COMMENT

Source: Model Act, § 6.28. This replaces former § 14-2-85(e).

Section 14-2-628 permits a corporation to pay underwriting and legal expenses, and the organization expenses of the corporation, from consideration received from shares.

Cross-References Consideration for shares, see § 14-2-621. Fully paid shares, see § 14-2-621. Liability for share consideration, see § 14-2-622.

RESEARCH REFERENCES

PART 3 S UBSEQUENT ACQUISITION OF SHARES BY SHAREHOLDERS AND CORPORATION

14-2-630. Shareholders' preemptive rights.

1. The shareholders of all corporations, other than those described in subsection (b) of this Code section, do not have a preemptive right to acquire the corporation's unissued or treasury shares, if any, except to the extent the articles of incorporation so provide.
2. The shareholders of the following corporations shall have preemptive rights as provided in subsection (c) of this Code section, unless the articles of incorporation expressly provide otherwise:
   1. Corporations electing statutory close corporation status; and
   2. Corporations in existence on July 1, 1989, whose:
      1. Shareholders had such rights as of that date; or
      2. Articles of incorporation have been restated or amended on or after July 1, 1989, with notice to the shareholders that such restatement or amendment would cause the shareholders of the corporation to have preemptive rights.
3. A statement included in the articles of incorporation that the corporation elects to have preemptive rights (or words of similar import) means that the following principles apply except to the extent the articles of incorporation expressly provide otherwise:
   1. The shareholders of the corporation have a preemptive right, granted on uniform terms and conditions prescribed by the board of directors to provide a fair and reasonable opportunity to exercise the right, to acquire proportional amounts of the corporation's unissued or treasury shares upon the decision of the board of directors to issue them;
   2. There is no preemptive right with respect to the issuance of:
      1. Shares issued as a share dividend;
      2. Fractional shares;
      3. Shares issued to effect a merger or share exchange;
      4. Shares issued as compensation to directors, officers, agents, or employees of the corporation, its subsidiaries, or affiliates upon terms and conditions approved or ratified by the affirmative vote of the holders of a majority of the shares entitled to vote thereon;
      5. Shares issued to satisfy conversion or option rights created to provide compensation to directors, officers, agents, or employees of the corporation, its subsidiaries, or affiliates upon terms and conditions approved or ratified by the affirmative vote of the holders of a majority of the shares entitled to vote thereon;
      6. Shares authorized in articles of incorporation that are issued within one year from the effective date of incorporation;
      7. Shares issued under a plan of reorganization approved in a proceeding under any applicable act of Congress relating to the reorganization of corporations;
      8. Shares sold otherwise than for money, deemed by the board of directors in good faith to be advantageous to the corporation's business, other than shares sold pursuant to subparagraph (A) or (B) of this paragraph; or
      9. Shares released by waiver from their preemptive right by the affirmative vote or consent in writing or by electronic transmission of the holders of two-thirds of the shares of the class to be issued. Any vote or consent shall be binding on all shareholders and their transferees for the time specified in the vote or consent up to but not exceeding one year from the date thereof and shall protect the corporation, its management, and all persons who may within that time acquire the shares so released;
   3. A shareholder may waive his or her individual preemptive right at any time, and the holders of a class of shares may waive the preemptive rights of the class by the affirmative vote or consent in writing or by electronic transmission of the holders of two-thirds of the shares of the class with preemptive rights. The waiver of preemptive rights with respect to past issuances of shares shall be effective if made by the person who was the shareholder at the time the shares were issued. A waiver evidenced by a writing or by electronic transmission is irrevocable even though it is not supported by consideration;
   4. Holders of shares of any class without general voting rights or with preferential rights to distributions or assets have no preemptive rights with respect to shares of any class;
   5. Holders of shares of any class with general voting rights but without preferential rights to distributions or assets have no preemptive rights with respect to shares of any class with preferential rights to distributions or assets unless the shares with preferential rights are convertible into or carry a right to subscribe for or acquire shares without preferential rights; and
   6. Shares subject to preemptive rights that are not acquired by shareholders may be issued to any person at a consideration set by the board of directors that is not lower than the consideration set for the exercise of preemptive rights.
4. For purposes of this Code section, the term "shares" includes a security convertible into or carrying a right to subscribe for or acquire shares.
5. Shares that are otherwise validly issued and outstanding shall not be affected by reason of any violation of preemptive rights with respect to their issuance.
6. No action shall be maintained to enforce any liability for violation of preemptive rights unless brought within three years of the discovery or notice of the violation, but in no event shall any action be brought to enforce a liability for violation of preemptive rights more than five years after the issuance giving rise to the violation.

