TITLE 14 CORPORATIONS, PARTNERSHIPS, AND ASSOCIATIONS

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

ARTICLE 9 CLOSE CORPORATIONS

14-2-920. Shareholder agreements.

1. All the shareholders of a statutory close corporation may agree in writing to regulate the exercise of the corporate powers and the management of the business and affairs of the corporation or the relationship among the shareholders of the corporation.
2. An agreement authorized by this Code section is effective although:
   1. It eliminates a board of directors;
   2. It restricts the discretion or powers of the board or authorizes director proxies or weighted voting rights;
   3. Its effect is to treat the corporation as a partnership; or
   4. It creates a relationship among the shareholders or between the shareholders and the corporation that would otherwise be appropriate only among partners.
3. If the corporation has a board of directors, an agreement authorized by this Code section restricting the discretion or powers of the board relieves directors of liability imposed by law, and imposes that liability on each person in whom the board's discretion or power is vested, to the extent that the discretion or powers of the board of directors are governed by the agreement.
4. A provision eliminating a board of directors in an agreement authorized by this Code section is not effective unless the articles of incorporation or bylaws approved by shareholders or an agreement among all the shareholders contains a statement to that effect as required by Code Section 14-2-922.
5. A provision entitling one or more shareholders to dissolve the corporation under Code Section 14-2-933 is effective only if a statement of this right is contained in the articles of incorporation, a bylaw adopted by the shareholders, or an agreement among all the shareholders.
6. To amend an agreement authorized by this Code section, all the shareholders must approve the amendment in writing unless the agreement provides otherwise.
7. Subscribers for shares may act as shareholders with respect to an agreement authorized by this Code section if shares are not issued when the agreement is made.
8. If the articles of incorporation, a bylaw adopted by the shareholders, or an agreement among all the shareholders provides that directors elected by the holders of a class or series of shares shall have more or less than one vote per director on any matter, every reference in this chapter to a majority or other proportion of directors shall refer to a majority or other proportion of the votes of such directors.
9. This Code section does not prohibit any other agreement between or among shareholders in a statutory close corporation.

(Code 1981, §14-2-920, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1990, p. 257, § 8.)

COMMENT

Source: Model Statutory Close Corporation Supplement, § 20. Subsection (h) was drawn from Del. Code Ann. tit. 8, § 141(d), as amended, 1987. For previous law see § 14-2-120(b). The provisions of Section14-2-731 have been modified to reflect subsection (b), to make clear that any arrangements permitted for statutory close corporations are also permitted for other corporations, provided the corporation does not have shares traded regularly in public securities markets.

This section authorizes the shareholders to make any agreement they wish regulating the business of the corporation and their relationship to one another and to the corporation. All the shareholders must enter into the agreement, if it is one covered by this section. This section is not the exclusive means by which shareholders may agree; they retain the right to contact generally under the Code. Section 14-2-801(b) permits limitations on the exercise of corporate powers to be placed in the articles of incorporation, the bylaws approved by the shareholders, and in shareholders' agreements. Section 14-2-920(a) reaffirms that policy for statutory close corporations, and extends it to the relationship among the shareholders. Examples of provisions that may be included in an agreement are:

(1) The management of the business and affairs of the corporation in whole or part may be by or under the direction of all the shareholders of the corporation or by or under the direction of one or more shareholders or third parties selected by the shareholders.

(2) One or more shareholders may be given power to dissolve the corporation at will or upon the occurrence of a specified event or contingency.

(3) The manner of exercising or dividing voting power by the shareholders and directors may be established, and the use of director as well as shareholder proxies may be authorized.

(4) The terms and conditions of employment of any officer or employee of the corporation may be established, regardless of the length of employment.

(5) The identity of the directors and officers of the corporation may be established.

(6) The payment of dividends or division of profits may be established.

(7) Issues as to which the shareholders or directors are deadlocked may be made subject to arbitration, or arbitration may be required for any issue of disagreement between a shareholder in his capacity as a shareholder, director, officer, or employee and the corporation, or the other shareholders.

