Public Officers and Employees; Conflict of Interest; Stockholder Subject to G.S. 14-234

Subject:

Public Officers and Employees; Conflict of Interest; Stockholder Subject to G.S. 14-234.

Requested By:

A. Dumay Gorham, Jr.
Attorney for New Hanover Memorial Hospital, Inc.

Questions:

1. Are trustees of New Hanover Memorial Hospital, Inc., subject to the provisions of G.S. 14-234?

2. Does a trustee’s ownership of stock in a company which does business with the hospital violate

G.S. 14-234?

Conclusion:

1. Yes.

2. Yes.

New Hanover Memorial Hospital, Inc. is a nonprofit corporation organized under the North Carolina Nonprofit Corporation Act. The corporation was formed to operate New Hanover Memorial Hospital in Wilmington, North Carolina. The trustees (directors) of the hospital are appointed by the New Hanover County Board of Commissioners. The land and buildings that comprise the hospital are owned by New Hanover County and leased to the corporation. Counsel has also stated that there is no substantial difference between the relationship of New Hanover County and New Hanover Memorial Hospital, Inc. and that of Wake County and Wake County Hospital System, Inc.

In The News and Observer Publishing Company, a Corporation v. Wake County Hospital System, Inc., 55 N.C. App. 1, 284 S.E. 2d 542 (1981), the Court of Appeals held that the hospital was an agency of the county under the North Carolina public records statutes. The ratio decidendi of that case is applicable here. G.S. 131-126.28 provides that the construction and operation of a hospital are both public and governmental functions and "are declared to be county functions and purposes." A person who exercises these functions is a public officer. "The true test of a public office seems to be that it is parcel of the administration of government, civil or military, or is itself created by the law-making power." Eliason v. Coleman, 86 N.C. 236, 240241, 89 S.E. 136 (1882). The fact that the trustees of the hospital serve on the board of directors of a nonprofit corporation is not determinative. "(T)he title of the authority in question, whether it be "agency" or "board" or "bureau" or "office" or "department" is irrelevant to assessing the power it exerts." The News and Observer Publishing Company, a Corporation, supra, at 12. It is the opinion of this Office that the trustees of New Hanover Memorial Hospital, Inc., are public officers and subject to G.S. 14-234.

In State v. Williams, 152 N.C. 595, 68 S.W. 900 (1910), the Supreme Court found the predecessor to G.S. 14-234 applicable to a president and director of a company who was also an alderman although there was no evidence of moral turpitude. "The application of this rule may in some instances appear to bear hard upon individuals who have committed no moral wrong; but it is essential to the keeping of all parties filling a fiduciary character to their duty, to preserve the rule in its integrity, and to apply it to every case which justly falls within its principle." (Id. at 599) The Court left open the question whether the statute was applicable to a mere stockholder. In State v. Weddell, 153 N.C. 587, 68 S.E. 897 (1910), the Court held that the statute was inapplicable to a person who was both an alderman and an employee of a contractor with the city. The special verdict in the case found that Mr. Weddell "had no interest in the profit or losses" of the company on the contract." (Id. at 589). In an opinion of this Office to Mr. John F. Kime, dated November 14, 1978 (48 N.C.A.G. 68), this Office concluded that a public officer who is a stockholder of a corporation which contracts with a public body of which he is a member violates

G.S.

14-234. Although no North Carolina cases were found on point, courts of other states, construing language similar to that in our statute, have concluded that the amount of stock is immaterial since even one share of stock constitutes the "interest" which bring the person within the prohibition of the law.

Counsel for New Hanover Memorial Hospital, Inc. suggests that the nonprofit corporation conflicts of interest rule which is supported by the American Hospital Association and the Joint Commission on Accreditation of Hospitals should control. The rule only requires disclosure and abstention from discussion and voting on a specific issue. In contrast, G.S. 14-234 prohibits the making of a contract where there is a conflict of interest. See 48 N.C.A.G. 68 (1978). Counsel also suggests that since the company in question, General Electric Company, has outstanding two hundred twenty seven million (227,000,000) shares of stock, the trustee’s holdings are insignificant and his interest in the company is insubstantial. Although there may be merit to counsel’s argument, the statute, however, is contrary and forbids the making of a contract where the public officer is "in any manner concerned or interested in making such contracts, or in the profits thereof." As indicated previously, the owner of only one share of stock of a for-profit company would have an interest in the profits of a contract and therefore an interest prohibited by

G.S.

14-234. As long as a trustee of the hospital is a stockholder in the General Electric Company, the hospital should not enter any contract with the company. Unlike State v. Williams, supra, it does not appear that the trustee’s position as General Manager of the Wilmington Manufacturing Department of the General Electric Company subjects the trustee to the penalties of G.S. 14-234 because, according to counsel’s letter, the Wilmington plant manufactures components of commercial nuclear reactors and not medical equipment and supplies for which the hospital would contract. Thus, the nexus between the position of public officer and corporate manager in the aforementioned case is not present here.

Rufus L. Edmisten Attorney General

Robert R. Reilly Assistant Attorney General