This appeal presents a two-part question: Was Section 7 of Eastern’s bylaws, adopted 20 August 1971, a valid shareholders’ agreement; and, if so, was it subject to amendment under Section 4, which authorized amendment, repeal, or re-write of the bylaws by the affirmative vote of a majority of the stockholders?
The trial judge found as a fact that on 20 August 1971 all the shareholders of Eastern, by unanimous vote, adopted a set of bylaws. Among these was Section 7, which authorized the board of directors, by a majority vote, to designate an executive committee composed of three of its members — one from each of the three families who owned the stock of Eastern. This committee was given exclusive authority to select the company’s employees but the unanimous consent of its members was required for the employment of any individual. This finding is supported by plenary competent evidence in the record and therefore may not be disturbed on appeal.
Cogdill v. North Carolina State Highway Commission,
Defendants do not seriously question any of the trial judge’s findings of fact. They do, however, dispute his conclusions of law (1) that Section 7, albeit incorporated in the bylaws of 20 August 1971 by unanimous consent of the stockholders, was a shareholders’ agreement within the intent and meaning of G.S. 55-73(b); and (2) that Section 7 is binding upon the shareholders for a period not to exceed ten years from 20 August 1971 unless repealed or amended by the unanimous consent of all Eastern’s shareholders. These conclusions of law are subject to appellate review,
Harrelson v. Insurance Co.,
We shall here attempt no precise definition of a “shareholders’ agreement.” In a broad sense the term refers to *481 any agreement among two or more shareholders regarding their conduct in relation to the corporation whose shares they own. See N. C. Gen. Stats. § 55-73 (1975). The form and substance of such an agreement will vary with the nature of the business and the objectives of the parties. It may be an agreement between stockholders in a corporation the shares of which are publicly traded or one whose shares are closely held. However, “[agreements among shareholders are primarily a feature of close corporations.” 6 Cavitch, Business Organizations § 114.01 (1978). In the context of this case the term refers to an arrangement whereby all the shareholders in a close corporation, the stock of which is not traded in markets maintained by securities dealers or brokers, seek to conduct their business as if they were partners operating under a partnership agreement. G.S. 55-73(b).
By means of a shareholders’ agreement a small group of investors who seek gain from direct participation in their business and not from trading its stock or securities in the open market can adopt the decision-making procedures of partnership, avoid the consequences of majority rule (the standard operating procedure for corporations), and still enjoy the tax advantages and limited liability of a corporation. Such businesses are, with reason, often called “incorporated parnerships.” Cary, How Close Corporations May Enjoy Partnership Advantages: Planning for the Closely Held Firm. See 48 N.W. U.L. Rev. 427 (1953); 6 Cavitch, Business Corporations § 114.01 (1978).
In earlier years, when statutes and principles governing the law of corporations were principally concerned with corporations having publicly traded stocks, agreements among shareholders — whether taking the form of voting trusts, pooling agreements, or extrinsic contracts — confronted considerable judicial antipathy. Courts would invalidate such consensual arrangements on the grounds that they severed from the stock incidents of ownership, such as the rights of voting and alienation, or prevented stockholders from voting “in the best interests of the corporation,” or were inconsistent with the principle of majority rule embedded in the statutory norms. 1 O’Neal, Close Corporations, §§ 5.04, 5.06 (2nd Ed. 1971). In connection with close corporations, agreements were also stricken if they violated the judicial doctrine, succinctly enunciated in
Jackson v. Hooper,
Over the years, however, both courts and legislatures gradually changed their thinking about the relationship which incorporation created between the state and businessman and their attitutde toward shareholders’ agreements. 1 O’Neal, supra, § 3.52. For example, subject to certain specified limitations, voting trusts were expressly authorized by statutes, and shareholders were also given wider authority to agree upon arrangements deviating from certain corporate norms. See e.g., G.S. 55-§§ 16, 24, 28, 31, 56, 65, 66, and 72 (1975). As the number of closely held corporations increased, experience revealed that the problems of a corporation whose stock is not generally publicly traded are different from those of a publicly held corpration. The authorization of the shareholders’ agreements was a recognition of the needs of stockholders in a close corporation to be able to protect themselves from each other and from hostile invaders. 6 Cavitch, supra, § 114.01; 1 O’Neal, supra at § 1.11.
In such a business, if the internal “government” of the-corporation was conducted strictly by the vote of the majority of the outstanding shares, the largest shareholder(s) could dominate the policies of the corporation over the objections of other shareholders. “In a nutshell, Family A with 51% ownership of a close corporation can live in luxury off a profitable business while Family B starves with 49%.” Undoubtedly, “Family B” would not have invested their money in a rarely traded stock if they had thought that they would be excluded from the decision making process and thereby the benefits of the business. See, Latty, Close Corporations and the New North Carolina Business Corporation Act, 34 N.C.L. Rev. 432, 435 (1956) (hereinafter cited as Latty); O’Neal, “Squeeze-Outs” of Minority Shareholders, § 2.10 (1975).
