Code Commission notes.

- Pursuant to Code Section 28-9-5, in 2004, "after" was inserted following "governed," in subsection (i).

Law reviews.

- For article discussing financial statement required under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article, "The Acquisition Process and the Closely-Held Corporation: Selected Legal Aspects," see 36 Mercer L. Rev. 567 (1985). For article, "Some Distinctive Features of the Georgia Business Corporation Code," 28 Ga. St. B. J. 101 (1991). For article, "2006 Amendments to Georgia's Corporate Code and Alternative Entity Statutes," see 12 Ga. St. B. J. 12 (2007).

COMMENT

Source: Model Act, section 11.03. This replaces former § 14-2-212.

Subsection (b) requires the board of directors to propose the plan of merger or share exchange and then submit the proposal to the shareholders. When proposing a plan of merger (other than parent-subsidiary mergers covered by Section 14-2-1104) or share exchange, the board of directors must make a recommendation to the shareholders (in the case of a share exchange, only to the holders of shares to be acquired) that the plan be approved, unless it elects that because of conflict of interest or other special circumstances it should make no recommendation. If the board of directors so elects, it must describe the conflict or circumstances, and communicate the basis for its election, when presenting the proposed plan of merger or share exchange to the shareholders. See the Comment to Code Section 14-2-1003(b).

Subsection (b)(1) of the Model Act has been amended by replacing the concept of "determination" of a conflict of interest with that of an "election" not to make a recommendation, in order to eliminate any negative implications that a board with a conflict of interest may not communicate with its shareholders; candid communication remains appropriate, and fair recommendations remain permissible, even for a board with a conflict of interests. It is intended that a board of directors may recommend a merger or share exchange to the shareholders in those cases where the directors determine that there is a conflict of interest, or other special circumstances, so long as the board determines that, in light of all the circumstances and the disclosures made to such shareholders, such recommendation should be made. A provision permitting submission of a merger or share exchange to shareholders without recommendation is a departure from judicial decisions in other jurisdictions, which generally hold that a board has a duty to recommend a course of action to shareholders. See, e.g., Smith v. Van Gorkom, 488 A.2d 858 (Del. Supr. 1985) Jewel Companies, Inc. v. Pay Less Drug Stores Northwest, Inc., 741 F.2d 1555 (9th Cir. 1984), and ConAgra, Inc. v. Cargill, Inc., 222 Neb. 136, 382 N.W.2d 576 (1986).

Subsection (c) permits the board of directors to condition its submission of a plan of merger or share exchange on any basis; for example, the board may direct that the plan is approved only if it receives a favorable vote of a specified percentage of the disinterested shareholders voting on the plan, or approval of a voting group, voting separately, that does not otherwise have the right to vote separately, or that shareholders holding no more than a specified number or percentage of shares file notice of intent to demand payment under Article 13. Former Section 14-2-212(d) created an implicit right to impose conditions, since it allowed mergers to be abandoned even after shareholder approval, "pursuant to provisions therefore, if any, set forth in the plan of merger or consolidation."

Subsection (d) requires notice of a shareholders' meeting in accordance with the general provisions of Section14-2-705, which requires a minimum of 10 days' notice. Former § 14-2-212(b) treated votes on mergers and consolidations as special events, and required written notice of a shareholders' meeting at least 20 days in advance of the meeting, rather than the 10 days required for most other matters by § 14-2-113(a). With large publicly held corporations, it is anticipated that the difficulties of securing sufficient proxies for corporate action would generally mean that corporations will give notice more than 10 days in advance, and that this is not a matter of public policy.

Subsection (d) departs from the Model Act in that it does not require notice to holders of classes of shares not entitled to vote. The phrase "whether or not" was deleted before the phrase "entitled to vote." No justification for such notice could be found, except to notify potential litigants of an opportunity to enjoin a merger.

Subsection (e) states that a plan of merger, to be approved, must be approved by by a majority of all the votes entitled to be cast on the plan. This includes those shares that obtain their voting rights by reason of subsection (f), as well as those with voting rights provided in the articles of incorporation. This is a greater vote than that required for ordinary matters under Section 14-2-725. Section 14-2-140(28) provides that all shares entitled by either the articles of incorporation or this Code to vote generally on a matter are a single voting group for that purpose. Thus a majority of all votes entitled to be cast will be required for approval of a plan. This departs from the Model Act approach, which required approval by each voting group, voting separately, including a class of non-voting shares entitled to vote on the merger by virtue of subsection (f). This could give a veto power, and excessive leverage, to the holders of a small class of shares, and was eliminated.

