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(Code 1981, §14-2-860, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1989, p. 946, § 38.)
Source: Model Act, proposed § 8.60, as reported by ABA Committee on Corporate Laws, Changes in the Model Business Corporation Act - Amendments Pertaining to Director's Conflicting Interest Transactions, 43 Bus. Law. 691 (1988). The text of proposed Subchapter F of Chapter 8 of the Model Act and the proposed Official Comments, as published in that article, were contained in the proposed Code revision submitted by the Code Revision Committee to the General Assembly at the time of adoption of the Code. The language of Part 6 is identical to Subchapter F, and the Comments to Part 6 are drawn from and summarize the proposed Official Comments to Subchapter F. Reference is made to that article for a fuller discussion of the meaning of the provisions of Part 6.
There were no comparable definitions in former law. Compliance with the safe harbor provisions of Part 6 provides greater certainty and judicial economy than former law.
The definitions set forth in Section 14-2-860 apply to Part 6 only and have no application elsewhere in the Code.
Subsection (1) defines a conflicting interest only with respect to a transaction by a corporation. Thus this part operates only in the context of a transaction. It does not apply to situations not involving transactions, such as corporate inaction, or actions by directors that are taken with respect to third parties, if no corporate transaction is involved. The transaction may be directly between the director and the corporation (or a subsidiary or any other entity in which the corporation has a controlling interest), between the corporation (or a subsidiary or any other entity in which the corporation has a controlling interest) and a party in which the director has an economic interest sufficiently material to influence his decisions as a director, between the corporation (or a subsidiary or any other entity in which the corporation has a controlling interest) and a "related person" of the director (defined in subsection (3)), or between the corporation (or a subsidiary or any other entity in which the corporation has a controlling interest) and an entity described in subsection (1)(B).
The latter group includes entities in which the director is a director, general partner, agent or employee, and other defined persons and entities likely to be owed fiduciary duties by the director, or to be in a position to influence the director. It covers, importantly, those in control of the corporation of which the director is a director, if the controlling person has a beneficial financial interest in the transaction likely to exert an influence on the director's judgment. The likelihood of influence is specified to be an objective standard: "of such financial significance to that person that it would reasonably be expected to exert an influence on the director's judgment."
The definition of conflicting interest requires that the director know of the transaction. More than that, it requires that he know of his interest conflict at the time of the corporation's commitment to the transaction. Absent that knowledge by the director, the risk to the corporation addressed by Part 6 is not present.
The definition of "conflicting interest" is exclusive. An interest of a director is a conflicting interest if and only if it meets the requirements of subsection (1).
Subsection (1)(B) has a differentiated threshold keyed to the significance of the transaction. Thus, although subsection (A) is triggered whether or not the transaction is brought before the board of directors for action, subsection (B) is triggered only if the matter is of such character and significance that it would ordinarily be brought before the board for action.
Two subcategories of "related person" of the director are set out in subsection (3). These subcategories are specific, exclusive and preemptive.
The first subcategory is made up of the closely related family, or near-family, individuals, trusts and estates as specified in clause (i). The clause is exclusive insofar as family relationships are concerned.
The second subcategory is made up of persons specified in clause (ii) to whom or which the director is linked in a fiduciary capacity as, for example, in his status as a trustee or administrator.
Subsection (4) defines "required disclosure." There are two elements that together make up the defined term: (1) the disclosure of the existence of the conflicting interest and (ii) disclosure of the material facts known by the director about the subject of the transaction. While material facts that pertain to the subject of the transaction must be disclosed, a director is not required to reveal personal or subjective information that bears upon his negotiating position (such as, for example, his urgent need for cash, or the lowest price he would be willing to accept), despite the fact that such information would be relevant to the corporation's decision-making in the sense that, if known to the corporation, it would improve the corporation's negotiating position.
Subsection (5) defines the time of the commitment by the corporation (or its subsidiary or other controlled entity) to the transaction in operational terms geared to change of economic position.
Note to 1989 Amendment The 1989 amendment made clarifying changes in subclauses (1)(B) and (3). In subclause (1)(B), new subclause designations were added for clarity, and the phrase "an entity that controls" was replaced with the phrase "a person that controls one or more of the entities specified in clause (i) or an entity that . . ."
Clause (3) was amended to expand the group of influential related persons to include certain relatives of a spouse, or the spouse of certain relatives, namely a director's brother, sister, or parent, and the spouse of a director's child, grandchild, brother, or sister.
These changes follow the final revision of the Model Act provisions.
Cross-References Action by the board of directors, see §§ 14-2-821 &14-2-824. Committees of the board of directors, see § 14-2-825. Compensation of directors, see § 14-2-811. "Entity" defined, see § 14-2-140. Exculpation from liability for adoption of bylaws precluding business combination with interested shareholders, see § 14-2-1131 et seq.
- In a suit by a wife as minority shareholder against her husband as majority shareholder, it was proper to allow the wife to argue that the husband carried the burden to prove that thousands of dollars in corporate charges for his personal expenses were properly disclosed and approved after he shut out the wife from the corporation or were fair under the criteria of O.C.G.A. § 14-2-860 et seq., and it was also proper to give a jury charge on the matter; upon a showing that an officer or director had a beneficial financial interest in a transaction with the corporation, the burden of proof devolved upon the officer or director to show that the transaction received proper approval or was fair to the corporation. Rosenfeld v. Rosenfeld, 286 Ga. App. 61, 648 S.E.2d 399 (2007), cert. denied, 2007 Ga. LEXIS 613 (Ga. 2007).
In a separate suit arising out of a divorce action, in which a wife sued the husband directly for breach of fiduciary duty regarding corporation assets, the trial court did not err by allowing the wife to argue that the husband carried the burden to prove that thousands of dollars in corporate charges for the husband's personal expenses, after the husband shut the wife out from the corporation, were properly disclosed and approved or were fair under the criteria of O.C.G.A. § 14-2-860 et seq., and in giving a jury charge on the matter; the trial court properly found that the burden of proof on the questions of good faith, fair dealing, and loyalty was placed upon the officer, the husband, who allegedly appropriated the opportunity. Rosenfeld v. Rosenfeld, 286 Ga. App. 61, 648 S.E.2d 399 (2007), cert. denied, 2007 Ga. LEXIS 613 (Ga. 2007).
- Trial court did not err by granting summary judgment to a manufacturer, a company, and a member of the company's board of directors on a president's breach of fiduciary duty claim because the existence of a personal loan the member had obtained from the Russian national did not support an inference of unfairness to the manufacturer. Zions First National Bank v. Macke, 316 Ga. App. 744, 730 S.E.2d 462 (2012).
- 18B Am. Jur. 2d, Corporations, §§ 1514 et seq., 1520 et seq.
- 19 C.J.S., Corporations, §§ 549, 550, 597 et seq.
Total Results: 1
Court: Supreme Court of Georgia | Date Filed: 1993-09-13
Citation: 434 S.E.2d 455, 263 Ga. 412, 93 Fulton County D. Rep. 3300, 1993 Ga. LEXIS 627
Snippet: interest provisions in Part 6 of the GBCC, OCGA § 14-2-860 et seq., to the situation here, where advancement