North Carolina Department of Justice
North Carolina Department of Justice
North Carolina Department of Justice
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February 17, 2000

Ms. Susan H. Ehringhaus
Senior University Counsel
103 South Building
Chapel Hill, North Carolina 27599 

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 ofdirectors 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 thepolicies 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