TITLE 14 CORPORATIONS, PARTNERSHIPS, AND ASSOCIATIONS

Section 2. Business Corporations, 14-2-101 through 14-2-1703.

ARTICLE 9 CLOSE CORPORATIONS

14-2-912. Share transfer after first refusal by corporation.

A person desiring to transfer shares of a statutory close corporation subject to the transfer prohibition of Code Section 14-2-911 must first offer them to the corporation by obtaining an offer to purchase the shares for cash from a third person who is eligible to purchase the shares under subsection (b) of this Code section. The offer by the third person must be in writing and state the offeror's name and address, the number and class (or series) of shares offered, the offering price per share, and the other terms of the offer.
A third person is eligible to purchase the shares if:
1. He is eligible to become a qualified shareholder under any federal or state tax statute the corporation has adopted and he agrees in writing not to terminate his qualification without the approval of the remaining shareholders; and
2. His purchase of the shares will not impose a personal holding company tax or similar federal or state penalty tax on the corporation.
The person desiring to transfer shares shall deliver the offer to the corporation and by doing so offers to sell the shares to the corporation on the terms of the offer. Within 20 days after the corporation receives the offer, the corporation shall call a special shareholders' meeting, to be held not more than 40 days after the call, to decide whether the corporation should purchase all (but not less than all) of the offered shares. The offer must be approved by the affirmative vote of the holders of a majority of votes entitled to be cast at the meeting, excluding votes in respect of the shares covered by the offer.
The corporation must deliver to the offering shareholder written notice of acceptance within 75 days after receiving the offer or the offer is rejected. If the corporation makes a counteroffer, the shareholder must deliver to the corporation written notice of acceptance within 15 days after receiving the counteroffer or the counteroffer is rejected. If the corporation accepts the original offer or the shareholder accepts the corporation's counteroffer, the shareholder shall deliver to the corporation duly endorsed certificates for the shares, or instruct the corporation in writing to transfer the shares if uncertificated, within 20 days after the effective date of the notice of acceptance. The corporation may specifically enforce the shareholder's delivery or instruction obligation under this subsection.
A corporation accepting an offer to purchase the shares under this Code section may allocate some or all of the shares pro rata to those of its shareholders who desire to purchase the shares unless all of the shareholders who desire to purchase approve a different allocation to the shareholders or to other persons. If the corporation has more than one class (or series) of shares, however, the remaining holders of the class (or series) of shares being purchased are entitled to a first option to purchase the shares not purchased by the corporation in proportion to their shareholdings or in some other proportion agreed to by all the shareholders participating in the purchase.
If an offer to purchase shares under this Code section is rejected, the offering shareholder, for a period of 120 days after the corporation received his offer, is entitled to transfer to the third-person offeror all (but not less than all) of the offered shares in accordance with the terms of his offer to the corporation.

(Code 1981, §14-2-912, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1989, p. 946, § 41.)

COMMENT

Source: Model Statutory Close Corporation Supplement, § 12. There was no standardized share transfer restriction in previous law. Former § 14-2-171(b)(1) permitted articles of incorporation to set forth "any provision, not inconsistent with law, for the regulation of the internal affairs of the corporation and for the restriction of the transfer of shares." No further rules were provided, leaving open questions of what restraints on alienation were reasonable and whether amendments to articles can restrict the transferability of previously issued shares.

Subsection (a) provides that if the proposed transfer is not exempt under Section 14-2-911(b) the shareholder may sell his shares only if he obtains an offer from a nonshareholder who meets the requirements of subsection (b)(1) and (2) of this section. The mere offer by a shareholder to sell his shares to the corporation does not trigger the first refusal option and other rights provided by this subsection. These rights are only triggered by an offer meeting the specifications stated - that the offer obtained by the shareholder must be for cash, and must be in writing. It must also be sufficiently specific to satisfy the statute of frauds. Offers made to purchase shares for consideration other than cash are not covered by this subsection.

