If a town council member or county commissioner owns stock in a corporation, or serves as an officer of that corporation, can the town or county lawfully enter into a contract with the corporation?
Plain-English summary
John F. Kime, Town Manager of Liberty, North Carolina, asked the AG whether a public officer (a council member, county commissioner, board member) could lawfully be on both sides of a contract between his public body and a corporation in which he held stock or served as an officer.
The 1978 AG answered no. The general rule is well established: a public officer who is either a stockholder or officer of a corporation that enters into a contractual relation with the office or the public body of which he is a member violates the statute prohibiting public officers from having a direct or indirect interest in any such contract, and runs against the public policy declared at common law.
The opinion relied on G.S. 14-234, the statutory self-dealing prohibition. The North Carolina Supreme Court had already held in State v. Williams, 153 N.C. 595, and Lexington Insulation Co. v. Davidson County, 243 N.C. 252, that G.S. 14-234 reaches an officer of a corporation in making contracts between the corporation and the city or county governing body of which he is a member.
The AG acknowledged that the North Carolina cases involve corporate officers, not mere stockholders. But courts in many other jurisdictions, applying statutes with similar broad language ("be in any manner interested," "make any contract for his own benefit," "be in any manner concerned or interested in making such contract"), apply the rule to stockholders as well. The AG opinion treated the broad statutory language as a basis for extending the rule.
The opinion also pointed to an earlier 1970 AG opinion (40 N.C.A.G. 565, March 13, 1970) that had held a school board prohibited from contracting with a wholly owned subsidiary of a parent company in which a board member held stock. That extends the rule even further: a board member's stock in the parent disqualifies a contract with the subsidiary.
The practical consequences in the 1978 AG opinion:
The contract is void.
Public funds expended under the void contract can be recovered, as an unlawful expenditure of public funds.
The administrative official who, knowing of the prohibited interest, contracts with or purchases supplies from the conflicted firm may himself be in violation of G.S. 14-230 (an additional criminal-misconduct-in-office statute).
Currency note
This opinion was issued in 1978. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The public officer conflict-of-interest law in North Carolina has been refined over the decades, with the Open Government and State Government Ethics Act adding additional disclosure and disqualification requirements at the state level, and local government conflict-of-interest provisions further elaborated. The basic principle (a public officer cannot self-deal through a corporate intermediary) is fundamental and survives, but the specific procedural mechanisms, recusal rules, and de minimis stockholder exceptions may differ today.
Historical context: what the AG concluded
The 1978 opinion did several pieces of interpretive work:
It read G.S. 14-234 broadly. The statute prohibits a public officer from being "in any manner interested" in a contract. Corporate officers are squarely within that language; the Supreme Court had already so held. Stockholders, though not addressed by North Carolina case law at that time, fit naturally within the same broad language.
It used the cross-jurisdiction consensus as persuasive authority. Many states had statutes with similar broad language and had applied them to stockholders. The opinion cited 140 C.L.R. 344 (a treatise reference) as collecting cases in support of the general rule. Although other states' decisions are not binding in North Carolina, where the statutory language is similar and the policy goal is the same, the consensus is persuasive.
It read the prohibition to cover indirect interests. The 1970 prior opinion's holding that a board member's stock in a parent corporation disqualified contracts with the parent's wholly owned subsidiary is significant. The interest can be one layer removed and still trigger the statutory bar. The opinion's framing of "indirect interest" carries that reach forward.
It put administrative officials on notice. G.S. 14-230 reaches administrative officials, separately from G.S. 14-234. An administrative official knowingly entering into a conflicted contract is exposed to misconduct-in-office liability. The 1978 opinion makes that exposure explicit, which serves a deterrence function.
It made the contract void, not merely voidable. The opinion treats the contract as void, and the funds as recoverable. That is a strong remedy. Many self-dealing rules in private corporate law make the resulting contract voidable at the corporation's election. The public sector rule is stricter: the contract has no legal effect.
Background and statutory framework
G.S. 14-234 is a criminal statute that prohibits a public officer from being interested in a contract entered into by the public body of which he is a member. The statute has its roots in early-twentieth-century North Carolina, and the legislature has periodically updated its scope and remedies.
The statutory phrase "be in any manner interested" is broad on purpose. The General Assembly wanted to cover not just direct contracts between the officer and the public body, but also contracts where the officer would benefit through corporate ownership, partnership, or other indirect arrangement.
State v. Williams (1910) and Lexington Insulation Co. v. Davidson County (1955) are the two North Carolina cases the 1978 opinion cited. State v. Williams established that the prohibition reaches a public officer who is a corporate officer of the contracting corporation. Lexington Insulation reaffirmed and applied the same principle to a county commissioner's role with an insulation supplier.
