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(Code 1981, §14-2-631, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1989, p. 946, § 20; Ga. L. 1997, p. 1165, § 3.)
- For article discussing the rights of a corporation to acquire, encumber, and dispose of its own shares under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article discussing treasury shares and restrictions placed upon their use by the corporation, see 3 Ga. L. Rev. 11 (1968). For article discussing "earned" surplus and "capital" surplus concepts under Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article discussing the issuance of and limitations on redeemable shares under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article, "Estate Planning: The Use of Insurance to Fund Stock Purchase Agreements," see 9 Ga. St. B. J. 303 (1973). For article, "Some Distinctive Features of the Georgia Business Corporation Code," 28 Ga. St. B. J. 101 (1991).
Source: Model Act, § 6.31. This replaces former §§ 14-2-92 & 94.
Subsection (a) restates the fundamental power of a corporation to reacquire its own shares. Such a transaction constitutes a "distribution" by the corporation (see the definition of that term in Section14-2-140) and is subject to the limitations of Section14-2-640. Repurchased shares do not become treasury shares, as they did under former § 14-2-94(b); they are returned to the status of authorized but unissued shares.
Subsection (b) requires cancellation only where articles of incorporation prohibit reissue of acquired shares. Former § 14-2-94(a) required that if shares were acquired out of stated capital they must be canceled. No comparable provision exists in the Code.
Subsection (c) requires a simplified official filing to reflect the reduction of authorized shares. This provision is included in order that there be a public record of the number of authorized shares that a corporation may issue. The amendment may be made without shareholder action. See Section 14-2-1002. Until the amendment is effective, the corporation has power to reissue the reacquired shares despite a prohibition in the articles of incorporation. In such a case, the action of the directors in issuing the shares may be challengeable but the shares so issued would be fully paid and nonassessable if issued in conformity with Section 14-2-621.
Note to 1989 Amendment Subsection (a) was amended in 1989 to restore the concept of treasury shares to the Code on an optional basis. For corporations with shares listed on stock exchanges, listing fees may be avoided where treasury shares are sold by a corporation, while fees may be incurred if authorized but unissued shares are sold, even though they represent shares previously purchased by the corporation. Subsection (c) was amended by striking requirements that the articles of amendment be delivered to the Secretary of State for filing and that they contain the name of the corporation, since these matters are covered in Code Section 14-2-1006. Subsection (d) was added to permit directors to adopt articles of amendment providing for treasury shares without shareholder approval.
Note to 1997 Amendments Subsection (f) [subsection (e)] was added in 1997. It is intended to allow a corporation to pledge its own treasury shares as collateral for corporate obligations.
Cross-References Acquisition as "distribution," see § 14-2-140. Amendment of articles of incorporation, see Article 10, Part 1. Amendment of articles of incorporation by board of directors, see § 14-2-1002. Annual registration, see § 14-2-1622. "Deliver" includes mail, see § 14-2-140. Director standards of conduct, see §§ 14-2-830 &14-2-831. Distributions generally, see § 14-2-640. Effective time and date of amendment, see § 14-2-123. Filing fees, see § 14-2-122. Filing requirements, see § 14-2-120. Issuance of shares, see § 14-2-621.
- In light of the similarity of the statutory provisions, decisions under former Code 1933, § 22-513 and former Code Section 14-2-92, which were repealed by Ga. L. 1988, p. 1070, § 1, effective July 1, 1989, are included in the annotations for this Code section.
Former Code 1933, § 22-513 (see now O.C.G.A. § 14-2-631) merely sanctioned corporate purchase of its own shares to eliminate any conflict with the legal principle in some jurisdictions that such a purchase is never permissible without an express grant of authority, and does not grant a corporation an absolute right to purchase its own stock regardless of the circumstances. Comolli v. Comolli, 241 Ga. 471, 246 S.E.2d 278 (1978) (decided under former Code 1933, § 22-513).
If issuance of debenture is prohibited by law, repurchasing contract is void and cannot be enforced. Hullender v. Acts II, 153 Ga. App. 119, 264 S.E.2d 486 (1980) (decided under former Code 1933, § 22-513).