To protect their investment minority shareholders frequently resort to agreements (usually, and wisely, made at the time of incorporation) between themselves and the other shareholders which guarantee to the minority such things as restrictions on the transfer of stock; a veto power over hiring and decisions concerning salaries, corporate policies or distribution of earnings; or procedures for resolving disputes or making fundamental changes in the corporate charter.
See
6 Cavitch,
supra,
§§ 114.02, 114.03[3]; Robinson, North Carolina Corporation Law and Practice § 7-7
*483
(2d Ed. 1974).
See generally
1 O’Neal, Close Corporations § 4.10 (2d Ed. 1971). The agreements may also require certain affirmative actions, such as the payment of dividends.
Geller v. Geller,
North Carolina authorized shareholders’ agreements in the Business Corporation Act of 1955, codified as G.S. 55-1, et seq. (1975). Professor O’Neal described this Act as “the first really extensive and imaginative statutory innovations on close corporations.” 1 O’Neal, Close Corporations, § 1.14a, Ch. 1-p. 57 (1971). See also Bradley, Toward a More Perfect Close Corporation — The Need for More and Improved Legislation, 54 Geo. L.J. 1145, 1146 (1966).
With respect to close corporations, the heart of the North Carolina Act is G.S. 55-73.
See
Latty,
supra
438-440. This statute labeled “Shareholders’ Agreements,” is divided into three sections. G.S. 55-73(a) validates and makes enforceable against its signatories for a limited period, a written “agreement between two or more shareholders” regarding the voting of their stock.
Stein v. Capital Outdoor Adv. Inc.,
G.S. 55-73(b) provides, inter alia, that “no written agreement to which all of the shareholders have actually assented . . . which relates to any phase of the affairs of the corporation, . . . shall be invalid ... on the ground that it is an attempt by the parties thereto to treat the corporation as if it were a partnership or to *484 arrange their relationships in a manner that would be appropriate only between partners.” Such an agreement may be “embodied in the charter or bylaws or in any side agreement in writing and signed by all the parties thereto.” This langauge has been widely borrowed for the close corporations statutes of several other jurisdictions. CAL. CORPORATIONS CODE ANN. § 300(b) (West 1977); DEL CODE ANN. tit. 8, § 354 (1975); FLA St. Ann. § 607.107 (West 1977); KAN. STAT. § 17-7214 (1974); MD. CORP & ASS’NS CODE § 104 (1973); PA. STAT. Ann. tit. 15 § 1385 (Purdon Supp. 1978-79); S. C. CODE Ann. § 33-11-220 (1977). However, no decision from any of these jurisdictions involving the questions we consider here has been called to our attention.
Counsel have debated at length the question whether Section 7 of Eastern’s bylaws is a bylaw or a shareholders’ agreement within the meaning of G.S. 55-73(b). In our view this debate is sterile, for these terms are not mutually exclusive. Bylaws which are unanimously enacted by all the shareholders of a corporation are also shareholders’ agreements. Consensual agreements coming with G.S. 55-73(b) are shareholders’ agreements whether they are embodied in the bylaws or in a duly executed side agreement. No particular title, phrasing or content is necessary for a consensual arrangement among all shareholders to constitute a “shareholders’ agreement.” Consequently, we hold that Section 7 of the bylaws adopted on 20 August 1971 is a shareholders’ agreement within the meaning of G.S. 55-73(b). The decision of the Court of Appeals to the contrary is disapproved.
However, contrary to the arguments of counsel, this holding does not determine this case. Since consensual arrangements among shareholders are
agreements
— the products of negotiation — they should be construed and enforced like any other contract so as to give effect to the intent of the parties as expressed in their agreements, unless they “violate the express charter or statutory provision, contemplate an illegal object, involve . . . fraud, oppression or wrong against other shareholders, or are made in consideration of a private benefit to the promisor. . . .”
Wilson v. McClenny,
The trial judge ruled that Section 7, as a shareholders’ agreement, was incapable of amendment or repeal for ten years except by unanimous assent of all the stockholders. Section 7, however, was only one of a complete set of bylaws, all of which —after a *485 section-by-section consideration which involved several revisions of Section 7 — were unanimously adopted as a whole by a vote of all of Eastern’s shareholders. Thus, the entire bylaws constituted an agreement among the shareholders. Article VIII, Section 4 of those bylaws (hereinafter “Section 4”) authorized the repeal of “these bylaws” by a majority vote of the directors, except as otherwise provided therein. As we noted in the preliminary statement of facts, neither in Section 7 nor elsewhere in the bylaws was there any other provision regarding amendment or repeal of “these bylaws.” Nothing else appearing, therefore, the presumption is that the parties intended Section 4 to apply to every section of the bylaws.
