Does the UNC Health Care System have the legal authority to become Rex Healthcare's sole corporate member, and if it does, will Rex employees thereby become state employees?

Plain-English summary

This is the System-side companion to the Rex/UNC Health opinion of March 8, 2000. UNC Health Care System General Counsel Susan Ehringhaus asked Senior Deputy AG Grayson Kelley two narrower questions: did the System have legal authority to acquire sole-member control of Rex, and would Rex employees become state employees on closing.

Authority question. Yes. Chapter 212, Section 11.8 of the 1998 Session Laws created the System as an "affiliated enterprise" of UNC. Its statutory purpose under G.S. 116-37(a)(1) is broad: patient care, education, research, and public-service goals. The Act "neither endorses nor restricts the authority of the System to acquire additional health-care facilities in furtherance of its mission." Instead, G.S. 116-37(b)(4) authorizes the System's board to "exercise such authority and responsibility and adopt such policies, rules, and regulations as it deems necessary and appropriate" to meet those goals. That broad delegation, plus the management flexibility for purchasing, real property, and construction in G.S. 116-37(h), (i), and (j), gives the System the legal authority to acquire corporate control of Rex through the proposed sole-member structure.

The opinion is careful about what is being acquired. The System will not directly take Rex's physical facilities or real property. It will acquire corporate control through its contractually acquired status as sole corporate member and its power to appoint Rex board members. That control will let the System direct most management functions and responsibilities of Rex and its affiliates.

Employees question. No. Rex employees stay private. Chapter 126 (the State Personnel Act) defines and categorizes employees of state agencies, institutions, and boards. Chapter 135 defines "state employee" for retirement and major-medical benefits. Neither chapter extends to people employed by a 55A nonprofit corporation, even one whose sole member is a state agency.

Rex was originally established under the 1838 will of John Rex and reorganized under Chapter 55A in 1985 at legislative direction. It is governed by a Board of Trustees with full corporate powers. Its employees are private employees with no rights or benefits under any state employment system or benefit program.

The opinion concludes: "Acquisition of corporate control over Rex by the System will not, in our view, convert Rex from a private, not-for-profit corporation organized under Chapter 55A of the General Statutes into a state government agency, institution or board. Rex's employees will therefore remain employees of a private, not-for-profit corporation and will not, in our opinion, become employees of the State of North Carolina."

Currency note

This opinion was issued in 2000. 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.

UNC Health Care System (now UNC Health) absorbed Rex in 2000. The legal structure described here (sole-member control, private 55A status, private employee status) has held up under operating practice. Any present-day question about state-employee status for UNC Health affiliate employees should check both the current text of Chapter 116-37 and the post-2000 Board of Governors policies governing the System.

Common questions

Q: What is "sole corporate member" status?
A: In a Chapter 55A nonprofit corporation, a corporate member is roughly analogous to a shareholder in a business corporation: a person or entity with statutory voting rights and the power to elect the board. A "sole" corporate member is the only member, controlling all member-level decisions.

Q: Why did the System acquire member status rather than buying Rex's assets?
A: Several reasons. Asset purchase would have triggered tax, regulatory, and bond-financing complications. Sole-member acquisition keeps Rex intact as a corporation, preserves its tax-exempt status, preserves its existing contracts (since the corporation continues), and gives the System control without the operational complexity of a merger.

Q: Does sole-member control transform a 55A nonprofit into a state agency?
A: No, in the AG's view. The corporate form (55A nonprofit) determines the entity's legal character. Who controls it (private members or a state agency as sole member) affects governance, not legal classification. Rex remains a 55A nonprofit even when controlled by a state-affiliated enterprise.

Q: What about retirement benefits for Rex employees who later work for a state-controlled employer?
A: Chapter 135 defines who is in the state retirement system. Rex employees aren't covered. If a Rex employee transferred to the System itself (a state-affiliated employer), retirement coverage would attach at that point. But staying at Rex even under System control does not trigger Chapter 135 coverage.

Q: Does this opinion bind UNC?
A: AG opinions are advisory, not binding. Courts give them weight, and state agencies typically follow them when structuring transactions. But the doctrine here (state-affiliated control does not transform a private corporation into a state agency) is well-grounded in NC law and would likely be upheld if litigated.