- In a case in which the book value of the stock in question is $0.00 and no creditors or other shareholders could be injured by the enforcement of a stock repurchase agreement because no actual payment of corporate funds would be required thereunder, a decree of specific performance would not be erroneous notwithstanding the corporation's insolvency. McCreery v. RSA Mgt., Inc., 249 Ga. 43, 287 S.E.2d 203 (1982) (decided under former Code 1933, § 22-513).
Cited in Bridges v. 20th Century Travel, Inc., 149 Ga. App. 837, 256 S.E.2d 102 (1979); Scroggins v. Powell, Goldstein, Frazer & Murphy (In re Kaleidoscope, Inc.), 25 Bankr. 729 (N.D. Ga. 1982); Corporate Jet Aviation, Inc. v. Vantress, 82 Bankr. 619 (N.D. Ga. 1987).
- 18A Am. Jur. 2d, Corporations, § 391. 18B Am. Jur. 2d, Corporations, § 1755 et seq.
- 18 C.J.S., Corporations, § 204. 19 C.J.S., Corporations, § 660 et seq.
- Unwarranted payment of dividends as ground for ousting foreign corporation, 41 A.L.R. 997.
Transfer of bank or other corporate stock to corporation issuing it, as releasing transferrer from stockholders' statutory added liability, 86 A.L.R. 72.
Validity, construction, and effect of provisions of articles of incorporation or certificates of stock relating to redemption or retirement of stock, 88 A.L.R. 1131.
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 A.L.R. 315.
Validity and effect of agreement by a corporation contemporaneously with issue or sale of stock, to repurchase or redeem the stock or to cancel the subscription therefor and refund consideration paid, 101 A.L.R. 154.
Issuance by corporation of new stock certificates without requiring surrender of old, 150 A.L.R. 148.
Reduction of capital stock and distribution of capital assets upon reduction, 35 A.L.R.2d 1149.
Minority stockholders' right to enjoin further or additional issuance of stock, 38 A.L.R.2d 1366.
Rights of creditors of corporation with respect to its purchase or acquisition of its own stock, 47 A.L.R.2d 758.
Transfer of, and voting rights in, stock of co-operative apartment association, 99 A.L.R.2d 236.
Construction and operation of statute restricting corporation's right to purchase its own stock to purchase from surplus, 61 A.L.R.3d 1049.
(Code 1981, §14-2-640, enacted by Ga. L. 1988, p. 1070, § 1.)
- Criminal responsibility of corporations, § 16-2-22.
Personal liability of corporate officer or employee for tax delinquency, § 48-2-52.
- For article discussing distributions from capital surplus to shareholders, see 3 Ga. L. Rev. 11 (1968). For article discussing "earned" surplus and "capital" surplus concepts under Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article discussing corporation director's liability for improper payments to shareholders, see 3 Ga. L. Rev. 11 (1968). For article discussing liability of corporate directors, officers, and shareholders under the Georgia Business Corporation Code, and as affected by provisions of the Georgia Civil Practice Act, see 7 Ga. St. B.J. 277 (1971). For note discussing effect of Georgia law on dividend restrictions, see 24 Ga. B. J. 254 (1961).
Source: Model Act, § 6.40. This replaces former §§ 14-2-90,14-2-91,14-2-92(e), &14-2-154(c).
Former rules limiting dividends to earned surplus or current earnings, and limiting distributions in partial liquidation to capital surplus, thus preserving stated capital as a "fund" (unless stated capital was reduced by the shareholders) have been entirely eliminated in the Code. It has long been recognized that the traditional "par value" and "stated capital" statutes do not provide significant protection against distributions of capital to shareholders.
The financial provisions of the Code sweep away all the distinctions among the various types of surplus but retain restrictions on distributions built around the traditional equity insolvency test of earlier statutes, and adds a balance sheet test designed to give protection to long-term creditors. Former law did impose an equity insolvency test on distributions that prohibited distributions of assets if the corporation was insolvent or if the distribution had the effect of making the corporation insolvent or unable to meet its obligations as they were projected to arise. See former §§ 14-2-90(a), 91(a)(1) and 92(e).