The articles of incorporation or bylaws of either corporation, however, may require a separate majority vote by one or more voting groups of that corporation. In that event subsection (e)(2) provides that each such voting group must approve the plan by a separate vote. The reference to greater voting requirements in the bylaws is a Georgia modification of subsection (e) of the Model Act, reflecting changes made in Section 14-2-1021, which allow shareholder adoption of such requirements. Where a merger involves an interested shareholder, higher voting requirements may be provided in the bylaws of the corporation adopted by the board of directors, as provided in Sections 14-2-1110 - 14-2-1113.

Subsection (f) entitles holders of non-voting shares to vote on a plan of merger if the plan contains a provision that "if contained in a proposed amendment to articles of incorporation, would require action by one or more separate voting groups on the proposed amendment." See Section 14-2-1004. Unlike the Model Act, however, these shares obtain voting rights not as separate voting groups, with veto power over the transaction, but as members of a larger voting group, described in subsection (e)(1), including all shares entitled to vote on the merger or share exchange.

The Code thus makes a distinction between amendments to articles of incorporation and mergers, in determining whether voting groups obtain voting rights as a separate group. Internal recapitalization decisions merit more protection for non-voting shares than transactions with third parties, even with dominant shareholders. Small classes of non-voting shares will be protected from overreaching in recapitalizations in which their shares are canceled or redeemed by voting rights. In mergers such voting rights would give the class the power to veto transactions of value to both corporations, which would have the effect of giving a small class, with only a small stake in the transaction, the power to insist on a disproportionate sharing of the gains as a condition for approving it. In these cases holders of non-voting shares are remitted by the Code to their dissenters' rights under Article 13.

Thus nonvoting shares of a corporation can be "cashed out" through a merger under Article 11 without gaining separate voting rights, although this will not be possible through amendment of the articles of incorporation. The Code thus adopts the approach of Delaware law, that distinct sections of the Code will have "independent legal significance," so that what is prohibited by one section may be accomplished in substance through employment of another form of transaction. Hariton v. Arco Electronics, Inc., 41 Del. Ch. 74, 188 A.2d 123 (1963).

Subsection (g) has no counterpart in the Model Act or in former Georgia law. It requires voting by voting groups in a share exchange, with each class or series of shares that is to be acquired in a share exchange entitled to vote as a separate voting group. This provision protects all classes of shareholders when more than one class or series of shares are being acquired on different terms.

Subsection (h) describes when approval by the shareholders of the surviving corporation is not required. The theory behind this subsection is that shareholders' votes should be required only if the transaction fundamentally alters the character of the enterprise or substantially reduces the shareholders' participation in voting or profit distribution. It is believed that the transactions for which shareholder approval is not required by subsection (h) do not alter the investors' prospects any more than many other management decisions, and thus should not require a shareholder vote.

Subsection (h)(3) (originally subsections (g)(3) & (4) of the Model Act) has been amended to restore the approach of former Georgia law. Former § 14-2-212(a)(3) provided that the plan need not be submitted to shareholders if no new shares would be issued or any new shares to be issued could be issued by the Board of Directors without shareholder approval. Thus, Model Act language that excused a shareholder vote only if the shares issued and to be issued did not exceed prior issued shares by more than 20% was deleted, and language excusing a shareholder vote if the shares that were to be issued would not exceed the previously authorized shares. Generally stock exchange rules will restrict the ability of corporations with listed securities to merge without a shareholder vote. A corporate charter could impose a similar restriction. Public policy does not require a shareholder vote to acquire another business by merger or share exchange where the board possessed authority to issue the same number of shares for cash to finance the same acquisition. Where the Model Act provided separately for participating shares (shares with unlimited rights to participate in distributions) and voting shares (shares with unconditional rights to vote in elections of directors), the Code consolidates these into one subsection, with a reference to "number and kind." There is no intent to cover shares other than those with such voting and participation rights.

Subsection (i) makes it clear that the corporations may abandon without shareholder approval a merger or share exchange even though it has been previously approved by the shareholders. Abandonment under this section does not affect contract rights of third parties. This subsection addresses corporate power, not contract rights. The plan, however, may require that abandonments be approved by shareholders before they are effective.

Note to 1989 Amendment The 1989 amendment added the phrase "or share exchange" to subsection (e) after the first reference to "merger" to correct an omission in the 1988 enactment of the Code.