Background and statutory framework

The University of North Carolina Health Care System sits in an unusual statutory niche. It is not the UNC School of Medicine itself, and it is not UNC Hospitals alone. It is an "affiliated enterprise" combining UNC Hospitals and the clinical patient-care programs of the School of Medicine, with its own board and considerable operational autonomy.

The 1998 Session Laws gave the System broad delegated authority. The legislature wanted the System to compete in the rapidly consolidating healthcare market without micromanagement from the General Assembly each time a strategic opportunity arose. The G.S. 116-37(b)(4) language ("exercise such authority and responsibility and adopt such policies, rules, and regulations as it deems necessary and appropriate") is one of the broadest statutory delegations to any state-affiliated entity.

In 1999, the System and Rex began negotiating the acquisition. Rex needed strategic support; the System wanted a broader service area. The deal structure (sole-member acquisition plus $163 million in payments) emerged from those negotiations. By February 2000, when Ehringhaus wrote, the basic deal structure was in place but final documents were still being finalized.

The AG's two-question opinion was the first of two parallel responses. This one, addressed to Ehringhaus, focused on whether the System could legally do the deal. The March 8 opinion to Representative Blue addressed broader public-interest questions (public-funds spending, oversight, immunities). Together they provided the legal cover for the transaction to close.

The opinion's lasting significance is the legal blueprint for state-affiliated acquisition of private nonprofits. The sole-member structure has since been used by other state-affiliated entities in NC and elsewhere as a way to achieve operational integration without losing 501(c)(3) tax exemption or triggering the state-employee complications of full agency status.

Citations

• N.C. Gen. Stat. § 116-37(a)(1) (System's statutory purpose)
• N.C. Gen. Stat. § 116-37(b)(4) (broad authority to act as necessary and appropriate)
• N.C. Gen. Stat. § 116-37(h), (i), (j) (purchasing, real property, construction flexibility)
• N.C. Gen. Stat. § 126-5 (definition of state employees under State Personnel Act)
• N.C. Gen. Stat. ch. 55A (Nonprofit Corporation Act)
• N.C. Gen. Stat. ch. 135 (Retirement System and Comprehensive Major Medical Plan)
• 1998 N.C. Sess. Laws ch. 212, § 11.8 (creating the UNC Health Care System)

Source

• Landing page: https://ncdoj.gov/opinions/authority-of-unc-health-care-system-to-acquire-control-of-rex-hospital/

Original opinion text

Re: Advisory Opinion; Authority of University of North Carolina Health Care System to Acquire Control of Rex Healthcare, Inc.

Dear Ms. Ehringhaus:

You have requested our opinion concerning certain legal issues related to the proposal of the University of North Carolina Health Care System ("System") to become the sole member of and to acquire one hundred percent (100%) control of Rex Healthcare, Inc. ("Rex"). The details of the proposed transaction are summarized in your letters of November 23, 1999 and February 10, 2000. In responding to your request we have primarily relied on these descriptions of the proposed transaction, as well as a draft Acquisition Agreement dated January 25, 2000, and a draft Endowment Agreement dated January 25, 2000.

It is our understanding that the transaction will involve two principal steps. First, the Articles of Organization and Bylaws of Rex will be amended to make the John Rex Endowment ("Endowment") the sole corporate member of Rex. The Endowment is a not-for-profit corporation organized in 1999. Its initial board of directors consists of the members of the current Rex board. At closing, the Endowment will transfer its membership of Rex to the System. The System will also acquire the power to appoint, directly or indirectly, all members of the Rex board and the boards of its affiliates. Additional powers which will be acquired by the System include the authority of the system's Chief Executive Officer to replace the Chief Executive Officers of Rex and its affiliates. This transaction will vest the System with corporate control over Rex and its affiliates.

As consideration for acquisition of this control, the System will transfer to the Endowment One Hundred Million Dollars ($100,000,000) at closing. The Endowment will thereafter, over a ten-year period, transfer to Rex Twenty-Five Million Dollars ($25,000,000) for capital projects approved by the System and Rex. The investment income from the remaining Seventy-Five Million Dollars ($75,000,000) will be used by the Endowment to support indigent care and community health programs. In addition, the System will transfer directly to Rex, over a ten-year period, Sixty-Three Million Dollars ($63,000,000) to fund strategic initiatives of Rex approved by the System.

