Code Commission notes.

- Pursuant to Code Section 28-9-5, in 2003, "unless: (i) The corporation" was substituted for "unless the corporation: (i)", "(ii) Each" was substituted for "(ii) each", and "(iii) The" was substituted for "(iii) the" in subparagraph (a)(1)(A).

Law reviews.

- For article, "Business Associations," see 53 Mercer L. Rev. 109 (2001). For article, "Why Discounts are Now Inappropriate Under Georgia's Dissenters' Rights Statute," see 6 Ga. St. B. J. 12 (2001).

COMMENT

Source: Model Act, § 13.02; former § 14-2-250(d).

Subsection (a) establishes the scope of a shareholder's right to dissent (and his resulting right to obtain payment for his shares) by defining the transactions with respect to which a right to dissent exists. These transactions include, in subsection (a)(1), a plan of merger if (i) shareholder approval is required for the merger under Section14-2-1103 or the articles of incorporation, and the shareholder is entitled to vote, or (ii) the shareholder is a shareholder of a subsidiary that is merged with a parent under Section14-2-1104. Former § 14-2-250(a)(1) allowed a shareholder to dissent from any merger or consolidation. The reference to the shareholder's entitlement to vote excludes those shareholders of a surviving corporation who do not have the right to vote, as set out in Section14-2-1103(g), generally because the number of shares being issued in the merger does not exceed those previously authorized, and because substantial rights of the shareholders are not being changed by the merger.

Section 14-2-1103(c) permits the board to condition submission of the plan of merger on any basis, which may include approval through a vote of a class or series of shares that would not otherwise be entitled to voting rights. Normally shareholders of a merging corporation will be entitled to voting rights under Section 14-2-1103(f) if the merger has the effect of an amendment to articles of incorporation that would significantly alter rights, and create voting rights under Section 14-2-1004. This subsection should be read in conjunction with subsection (a)(5), which provides dissenters' rights with respect to any corporate action to the extent the articles, bylaws, or a resolution of the board of directors grant a right of dissent. Georgia law previously contained no provision comparable to subsection (a)(5). Thus the corporation can accord dissenters' rights to holders of a class or series of stock where neither the Code nor articles of incorporation permit. These dissenters' rights can be coupled with voting rights if the board so chooses.

Other dissenters' rights are granted by subsection (a)(2) with respect to a share exchange under Section 14-2-1102 if the corporation is a party whose shares are being acquired by the plan and the shareholder is entitled to vote on the exchange; by subsection (a)(3) with respect to a sale or exchange of all or substantially all of the property of the corporation requiring approval by holders of the class of shares held by the shareholder under Section 14-2-1202 if a shareholder vote is required for the sale or exchange; and by subsection (a)(4) with respect to amendments to articles of incorporation that impair the shareholders' rights as shareholders in any of the enumerated ways.

Subsection (a)(4)(i) gives shareholders dissenters' rights if an amendment of the articles of incorporation materially and adversely affects rights because it alters or abolishes a preferential right of the shares. Former Georgia law was much more detailed about which alterations trigger these rights. Former § 14-2-250(a)(4) allowed shareholders to dissent to amendments to articles of incorporation making dividends on preferred shares non-cumulative, from action reducing a dividend preference on preferred shares, and from action reducing a preferential right of preferred shares upon liquidation, from any amendment of the articles that would, among other things, "alter his percentage of the equity in the corporation," and from any amendment of the articles that adversely affects the shareholder by "Imposing, altering, or abolishing any restriction on the transfer of any of his shares." No comparable provisions are found in § 14-2-1302.

Subsection (b) establishes dissenters' rights as the exclusive remedy of this article. Subsection (b) of the Model Act was amended by replacing the phrase "is unlawful" with "fails to comply with the procedural requirements of this chapter or the articles of incorporation or bylaws of the corporation." Thus, the fact that the merger might be argued to be unlawful as a breach of the directors' duty of care is not ground for equitable relief at the instance of a shareholder. The dissenters' rights remedy is the exclusive remedy unless the transaction is not in compliance with the requirements of the Code, or the vote required to approve the action was obtained by fraudulent and deceptive means.

The theory underlying this section is as follows: when a majority of shareholders has approved a corporate change, the corporation should be permitted to proceed even if a minority considers the change unwise or disadvantageous, and persuades a court that this is correct. Since dissenting shareholders can obtain the fair value of their shares, they are protected from pecuniary loss. Thus in general terms an exclusivity principle is justified. But the prospect that shareholders may be "paid off" does not justify the corporation in proceeding unlawfully or fraudulently. If the corporation attempts an action in violation of the corporation law on voting, in violation of clauses in articles of incorporation prohibiting it, or by deception of shareholders - to take some examples - the court's freedom to intervene should be unaffected by the presence or absence of dissenters' rights under this article.

Complaints of "unfairness" of the terms of a merger in which a majority takes out minority interests are not contemplated under subsection (b). In such business combinations, if the bylaws of the corporation so provide, minority shareholders frequently obtain their protection from the fair price and voting requirements of Sections 14-2-1111 and 14-2-1112(b), or from the business combination provisions of Article 11A. Thus, only those business combinations with an interested shareholder not subject to Part 2 of Article 11 raise issues of whether fairness requires some sharing of the gains with minority shareholders. The Code approach is to leave the parties with such rights as they may have contracted for, plus dissenters' rights. See Carney, Shareholder Coordination Costs, Shark Repellents, and Takeout Mergers: The Case Against Fiduciary Duties, 1983 Am. Bar Found. Res. J. 341.

