O.C.G.A. § 14-2-626 (2019)

Annotations

Law reviews. - For article, ‘‘2013 Georgia Corporation and Business Organization Case Law Developments,’’ see 19

Ga. St. B. J. 28 (April 2014). For annual survey on business associations, see 66 Mercer L. Rev. 15 (2014).

COMMENT Source: Model Act, § 6.27. There was no comparable provision in former Georgia law. Former § 14-2-171(b)(1) permitted articles of incorporation to set forth ‘‘any provision, not inconsistent with law, for the regulation of the internal affairs of the corporation and for the restriction of the transfer of shares.’’ No further rules were provided. Subsection (a) provides (1) that transfer restrictions may appear in articles, bylaws or shareholders’ agreements, and (2) that restrictions do not affect previously issued shares unless the holders vote affirmatively for the restriction or are parties to the agreement. Subsection (b) parallels provisions of the UCC concerning enforcement against subsequent holders. The terms of a restriction on transfer do not need to be set

CORPORATIONS & PARTNERSHIPS

forth in full or summarized in detail on a certificate or information statement required by Section 14-2-626(b) for uncertificated securities. Rather, subsection (b) provides that in the case of a certificated security, the existence of the restriction must be conspicuously set forth on the front or back of the certificate; in the case of an uncertificated security, the existence of the restriction must be noted in the information statement. There is no requirement that the notation on an information statement be conspicuous. If a transferee knows of the restriction he is bound by it even though the restriction is not noted on the certificate or information statement. The last sentence of subsection (b) was added to the Model Act; it is intended to be clarifying. Subsection (c) sets out grounds for justifying restrictions as being for a reasonable purpose, specifying (1) maintenance of corporate status, whether Subchapter S status or some other status depending on number or identity of shareholders (such as professional corporations), (2) maintenance of exemptions under securities laws, and (3) a general ‘‘any other reasonable purpose’’ clause that incorporates traditional doctrines about reasonable restraints on alienation. Thus subsection (c) does not limit permissible purposes, recognizing the variety of possible reasons for restrictions. The variety of purposes that have been permitted have increasingly emphasized the nature of share ownership as contractual, rather than as regulated by external doctrines about transferability. Subsection (d) specifies forms of restrictions that are permitted, thus clarifying a murky area in Georgia and elsewhere: (1) rights of first refusal; (2) buy-sell agreements; (3) consent restraints (‘‘if the requirement is not manifestly unreasonable’’) and (4) prohibitions of transfers to specified classes of persons or to designated persons if not manifestly unreasonable. The types of restrictions referred to in subsections (d)(1) (option agreements) and (2) (buy-sell agreements) are imposed as a matter of contractual negotiation and do not prohibit the outright transfer of shares. Rather, they designate to whom shares or other securities must be offered at a price established in the agreement or by a formula or method agreed to in advance. By contrast, the restrictions described in subsections (d)(3) and (4) may permanently limit the market for shares by disqualifying all or some potential purchasers. As a result the restrictions imposed by these two provisions must not be ‘‘manifestly unreasonable.’’ The reasonableness of a restriction on transfer can be justified either by its procedure or its execution. Thus, where a consent restraint requiring unanimous consent might be considered unreasonable because it provides a veto, it could be saved by a showing either that the corporation had characteristics of a partnership, where unanimous consent is required for admission of new members, so that there can be ‘‘no greater objection to retaining the right of choosing one’s associates in a corporation than in a firm’’ (Holmes, J., in Barrett v. King, 8 Mass. 476, 479, 63 N.E. 934, 935 (1902)), or by a showing that consent had not been unreasonably withheld. This liberal treatment is consistent with the Code’s general approach of maximizing the freedom of participants in corporations to choose their own arrangements, even where they resemble those found in partnerships. Cross-References Certificates for shares, see § 14-2-625. Classes of shares, see § 14-2-601. Close corporations, see Article 9. Consideration for shares, see § 14-2-621. ‘‘Conspicuously’’ defined, see § 14-2-140. Debt securities, see § 14-2-302. Dissenters’ rights, see § 14-2-1324. Information statement, see §§ 14-2-625 & 14-2-626. Notice of statutory close corporation status, see § 14-2-910. Professional corporations, see Georgia Professional Corporation Act.

JUDICIAL DECISIONS Restriction invalid. - Provision in a family corporation’s articles of incorporation which prohibited a Chapter 7 debtor from selling stock the debtor owned in the corporation for a period of ten years was invalid and unenforceable under O.C.G.A. § 14-2-627 because the provision did not fall into any of the four categories of permissible restrictions that were recognized under § 14-2-627(d), and the court ordered the corporation to reissue shares the debtor owned in the corporation in the bank’s name to partially satisfy a debt the debtor owed to the bank. AB&T Nat’l Bank v. Mossy Dell, Inc. (In re Beauchamp), 483 B.R. 268 (Bankr. M.D. Ga. 2012), overruled on other grounds, 500 B.R. 235 (Bankr. M.D. Ga. 2013). Bankruptcy court did not err when the court found that restrictions a family-

owned corporation placed on the transfer of the corporation’s stock, which limited transfer to the lineal descendants of a husband and wife who founded another corporation and prohibited shareholders from transferring their shares for ten years, was invalid under O.C.G.A. § 14-2-627 to the extent it prohibited shareholders from transferring their shares for ten years; however, nothing in the statute supported the court’s determination that the provision which allowed transfer only to family members was manifestly unreasonable because it did not provide an alternative means for shareholders to realize the value of their shares. Mossy Dell, Inc. v. AB&T Nat’l Bank (In re Beauchamp), 500 B.R. 235 (M.D. Ga. 2013).

RESEARCH REFERENCES Am. Jur. 2d. - 18A Am. Jur. 2d, Corporations, §§ 563 et seq. C.J.S. - 18 C.J.S., Corporations, §§ 287 et seq, 342. 19 C.J.S., Corporations, § 780.

ALR. - Construction and application of articles, bylaws, statutes, or agreements restricting alienation or transfer of corporate stock, 2 ALR2d 745.