O.C.G.A. § 14-2-601 (2019)

Annotations

Law reviews. - For article discussing issuance and characteristics of shares of stock under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article discussing the issuance and characteristics of convertible shares under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article discussing the issuance of and lim-

itations on redeemable shares under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). 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, § 6.01. This replaces former § 14-2-80. Subsection (a) omits the reference of former § 14-2-80(a) to creating shares with or without par value. The Code also eliminates the legal capital conditions on conversion formerly contained in § 14-2-80(b)(5). Old statutory distinctions between common and preferred shares have been abandoned, in favor of complete contractual flexibility. The language contained in the proviso was intended to negate any inference of invalidity of provisions that treat holders of shares of the same class differently, such as dual class voting provisions, or that grant greater or lesser voting or

CORPORATIONS & PARTNERSHIPS

redemption rights, which are often based either on size or duration of holdings. Such provisions were explicitly approved by the Delaware Supreme Court in Providence & Worcester Co. v. Baker, 378 A.2d 121 (1977). This language was intended to permit the approach of the Delaware Supreme Court in permitting distinctions to be made among holders of securities, rather than the approach of some Federal courts, which-have held that distinctions made on the basis of the identity of the holder of the securities are prohibited. See Asarco Inc. v. Court, 611 F. Supp. 468 (D. N.J. 1985). Subsection (b) is new to Georgia law. Following the approach outlined above, of not distinguishing between preferred and common, it simply mandates that the corporation must authorize one or more classes of shares that have unlimited voting rights and one or more classes that are to receive the net assets of the corporation upon dissolution. These fundamental characteristics need not be placed in a single class of shares but may be divided as desired. It is nevertheless essential that the corporation always have authorized shares with these two characteristics, and Section 14-2-603 requires that shares having in the aggregate these characteristics always be outstanding. Subsection (c) lists the principal features that are customarily incorporated into classes of shares. Subsection (d) makes clear that this listing is not exhaustive. Subsection (c) authorizes creation of classes of shares with limited or residual rights without significant limitation. Subsection (c)(1) contains new language authorizing shares with ‘‘special, conditional or limited voting rights. . . .’’ This contemplates voting rights triggered by the passage of a specified number of dividends, but it could be used to validate the use of various super-voting provisions, such as giving common shares super-voting rights when held for a specified time, or limiting voting power when accumulated in large blocks by single holders and their associates. Subsection (c)(1) provides that any class of shares may be granted multiple or fractional votes per share without limitation. See Section 14-2-721. Shares of any class may also be made nonvoting ‘‘except to the extent prohibited by this chapter.’’ This ‘‘except’’ clause refers to the provisions in the Code that permit shares that are designated to be nonvoting to vote on amendments to articles of incorporation and mergers or share exchanges that directly affect that class (Sections 14-2-726, 1004 and 1103). Subsection (c)(2) authorizes shares that are redeemable or convertible. This permits common shares that are redeemable at the option of the corporation, the holder, a third party, or upon the occurrence of a designated event. This repeals Georgia’s prohibition of redeemable common shares, contained in former § 14-2-93(a). Shares redeemable at the option of the corporation are sometimes called ‘‘callable shares,’’ while shares redeemable at the option of the shareholder are sometimes described as involving a ‘‘put.’’ The Code permits either type of redemption for any class of shares and thereby permits the creation of redeemable or callable shares without limitation (subject only to the provisos that the class or classes of shares described in subsection (b) must always exist and that at least one share of each class with those rights or powers must be outstanding under Section 14-2-603). Subsection (c)(2) also eliminates the provision in former § 14-2-80(b)(5) that shares may be convertible into shares of a class having prior or superior rights only when so provided in the articles of incorporation. This has the effect, among others, of prohibiting so-called ‘‘upstream’’ conversions, that is, shares convertible into debt securities or into a class of shares having prior or superior preference rights. This restriction was eliminated because the power to make shares redeemable at the