Subsection (a) imposes a single, uniform test on all distributions. It eliminates the former distinctions between dividends ( § 14-2-90) (payable only from earned surplus or current earnings, except in the case of wasting asset corporations), distributions in partial liquidation ( § 14-2-91) (payable from capital surplus), and share repurchases ( § 14-2-92) (payable from earned surplus, and from capital surplus if permitted in the articles or approved by the shareholders).
Subsection (b) provides a default rule for determining the record date for distributions, in the absence of specification by the board of directors.
Subsection (c) restricts "distributions" (the new generic term defined in § 14-2-140(6) to cover any transfer of money or property, or incurrence of indebtedness to shareholders, thus covering repurchases, dividends and returns of capital) with two basic tests:
(1) an equity insolvency test (inability to pay debts as they become due in the usual course of business, which preserves the rule formerly found in §§ 14-2-90(a), 91(a)(1) and 92(e).
(2) a balance sheet test that requires remaining assets to be sufficient to cover all creditors plus preferences on senior securities on liquidation. This is similar to the limitation on distributions in partial liquidation contained in former § 14-2-91(a)(4), where no earned surplus was available, and in § 14-2-92(e), governing share repurchases. Under former law, dividends were also governed by a surplus test under § 14-2-90(a)(1).
In most cases involving a corporation operating as a going concern in the normal course, information generally available will make it quite apparent that no particular inquiry concerning the equity insolvency test is needed. It is only when circumstances indicate that the corporation is encountering difficulties or is in an uncertain position concerning its liquidity and operations that the board of directors or, more commonly, the officers or others upon whom they may place reliance under Section 14-2-830(b), may need to address the issue.
Subsection (c)(2) requires that, after giving effect to any distribution, the corporation's assets equal or exceed its liabilities plus (with some exceptions) the dissolution preferences of senior equity securities.
Subsection (c)(2) provides that a distribution may not be made unless the total assets of the corporation exceed its liabilities plus the amount that would be needed to satisfy any shareholder's superior preferential rights upon dissolution if the corporation were to be dissolved at the time of the distribution. The treatment of preferential rights mandated by this section may always be eliminated by an appropriate provision in the articles of incorporation.
The provisions of former § 14-2-91(a)(3), prohibiting distributions to common unless all cumulative dividends on preferred have been paid are not contained in the Model Act. This is a matter of contract rather than corporate law.
Subsection (d) authorizes asset and liability determinations to be made for this purpose on the basis of either (1) financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or (2) a fair valuation or other method that is reasonable in the circumstances. This is similar to the language of former § 14-2-154(c) governing liability of directors for dividends) which excused directors who rely on financial statements, except that § 154(c) permitted a director in good faith to consider the assets to be worth their book value. The concept of "reappraisal surplus" in § 14-2-2(4) of the former law, which was designed to alleviate the formalism of the old legal capital requirements, was eliminated as unnecessary, with the abandonment of the other categories of surplus. This leaves boards free to revalue assets to their current values at the time of a proposed distribution. See, e.g., the leading "balance sheet" case of Randall v. Bailey, 288 N.Y. 280, 43 N.E.2d 43 (1942).
In a corporation with subsidiaries, the board of directors may rely on unconsolidated statements prepared on the basis of the equity method of accounting (see American Institute of Certified Public Accountants, APB Opinion No. 18 (1971)) as to the corporation's investee corporations, including corporate joint ventures and subsidiaries, although other evidence would be relevant in the total determination. While a board is expressly permitted to rely upon unconsolidated statements, it may, in its discretion, continue to rely upon consolidated statements, in accordance with former law under § 14-2-97.