The 1970 AG opinion (40 N.C.A.G. 565) addressed the school board contracting with a wholly owned subsidiary. The principle there is that corporate-structure separation does not cleanse the conflict. If the public officer's stockholding ultimately ties him to the contracting entity through the corporate chain, the statutory bar applies.
G.S. 14-230, the related statute the opinion cited as exposing administrative officials, deals with misconduct in office. The opinion uses it to extend deterrence to the administrative side of the contracting transaction: not just the board member with the conflict, but the manager or purchasing officer who knowingly carries the deal through.
Common questions
Does a small minority stockholding (one share, two shares) trigger the bar?
The 1978 opinion does not address a de minimis exception. The statutory language ("in any manner interested") is broad and does not by its terms exempt small holdings. Other states have read de minimis exceptions into similar statutes, and North Carolina has likely refined this in subsequent law. Modern conflict-of-interest practice typically uses specific dollar or percentage thresholds, often tied to disclosure rather than absolute disqualification. The 1978 baseline is strict.
Can the board member just recuse and let the rest of the board approve the contract?
Recusal addresses some forms of conflict but does not cure the statutory bar in the 1978 framework. G.S. 14-234 prohibits the public officer's interest in the contract, not just his vote. A contract in which the officer has an interest is barred even if the officer abstains from voting. Modern conflict-of-interest law has built more elaborate recusal-based safe harbors.
What about contracts with the spouse's business or a family trust?
The 1978 opinion does not reach spousal or family-trust holdings. The general principle (direct or indirect interest) and the modern conflict-of-interest framework would typically reach close family relationships and trust structures. Specific application requires looking at current statutes and any local conflict-of-interest ordinance.
Can the contract be ratified later if the conflict is disclosed?
The 1978 opinion treats the contract as void. Void contracts are typically not subject to ratification; the legal effect is as if the contract never existed. Some specific remedies for innocent counterparties (return of value provided, restitution) may exist outside the contract framework, but the AG's basic position is that the contract has no force.
What is the practical effect on a supplier?
A supplier whose corporate officer happens to be on the buying public body should not bid on or perform contracts with that public body unless and until the conflict is resolved. If the conflict comes to light after performance, the public body may recover funds paid, leaving the supplier with no enforceable contract. The risk falls heavily on the supplier as well as the conflicted officer.
Source
- Landing page: https://ncdoj.gov/opinions/public-officer-contracting-with-corporation-which-he-is-stockholder-officer/
Citations
- N.C.G.S. § 14-234
- N.C.G.S. § 14-230
- State v. Williams, 153 N.C. 595
- Lexington Insulation Co. v. Davidson County, 243 N.C. 252
- 40 N.C.A.G. 565 (March 13, 1970)
- 140 C.L.R. 344 (treatise reference)
Original opinion text
Subject:
Requested By: John F. Kime, Town Manager, Liberty N.C.
Conclusion: Yes. The general rule is that a public officer who is either a stockholder or officer of a corporation which enters into a contractual relation with the office or the public body of which he is a member, violates a statute which prohibits such public officer from having a direct or indirect interest in any such contract, and is also against public policy as declared by the common law.
Many cases are cited in 140 C.L.R. 344 to support the above general rule. The North Carolina Supreme Court has held that the prohibition of G.S. 14-234 extends to an officer of a corporation in making contracts between the corporation and the city or county governing body of which he is a member. State v. Williams, 153 N.C. 595; Lexington Insulation Co. v. Davidson County, 243 N.C. 252.
Although we find no North Carolina cases involving a public official who was a mere stockholder in the corporation, the courts in many other jurisdictions apply the general rule stated above. Most of the statutes involved contained language similar to G.S. 14-234, "be in any manner interested", "make any contract for his own benefit", "be in any manner concerned or interested in making such contract . . ., "either privately or openly, singly or jointly with another".
In an opinion dated March 13, 1970, 40 N.C.A.G. 565, this Office held that a school board is prohibited from contracting with a wholly owned subsidiary company of a parent company in which a school board member has stock.
Any administrative official of a local unit of government, having knowledge that a board member has a prohibited interest in a corporation or business, who contracts with or purchases supplies from the firm or corporation may be in violation of G.S. 14-230, and in any event the contract would be void and the funds could be recovered as being an unlawful expenditure of public funds.
Rufus L. Edmisten
Attorney General
James F. Bullock
Senior Deputy Attorney General