Judge Robinson recently issued an order containing what may be the first interpretation of the “Special Meeting” provisions of the North Carolina Business Corporation Act (the “Act”), N.C. Gen. Stat. §§ 55-7-02 and -03, in In re Matter of Special Shareholders’ Meeting of Phytonix Corporation. The statute provides shareholders with a mechanism to demand a prompt meeting on an issue of interest. In particular, the Act requires a non-public corporation to hold such a meeting
within 30 days after the holders of at least ten percent (10%) of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the corporation’s secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held.
N.C. Gen. Stat. § 55-7-02.
If the corporation does not timely hold the Special Meeting within those 30 days, “[t]he superior court of the county where a corporation’s principal office (or, if none in this State, its registered office) is located may, after notice is given to the corporation, summarily order a meeting to be held … on application of a shareholder who signs a demand for a special meeting valid under G.S. 55-7-02[.]” N.C. Gen. Stat. § 55-7-03.
In the Phytonix case, the shareholder delivered a valid demand for a special shareholders’ meeting pursuant to § 55-7-02 on December 4, 2019. Twenty-three days later, on December 27, 2019, the shareholder filed an Application pursuant to § 55-7-03, asking the superior court to summarily order the meeting.
Astute readers might notice that the Act gives the corporation 30 days to hold the Special Meeting, but the shareholder only waited 23 days before filing an action. Phytonix noticed the same discrepancy, and moved to dismiss the Application as premature—arguing that it still had a week to hold a Special Meeting when the shareholder asked for court intervention.
Judge Robinson disagreed. Looking deeper into the Act, Judge Robinson cited both the notice provisions of § 55-7-05(a) which require at least 10 days’ notice of the meeting and the Phytonix Bylaws which require 15 days’ notice. Finding that the larger notice period in the Bylaws controlled, the Court reasoned that Phytonix would have had to send appropriate notice of the Special Meeting at least 15 days before the end of the 30-day period required by the Act. In other words, Phytonix only had 15 days from the shareholder’s demand to properly notice the meeting, even though it had the full 30 days to hold the meeting. When December 19, 2019 came and went with no meeting noticed, it was a foregone conclusion that a proper meeting would not be timely held.
Phytonix had an alternative argument for dismissal that also failed. Phytonix had moved to dismiss the Application as moot because shortly after the shareholder filed the Application, the Phytonix Board passed a resolution to hold a Special Meeting on January 31, 2020. Once again, Judge Robinson disagreed, concluding that once the Court has the authority to summarily order the Special Meeting pursuant to the Act, it has “significant discretion” in setting the meeting terms. The Court listed several examples of such terms from § 55-7-05(b), including the meeting time and place, the shareholders entitled to participate, the quorum required for specific matters, and the discretion to award reasonable expenses including attorneys’ fees. In this instance, the meeting described in the Board Resolution differed from the meeting demanded by the shareholder, and therefore there was still a live controversy for the Court to determine. The Court then set out meeting terms that substantially varied from the Board resolution.
- Shareholder demands often require expeditious action, and a Special Meeting demand is no different. Because the Act requires at least 10 days’ notice of a Special Meeting, the 30-day deadline to hold a meeting becomes a 20-day deadline in practice—or even sooner, depending on the bylaws.
- A corporation that fails to timely hold a Special Meeting cannot necessarily get a “do over” by later voluntarily offering to hold a meeting, particularly if the conciliatory meeting differs from the shareholder’s demand.