(Code 1981, §14-2-630, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1989, p. 946, § 19; Ga. L. 1993, p. 1231, § 5; Ga. L. 2004, p. 508, § 6.)

COMMENT

Source: Model Act, § 6.30. This replaces former § 14-2-111.

Subsection (a) adopts an "opt in" provision for preemptive rights: Unless an affirmative reference to these rights appears in the articles of incorporation, no preemptive rights exist.

Because subsection (a) reverses the presumption of former § 14-2-111(b) that preemptive rights exist unless denied in the articles, a new subsection (b) has been added to the Model Act provisions to make clear that it does not change preemptive rights for corporations created under the existing act. Subsection (b) preserves previously existing preemptive rights that existed by virtue of the silence of a corporation's articles of incorporation under the former "opt out" provision of § 14-2-111(b).

Similarly, corporations electing statutory close corporation status under Article 9 of this chapter are dealt with separately under subsections (a) and (b) so as to provide preemptive rights on an "opt out" basis. This preserves the provisions of former law for those corporations most likely to value such a rule.

Subsection (c) provides a standard model for preemptive rights if the corporation desires to exercise the "opt in" alternative of subsection (a). The simple phrase, "the corporation elects to have preemptive rights," or words of similar import, results in the rest of subsection (c) becoming applicable to the corporation. But a corporation may qualify or limit any of the rules set forth in subsection (c) by express provisions in the articles of incorporation if the rules are felt to be undesirable or inappropriate for the specific corporation.

The provisions of subsection (c) establish rules for most of the problems involving preemptive rights. Thus subsection (c)(1) defines the general scope of the preemptive right giving appropriate recognition to the discretion of the board of directors in establishing the terms and conditions for exercise of that right. Subsection (c)(2) lists the principal exceptions to preemptive rights, including a one year period during which initial capital can be raised by a newly formed corporation without regard to the preemptive rights of persons who have previously acquired shares. The exceptions now contained in subsection (c)(2) have been amended to conform them to the approach of former Georgia law. Thus, subsections (c)(2)(A), (B), (C), (G) and (I) are taken in their entirety from former law. Stock dividends, excepted in subsection (c)(2)(A), must be pro rata and to the holders of the same class under most circumstances, and cannot alter relative ownership claims. While issuance of fractional shares, excepted under subsection (c)(2)(B), may alter relative ownership claims, in most instances the alteration will be insignificantly small. An exception for mergers and share exchanges, in subsection (c)(2)(C), is traditional, and reflects the belief that acquiring another business is of sufficient importance that it should not be blocked by preemptive rights claims. This is consistent with the approach to protection of class rights under Section 14-2-1004, where they obtain separate protection and veto powers over internal reorganizations, but not under Section 14-2-1103, where class rights are aggregated in mergers and share exchanges. The Code is consistent in not giving small claim holders veto powers over business transactions with third parties.

Subsections (c)(2)(D) and (E) provide standardized exceptions to the preemptive rights doctrine. They cover shares and rights issued to officers and directors as compensation. Because issuance of such shares in a close corporation can have a large impact on voting control of the corporation, it is appropriate to require shareholder approval. This restores the requirement of former law, contained in § 14-2-111(d)(7).

Subsection (c)(2)(F) was amended to extend the original issue exception from the six months provided in the Model Act to restore the one year period of former Georgia law. Subsection (c)(2)(H) was amended to limit the exception for shares issued otherwise than for money by incorporating the language of former Georgia law, in § 14-2-111(d)(3), which contained an implicit "business purpose" test.

Subsection (c)(2)(I) follows former law, and provides a means for group waiver of preemptive rights, by the holders of two-thirds of the shares of the class of shares to be issued. This waiver is only for as long as specified in the resolution, and may not be for longer than one year. This exception provides flexibility in arranging financing for a corporation, but poses dangers for the distribution of power in close corporations.

Subsection (c)(3) creates rules with respect to the waiver of these rights. The Model Act provision was amended to clarify the rule that a shareholder can waive preemptive rights "at any time," whether before or after any proposed issuance of shares in which such rights are not to be or have not been honored. Further, these rights can be waived by the holders of the entire class, acting in effect as a voting group, by the affirmative vote of the holders of two-thirds of the class. The second sentence codifies existing law, that generally, absent a specific assignment of a chose in action to a transferee of shares, the right to sue remained with the person who was the shareholder at the time any preemptive rights are violated, and the right to waive claims resides in that person as well. If a specific assignment of claims arising by reason of violations of preemptive rights has been made, of course, the assignee is the person who can waive the rights that were violated.