Plaintiffs argue, however, that because Section 7 is the only bylaw which “arranges [the shareholders’] relationships in a manner that would be appropriate only between partners,” it alone should be treated as a shareholders’ agreement and thus be the only bylaw not subject to amendment or repeal under Section 4. This contention misunderstands the significance of G.S. 55-73(b).
That section creates no distinctions between a shareholders’ agreement in which the parties seek to deal with the corporation as a partnership and any other stockholders’ agreement “which relates to any phase of the affairs of the corporation.” It adds nothing, either expressly or impliedly, to the words of the agreement; nor does it suspend the rules of contract law relating to its construction, modification or rescission. G.S. 55-73(b) merely provides that a shareholders’ agreement in which the parties seek to deal with affairs of the corporation in a manner “which would be appropriate only between partners”
is not invalid for that reason.
Section (b), like the other two sections of G.S. 58-73, simply abrogates, as to agreements within its purview, certain judicial doctrines which had formerly invalidated particular shareholders’ agreements on those grounds which the statute now disallows. A shareholders’ agreement is not valid and enforceable merely because it fits the specifications of G.S. 55-73. It can be invalidated under the law of contracts upon any ground which would entitle a party to such relief.
See Stein v. Capital Outdoor Ad., Inc., supra
at 84,
The reason for phrasing the provisions of G.S. 55-73 mainly in the negative was to provide latitude to both the shareholders who enter into agreements “which relate to . . . the affairs of the corporation” and to the courts which must construe and assess their *486 contracts. As pointed out by Professor Latty, the underlying purpose of the statute was to furnish shareholders “a legal framework within which partnership-like arrangements having a reasonable business purpose could be worked out with a substantial assurance of legal validity.” Latty, supra at 439. The statute was not intended to, and it does not, define “shareholders’ agreements” to mean only those arrangements which “are an attempt ... to treat the corporation as if it were a partnership” or which “arrange . . . relationships in a manner that would be appropriate only between partners.”
G.S. 55-73(b) permits shareholders to embody their agreement “in the charter or the bylaws or in any side agreement in writing signed by all the parties thereto.” Had Section 7 been a “side agreement” signed by all the stockholders, and not been made a part of the bylaws, it is plausible to argue that absent an internal provision governing its amendment it could be amended only by unanimous consent of all the stockholders. As the Court of Appeals noted in its opinion, “a shareholders’ agreement may not be altered or terminated except as provided by the agreement, or by all parties, or by operation of law.”
Blount v. Taft,
“All contemporaneously executed written instruments between the parties, relating to the subject matter of the contract, are to be construed together in determining what was undertaken.”
Yates v. Brown,
Ordinarily the function of a shareholders’ agreement is to avoid the consequences of majority rule or other statutory norms imposed by the corporate form. Since the purpose of these arrangements is to deviate from the structures which are generally regarded as the incidents of a corporation, it is not unreasonable to require that the degree of deviation intended be explicitly set out. Most commentators advise the draftsman of a shareholders’ agreement to include a specific provision governing amendments. See McNulty, Corporations and the Intertemporal Conflicts of Law, 55 Cal. L. Rev. 12, 27 et seq. (1967); O’Neal, Giving Shareholders Power to Veto Corporate Decisions; Use of Special Charter and Bylaw Provisions, 18 Law and Cont. Prob. 451, 469 (1953); O’Neal, “Squeeze-Outs” of Minority Shareholders, § 8.12 (1975). Requiring the insertion of such an amendment provision works no undue hardship on the parties if all are agreed upon its inclusion. McNulty, 55 Cal. L. Rev., supra.
Having concluded that the shareholders made Section 7 subject to the amendment power conferred upon the directors by Section 4, it will be enforced unless enforcement would contravene some principle of equity or public policy. Plaintiffs have not alleged that the acts of defendant constituted oppression or a breach of a fiduciary duty imposed by G.S. 55-32, G.S. 55-73(c), or the common law.
See Goines v. Long Mfg. Co.,
*488 This decision, of course, will expose plaintiffs as minority shareholders in a close corporation to a risk from which Section 7 for a while protected them. However, minority shareholders who would have protection greater than that afforded by Chapter 55 of the General Statutes and the judicial doctrines prohibiting breach of a fiduciary relationship must secure it themselves in the form of “a well drawn” shareholders’ agreement.
For the reasons stated in this opinion the action of the Court of Appeals in reversing the judgment of the trial court is
Affirmed.