The approach of subsection (c) follows the general approach of former Georgia law, which contained a market exception to appraisal rights. The language was drawn from Del. Code Ann. tit. 8, § 262, which limits appraisal rights to those cases where the shareholders do not receive shares of a publicly held corporation with comparable liquidity. Therefore holders of listed shares would have appraisal rights in a merger converting their shares to cash. The Code uses the Delaware approach of a "national securities exchange," rather than the limitation of former § 14-2-250(d)'s reference to the New York and American stock exchanges. A "national securities exchange" is defined under Section14-2-140 by reference to the Georgia Securities Act of 1973, and its designation is intended to govern. See Section14-2-140.

Restoration of dissenters' rights by the articles of incorporation, under subsection (c)(2) has the effect of making dissenters' rights exclusive under subsection (b). Similar treatment can be obtained under subsection (a) either by conditioning the merger upon approval of a class of shares (subsection (a)(1)) or by granting dissenters' rights to shareholders without voting rights by board resolution (subsection (a)(5)).

Several provisions of Article 9 of the Code also trigger dissenters' rights. Section 14-2-902 provides that a shareholder who votes against an election of statutory close corporation status may dissent. Similarly, a shareholder who votes against an election to terminate such status may dissent under Section 14-2-931. Section 14-2-914 provides that a close corporation may elect, in its articles of incorporation, provisions for mandatory buy-out of deceased shareholders. The procedures and price formulae set out in Sections 14-2-915 to 917 may be modified by an amendment to the articles of incorporation, and a shareholder who votes against such an amendment is entitled to dissenters' rights if the amendment terminates or substantially alters his existing rights to have his shares purchased.

Note to 1989 Amendment The 1989 amendment emphasizes the exclusive nature of the appraisal remedy under the Code. First, appraisal is exclusive regardless of whether the shareholder has chosen to exercise this remedy. While this was the intended effect of subsection (b), the addition of this phrase reinforced this intent. Second, the only exceptions from the exclusivity of appraisal remain "fraud or illegality," but the terms are more clearly specified. While the 1988 Code specified that illegality meant failure to comply with the procedural requirements of the Code, concerning adoption of appropriate director resolutions, plans of mergers, and proper notice to shareholders, as well as obtaining the requisite shareholder vote, it did not specify the nature of the "fraud" that would allow collateral challenges to the corporate action. Because fraud can be "actual fraud" that involves deception, or "constructive fraud," in equity, that involves some claim of a breach of a fiduciary duty, litigants in some cases have been permitted to use "fraud" claims, which are in essence claims that a fiduciary has acted unfairly, to litigate valuation issues that are appropriately disposed of in appraisal proceedings. Accordingly, the 1989 amendment made it clear that only "actual fraud," involving traditional notions of deception, permits collateral attack on the corporate action. In this respect the Code follows the general approach, but not the language, of Cal. Corp. Code § 1312(a), which makes appraisal exclusive "except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted. . . ." (California permits broader equitable challenges to mergers with controlling shareholders, but the shareholder who sues must relinquish his right to an appraisal proceeding.)

The 1989 amendment changed subsection (c)(1) by replacing the word "company" with "corporation." "Company" is not a defined word in the Code, although there are references to a "joint-stock company" as a form of "joint stock association" in section 14-2-1109(a)(1).

Note to 1999 Amendment Subsection (a)(1)(A) was amended to provide for dissenters' rights in favor of the minority shareholders of a subsidiary corporation that is merged with its parent corporation pursuant to Section14-2-1104. See 1999 amendment to § 14-2-1104.

Note to 2003 Amendment See Comment to Code Section 14-2-1104 for an explanation of amendments to subparagraph (1) of subsection (a) of this Code Section.

The amendments to subparagraph (4) of subsection (a) of Code Section 14-2-1302 conform to the language of Section 13.02 of The Model Business Corporation Act (the "Model Act"), as amended in 1999. Section 13.02 of the Model Act was amended to eliminate dissenters' rights in connection with amendments to the articles of incorporation other than amendments effectuating reverse stock splits which reduce the number of shares that a shareholder owns of a class or series to a fractional share if the corporation has the obligation or right to repurchase the fractional share so created. The reasons for granting dissenters' rights in this situation are similar to those granting such rights in cases of cash-out mergers, as both transactions could compel affected shareholders to accept cash for their investment in an amount established by the corporation. The right to dissent is afforded only for those shareholders of a class or series whose interest is so affected.

Note to 2006 Amendment In order to provide additional protection to shareholders who may be treated differently in a plan of merger or exchange in accordance with the provisions of subsection (b)(3) of Code Section 14-2-1101, subsection (b)(3) of Code Section 14-2-1102, subsection (b)(2) of Code Section 14-2-1104 and clause (C) of subsection (d)(1) of Code Section 14-2-1109, new clause (B) of subsection (d)(1) of Code Section 14-2-1302 would exclude such shareholders from the "market exception" of Code Section 14-2-1302, which eliminates dissenters rights for transactions involving the issuance of shares of a public corporation to shareholders of a publicly held Georgia corporation. This new clause provides that a shareholder shall not be required by the terms of the plan of merger or exchange to accept any consideration that is different than the consideration to be provided to the holder of any other shares of the same class or series of shares held by that shareholder.

Cross-References Amendment of articles of incorporation, see Article 10, Part 1. Bylaws, see § 14-2-205 and Article 10, Part 2. Cumulative voting, see § 14-2-728. Dissolution, see Article 14. Fractional shares, see § 14-2-604. "National securities exchange" defined, see § 14-2-140. Preemptive rights, see § 14-2-630. Redemption of shares, see §§ 14-2-601 &14-2-631. Sale of assets, see Article 12. Share dividends, see § 14-2-623. Share preferences, see §§ 14-2-601 &14-2-602. "Voting group" defined, see § 14-2-140. Voting rights generally, see § 14-2-721.

JUDICIAL DECISIONS

RESEARCH REFERENCES