O.C.G.A. § 14-2-742 (2019)

Annotations

COMMENT Source: Model Act, § 7.42 (under consideration, 1987). This replaces former § 14-2-123(c), which merely required the complaint to allege with particularity plaintiff ’s efforts to secure the initiation of the action by the board of directors, or the reasons for not making that effort. Section 14-2-742 requires a written demand on the corporation in all cases. The demand must be made at least 90 days before commencement of suit unless irreparable injury to the corporation would result, in which case the period may be shortened. 1. Form of Demand. Section 14-2-742 specifies only that the demand shall be in writing. The demand should, however, set forth the facts concerning share ownership and be sufficiently specific to apprise the corporation of the action so that the demand can be investigated. In keeping with the spirit of this section, the specificity of the demand should not become a new source of dilatory motions. 2. Upon Whom Demand Should Be Made. Section 14-2-742 states that demand shall be made upon the corporation. Reference is not made specifically to the board of directors as in previous versions of the Model Act, since there may be instances in which the taking of, or refusal to take, action would fall within the authority of an officer of the corporation, such as a decision to sue a third party for an injury to the corporation. Nevertheless, it is expected that in most cases the board of directors will be the appropriate body to review the demand. The demand should be addressed to the board of directors, chief executive officer or corporate secretary of the corporation at its principal office to ensure that it reaches the appropriate person for review. 3. The 90 Day Period. Section 14-2-742(2) provides that the derivative proceeding may not be commenced until 90 days after demand has been made. The corporation may request counsel for the shareholder to delay filing suit until the investigation is completed or, if suit is commenced, the corporation can apply to the court for a stay under Section 14-2-743. Two exceptions are provided to the 90 day waiting period. The first exception is the situation where the shareholder has been notified of the rejection of the demand prior to the end of the 90 days. The second exception is where irreparable injury to the corporation would otherwise result if the commencement of the proceeding is delayed for the 90 day period. It should be noted that the shareholder bringing suit does not necessarily have to be the person making the demand. Only one demand need be made in order for the corporation to consider whether to take corrective action. 4. Response by the Corporation. There is no obligation on the part of the corporation to respond to the demand. However, if the corporation, after receiving the demand, decides to institute litigation or, after a derivative proceeding has commenced, decides to assume control of the litigation, the shareholder’s right to commence or control the proceeding ends unless it can be shown that the corporation will not adequately pursue the matter.

Cross-References Board of Directors, exercise of power, see § 14-2-801. ‘‘Derivative proceeding’’ defined, see § 14-2-740. Directors’ conflicting interest transactions, see Article 8, Part 6. ‘‘Proceeding’’ defined, see § 14-2-140. ‘‘Shareholder’’ defined, see § 14-2-740. JUDICIAL DECISIONS Section is procedural only. - O.C.G.A. § 14-2-742 has nothing to do with the merits of the shareholder’s claim but only with a procedural prerequisite for asserting such a claim. McGregor v. Stachel, 200 Ga. App. 324, 408 S.E.2d 118 (1991). Response to demand. - Comment 4 of O.C.G.A. § 14-2-742 does not prohibit the commencement of a shareholder’s derivative action once the corporation files suit, without regard to the type of action filed and without reference to whom is being sued. McKoon v. Jones, 214 Ga. App. 40, 447 S.E.2d 50 (1994). A shareholder’s right to pursue a derivative action against officers and directors of a corporation was not terminated when, in response to the shareholder’s demand that action be taken against the officers

and directors, the corporation filed suit against its surety to recover on a fidelity bond. McKoon v. Jones, 214 Ga. App. 40, 447 S.E.2d 50 (1994). Waiver of waiting period. - Trial court acted within its discretion in waiving the 90-day waiting period because the corporate president’s sale of property was imminent. Ebon Found., Inc. v. Oatman, 269 Ga. 340, 498 S.E.2d 728 (1998). No abuse of discretion by dismissal. - Trial court did not abuse the court’s discretion in dismissing a shareholder’s derivative action suit because the challenging shareholder failed to provide evidence to refute the evidence of the board and executives that the demand review committee members were independent. Benfield v. Wells, 324 Ga. App. 85, 749 S.E.2d 384 (2013).

RESEARCH REFERENCES Am. Jur. 2d. - 19 Am. Jur. 2d, Corporations, § 1949. C.J.S. - 18 C.J.S., Corporations, § 488 et seq. ALR. - Request that stockholders as a body sue directors as a condition of right of individual stockholders to bring the action in the interest of the corporation, 72 ALR 628. Circumstances excusing demand upon

other shareholders which is otherwise prerequisite to bringing of stockholder’s derivative suit on behalf of corporation, 48 ALR3d 595. Negligence, nonfeasance, or ratification of wrongdoing as excusing demand on directors as prerequisite to bringing of stockholder’s derivative suit on behalf of corporation, 99 ALR3d 1034.