December 22, 1986
Subject:
Application of Professional Corporation Act, G.S. 55B to Employee Stock Ownership Plans (ESOP)
Requested By:
Julian Mann, III Attorney for the North Carolina Board of Architecture
Question:
Under G.S. 55B-6, may an architectural professional corporation establish an employee stock ownership plan (ESOP) wherein up to one third of the outstanding shares of the professional corporation are held in trust, by a trustee who is a licensed employee of the corporation, for the benefit of non-licensed employees of the corporation?
Conclusion:
Yes.
The Employee Stock Ownership Plan (ESOP) proposed here would have the following characteristics: The ESOP will be an agreement between the trustee (who will be a licensed shareholder of the corporation) and the corporation, under which the trustee will hold stock in the corporation for the benefit of corporation employees (hereinafter "participants"). The shares attributable to the accounts of the participants plus all shares owned by non-licensed shareholder employees will comprise less than one third of the total outstanding shares of the corporation.
The specific question posed here is whether the proposed ESOP would be in violation of G.S. 55B-6 which is set out in full as follows:
§ 55B-6. Capital stock.
"A professional corporation may issue shares of its capital stock only to a licensee as hereinabove defined, and such shareholders may voluntarily transfer such shares of stock issued to him only to another such licensee. No share or shares of any stock of such corporation shall be transferred upon the books of the corporation unless and until the corporation has received a certification of the appropriate licensing board that the transferee of such shares is a licensee as here defined. Provided, it shall be lawful in the case of professional corporations rendering services as defined in Chapters 83, 89A and 89C, for non-licensed employees of such corporation to own not more than one third of the total issued and outstanding shares of such corporation. Upon the transfer of any shares of such corporation to a non-licensed employee of such corporation, the corporation shall inform the appropriate licensing board of the name and address of the transferee and the number of shares issued to such nonprofessional transferee. Any share of stock of such corporation issued or transferred in violation of this section shall be null and void. No shareholder of a professional corporation shall enter into a voting trust agreement or any other type of agreement vesting in another person the authority to exercise the voting power of any or all of his stock. (1969, c. 718, s. 6; 1977, c. 855, s. 1.)"
It is the opinion of this office that the proposed ESOP does not constitute an illegal voting trust and that it fully complies with the requirements of G.S. 55B-6. The participants under the ESOP proposed here would be the beneficiaries of a trust, the corpus of the trust consisting of stock of the professional corporation. Thus the participants under the plan would be equitable but not legal owners of the stock which constitutes the corpus of the trust. Since the participants are never given or promised any legal interest in the stock, they have no voting power and they are incapable of entering into an agreement to vest the voting power of the stock in another. Obviously, one cannot agree to give away what he does not have.
The only "agreement" involved in this type of plan would be an agreement between the trustee and the corporation in which the trustee agrees to hold the shares for the participating employees. This does not constitute an agreement to vest the voting power of the stock in another person since the voting power of the stock at all times remains with the trustee. The proposed ESOP therefore does not constitute a prohibited voting trust.
The policy behind G.S. 55B-6 presumably is that of keeping majority control of a professional corporation in the hands of licensed professionals who will manage the corporation consistent with the ethical standards of the profession. (See Official Comment to Model Professional Corporation Act § 22). The proposed ESOP would in no way contravene this policy, nor would it violate the statute. All ESOP shares would be voted by the trustee, a licensed professional employee of the corporation. Moreover, the ESOP would absorb only so many shares as would allow the total number of shares owned by non-licensed employees (either equitably or legally) to be less than one third of the total amount of outstanding shares. This is consistent with G.S. 55B
6.
In conclusion, the ESOP proposed here does not violate G.S. 55B-6 because (1) all interests in the stock (both equitable and legal) will be held by authorized shareholders; and (2) there has been no "voting trust" whereby shareholders have agreed to convey away their voting rights.
Lacy H. Thornburg Attorney General
Richard G. Sowerby, Jr. Associate Attorney General