At the end of last week, the North Carolina General Assembly passed significant legislation affecting the State’s business legal climate. With large bipartisan majorities, the Legislature adopted Senate Bill 853 (SB 853), which is intended to improve the predictability of litigation in the Business Court and empowers companies to efficiently change their corporate structure creating new financing and disposition options. Senate Bill 648 (SB 648), which contains the “Abusive Patent Assertions Act,” makes the State a path breaking national leader in protecting the intellectual property of the innovation community against frivolous attacks by “Patent Trolls.” Similarly, the bill places North Carolina in a leadership position by empowering companies to better manage their litigation risks by enabling them to specify the State as the forum for certain disputes.
Our previous Client Alert of July 10, addressed that both of these bills were close to passing. This update addresses the final content of both bills, which the Governor is expected to sign soon. The bills should have a significant positive impact on the State’s business climate.
SB 853 “The Business Court Modernization Act”
Modernizing the Business Court
Legislators addressed the need to clarify issues around Business Court jurisdiction. For example, formerly, “internet” cases were within the Court’s jurisdiction. The term “internet” was not defined in the statute and raised concerns that cases that did not require special Business Court expertise could be filed in the Business Court. Disputes regarding the “internet” alone will not qualify for Business Court jurisdiction under the new legislation; the dispute would also need to involve other covered matters such as technology licensing issues. The legislation makes a number of other adjustments including giving the Business Court jurisdiction over certain high value contract disputes.
SB 853 also establishes direct appeal for Business Court cases to the Supreme Court. Now, instead of an appeal first being heard by a randomly assigned three-judge panel of the Court of Appeals, litigants can seek review directly to the Supreme Court, with review by the full panel of seven justices. This procedure is expected to expedite resolution of business disputes and add predictability to decisions involving important business issues.
Separately, in the Budget Bill, the General Assembly provided for two more Business Court judges in 2015.
Simplifying Holding Company Reorganizations
A holding company reorganization is a transaction whereby a new parent corporation (the holding company) becomes the sole shareholder of an existing corporation (the constituent corporation) either through a merger or a share exchange. Following a holding company reorganization, the shareholders of the constituent corporation become the shareholders of the holding company, and the directors of the constituent corporation become (or remain) the directors of the holding company. Holding company structures are employed for a variety of reasons, including segregating the liabilities of separate lines of business, allowing for structured leverage, and facilitating dispositions of assets. Holding company structures are often used by publicly-traded companies, particularly ones in heavily regulated industries.
Historically, in North Carolina, an existing operating company has been required to engage in either a merger or a share exchange transaction that would require a shareholder vote and, with respect to nonpublic corporations, generally trigger statutory appraisal rights. A number of states, led by Delaware, have enacted statutes that permit holding company reorganizations without shareholder approval and without appraisal rights. New Section 55-11-11 of the North Carolina Business Corporation Act (the Holding Company Statute) is modeled on Delaware’s holding company statute, and will allow holding company reorganizations in North Carolina without shareholder approval or appraisal rights, if certain statutory requirements are satisfied. The requirements protect shareholders of the constituent corporation so that they have substantially identical ownership and rights in the holding company following the merger.
The Holding Company Statute will reduce the cost and time required by North Carolina corporations to form a holding company by removing the requirement for a shareholder vote, eliminating appraisal rights in connection with the holding company reorganization and facilitating compliance with federal securities laws and regulations. Corporations that desire to adopt a holding company structure should carefully consider availing themselves of the benefits of this law.
SB 648 North Carolina Commerce Protection Act of 2014
Abusive Patent Assertions Act
Nationally, there is significant attention to the negative effects of “patent trolls” on the American economy and innovation. A “patent troll” does not research, develop technology or products related to its patents, or perform any technology transfer function. Instead, patent trolls acquire patents solely for the purpose of obtaining licensing fees from alleged infringers. Patent trolls often employ aggressive litigation tactics in the hopes that a target will pay a licensing fee rather than undertake expensive litigation.
With this legislation, our General Assembly sent a clear message, i.e., a patent troll threatens a North Carolina business at its own peril. The bill gives jurisdiction to a North Carolina court over any person or entity that sends a patent infringement demand letter to a North Carolina company, and empowers the North Carolina company to sue a troll in North Carolina, if the troll makes an unfair patent demand or files an unfair lawsuit anywhere against the North Carolina company. If the demand is found to be in bad faith, the bill provides for equitable relief, monetary damages, costs and reasonable attorneys’ fees, as well as “exemplary damages” of either $50,000 or triple the total damages, costs and fees, whichever is greater.
Perhaps most importantly, the law puts the individuals who control or direct the troll on the hook for their misconduct by enabling joinder of an “interested party,” i.e., a controlling stakeholder in the patent troll itself. Subject to the court making certain legal findings, if the defendant troll isn’t able to pay an award, the court could hold the interested parties jointly and severally liable and make them pay. That potential exposure to liability could provide a healthy deterrent to meritless litigation. This legislation makes North Carolina a path breaking national leader in protecting those who innovate and build our future.
Risk Management through Exclusive Venue Provisions
In another first-of-its-kind law, North Carolina now expressly confirms a corporation’s right to designate North Carolina as the exclusive forum for internal corporate litigation. The law creates a new section of the Business Corporations Act (§ 55-7-50) stating: “A provision in the articles of incorporation or bylaws of a corporation that specifies a forum or venue in North Carolina as the exclusive forum or venue for litigation relating to the internal affairs of the corporation shall be valid and enforceable.” For example, a company could require shareholder derivative actions, cases alleging a breach of fiduciary duty by the company's directors, and cases arising under the Business Corporation Act to be brought in North Carolina state court (where the North Carolina Business Court would have jurisdiction) or federal court in North Carolina.
Such a provision avoids the substantial expense of fighting shareholder litigation in multiple states simultaneously and ensures that internal corporate litigation is handled by a court familiar with the governing law and is convenient for the company and employees. Absent an enabling statute, however, such provisions have been challenged in litigation. By enacting this law, the General Assembly will provide certainty to North Carolina companies and give them a valuable tool to manage risks associated with internal corporate disputes. The law also puts North Carolina in a leadership position on this issue.
In debate on the bills, legislators were clear that they hope these changes will improve North Carolina’s business legal climate, such that businesses and shareholders can feel confident incorporating in North Carolina (as opposed to another state such as Delaware) and having their legal matters resolved by North Carolina courts. Similarly, the Anti-Patent Troll legislation will make North Carolina a better location for those working on the innovations that create jobs and our State’s future.