Your first question is whether the System has the requisite legal authority to enter into this proposed transaction. The System was established by Chapter 212, Section 11.8 of the 1998 Session Laws, as an affiliated enterprise of the University of North Carolina. The System is comprised of the University of North Carolina Hospitals at Chapel Hill and the clinical patient care programs established or maintained by the School of Medicine of the University of North Carolina at Chapel Hill. The statutory purpose of the System is ". . . to provide patient care, facilitate the education of physicians and other health care providers, conduct research collaboratively with the health sciences schools of the University of North Carolina at Chapel Hill, and render other services designed to promote the health and well-being of citizens of North Carolina". G.S. § 116-37(a)(1). The statute neither endorses nor restricts the authority of the system to acquire additional health-care facilities in furtherance of its mission. Instead, G.S. § 116-37(b)(4) provides:

In meeting the patient-care, educational, research, and public-service goals of the University of North Carolina Health Care System, the board of directors is authorized to exercise such authority and responsibility and adopt such policies, rules, and regulations as it deems necessary and appropriate, not inconsistent with the provisions of this section or the policies of the Board of Governors.

The System is further authorized to establish, subject to certain limitations, its own policies, rules, regulations and procedures for purchasing requirements, real property transactions, and design, construction and renovation activities. G.S. § 116-37(h), (i) and (j).

It is our understanding of the proposed transaction that the System will not directly acquire the physical facilities, real property or other tangible assets of Rex and its affiliates. The System will instead acquire corporate control through its contractually acquired status as sole corporate member of Rex and its power to control the process of appointing board members. This corporate control, along with certain other provisions of the transaction documents, will vest in the System legal authority to maintain direct or indirect control over most management functions and responsibilities of Rex and its affiliates. Through the application of this control, the System believes it will be able to further its statutory responsibility to enhance the quality of care available to the people of North Carolina, provide greater stability to the System and Rex, and increase support for indigent care and community health programs.

The legislation creating the System reflects a clear legislative intent to authorize the System to act with such degree of autonomy and flexibility as may be necessary to achieve these goals within the increasingly competitive health care industry. This intent is evidenced by the language of G.S. § 116-37(b)(4) which authorizes the System's board of directors ". . . to exercise such authority and responsibility and adopt such policies, rules, and regulations as it deems necessary and appropriate . . ." to achieve these goals. In view of this broad statutory delegation of power, it is our opinion that the System has the legal authority necessary to acquire control of Rex through the proposed transaction as described in the documents provided to this Office.

Your second inquiry is whether, upon consummation of the transaction as described, the employees of Rex will become employees of the State of North Carolina.

It is our opinion that they will not.

The State of North Carolina's system of personnel administration for employees of State government is codified under Chapter 126 of the General Statutes. G.S. § 126-5 defines and categorizes employees of state agencies, institutions and boards who are vested with legal employment rights by virtue of their status as state employees. Chapter 135 of the General Statutes defines the term state "employee" for purposes of entitlement to benefits under the Retirement System and Comprehensive Major Medical Plan. Neither these state statutory programs, nor any other statutory provision of which we are aware, includes within a definition of the term "state employee" individuals who are not directly employed by a state or local governmental entity.

Rex is a tax-exempt, charitable corporation originally established under the 1838 will of John Rex. The corporation was reorganized under Chapter 55A of the General Statutes as directed by action of the 1985 General Assembly. At present, Rex has no corporate members, but is the sole member of Rex Hospital, Inc. and several other affiliate corporations that operate non-acute and community-based health care services. Rex is governed by a Board of Trustees vested with full corporate powers required to manage the business affairs of the corporation. Employees of Rex are private employees with no legal rights or benefits under the state employment system or any other benefit program established for state government employees.

Acquisition of corporate control over Rex by the System will not, in our view, convert Rex from a private, not-for-profit corporation organized under Chapter 55A of the General Statutes into a state government agency, institution or board. Rex's employees will therefore remain employees of a private, not-for-profit corporation and will not, in our opinion, become employees of the State of North Carolina.

Signed by:

Grayson G. Kelley
Senior Deputy Attorney General