COMMENT

Source: Model Statutory Close Corporation Supplement, § 31. There were no comparable provisions in former Georgia law.

Sections 31 and 32 deal with issues that arise when it is decided to terminate a corporation's status as a statutory close corporation.

Termination is accomplished by amendment of the articles of incorporation to eliminate the special designation required by Section 14-2-902. This amendment must be approved by the same vote (two-thirds) that is necessary to elect close corporation status (unless the articles specify a higher vote); and shareholders who vote against the termination have dissenters' rights. This is consistent with the provisions in Section 14-2-902(b) for election by an existing corporation to become a statutory close corporation. As permitted in Section 14-2-1003(e), higher voting requirements may be imposed by the articles of incorporation.

If the status of a statutory close corporation that is operating without a board of directors is to be terminated, in addition to amending the articles of incorporation to delete the reference to the statutory close corporation election, the corporation must either delete the statement that it has no board of directors, or comply with the provisions of Sections 14-2-731 and 801 to eliminate the board through approval of all the shareholders. If the corporation chooses to delete the statement eliminating the board, it must immediately elect a board of directors.

In the absence of agreement upon rights and duties of the shareholders, the corporation upon termination automatically becomes subject to the general requirements of the Code or of the Georgia Professional Corporation Act if the corporation was organized as a professional corporation. Further, except for transfer restrictions under Section 14-2-911, any existing rights of the shareholders established by agreement (cf. UNIFORM COMMERCIAL CODE § 1-201(3)) between the shareholders or with the corporation and any rights granted to the shareholders in the articles of incorporation that are valid under the general business or professional corporation acts remain in effect.

If the shareholders desire to have transfer restrictions applicable under Section 14-2-911 to continue after termination of statutory close corporation status, the restrictions must meet all requirements specified in Section 14-2-627. An alternative method of continuing the Section 14-2-911 transfer restrictions after termination is to include a provision in the articles of incorporation that Section 14-2-911(b)(7) (which exempts transfers made after termination of statutory close corporation status from the statutory transfer restrictions) does not apply. This eliminates the need to draft a complete set of transfer restrictions. To be binding on third parties, however, all new shares issued after the termination is effective must contain a notice meeting the requirements of Section 14-2-627(b) and other applicable law. See UNIFORM COMMERCIAL CODE § 8-204. The notice required as to shares of statutory close corporations by Section 14-2-910 is no longer appropriate, although it may be effective notice with respect to all shares outstanding at the time of termination.

Most of the special control and distribution arrangements among the shareholders and the optional provisions that may be included in the articles of incorporation are not affected by the termination. For example, if Sections 14-2-914 through 917 have been elected, the buy-out purchase option at the death of a shareholder continues to apply, unless the articles of incorporation are amended to terminate the option. See the Comment to Section 14-2-914. Some provisions, however, may be of doubtful validity after termination such as a provision in the articles of incorporation giving one or more minority shareholders the right to dissolve the corporation as authorized by Section 14-2-933. This article gives some automatic protection by providing in Section 14-2-932(b) that the special control and contractual arrangements automatically continue in effect unless they are invalid under other applicable statutes or case law.

Cross-References Amendment of articles of incorporation, see Article 10, Part 1. Dissenters' rights, see Article 13. Effect of termination, see § 14-2-932. Effective date of amendment of articles of incorporation, see § 14-2-123. Election not to have board of directors, see §§ 14-2-801 &14-2-922. Filing fees, see § 14-2-122. Filing requirements, see § 14-2-120. Share transfer restrictions: generally, see § 14-2-627; statutory close corporations, see § 14-2-911 et seq. Voting by voting groups: amendment of articles of incorporation, see § 14-2-1004; generally, see §§ 14-2-725 &14-2-726. "Voting group" defined, see § 14-2-140.

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