Note to 1993 Amendment The 1993 amendment added the words "votes entitled to be cast by holders of the" to subsection (e)(2). This clarifies that shareholders vote the number of votes entitled to be cast by each share according to the articles of incorporation, which may in some cases not be on the basis of one share, one vote. This change makes subsection (e)(2) consistent with subsection (e)(1).

Note to 1996 Amendment Subsection (h)(2) was amended to conform generally to Delaware General Corporation Law § 251(f)(2). Former Code Section 14-2-1103(h)(2) required that, in order to avoid submitting a plan of merger for action by the shareholders of the surviving corporation, each shareholder of the surviving corporation whose shares were outstanding immediately before the effective date of the merger had to hold the same number of shares, with identical designation, preferences, limitations, and relative rights, immediately after the merger. The 1996 amendment was added to address the situation where a corporation owns shares of the surviving corporation immediately before the effective date of the merger. Under former section 14-2-1103(h)(2), action by the shareholders of the surviving corporation was arguably required, because (for one thing) the merger caused the shares to lose their voting rights (see Code section 14-2-721). As long as the other conditions of subsections (h)(2) and (h)(3) are met, the 1996 amendment allows a surviving corporation to merge with a corporation owning shares of the surviving corporation immediately before the effective date of the merger without submitting the plan of merger for action by the shareholders of the surviving corporation. It is believed that such a transaction does not alter investors' prospects any more than many other management decisions, and thus should not require a vote of shareholders.

Note to 1997 Amendment Subsection (h) was amended to include references to share exchanges. This makes all of the rules for share exchanges parallel to those for mergers.

Note to 2004 Amendment The amendment to Code Section 14-2-1103(c) is modeled on Section 7-111-103(3) of the Colorado Business Corporation Act, which extends the authority of the board of directors provided under the 1999 amendments to Model Act Section 11.04(c) (formerly Section 11.03[c]) to condition a plan of merger or share exchange beyond mere submission to the shareholders to the effectiveness of the plan. The amendment to subsection (c) combines the Colorado Act and the Model Act concepts, such that the board will now have the flexibility to make conditional its submission of the plan to the shareholders and the effectiveness of that plan.

The reference to the laws governing a foreign constituent corporation to a merger or share exchange in the amendment to Code Section 14-2-1103(i) is based on Model Act Section 11.08(a), added in 1999, and is made in recognition that either the plan of merger or share exchange itself or, in the case of such a transaction involving a Georgia corporation and a foreign corporation, the organic law of the foreign corporation, may prohibit the abandonment of the plan of merger or share exchange once a shareholder approval is obtained in accordance with that law.

The amendment to Code Section 14-2-1103(i) permits the board of directors to abandon a plan of merger or share exchange not only prior to filing but between filing and a specified future effective date and contains a cross-reference to new subsection (j), which sets forth the procedure to effect a post-filing abandonment.

New subsection (j) of Code Section 14-2-1103 is modeled on Model Act Section 11.08(b), added in 1999. It sets forth the procedures for the board of directors to follow in order to abandon a merger or share exchange with respect to which articles or a certificate has been filed but which, pursuant to the authority granted in Code Section 14-2-123, specified a delayed effective date. A concurrent amendment to Code Section 14-2-1003 specifies a similar procedure for the abandonment of articles of amendment to the articles of incorporation.

Note to 2006 Amendment The changes in subsection (b)(1) of Code Section 14-2-1103 clarify that the board of directors has the authority not only to withhold its recommendation of a plan of merger or share exchange because of conflicts of interest or other special circumstances, but also to recommend that the shareholders reject or vote against such a plan. See comment to Section 14-2-1101(c)(2).

Cross-References Director standards of conduct, see §§ 14-2-830 &14-2-831. Dissenters' rights, see Article 13. Distribution, see §§ 14-2-140 &14-2-640. "Notice" defined, see § 14-2-141. Notice of shareholder meeting, see § 14-2-705. Shareholder action without meeting, see § 14-2-704. Supermajority quorum and voting requirements, see § 14-2-727, Article 11, Part 2, and Article 11A. Unanimous consent of shareholders, see § 14-2-704. Voluntary share exchange, see §§ 14-2-1102 &14-2-1107. Voting by voting groups generally, see §§ 14-2-725 &14-2-726. Voting by voting group on amendment of articles of incorporation, see § 14-2-1004. Voting entitlement of shareholders generally, see § 14-2-721. "Voting group" defined, see § 14-2-140.

JUDICIAL DECISIONS

RESEARCH REFERENCES