option of the shareholder for cash (see subsection (c)(2)(ii) should logically permit the shares to be redeemable or convertible at the option of the shareholder into other shares with senior preferential rights. Creditors of the corporation and holders of shares with preferential rights are less seriously affected by a conversion of shares into debt or into shares with preferential rights than they would be by the redemption of the shares for money, which is permitted by the Code, subject to the limitations of Section 14-2-640. Shares made ‘‘redeemable’’ for debt under subsection (c)(2)(ii), achieve the same effect as a right to ‘‘convert’’ shares into debt securities. Subsection (d) was added to the Model Act provisions. It eliminates the requirement of former § 14-2-80(b)(5) that convertible securities may not be issued unless a sufficient number of authorized but unissued or treasury shares were reserved by the board to be issued only in satisfaction of the conversion rights. It expressly validates the issuance of shares with certain conversion or redemption rights even where the corporation currently lacks sufficient authorized shares to honor such rights if they are triggered. In effect it provides that issuance of shares convertible or redeemable into shares presently not authorized is not ultra vires, and that enforcement of these conversion or redemption rights is a matter of contract, not of corporate power. Subsection (f ) has been taken from Calif. Gen. Corp. L. § 205, to provide a basis for calculating any franchise or other taxes that may be based on par value. Note to 1989 Amendment The 1989 amendments to section 14-2-601 were intended to be clarifying. Changes in subsection (a) were intended to clarify that its provisions relate to classes of shares generally. The exception, relating to the treatment of series in section 14-2-602, was moved to the beginning of the sentence to separate it from the proviso. References to ‘‘class or series’’ of shares were replaced with more general references to ‘‘the shares’’ to clarify that the provisions of section 14-2-601 apply to shares generally, while the provisions of section 14-2-602 apply to series within a class. Subsection (c)(2) was amended by including authorization of classes of shares that are exchangeable, as distinguished from convertible, to clarify that exchange rights into shares of another corporation may be created. Subsection (d) was amended by adding the phrase ‘‘or other securities’’ following the reference to shares, to clarify the breadth of the corporation’s power to issue securities. A reference to ‘‘exchangeable’’ was added to the phrase ‘‘redeemable or convertible’’ to clarify that any form of transaction involving securities is covered by this subsection. Subsection (f ) was amended by the addition of the last clause, to clarify that if the board designates a par value for the purpose of complying with a particular statute, that designation applies for that purpose only. Note to 2000 Amendment Subsection (a) has been amended to clarify that shares of a series within a class which has been designated, either in accordance with this Code section or in accordance with Code Section 14-2-602, may have preferences, limitations, and relative rights different from those of shares of other series within the same class. This subsection has also been amended to add a reference to Code Section 14-2-624, which clarifies that compliance with the provisions of Code Section 14-2-624 shall not result in a conflict with this subsection.

