O.C.G.A. § 14-2-746 (2019)

Annotations

COMMENT Source: Model Act, § 7.46 (under consideration, 1987). This replaces provisions formerly found in § 14-2-123(e) & (f ). Section 14-2-746(1) is intended to be a codification of existing case law. See, e.g., Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970). It provides that the court may order the corporation to pay the plaintiff ’s reasonable expenses (including attorney’s fees) if it finds that the proceeding has resulted in a substantial benefit to the corporation. This preserves the approach of former law, § 14-2-123(e). The subsection requires that there be a ‘‘substantial’’ benefit to the corporation to prevent the plaintiff from proposing inconsequential changes in order to justify the payment of counsel fees. While the subsection does not specify the method for calculating attorneys’ fees, it does require that the expenses be reasonable, which would include taking into account the amount or character of the benefit to the corporation. A corporation would not receive a substantial benefit from a monetary judgment in a derivative proceeding if it would be obligated to make payments to directors equal to the judgment pursuant to shareholder approved indemnification under Section 14-2-856. Subsection (2) continues the approach of former § 14-2-123(f ) and provides that on termination of a proceeding the court may require the complainant to pay the defendants’ reasonable expenses, including attorneys’ fees, if it finds that the proceeding ‘‘was commenced or maintained without reasonable cause or for an improper purpose.’’ The phrase ‘‘for an improper purpose,’’ has been added to parallel Federal Rule of Civil Procedure 11 as recently amended in order to prevent proceedings which may be brought to harass the corporation or its officers. Cross-References Award of costs and attorneys’ fees in appraisal proceedings, see § 14-2-1331. JUDICIAL DECISIONS Editor’s notes. - In light of the similarity of the statutory provisions, decisions under former Code 1933, § 22-615 and former Code Section 14-2-123, which were repealed by Ga. L. 1988, p. 1070, § 1, effective July 1, 1989, are included in the annotations for this Code section. Rule of recovery for corporation is well settled in stockholders’ derivative suits and recovery ‘‘normally’’ goes to the corporation. Schnorbach v. Fuqua, 70 F.R.D. 424 (S.D. Ga. 1975) (decided under former Code 1933, § 22-615). Award of attorney’s fees. - While determination that action was brought without reasonable cause was necessary to support award of attorney’s fees under former Code 1933, § 14-2-615 (see now O.C.G.A. § 14-2-76), there was no need for a determination of the contrary to deny such an award. Grizzard v. Petkas, 155 Ga. App. 741, 272 S.E.2d 583 (1980) (decided under former Code 1933, § 22-615).

An award of attorneys’ fees pursuant to former subsection (f ) required a specific finding, and adequate underlying factual findings, that the derivative action was brought ‘‘without reasonable cause.’’ Rothenberg v. Security Mgt. Co., 736 F.2d 1470 (11th Cir. 1984) (decided under former § 14-2-123). Former § 14-2-123 (see now O.C.G.A. § 14-2-746) does not prevent a shareholder’s recovery of costs and attorney fees directly from the corporate officers responsible for the misconduct giving rise to the derivative action. Grizzard v. Petkas, 173 Ga. App. 629, 327 S.E.2d 514 (1985) (decided under former § 14-2-123). In a derivative suit in which former shareholders of a borrower corporation alleged claims for breach of fiduciary duty and fraud, the borrower corporation, its board of directors, another corporation, and a financial company were entitled to a reasonable award of fees and expenses

CORPORATIONS & PARTNERSHIPS

after: (1) the shareholders pursued their claims in bad faith because they ignored binding precedent stating that former shareholders lacked standing to file derivative actions; and (2) the fees and expenses were supported by records detailing the time spent on each task and affidavits attesting to the reasonableness of the hours spent on each task and the rates charged. Hantz v. Belyew, No. 1:05-CV-1012-JOF, 2006 U.S. Dist. LEXIS 82019 (N.D. Ga. Nov. 8, 2006). Fees not awarded. - The shareholders’ claims for breach of fiduciary and fraud against a bankrupt corporation, its board of directors, and two investor corporations were dismissed because the shareholders no longer owned any shares in the bankrupt corporation and therefore did not meet the ownership requirements of Fed. R. Civ. P. 23.1, the shareholders were not entitled to attorney’s fees pursuant to O.C.G.A. § 14-2-746. Hantz v. Belyew, No. 1:05-CV-1012-JOF, 2005 U.S. Dist. LEXIS 41690 (N.D. Ga. Mar. 23, 2005).

Partial award of fees. - In a derivative suit in which former shareholders of a borrower corporation alleged claims for breach of fiduciary duty, conspiracy, and fraud, the borrower corporation, its board of directors, another corporation, and a financial company were entitled to a reasonable award of fees and expenses incurred in ‘‘case preparation’’ as that term has been defined in relation to 42 U.S.C. § 1988, but, in accordance with 28 U.S.C. § 1920, the court declined to award expenses for computerized research and search charges. The court also declined to award sums of $20,000 or $9,000 for attorney’s fees incurred in the preparation of the motion for fees and instead awarded $5,000. Hantz v. Belyew, No. 1:05-CV-1012-JOF, 2006 U.S. Dist. LEXIS 82019 (N.D. Ga. Nov. 8, 2006). Derivative plaintiff is not required to post security for costs. Oldfield v. Alston, 77 F.R.D. 735 (N.D. Ga. 1978) (decided under former Code 1933, § 22-615).

RESEARCH REFERENCES Am. Jur. 2d. - 19 Am. Jur. 2d, Corporations, § 2133 et seq. ALR. - Validity of statutory provision for attorneys’ fees, 90 ALR 530. Right of protective committee, its attorney, or employee, representing stockholders, bondholders, or other creditors, to compensation for expenses and services, 115 ALR 559. Attorneys’ fees and other expenses incident to controversy respecting internal affairs of corporation as charge against the corporation, 152 ALR 909; 39 ALR2d 580.

Constitutionality, construction, and application of statutes requiring security for costs or expenses in case of stockholder’s action in right of corporation, 159 ALR 978. Amount of attorneys’ compensation in absence of contract or statute fixing amount, 57 ALR3d 475. Validity of statute allowing attorney’s fee to successful claimant but not to defendant, or vice-versa, 73 ALR3d 515. Amount of attorneys’ fees in matters involving commercial and general business activities, 23 ALR5th 241.