O.C.G.A. § 14-2-940 (2019)

Annotations

Law reviews. - For article, ‘‘The Development of the Shareholder’s Direct Ac-

tion Damage Remedy,’’ see 28 Ga. St. B. J. 195 (1992).

COMMENT Source: Model Statutory Close Corporation Supplement, § 40. Former Section 14-2-142 provided for appointment of a provisional director if directors were deadlocked in management, and shareholders were unable to break the deadlock, and injury to the corporation was being suffered or threatened. The grounds were thus similar to those of Section 14-2-940, except for the requirement of injury to the corporation. An action for relief under former law was not limited to close corporations; the only limit was that the action must be filed either by one-half of the directors, or the holders of not less than one-third of all voting shares. Former Section 14-2-285(a)(1) provided for judicial dissolution in an action by a shareholder on similar grounds, if it is impracticable to appoint a provisional director. Additional grounds specified were fraud, illegality, and misapplication or waste of corporate assets. 1. INTRODUCTION Sections 14-2-940 through 14-2-943 are derived from similar provisions in the California, Michigan, Minnesota, New Jersey, and South Carolina statutes, which in turn are derived from former section 210 of the 1948 English Companies Act (reenacted as section 75 of the 1980 English Companies Act). There are two major differences between these statutes and Sections 14-2-940 through 943: (I) the statutes, either specifically or by implication, provide that a shareholder may obtain relief only if he has statutory grounds for dissolution, whereas Section 14-2-943 does not tie relief either to a suit to compel dissolution or to the establishment of grounds for dissolution; and (2) the range of relief available to the court is spelled out in greater detail. The primary danger in granting relief for oppression and related conduct by dissolution is that the remedy is drastic and courts have usually refused to order

CORPORATIONS & PARTNERSHIPS

dissolution of a solvent corporation, except in extreme cases of fraudulent conduct. Under this article, dissolution is one form of relief that may be ordered by the court, but it is appropriate only as a last resort after other possibilities of resolving the dispute have failed. If a shareholder is actually seeking liquidation of the corporation, he may bring an action for dissolution under Section 14-2-1430. Although Sections 14-2-940 through 943 probably will be invoked most frequently by minority shareholders, the ground for relief described in Section 14-2-940(a)(2) may be used by the holders of the majority of shares to seek relief from deadlocks created by veto rights given minority shareholders which threaten the corporation’s continued existence. Moreover, even in suits brought by minority shareholders, the court has power under Section 14-2-942 to order the petitioning shareholders to sell their shares to the corporation or to the remaining shareholders, even if this is not the relief requested. Relief available under Sections 14-2-940 through 943 is circumscribed to minimize the danger of abuse by shareholders. No relief of any kind may be ordered unless the court affirmatively finds that one or more of the specific conditions listed in Section 14-2-940(a) - fraud, oppression, unfairly prejudicial conduct, deadlock, or grounds for involuntary dissolution exist. The petitioner has the burden of proof on this issue. The court may award expenses and attorneys’ fees to either side under Section 14-2-94l(b) in order to discourage or punish the bringing of harassment suits. Finally, if the complaining shareholder has agreed to arbitrate the dispute in question or to resolve it in some other nonjudicial manner, these remedies must be exhausted under Section 14-2-940(c) before a suit under this section may be filed. 2. GROUNDS FOR RELIEF Relief may be granted if any of the three categories of circumstances specified exist. Section 14-2-940(a)(l) provides relief from oppression and related conduct that adversely affects a minority shareholder in any relationship with the corporation. Attempted squeeze-outs in close corporations often involve removing a shareholder from his various offices or diminishing his compensation. The subsection makes clear that relief is not limited to those situations in which the value of the shareholder’s share interest has been adversely affected. No attempt has been made to define oppression, fraud, or unfairly prejudicial conduct. These are elastic terms whose meaning varies with the circumstances presented in a particular case and it is felt that existing case law provides sufficient guidelines for courts and litigants. See, e.g., Annot., ‘‘What amounts to ‘oppressive conduct’ under statute authorizing dissolution of corporation at suit of minority stockholders,’’ 56 A.L.R.3d 358 (1974). Section 14-2-940(a)(2) allows relief when the corporation is dead-locked. Whether a deadlock is created by majority or minority shareholders is immaterial and either majority or minority shareholders may claim relief under this subsection. Relief may be granted even though the corporation’s financial condition is not threatened with irreparable injury if the court finds that the interest of all the shareholders is being damaged by the deadlock. Section 14-2-940(a)(3) permits a shareholder to claim relief under this section if grounds for involuntary dissolution exist (see Section 14-2-1430). By filing an action under this section, a greater range of relief is made available to the shareholder. For example, the petitioning shareholder may not wish the corporation dissolved, even though grounds for dissolution exist.

3. PREREQUISITES TO GRANTING RELIEF Under Section 14-2-940(c), nonjudicial remedies that the petitioning shareholder has agreed to seek must be exhausted before a suit may be brought under this section. Arbitration clauses covering a wide variety of intracorporate disputes are commonly included in shareholder agreements. If a dispute is covered by an arbitration agreement, the shareholder must submit the claim to arbitration before filing suit under this section and the right to file under this section after the arbitration proceeding is commenced depends on the preclusive effect of the arbitration under state law independent of the corporation statutes. The requirement in Section 14-2-940(d) that a shareholder who has dissenters’ rights with respect to a transaction must file suit challenging the transaction under this section before the time he is required to perfect his dissenters’ rights is designed to prevent a shareholder who has foregone his dissenters’ rights from filing suit under this section to prevent a proposed transaction from being consummated. If the complaining shareholder has not taken timely action to perfect his dissenters’ rights, he is relegated to whatever other rights might be available to him under state or federal law. See, e.g., Comment to Section