Subsection (e) sets out rules for testing the legality of distributions involving delayed or deferred payments, such as executory agreements to repurchase shares, or the issuance of corporate debt as consideration for share repurchases. Former § 14-2-92(e) provided that an executory agreement to purchase was permitted only when "such purchase or payment would not violate the insolvency or net assets tests," and 92(f) forgave a violation only if, at the time payment was required, the corporation would not violate those tests. Commentary indicated that the repurchasing corporation must be solvent both at the time of an agreement to repurchase and at the time of each payment. Herwitz, "Installment Repurchase of Stock: Surplus Limitations," 79 Harv. L. Rev. 303, 322 (1965). See Hullender v. Acts II, 153 Ga. App. 119 (1980) (refusing to enforce a corporate note given in a buy-back because of insolvency at time note was given. Uncertainty thus surrounded the enforceability of executory repurchase agreements until each installment payment was made. The provisions of subsection (e) clarify this area.
Subsection (e)(1) provides that compliance with the insolvency and net asset tests shall be measured at the earlier of (1) the payment date or (2) the date the shareholder ceases to be a shareholder, except as provided in subsection (g). Distribution of indebtedness is defined as a payment for purpose of share repurchases.
Subsection (e)(2) provides that the time for measuring the effect of a distribution of indebtedness is the date the indebtedness is distributed.
Subsection (e)(3) provides that the time for measuring the effect of a distribution for compliance with the equity insolvency and balance sheet tests for all distributions not involving the reacquisition of shares or the distribution of indebtedness is the date of authorization, if the payment occurs within 120 days following the authorization; if the payment occurs more than 120 days after the authorization, however, the date of payment must be used. If the corporation elects to make a distribution in the form of its own indebtedness under subsection (e)(2), the validity of that distribution must be measured as of the time of distribution, unless the indebtedness qualifies under subsection (g).
Subsection (f) provides that indebtedness created to acquire the corporation's shares or issued as a distribution is on a parity with the indebtedness of the corporation to its general, unsecured creditors, except to the extent subordinated by agreement. Subsection (f) of the Model Act was amended by adding the second exception, "or except to the extent secured," which is intended to be clarifying.
Subsection (g) provides that indebtedness need not be taken into account as a liability in determining whether the tests of subsection (c) have been met if the terms of the indebtedness provide that payments of principal or interest can be made only if and to the extent that payment of a distribution could then be made under Section 14-2-640. This has the effect of making the holder of the indebtedness junior to all other creditors but senior to the holders of all classes of shares, not only during the time the corporation is operating but also upon dissolution and liquidation.
Although subsection (g) is applicable to all indebtedness meeting its tests, regardless of the circumstances of its issuance, it is anticipated that it will be applicable most frequently to permit the reacquisition of shares of the corporation at a time when the deferred purchase price exceeds the net worth of the corporation. In such situations, it is anticipated that net worth will grow over time from operations so that when payments in respect of the indebtedness are to be made the two insolvency tests will be satisfied. In the meantime, the fact that the indebtedness is outstanding will not prevent distributions that could be made under subsection (c) if the indebtedness were not counted in making the determination.
Cross-References Director standards of conduct, see § 14-2-830 et seq. "Distribution" defined, see § 14-2-140. Failure to present certificates for redemption or cancellation, see § 14-2-641. Liability for unlawful distributions, see § 14-2-831. Record date, see § 14-2-707. Redemption, see §§ 14-2-601 &14-2-631. Share dividends, see § 14-2-623.
- In light of the similarity of the statutory provisions, a decision under former Code 1933, § 22-512 and former Code Section 14-2-91, which were repealed by Ga. L. 1988, p. 1070, § 1, effective July 1, 1989, is included in the annotations for this Code section.
- One cannot withdraw capital from a corporation without first arranging for payment of its valid debts. Nicholson v. Core (In re Carolee's Combine, Inc.), 3 Bankr. 324 (Bankr. N.D. Ga. 1980) (decided under former Code 1933, § 22-512).
- Georgia's stock distribution and repurchase statutes applied to a leverage acquisition of a corporation. Munford v. Valuation Research Corp., 97 F.3d 456 (11th Cir. 1996).
- Since the defendant guarantors had insisted on structuring the buyout of a former shareholder's interest as a purchase of stock by the corporation and guarantee of the corporation's obligation, the guarantors could not contend that the entire transaction was void on the ground that the transaction rendered the corporation insolvent. Morris & Manning Ins. Agency, Inc. v. Morris, 211 Ga. App. 433, 439 S.E.2d 660 (1994).
