Eligibility of a Director of a Bank to Serve as a Member of the State Banking Commission

June 18, 1993

Honorable William T. Graham Commissioner of Banks State Banking Commission Dobbs Building 430 North Salisbury Street Raleigh, North Carolina

RE: Advisory Opinion – Eligibility of a Director of a Bank to Serve as a Member of the State Banking Commission; N.C.G.S. § 53-92

Dear Commissioner Graham:

This advisory opinion is given in response to your letter of June 2, 1993, to Special Deputy Attorney General Henry T. Rosser.

ISSUES

(1): Is a member of the board of directors of a bank who is not also an officer or employee of a bank eligible for appointment to the State Banking Commission?
(2): May a director who is not also an officer or employee of a bank, but who has been appointed and has taken the oath of office as a member of the State Banking Commission, lawfully serve as a member of the Commission?

CONCLUSIONS

(1): No.
(2): No.

FACTS

An individual who is a director and the chief executive officer of a bank holding company and also a director of a bank controlled by the holding company has been appointed, has taken the oath of office, and is serving as a member of the State Banking Commission. This individual holds no other office or employment with the bank of which he is a director or with any other bank.

DISCUSSION

(1) The qualifications for members of the State Banking Commission (Commission) are set out in G.S. § 53-92, which provides in pertinent part:

The Governor shall appoint five practical bankers and seven persons selected primarily as representatives of the borrowing public . . . . The persons selected primarily as representatives of the borrowing public shall not be employees or directors of any financial institution . . . . (Emphasis added.)

The term "practical banker" is defined in G.S. § 53-1(5) as:

[A]n officer or employee of a bank actively engaged in performing duties in managing or supervising or assisting in managing or supervising the conducting of a banking business, including any such banker who is in a retired status from such duties.

A director of a financial institution is expressly excluded by G.S. § 53-92 from serving as a Commission member selected as a representative of the borrowing public. At issue is (i) whether a bank is a financial institution within the purview of G.S. § 53-92, (ii) whether a bank holding company is a financial institution within the purview of that statue, and (iii) whether a person who has been elected a member of the board of directors of a bank is, by virtue of such election, also an officer of the bank within the purview of G.S. § 53-92 and, therefore, may serve as a practical banker member of the Commission.

No appellate cases of this State have been found which are dispositive, and Chapter 53 of the General Statutes does not define the term "financial institution." The term has been defined, however, as:

[A]ny organization authorized to do business under state or federal laws relating to financial institutions, including, without limitation, banks and trust companies, savings banks, building and loan associations, savings and loan companies or associations, and credit unions. Black’s Law Dictionary, 568 (5th ed. 1979).

While Chapter 53 does not define "financial institution," several other statutes do so. Thus, the term is defined as: [A]ny banking corporation or trust company, building and loan association, insurance company or related corporation, partnership, foundation, or other institution engaged primarily in lending or investing funds.

G.S.: § 53-37(8), relating to North Carolina enterprise corporations.

[A] person, firm or corporation engaged in the business of receiving, soliciting or accepting money or its equivalent on deposit and/or lending money or its equivalent.

G.S. § 54B-4(25), relating to savings and loan associations.

Although each of the foregoing definitions was designed to apply to the particular statutory scheme of which it is a part, all have in common a requirement that a "financial institution" be involved in the business of lending, and most require that it be a depository institution. It is clear, therefore, that a bank is a "financial institution." It is equally clear that a bank holding company is not. North Carolina bank holding companies are created under the provisions of the Business Corporation Act (G.S. Chap. 55) for the purpose of acquiring and holding the stock of banks. See

Articles 17 and 18 of Chapter 53 of the General Statutes. They are neither depository nor lending
institutions. We are of the opinion, however, that since the individual in question is a director of
a bank, he is disqualified by G.S. § 53-92 from serving as a member of the Commission
appointed to represent the borrowing public.

The question remains whether the individual in question may be appointed to serve as a practical
banker member of the Commission. Again, no dispositive North Carolina appellate decisions
have been found, and Chapter 53 of the General Statutes doe snot speak directly to this question.
To the extent not inconsistent with Chapter 53 or the business of banking, however, the laws
generally applicable to corporations, particularly those appearing in the corporations chapter of
the General Statutes, are made applicable to banks by G.S. § 53-135. A review of the provisions
of Chapter 53 relating to directors, see, e.g., G.S. §§ 53-43(1), 53-67, 53-78 through 83, shows
them to be consistent with the Business Corporation Act (G.S. Chap. 55). The general
corporation law view regarding directors as officers of a corporation is set out in 2 William M.
Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 271 (1990), as follows
(citations omitted):

In a broad sense, there is no doubt that a director of a corporation is an officer and is generally
embraced within the term "officers" as used in statutes. Thus, a director may be an officer within
a statute providing for verification of pleadings by a corporate officer. But a director has no
individual power of action as does an officer, who is usually elected or appointed by the board of
directors to perform specific duties as agent of the corporation. So, while the director is
ordinarily considered an officer, the director is not always such an officer as is contemplated by
certain statutes or bylaws, and there is no law forbidding a director to be also an employee and
agent of such corporation. Thus, although jurisdictions following the model business corporation
acts exclude directors from the term "employee," they also follow those acts in expressly stating
that a director may accept duties that would make him or her an employee. Statutes or bylaws
sometimes distinguish between directors who are elected by the stockholders and officers of the
corporation who are elected or appointed by the directors. Thus, a director is not an officer within
a statute providing that the directors may remove any "officers" when the interests of a
corporation shall require. So, directors may not be officers within a provision that salaries of
officers and employees shall be determined by the board of directors. Similarly, an executive
director and general manager of a corporation and its assistant general manager may be officers
and, consequently, not entitled to the preference for wages due employees other than officers.
The Revised Model Business Corporation Act clearly distinguishes between directors and
officers by consistently referring to the "appointment" of officers, as distinguished from the
"election" of directors. The Revised Model Act also consistently uses the word "elect" in
references to the selection of directors; this emphasizes the difference in the election process.

