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- For article, "The Acquisition Process and the Closely-Held Corporation: Selected Legal Aspects," see 36 Mercer L. Rev. 567 (1985). For note on 2000 amendment of O.C.G.A. § 14-2-1004, see 17 Ga. St. U. L. Rev. 46 (2000).

COMMENT

Source: Model Act, Section 10.04. This replaces former § 14-2-192.

A class or series of shares is generally entitled to vote separately as a voting group on any amendment that affects the class or series in the manner described in subdivisions (1) through (10) of subsection (a). Shares are entitled to vote as separate voting groups under this section even though they are designated as nonvoting shares in the articles of incorporation, or the articles of incorporation purport to deny them entirely the right to vote on the proposal in question, or purport to allow other classes or series of shares to vote as part of the same voting group. See subsection (d). All amendments must be approved by each voting group by a majority of all votes entitled to be cast on the amendment.

Subsection (a)(1) provides for class voting to increase or decrease the number of authorized shares of such class. The Model Act provision was amended to preserve the approach of former § 14-2-192(a)(1), which contained a proviso that class voting was not required if the articles specifically authorize an increase or decrease without such vote. This is a Georgia variation added in 1973.

Subsection (a)(10) was added to the Model Act provisions to restore the rights granted by former § 14-2-192(a)(3), which provided for class voting if an amendment would effect a cancellation of a class of shares. This makes it clear that a class of securities may be "cashed out" by an amendment to the articles of incorporation that recapitalizes the corporation. While this was implicit in the prior law, it should be more explicit, since use of this power might otherwise be in doubt. There is no reason why a corporation should not be able to do through recapitalization what it could already do by merger - cash out a class of investors. On the other hand, voting rights, in addition to dissenter's rights, assure that the class will be protected from unacceptable terms on a cash-out. This provision, which grants separate voting rights to classes subject to being "cashed out" by an amendment, is not applicable to parent-subsidiary mergers or for other mergers under Article 11, however. See Section14-2-1103. Thus a distinction is made between internal readjustments where each class is given voting power to protect itself from others, and transactions with third parties, where it is undesirable to require separate approval of each voting group because this might create veto power in voting groups with relatively small investments, to the general detriment of shareholders in the aggregate.

Subsection (a)(4), which requires class approval to change the designation, rights, preferences, or limitations of a class, achieves the same result as former § 14-2-192(a)(8), which required a class vote to break a class of preferred into series and to determine the rights of the series. The reference to "change" makes it clear that this does not refer to an original designation of rights and preferences of a new series of "blank" preferred under Section14-2-602 of the Code. The right to vote by voting groups under Section14-2-1004 is applicable only if "shareholder voting is otherwise required by this Act." An amendment that does not require shareholder approval, such as the creation of a new series of shares pursuant to authority reserved in the original articles of incorporation (see Section14-2-602), does not trigger the right to vote by voting groups under this section.

Elimination of legal capital concepts throughout the Code has eliminated one basis for class voting. Previously § 14-2-192(a)(2) provided that an increase or decrease in par value of a particular class entitled the class to voting rights. No comparable provision appears in the Code.

The right to vote as a separate voting group provides a major protection for classes or series of shares with preferential rights or classes or series of limited or nonvoting shares against amendments that adversely affect that class. This section, however, does not make the right to vote by separate voting group dependent on an evaluation of whether the amendment is detrimental to the class or series: if the amendment is one of those described in subsection (a), the class or series is automatically entitled to vote as a separate voting group on the amendment.

The ten types of changes that give rise to voting by voting groups are essentially the same as in former Georgia law, though their number has been reduced based on the conclusion that some of the changes listed in earlier versions were subsumed within other listed changes. Subsections (b) and (c) extend the privilege of voting by separate voting group to one or more series of a class of shares if the series has unique financial or voting provisions and is affected in one or more of the ways described in subsection (a). Subsection (b) allows different series of same class to vote as a separate group; this preserves the rule of former § 14-2-192(b). These subsections must necessarily be phrased in general terms; any significant distinguishing feature of a series, which an amendment affects or alters, should trigger the right of voting by separate voting group for that series.

While subsection (c) requires separate voting groups (series) within a class of stock to vote together as a single voting group under the circumstances specified, it does not require separate classes of shares to vote together. Whether such shares must vote together will be determined by the articles of incorporation (Sections 14-2-725(a) and 14-2-726(a)) or this Code (Sections 14-2-1004 and 14-2-1103). As a general rule, voting groups vote separately on amendments to the articles of incorporation (Section 14-2-726(b)), but together on fundamental corporate changes involving third parties, as in mergers (Section 14-2-1103(e)) and sales of assets (Section 14-2-1103(e)) Further, as a general rule, all shares with voting rights must be counted as a single voting group under Sections 14-2-1003(e) and 14-2-1103(e). Whether shares of two or more but less than all of the classes must be counted as a separate voting group is determined by subsection (c).

Subsection (d) has no counterpart in former Georgia law. Subsection (d) makes clear that the limited right to vote by separate voting groups provided by Section 14-2-1004 may not be narrowed or eliminated by the articles of incorporation. Even if a class or series of shares is described as "nonvoting" and the articles purport to make that class or series nonvoting "for all purposes," that class or series nevertheless has the limited voting rights provided by this section. Subsection (d) was included because of the ambiguity that would normally arise whenever a class or series of nonvoting shares is created; no inference of any kind should be drawn from subsection (d) as to whether other, unrelated sections of the Code may be modified by the provisions in the articles of incorporation. The last sentence of subsection (d) was added to the Model Act's language to clarify that groups may find voting rights in sources other than this act; viz, the articles of incorporation or board resolutions creating series of preferred.

Note to 1989 Amendment Subsection (a) was amended by the addition of a cross reference to section 1002, which excuses shareholder voting in specified circumstances. Subsection (b) was amended by the deletion of a cross reference to voting entitlements under subsection (a), and the addition of a final sentence, intended to clarify the Code, that no separate voting rights as a group attach to a series by virtue of this section if the rights of that series are not affected, even though rights of some other series within the same class are so affected, and that series is thus entitled to voting rights.

Note to 2000 Amendment The 2000 amendment to subsection (a) deleted the phrase "a shareholder vote" and added the phrase "a vote of such class" following the phrase "increased or decreased without." This amendment was intended to clarify that the vote of a class as a separate voting group is not required if the articles of incorporation authorize an increase or decrease in the number of authorized shares of the class without such class vote.

Cross-References Authorized shares, see § 14-2-601. Classes of shares, see §§ 14-2-601 &14-2-602. Dissenters' rights, see § 14-2-1302. Quorum for shareholders' meeting, see § 14-2-725. Series of shares, see § 14-2-602. Share rights and limitations, see § 14-2-601. Voting by voting groups generally, see §§ 14-2-725 &14-2-726. "Voting group" defined, see § 14-2-140.

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