- Payment for capital stock made to former employee/shareholders of a professional corporation was not a distribution in violation of O.C.G.A. § 14-2-640 since, under the terms of a termination agreement, the corporation was required to pay the purchase price of the stock, and the former employees were no longer shareholders. Dougherty, McKinnon & Luby v. Greenwald, 225 Ga. App. 762, 484 S.E.2d 722 (1997).
When the creditor first made a demand on the debtor to pay the creditor $900,000 in exchange for the creditor's stock, the debtor would not have been able to pay its debts as they came due in the usual course of its business, whether or not it paid the creditor. Therefore, the debtor was not permitted by O.C.G.A. § 14-2-640 to convert the creditor's equity to debt and hence was not obligated to pay $900,000 to the creditor; thus, the creditor's claim had to be disallowed. Vista Eyecare, Inc. v. Neumann (In re Vista Eyecare, Inc.), 283 Bankr. 613 (Bankr. N.D. Ga. 2002).
- 18B Am. Jur. 2d, Corporations, § 1709 et seq.
- 18 C.J.S., Corporations, § 360 et seq. 19 C.J.S., Corporations, §§ 571, 575, 576, 586, 637.
- Insolvency of corporation as barring stockholder's right to rescind subscription on ground of fraud, 41 A.L.R. 674; 46 A.L.R. 484.
Reduction of capital stock and distribution of capital assets upon reduction, 44 A.L.R. 11; 35 A.L.R.2d 1149.
Trademark or tradename as asset in case of bankruptcy, insolvency, or assignment for benefit of creditors, 44 A.L.R. 706.
Right or duty of corporation to pay dividends, and liability for wrongful payment, 55 A.L.R. 8; 76 A.L.R. 885; 109 A.L.R. 1381.
Right as between seller and purchaser of stock to dividends declared thereon, 60 A.L.R. 703.
Right of pledgee of corporate stock in respect of dividends declared thereon, 67 A.L.R. 485; 103 A.L.R. 849.
Rights of holders of preferred stock in respect of dividends, 67 A.L.R. 765; 98 A.L.R. 1526; 133 A.L.R. 653.
Duty and remedy as regards deferring payment of dividends from assets of insolvent bank or other insolvent corporation while there are undetermined claims or preferences, 88 A.L.R. 1301.
Constitutionality of tax upon corporate dividends, or the transfer thereof, in respect of stock owned by nonresident, 104 A.L.R. 1491.
Failure of purchaser of stock from existing corporation, or of subscriber thereto, to pay for same as affecting his right to dividends, 122 A.L.R. 1048.
Right as between life beneficiaries and remaindermen, or successive life beneficiaries, in corporate dividends or distributions during the life interest, 130 A.L.R. 492; 44 A.L.R.2d 1277.
Validity and construction of state statutes as applied to the taxation of income derived from dividends on stock of foreign corporations, 143 A.L.R. 147.
When dividends on corporate stock become taxable as income, 143 A.L.R. 596; 158 A.L.R. 1432; 167 A.L.R. 303.
Validity of cancellation of accrued dividends on preferred corporate stock, 8 A.L.R.2d 893.
Parties defendant to stockholder's suit to compel declaration of dividend, 15 A.L.R.2d 1124.
Preferred stockholders' rights, upon liquidation or dissolution to dividends, 25 A.L.R.2d 788.
Dividend rights in surplus of new consolidated corporation resulting from reduction of capital stock of former constituent corporations, 28 A.L.R.2d 1177.
Corporation's right to interplead claimants to dividends, 46 A.L.R.2d 980.
Construction of "net profits," "earnings," or the like, in provision for profit-sharing bonus for corporate officers or employees, 49 A.L.R.2d 1129.
Negligence, nonfeasance, or ratification of wrongdoing as excusing demand on directors as prerequisite to bringing of stockholder's derivative action on behalf of corporation, 99 A.L.R.3d 1034.
No results found for Georgia Code 14-2-631.