Preemptive rights may be an important means of protecting the allocation of voting control within a corporation. Preemptive rights also may serve in part the function of protecting the equity participation of shareholders. This combination of functions creates no problem in a corporation that has authorized only a single class of shares but may occasionally create problems in corporations with more complex capital structures. Thus, issuance of voting preferred stock may dilute the voting power of common shares, and dilute the dividend and liquidation claims of preferred stock. The Code resolves this conflict by protecting voting power rather than dividend and liquidation rights, and thus denies preemptive rights to all classes without general voting rights, as well as to all classes with preferential rights to distributions and assets, in subsection (4). The presumption is that rights of preferred are a creature of contract, while common rights are residual, and should receive greater protection from standard form default provisions of law.

Subsection (c) is primarily designed to protect voting power within the corporation from dilution, except under subsection (c)(5) where preemptive rights are granted with respect to convertible preferred, regardless of whether the class of common stock into which the preferred is convertible is voting or not. Former § 14-2-111(e) denied preemptive rights to common with respect to any other class.

Subsection (c)(6), as it appeared in the Model Act, originally provided that when shareholders have failed to exercise preemptive rights, those shares may be sold freely for one year without reoffering them to existing shareholders. This is shorter than the provision of § 14-2-111(d)(9), which provided that shares could be offered at any later time, provided the price was no lower. This provision was retained in the Code.

Subsection (d) expands preemptive rights through a special definition of "shares" to apply to all securities that are convertible into or carry a right to acquire shares subject to preemptive rights. Former § 14-2-111(e) provided "no holder of shares of any class shall have any preemptive right with respect to shares of any other class which may be issued. . . ."

Subsection (e) is new. It clarifies the status of shares issued in violation of preemptive rights; they are validly issued, and not subject to cancellation by reason of the preemptive rights violation.

Subsection (f) is new. The approach is based on Section 13 of the Securities Act of 1933. It provides a statute of limitations for all violations of preemptive rights, whether before or after adoption of this statute. No notice is required to cut off rights after five years. The statute is intended to limit equitable tolling claims to no more than two years. There are strong public policies, to facilitate further business financing, that justify these limits. These limitations apply to existing claims based on violations of preemptive rights, as well as to those that arise after the effective date of the Code. See Section 14-2-1704.

Note to 1989 Amendment The 1989 amendment amended subsection (a) by adding a reference to "treasury shares . . . , if any. . . ." Treasury shares were not contemplated by the Model Act, but were restored in the 1989 amendments to Code Section14-2-631, for those corporations electing to provide for them. This provision clarifies that treasury shares are to be treated in the same manner as unissued shares for purposes of preemptive rights. Accordingly, for these corporations electing preemptive rights, no standard exception from these rights is provided for treasury shares under subsection (c). This preserves the approach of the 1988 Code, and strengthens preemptive rights for electing corporations, since under former O.C.G.A. § 14-2-111(a) preemptive rights applied only to unissued shares.

Note to 1993 Amendment The 1993 amendment added language to subsections (a) and (b) referring to shareholders who did not have preemptive rights as of the effective date of the revised Code (i.e. July 1, 1989). If a corporation formed prior to 1989 restated its articles of incorporation under the new Code without including an express denial of preemptive rights, it was not clear whether the omission of such explicit language in the restated articles created preemptive rights because of the change in presumption effected by the revised Code. The amendment makes clear that such restatements did not create preemptive rights where none existed before, simply by virtue of such omission.

Note to 2004 Amendment The 2004 amendments permit shareholders to waive their preemptive rights by electronic transmission.

Cross-References Articles of incorporation, see § 14-2-202. Close corporations, statutory, see Article 9. Consideration for shares, see § 14-2-621. Debt securities, see § 14-2-302. Director standards of conduct, see § 14-2-830 et seq. Directors' conflicting interest transactions, see § 14-2-860 et seq. Distributions, see §§ 14-2-140 &14-2-640. Fractional shares, see § 14-2-604. Share classes and series, see §§ 14-2-601 &14-2-602. Shares qualified to vote upon directors' conflicting interest transactions, see § 14-2-863.

RESEARCH REFERENCES