Subsection (b) preserves the approach of former § 14-2-120(b), and states that a shareholder agreement is valid and enforceable even if it, inter alia, permits the business to be operated essentially as a partnership without a board of directors. This section gives legal sanction to the customary arrangements made by shareholders of close corporations where most or all of the shareholders are employees, and which are sometimes referred to as "incorporated partnerships."

Subsection (c) provides that the liabilities normally imposed on directors shall fall on whatever persons have the power of the board. These persons will, in turn, be entitled to the protections of any exculpatory provisions placed in articles of incorporation under Section 14-2-202(b)(4), and to the rights of indemnification provided in Sections 14-2-851 - 859. If the corporation has a board of directors with limited powers, the directors are responsible for the appropriate exercise of any management powers they retain, and would be liable for their failure to carry out their duties, and subject to such exculpatory provisions and indemnification as may exist.

Subsection (d) of the Model Close Corporation Supplement required any provision eliminating the board of directors entirely to take the form of a provision in the articles of incorporation, approved by the shareholders in the manner provided in Section 14-2-922. Since Section 14-2-801(b) specifically authorizes limitations on the board's powers to appear in either the articles of incorporation, bylaws, or shareholders' agreements, this provision was altered to be consistent with Section 14-2-801(b). The requirement that such provision could only be contained in the articles of incorporation was eliminated as inconsistent with the goal of corporate flexibility. Similar changes have been made in Section 14-2-922. The essential requirement is unanimous shareholder approval. The only reason for requiring placement of such a provision in the articles is to provide notice to third parties of the location of power to manage the corporation. This problem of demonstrating the authority of others to act on behalf of the corporation is one of documentation, not appropriate for this Code.

Subsection (e) permits the corporation to adopt a rule of dissolution at will by shareholders, which implements one of the basic rules of partnership law. Similarly, such dissolution could be made possible upon the occurrence of any specified event or contingency.

Subsection (f) requires unanimous shareholder agreement to amend arrangements made under this section. Only agreements allocating the power of the board are intended to be covered by this subsection; rules relating to other shareholder agreements, such as how to vote shares, or buy-sell agreements among shareholders, are not intended to be made more restrictive than the rules generally applicable to all corporations under the Code, or to statutory close corporations under Section 14-2-914(c), which requires a two-thirds vote to alter a mandatory repurchase agreement.

Subsection (g) permits pre-incorporation agreements among subscribers for shares to have the same effect as if the agreement had been made among shareholders. Implicit in this section is a rule that they shall cast the number of votes attached to the shares for which they have subscribed.

Subsection (h) was drawn from Del. Code Ann. tit. 8, § 141(d), as amended in 1987. It permits the articles of incorporation to provide for weighted voting among directors. Thus, a director can be given weight proportionate to the votes that elected him, or be given extra votes on certain matters, such as employment, dividends or other fundamental changes in the way the business is managed or structured. Weighted voting provides the corporate board with the same flexibility about voting rules as is possessed by partnerships.

Subsection (i) reaffirms what is implicit in subsection (a): that shareholders may continue to contract with each other, and with the corporation, with as much flexibility as they would have had without election of statutory close corporation status. This section is intended to expand, not restrict, their freedom to contract.

Note to 1990 Amendment The 1990 amendments ensure that either (1) the right of the shareholder to seek dissolution of the corporation or (2) the creation of weighted voting of directors may be addressed in any of the articles of incorporation, the bylaws, or a shareholder agreement. These three options are used throughout the close corporation provisions of the Georgia Business Corporation Code. The original version of § 14-2-920 inadvertently omitted the references to bylaws and shareholder agreements.

Cross-References Amendment of articles of incorporation, see Article 10, Part 1. Director standards of conduct, see § 14-2-830 et seq. Dissolution at option of shareholder, see § 14-2-933. Elimination of board of directors, see §§ 14-2-801 &14-2-922. Indemnification, see § 14-2-850 et seq. Proxies for directors, see § 14-2-731. "Shareholder" defined, see § 14-2-140. Special terms for directors, see § 14-2-921. Special voting power of directors, see §§ 14-2-731 &14-2-921. Subscriptions for shares, see § 14-2-620. Voting agreements, see § 14-2-731. Voting trusts, see § 14-2-730.