Corporations

Question 1

What are “Articles of Incorporation”?

Answer 1

The articles of incorporation must be filed to incorporate, but they need not spell out the manner in which the corporation is to be governed.

Question 2

What are “Articles of Correction”?

Answer 2

If the articles of incorporation contain an inaccuracy or were defectively executed, then articles of correction may be filed with the state to correct the inaccuracy or defect.

Question 3

What are “Bylaws”?

Answer 3

The bylaws may contain any lawful provision for the management of the corporation’s business or the regulation of its affairs that is not inconsistent with the articles of incorporation. When there is a conflict between the articles of incorporation and the bylaws, the articles of incorporation control.

Question 4

Who adopts the Corporate Bylaws?

Answer 4

Generally, the board of directors adopts the initial bylaws.

However, a majority vote by either the directors or the shareholders can adopt, amend, or repeal a bylaw.

Question 5

What is an “Organizational Meeting”? When is it held?

Answer 5

Once the articles of incorporation are filed, an organizational meeting is held at which the appointment of officers, adoption of bylaws, and approval of contracts may take place.

When the incorporators hold the meeting, election of the board of directors also takes place.

Question 6

What must be included in a corporation’s articles of incorporation?

Answer 6

The articles of incorporation must set forth the following basic information about the corporation:

1. its name,
2. the number of shares it is authorized to issue,
3. the street address of the initial registered office and the name and address of its registered agent,
4. the name and address of each incorporator, and
5. the mailing address of its initial principal office, if different from the initial registered office.

Question 7

What restrictions are placed on a Corporation’s name?

Answer 7

The corporation’s name must contain the word “corporation,” “company,” “incorporated,” “limited,” or an abbreviation thereof.

The corporate name must distinguish the corporation from any other corporation incorporated or authorized to transact business in Georgia.

Question 8

How must the articles of incorporation provide for the corporate purpose?

Answer 8

In Georgia, the articles of incorporation do not need to include a statement of the corporation’s purpose.

A corporation has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.

Question 9

What are the statutory powers granted to corporations by default?

Answer 9

1. To sue or be sued;
2. To have a corporate seal;
3. To make and amend bylaws;
4. To purchase and transfer rights in real or personal property;
5. To contract and incur liabilities;
6. To lend money, invest funds, and hold property;
7. To be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;
8. To elect directors and appoint officers;
9. To establish pension and profit-sharing plans;
10. To make donations for the public welfare or for charitable, scientific, or educational purposes;
11. To transact lawful business that will aid governmental policy; and
12. To make payments or donations in furtherance of the corporate business.

Question 10

What is the default durration for a corporation?

Answer 10

A corporation has perpetual duration, unless otherwise provided in the articles of incorporation or in an amendment to the articles of incorporation.

Question 11

What restrictions are placed on the Registered Agent?

Answer 11

A corporation must maintain a registered office and a registered agent in Georgia.

A registered agent may be any of the following individuals or entities whose business office is also the registered office of the corporation:

• a person who resides in Georgia,
• a domestic corporation or nonprofit domestic corporation, or
• a foreign corporation or nonprofit foreign corporation authorized to transact business in Georgia.

Question 12

What are the technical filing requirements for a corporation’s articles of incorporations?

Answer 12

The articles of incorporation must be:

1. in English,
2. typewritten or printed,
3. signed by the chairman of the board of directors, an officer, an incorporator, or other fiduciary, and
4. filed with the secretary of state along with a filing fee.

The secretary of state may authorize the filing of the articles by electronic transmission. The legal existence of a corporation begins when the articles of incorporation are filed by the secretary of state.

Question 13

Can a corporation generally commit an ultra vires action?

Answer 13

In general, the validity of a corporate action may not be challenged on the ground that the corporation lacks or lacked the power to act.

However, when a corporation that has stated a narrow business purpose in its articles of incorporation subsequently engages in activities outside that stated purpose, the corporation has engaged in an ultra vires act.

Question 14

Under what mannor may a corporate action be challenged as an ultra vires act?