It has also been said:

A director is not a public officer; he is an officer of the corporation, but distinguished from the
general officers such as president, secretary, and treasurer.
19 C.J.S. Corporations §460.

Similarly, 18 B Am. Jur. 2d Corporations §1346 states:

Although a director of a corporation is not an officer in the sense that he may act alone for the corporation without specific authority, and directors have been held not to be officers within the meaning of some statutes, under another view directors have been regarded as corporate officers. Notwithstanding these principles, however, a director may be elected to a particular corporate office.

The North Carolina Business Corporation Act (G.S. Chap. 55) (hereinafter, the Act) is based on the Revised Model Business Corporation Act (1984), see G.S. § 55-1-01, North Carolina Commentary, and is consistent with the views expressed in Fletcher. Thus, G.S. § 55-8-01(b) provides, in pertinent part, that, "[a]ll corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors. . . ." As the North Carolina Commentary notes, this section requires that the board direct the management of the corporation’s business and affairs, while the former statute required that the board manage the corporation’s business. The statute makes clear, therefore, that the board of directors will perform a directory function, and that the management function lies elsewhere. The Official Comment to G.S. § 55-8-40, which provides for the appointment of officers by the corporation’s board of directors, states:

Throughout the Model Act, the act of a board designating an officer is referred to as an "appointment" rather than an "election." The Act also consistently uses the word "elect" when referring to the selection of directors, thus emphasizing the difference in the selection process.

The duties of officers are prescribed by G.S. § 55-8-41, which makes clear that their authority and duties shall be those prescribed by the bylaws or by the board of directors, directly or mediately. The officers, therefore, perform the management function, subject to the directory authority of the board under G.S. § 55-8-01.

Part 5 (Part E of the Model Act) of Article 8 of the Act provides for indemnification of directors, officers, agents, and employees of corporations. The term "director" is defined by G.S. § 53-850(2) as a person who was or is a director of a corporation or who, while a director of a corporation, at the corporation’s request, is or was serving as a director, an officer, or in some other capacity for another enterprise. Subsection (5) of that statute, in defining "official capacity," makes a clear distinction between a director and an officer, providing that the term applies, with respect to a director, to the office of a director or, with respect to one who is not a director, as contemplated by G.S. § 55-8-56, to the office in the corporation held by the officer. In other words, there are separate indemnification provisions for directors, on the one hand, and for officers, on the other.

The provisions of G.S. §§ 55-8-51 through 55-8-55 relate exclusively to the indemnification of directors. Indemnification of officers is provided for in G.S. § 55-8-56. The Official Comment for that statute states, inter alia:

(1): Subchapter E (except for section 8.56) applies only to, and limits the indemnification of, directors.
(2): An officer, agent or employee of a corporation who is not a director may be indemnified by the corporation on a discretionary basis to the same extent as though he were a director. . . .

(Emphasis in original.)

3. Officers who are not Directors

Section 8.56(1) grants nondirector officers the same mandatory rights to indemnification under section 8.52 . . . as are granted directors. Thus, the net effect of section 8.56 is to provide officers with no less protection than is provided directors. . . .

It is clear from the foregoing that, under the Act, directors and officers are distinct corporate offices which serve different functions, and that directors, simply by being elected to the board of directors, do not also become corporate officers. However, as has been previously indicated, a director may be considered an officer for certain statutory purposes. The question, then is whether a director is an officer within the contemplation of G.S. § 53-92. In our opinion, he is not. A "practical banker," by definition, is "an officer or employee of a bank actively engaged in performing duties in managing or supervising or assisting in managing or supervising the conducting of a banking business. . . ." (Emphasis added.) G.S. § 53-1(5). As has previously been discussed, active management or supervision is the function of an officer under the Act, G.S. § 55-8-41, while the function of a director is to direct management, G.S. §§ 55-8-01, 53-67. Further, there is nothing in Chapter 53 which indicates that the meanings of the terms "director" and "officer," as they are used in that chapter, should differ from the definitions of those terms appearing in Chapter 55. We conclude, therefore, that a "practical banker," within the meaning of

G.S. §§ 53-1(5) and 53-92, must be an officer or employee of a bank and that a director, simply by virtue of his election to the bank’s board, is not an officer or employee of a bank.

(2) You have also asked whether a director who is not also an officer or employee of a bank, but has been appointed and taken the oath of office as a member of the State Banking Commission, may lawfully serve as a member of the Commission. This office, in an advisory opinion to the Commissioner of Banks dated March 1, 1993, concluded that when the status of a serving member of the State Banking Commission changes, so that he would be ineligible if he were being considered for appointment, such member is disqualified from further service. Since the member there was eligible at the time of his appointment, whereas the director here was ineligible at the time of his appointment, then a fortiori, the director is disqualified from further service.

Ann Reed Senior Deputy Attorney General

Henry T. Rosser Special Deputy Attorney General