greg pretty much agreed with his ex-wife, and said that upon the payment of the life insurance proceeds to Kenneth’s wife, he held 100% of the shares.

Kenneth’s widow had a different point of view.  She said that the Shareholders Agreement only applied to "restricted shares," and that the shares held by her late husband did not fit that definition. She also said that the corporation hadn’t complied with the life insurance provision given that it did not own the policies. She said she was entitled to both the insurance proceeds and the shares.

Continue Reading NC Court of Appeals Interprets the “Purchase on Death” Provisions of a Shareholders Agreement