Subsection (b) provides protection for both the corporation and its shareholders against unfavorable tax consequences, by permitting third persons to purchase shares only if their acquisition will not destroy favorable tax characteristics, such as Subchapter S status, under subsection (b)(1), and will not create an unfavorable tax status, such as imposition of personal holding company status on the corporation, under subsection (b)(2). These requirements apply to all purchases by third persons, including those made after satisfying the first option provisions of this section.

Subsection (c) encourages the parties to reach an agreement in a reasonably short period of time. Thus, after the selling shareholder has delivered the offer to the corporation, the corporation has 20 days within which to call a special shareholders' meeting. Failure to do so terminates the corporation's right to purchase. The special shareholders' meeting must be held within 40 days after the call to decide whether to purchase. Voting is by simple majority of a quorum, as is generally provided in Section 14-2-725. The holder of the shares covered by the offer is disqualified from voting, as an "interested" shareholder. This follows the approach of Section 14-2-863, which excludes interested directors from voting their shares to approve a director's conflicting interest transaction, and of Section 14-2-1111, which excludes the votes of an interested shareholder in a business combination. The determination of a quorum under this section is based on the total number of remaining shares in the corporation. Any other calculation would be futile, at least where the selling shareholder proposed to sell a majority of the shares of the corporation.

Subsection (d) encourages the parties to reach an agreement in a reasonably short period of time. The 15-day interval between the last day for holding a shareholders' meeting to consider the third-party offer and the cutoff date for the notice of acceptance is designed to allow time for the corporation and the other shareholders to contact potential third-party purchasers or shareholders not present at the meeting at which the decision to purchase was taken and to make any necessary arrangements to finance the purchase. Similarly, subsection (d) encourages negotiation by permitting a counteroffer by the corporation, which the selling shareholder may reject immediately. This is designed to allow the corporation to suggest different terms of payment, for example. Because the selling shareholder can immediately reject the counteroffer, it cannot be a vehicle for delaying a transfer.

Subsection (e) contemplates allocation of repurchased shares either to existing shareholders or to outside buyers. In order to protect allocations of voting power and economic rights that have previously been arranged through issuance of different classes or series of stock, subsection (e) provides that only holders of the same class of shares shall be eligible for such allocations, and only on a pro rata basis, unless those shareholders who elect to participate in the purchase unanimously agree to another allocation. The Model Close Corporation Supplement required unanimous approval of those shareholders who approved the repurchase. Georgia's modification creates a veto power only in those who elect to purchase. Those who elect not to purchase have already waived their right to preserve proportionate holdings, under this rule. The modification adds the words "pro rata," as a clarification of the default rule, to assure that no allocation of repurchased shares to shareholders can disturb existing voting power allocations without the consent of those electing to purchase.

If the corporation does not arrange the purchase of the offered shares, subsection (f) permits their transfer to the third person only if made within 120 days of the date the shareholder notifies the corporation of the third-party offer. Additionally, the transaction must be consummated on the terms set forth in the notice of the offer.

Note to 1989 Amendment The 1989 amendment moves the phrase "or to other persons" to the end of the first sentence to correct an error.

Cross-References Acquisition of own shares by statutory close corporation, see § 14-2-631. Effective date of notice, see § 14-2-141. "Notice" defined, see § 14-2-141. Notice includes mail, see § 14-2-140. Notice of shareholders' meeting, see § 14-2-705. Special shareholders' meeting, see § 14-2-702. Voting of shares, see Article 7, Part 2.

RESEARCH REFERENCES

Am. Jur. 2d.

- 18A Am. Jur. 2d, Corporations, § 569 et seq.

C.J.S.

- 18 C.J.S., Corporations, § 287 et seq.

ALR.

- Validity of restriction on alienation or transfer of corporate stock, 61 A.L.R.2d 1318.

Validity and construction of provision restricting transfer of corporate stock, which conditions transfer upon consent of one other than shareholder, officer, or director of corporation, 53 A.L.R.3d 1272.

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