CORPORATIONS & PARTNERSHIPS

Subsection (b) was added to the Code by the 2000 amendment to eliminate any question that, in addition to the procedures set forth in Code Section 14-2-602, a class of shares may be divided into series in the original articles of incorporation or by amendment to the articles of incorporation pursuant to board and shareholder action under Code Section 14-2-1003. The new subsection also contains provisions regarding the preferences, limitations and relative rights within a series similar to those set forth in Code Section 14-2-602(c). The 2000 amendments redesignated former subsection (b) as subsection (c). Subsections (c), (d) and (e), which have been redesignated as subsections (d), (e) and (f ), have been amended to add references to series of shares within a class, consistent with the other amendments to this Code section. Former subsection (f ) has been redesignated as subsection (g). The 2000 amendments to Code Section 14-2-601 are not intended to limit the authority of the board of directors to create and fix the terms of a series of shares under Code Section 14-2-602. Subsection (h) has been added to Code Section 14-2-601 to further clarify that the provisions of 14-2-601 shall not limit the authority or discretion of the board of directors to determine the terms of rights, options or warrants pursuant to Code Section 14-2-624. Note to 2003 Amendment The amendment to Code Section 14-2-601 adds a definition of ‘‘facts’’ ascertainable outside the articles of incorporation or any amendment thereto. It is based on Section 151 of the Delaware General Corporation Law and expressly allows for a determination or action by any person or body, including the corporation. This is also consistent with the definition of extrinsic ‘‘facts’’ objectively ascertainable found in Section 1.20(k) of the Model Business Corporation Act. Common examples of facts outside of the control of the corporation are references to an interest rate such as the federal funds rate or to securities market prices. The facts on which powers, designations, preferences, rights, qualifications, limitations or restrictions may be made dependent also include facts within the control of the corporation and do not need to occur independently. In addition to a determination or action by the corporation, references to extrinsic facts may also include, without limitation, references to determinations or actions by the board of directors, a committee of the board, an officer or agent of the corporation, or other person. Cross-References Amendment of articles: generally, see § 14-2-1001 et seq.; terms of series or class, see § 14-2-602. Articles of incorporation generally, see § 14-2-202. Certificateless shares, see § 14-2-626. Close corporations, see Article 9. Consideration for shares, see § 14-2-621. Debt securities, see § 14-2-302. Distributions, see § 14-2-640. Fractional shares, see § 14-2-604. Nonvoting shareholders’ right to notice, see §§ 14-2-704, 14-2-1003, 14-2-1103. Options, see § 14-2-624. Outstanding shares, see § 14-2-603. Preemptive rights, see § 14-2-630. Redemption, see § 14-2-631. Series of shares, see § 14-2-602. Voting by nonvoting shares, see §§ 14-2-1004, 14-2-1103. Voting by voting groups of shares, see §§ 14-2-140, 14-2-725, & 14-2-726. Voting rights generally, see § 14-2-721. RESEARCH REFERENCES Am. Jur. 2d. - 18A Am. Jur. 2d, Corporations, § 349 et seq. C.J.S. - 18 C.J.S., Corporations,

§§ 205, 206, 207 et seq., 456 et seq. 19 C.J.S., Corporations, § 965. ALR. - Corporate stock without par

value, 19 ALR 131; 36 ALR 791; 45 ALR 1501; 65 ALR 1347. Priority as between creditors and holders of preferred stock, 29 ALR 254. Construction and effect of provision for preference or redemption of preferred stock in respect of capital value, 33 ALR 1257; 124 ALR 1069. Payments by stockholders applicable upon double liability, 45 ALR 1215; 56 ALR 527; 83 ALR 147; 120 ALR 511. Right of corporation itself, in absence of fraud against it, to complain that stock issued as fully paid was based on overvaluation of property, or receipt of less than par value, 56 ALR 396. Duty of corporation upon presentation for transfer of stock standing in one’s name as trustee or other fiduciary, 56 ALR 1199. Issuance by corporation of new stock certificates without requiring surrender of old, 61 ALR 436; 150 ALR 148. Validity and construction of contract or option, on purchase of corporate stock by employee, for resale thereof to original seller on termination of employment, 66 ALR 1182. Voting power of corporation stock as confined to issued and outstanding stock to exclusion of authorized unissued stock or stock which has been reacquired by the corporation, 90 ALR 315. Implied obligation of purchaser of corporate stock to indemnify a vendor against future calls and assessments, 141 ALR 1351.

Power of board of directors to rescind or modify its action in calling stock for redemption or retirement, 148 ALR 839. Construction and application of provisions of statute, charter, bylaws, or stock certificate conferring upon holders of preferred or other specified class of stock a right to vote in event of nonpayment of dividends or other specified conditions, 154 ALR 418. Statutory requirements respecting issuance of corporate stock as applicable to foreign corporation, 8 ALR2d 1185. Delay of stockholders in exercising their right to convert their stock into other class of stock or corporate obligation, 10 ALR2d 587. Remedy for refusal of corporation or its agent to register or effectuate transfer of stock, 22 ALR2d 12. Patent rights, copyrights, trademarks, secret processes, formulas, or the like, as ‘‘property’’ within provisions of law or charter forbidding issuance of corporate stock except for money paid or property received, 37 ALR2d 913. Validity, construction, and effect of provisions of articles of incorporation or stock certificates relating to call, redemption, or retirement of common stock, 48 ALR2d 392. Power of corporation to change existing redemption rights of common stock shareholders, 70 ALR2d 843. Corporations: validity of charter provision for nonvoting common stock, 52 ALR3d 1131.