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Supreme Court Gets Down to Business—Business Court Cases, That Is

With the reworking of N.C.G.S. § 7A-27 to provide a direct appeal to the Supreme Court of North Carolina from certain orders of the North Carolina Business Court, it was expected that our State’s highest court would start churning out business law opinions. The batch of opinions from the Supreme Court released on December 7th contained three opinions originating from the Business Court, but only two of these came directly from the Business Court; perhaps the most high profile of the bunch (Corwin v. British American Tobacco) arrived at the Supreme Court by way of the Court of Appeals and an allowed petition for discretionary review.

Corwin v. British American Tobacco

The Court, in a 4-3 opinion, followed existing Delaware law to hold that a corporation’s shareholder has standing to bring a direct claim against other shareholders for breach of fiduciary duty based on alleged voting power dilution. The defendants had alleged that the action was actually derivative and therefore required that a pre-suit demand be made on the corporation. The Court majority rejected this argument, holding that the case fell into one of the exceptions to the general rule prohibiting direct actions to recover damages suffered by a corporation because the plaintiff had alleged an injury “distinct from the injury sustained by the corporation itself.”

The Court then turned to the question of whether minority shareholders could owe a fiduciary duty to other minority shareholders if that first group of minority shareholders exercised actual control over the corporation’s board. That issue had never been decided by North Carolina’s highest court, but the Delaware rule is that a “controlling stockholder” can include a minority stockholder if that minority stockholder exercises domination over the corporation through actual control of corporate conduct. This issue remains undecided, as the Court sidestepped it by holding that even if it were to follow that Delaware rule, the complaint did not adequately allege that defendant British American Tobacco exercised actual control over the board of Reynolds American, Inc. The dissent argued that the complaint satisfied North Carolina’s liberal notice pleading standard and the Court therefore should have decided the ultimate question of whether North Carolina follows the Delaware approach.

It is curious that the Court would have this issue of first impression before it and choose not to take the opportunity to craft North Carolina law. Neither the majority opinion nor the dissent gave much in the way of hints as to how the Court would have come out had it actually decided the issue. However, as the Court followed Delaware law on the issue of standing, it would not be a stretch to predict that it would have similarly followed Delaware law on the issue that it declined to reach.

Another interesting sidenote to this case is found in footnote 7 of the majority opinion and concerns the Rule 12(b)(6) standard in North Carolina. The majority and dissent disagreed as to what that standard is, a disagreement that ultimately proved dispositive. The majority’s reference to that dispute in footnote 7 admits a possible “lack of doctrinal consistency in our standard of review for Rule 12(b)(6) motions.” The Court declined to address that potential inconsistency, as it was not one of the issues brought forward in the PDR, but the mere mention of it suggests that were the issue to be brought before the Court, we might see a movement more toward the Twombly/Iqbal plausibility standard that has revolutionized federal court 12(b)(6) motions for the past decade.

Azure Dolphin v. Barton

Azure Dolphin was a unanimous opinion affirming Judge Conrad’s order dismissing claims for lack of personal jurisdiction, failure to state a claim, and other grounds. The Court further affirmed the Business Court’s denial of the plaintiffs’ second motion for leave to amend.

From a business tort law perspective, this case analyzed the plaintiffs’ alleged “hybrid constructive fraud and breach of fiduciary duty claim” and what level of factual allegations is necessary to sufficiently state such a claim. The Court’s analysis focused on the requirement of pleading either a fiduciary relationship as a matter of law or a fiduciary relationship as a matter of fact and the types of factual allegations necessary to support such fiduciary relationships.

From an appellate law perspective, you may recall that we wrote about this case back in March because it involved the question of whether the file-stamp on the notice of appeal is dispositive as to the date of filing. The notice of appeal was stamped filed on 2 November 2017, but the deadline for filing was 1 November 2017. When the issue was brought before Judge Conrad, he deemed the appeal to have been timely filed based on an affidavit from an employee in the Forsyth County Clerk’s Office testifying that the notice had been filed on 1 November 2017 and the stamp of 2 November 2017 on the document was due to an “equipment error.” The Supreme Court did not address this issue at all, but by simply exercising jurisdiction over the appeal, the Court may have impliedly agreed with Judge Conrad’s ruling that external evidence (such as the affidavit from the clerk’s employee) can make timely an appeal that on its face is untimely.

North Carolina Acupuncture Licensing Board v. North Carolina Board of Physical Therapy Examiners

Finally, in a relatively dry opinion (pun intended), the Supreme Court held that the practice of “dry needling” constitutes physical therapy and therefore falls within the scope of North Carolina’s Physical Therapy Act. The Court’s analysis was focused on whether the Physical Therapy Board’s underlying decision, which was upheld by the Business Court, was consistent with its enabling statutes and administrative rules. Because the Supreme Court determined that the Physical Therapy Board’s interpretation was consistent with those statutes and rules, it thus deferred to the Board’s interpretation.

Of note, the Court rejected one of the Acupuncture Board’s arguments on the grounds that it would have required the Court to “determine the outcome of hypothetical enforcement actions, and it is no part of the courts to issue advisory opinions.” That statement may shed some light on the Court’s decision in British American Tobacco not to address the substantive issue of whether a minority stockholder that was “controlling” might owe a fiduciary duty to other minority stockholders; because the complaint did not allege sufficient facts to present a situation of such “control,” further analysis on the merits could have been construed as an advisory opinion on a hypothetical situation. Of course, it is not unheard of for a jurisdiction’s highest court to take an opportunity to establish the law when such opportunity presents itself, even if ruling on that particular issue is ultimately of no moment to the case that brought the issue to the court. On the other hand, courts have shown some reluctance to push the law forward too quickly.

–Patrick Kane

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