Category: Business Law Section

New Tools for Your Corporate Law Toolbox in Recent Changes to the North Carolina Business Corporation Act

By David B. Clement

The General Assembly of North Carolina recently approved changes to the North Carolina Business Corporation Act, Chapter 55 of the General Statutes (the “NCBCA”), which the Governor signed into law on June 22, 2018 and which will take effect on October 1, 2018.[1]  The bill enacted into law (the “Act”) makes significant enhancements to North Carolina corporate law, the net effect of which is to:

  • eliminate any perceived advantage certain jurisdictions may have over North Carolina as business-friendly jurisdictions;
  • attract and retain qualified businesspersons as officers or board members of North Carolina corporations;
  • facilitate the efficient discharge of board duties, particularly for public companies subject to the Sarbanes-Oxley Act;
  • facilitate efficient corporation reorganizations and acquisitions; and
  • protect the reasonable expectations of shareholders with respect to their investments.

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Shareholder Inspection Rights for Closely Held Corporations

By Peter Webb

The North Carolina Business Court recently strengthened the hands of minority shareholders in closely-held corporations.  N.C. Gen. Stat. § 55-16-02(b) affords qualified shareholders the right to “inspect and copy: (1) [r]ecords of any final action taken with or without a meeting of the board of directors . . . ; (2) [a]ccounting records of the corporation; and (3) [t]he record of shareholder.”  In the recent case of Sharman v. Fortran Corp., the Business Court not only enforced the minority shareholder’s right to inspect and copy corporate and accounting records, but also awarded attorneys’ fees and court costs to the shareholder plaintiff.[1]  The decision sends a strong message to the directors of closely held corporation: Shareholders have a right to know how you are running the corporation.[2]

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You May Want To Give Nondisclosure Provisions Another Look

By Anderson Ellis

Whether in the context of an M&A transaction or the hiring of a key employee, business attorneys often find themselves drafting three standard contractual provisions aimed at protecting the business interests of their clients: noncompetition, nonsolicitation, and nondisclosure. While noncompetition and nonsolicitation provisions have long been scrutinized because of their inherent effect as restraints on trade, nondisclosure provisions have generally been subject to less judicial prejudice. However, a recent North Carolina Business Court decision may cause practitioners to reconsider the purpose and usefulness of nondisclosure provisions as they relate to the business interests their clients wish to protect.

In Duo-Fast Carolinas, Inc. v. Scott’s Hill Hardware & Supply Co., 2018 NCBC 2 (January 2, 2018), a salesman employed by a hardware company worked to attract business from local construction outfits in the Raleigh area. As part of his job, he saved customer contact information on his company phone, which became commingled with his personal contact book and email account through default syncing features on the device.  The salesman was terminated from the hardware company and returned his phone pursuant to the terms of his employment agreement, but unbeknownst to the salesman and his (now former) employer, the customer contacts remained in his personal contact book and email account. After beginning work with a competing hardware company in the area, the salesman discovered and began to use the old customer contact information in his personal contact book to attract customers to the new company. The salesman’s employment agreement, in addition to noncompetition provisions, contained a section entitled “Nondisclosure of Information,” which purported to prohibit him from “use[ing] or disclos[ing] for [his] own benefits or for the benefit of another or to the detriment of the [former employer] any of the [former employer’s] Trade Secrets or confidential and proprietary information” which included “the contents of any customer lists[,]” among other things, but notably lacked any time or geographical limitations. Id., ¶5. Upon discovering the salesman was soliciting some of its customers, the former employer filed a lawsuit against the salesman and his new employer alleging, among other things, breaches of the employment agreement. The case ended up in front of the North Carolina Business Court and each side filed a motion for summary judgment.

Plaintiff sued to enforce the noncompetition and nondisclosure restrictions against the Defendant, but the Court refused to do so.  In addition to finding that the noncompetition provisions were overbroad and did not protect the legitimate business interests of the employer, the Court made one key finding related to the nondisclosure provision that rendered it similarly unenforceable: the Court found that the information contained in the customer contact lists retained by the salesman were not sufficiently confidential in nature to be protected as such, since the identities of the customers were readily ascertainable by physically going to the customers’ construction sites. This lack of a business interest in the secrecy of the customer information indicated to the Court that the nondisclosure provision was more appropriately meant, in this instance, to prevent the individual defendant from soliciting customers for his business (a clear restraint of trade similar to a noncompetition provision) than to preserve Plaintiff’s legitimate business interests. Id., ¶46. When examined in this light, the Court found that the lack of time and geographical terms in the provision rendered it an overbroad restrictive covenant and declined to enforce it.

The key finding in this case – that information claimed to be private was “readily ascertainable” – may limit its applicability to agreements written for employers with complex customer-related information uniquely developed for a specific industry. Id., ¶45. However, the ruling does raise questions about the power of nondisclosure provisions to protect more general information (like client lists, which are the lifeblood of many sales-based businesses), as well as the level of scrutiny to which such provisions will be subject.  As a result, a prudent practitioner may consider adding reasonable time and geographical limitations to the terms of certain nondisclosure provisions as a safety measure for enforceability.

Business Section Members: Welcome to Your New Blog

By Stephen Later

This announcement marks a major turning point for the Business Law Section as we transition from our traditional newsletter to our new blog.  Jim Beckwith edited our newsletter for many years and, with his retirement, we decided to switch to a vehicle that will, we hope, offer more frequent delivery of news including updates on caselaw and legislative developments, Section business, and other matters of interest to our members.

The board of editors of our blog—Ben Baldwin, Abbie Baynes, Dave Clement, Ryan Coffield, Jonathan Jenkins, Bob Saunders, Andrew Steffensen, Jennifer Weaver, and Peter Webb—will rotate two-week periods of responsibility for blogs content.  We welcome additions to the board of editors as well as blog posters, so, if you are interested in joining the rotation or contributing an article or have ideas for topics, please reach out to Abbie Baynes, the chair of the board of editors, at abbie@gardnerskelton.com. Our success will, of course, depend upon the support and engagement of our members, so, if your inner Hemingway is searching for an outlet for expression, please reach out to Abbie or any of the other editors.

Thank you for your membership in the Business Law Section and, again, we welcome and encourage your participation in the blog or on a committee.  Our Section depends upon its members, so we hope that you take the opportunity to participate, and you will not be disappointed.

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