Answer 14

• A shareholder can file suit to enjoin the corporation’s ultra vires action;
• The corporation can take action against a director, officer, or employee of the corporation who engages in such action; or
• The state through the attorney general can initiate a proceeding against the corporation to enjoin its ultra vires action.

Question 15

May a corporation be bound by an ultra vires agreement?

Answer 15

When a corporation knows of the ultra vires act and retains the benefits of an unauthorized contract executed on its behalf without authority, the corporation may be bound because of ratification, and it cannot use ultra vires as a defense for its liability.

Question 16

May a corporation be enjoined from committing an ultra vires act?

Answer 16

In an action by a shareholder to enjoin an ultra vires act, it will be enjoined only if it is equitable to do so.

Question 17

What is the effect of de jure corporation?

Answer 17

The corporation, rather than persons associated with the corporation (i.e., shareholders, directors, officers, and other employees), is liable for activities undertaken by the corporation.

Question 18

What is the effect of a lack of good-faith effort to incorporate?

Answer 18

A person that conducts business as a corporation without attempting to comply with the statutory incorporation requirements is personally liable for those business transactions.

Question 19

What is the effect of a defective incorporation despite a good-faith effort to incorporate?

Answer 19

When a person makes an unsuccessful effort to comply with these incorporation requirements, that person may be able to escape personal liability under either the de facto corporation or corporation by estoppel doctrine.

Question 20

What is a “De facto corporation”?

Answer 20

Under Georgia law, any person who enters into contracts with knowledge that there was no incorporation is personally liable for all liabilities created.

This statute requires culpable knowledge. Thus, if a promoter acts, believing that the corporation exists, then there is no liability.

Question 21

What is “Corporation by estoppel”?

Answer 21

A person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner.

This doctrine does not apply if the promoter has knowledge that the corporation does not exist. This doctrine is limited to contract actions.

Question 22

May a corporation amend its articles of incorporation?

Answer 22

The corporation can amend its articles with any lawful provision. The procedure for securing approval to amend the articles of incorporation varies depending on whether the corporation has issued stock. Once the necessary approval is obtained, articles of amendment must be filed with the state.

Question 23

How may a corporation amend its articles if no stock has been issued?

Answer 23

If the corporation has not issued stock, then the board of directors—or, if the board does not exist, the incorporators—may amend the articles of incorporation.

Question 24

How may a corporation amend its articles of incorporation if stock has been issued?

Answer 24

If stock has been issued, then corporations generally must follow a two-step approval process:

i) The board of directors must adopt the amendment to the articles of incorporation; and
ii) The board must submit the amendment to the shareholders for their approval by majority vote.

Question 25

Who is a “promoter”?

Answer 25

Before the formation of a corporation, a promoter engages in activities, such as procuring capital and entering into contracts, to bring the corporation into existence as a business entity.

Question 26

Who holds the liability for pre-incorporation agreements?

Answer 26

All persons purporting to act on behalf of a corporation, knowing there was no incorporation, are jointly and severally liable for all liabilities created while so acting, even after the corporation comes into existence, unless a subsequent novation releases the promoter from liability.

Question 27

What is a common novation agreement in corporate law?

Answer 27

A novation is an agreement between all the parties releasing the promoter from liability and substituting the corporation. If a party who contracts with a promoter agrees to look to some other person or fund for payment, then the promoter is not personally liable.

Question 28

What fiduciary duties does a promoter possess regarding the corporation?

Answer 28

A promoter stands in a fiduciary relationship with the pre-incorporated corporation.

The promoter can be liable to the corporation for violating a fiduciary duty, such as failing to disclose a commission on a pre-incorporation transaction.

Question 29

What is a promoters right to reimbursement?

Answer 29

Although a promoter can seek compensation for pre-incorporation activities undertaken on the corporation’s behalf and reimbursement for related expenses, the promoter cannot compel the corporation to make such payments, because the promoter’s acts, while done to benefit the corporation, are not undertaken at the corporation’s direction.

Question 30

What is the general rule regarding a promoters pre-incorporation transaction liablties?

Answer 30

A corporation is not liable for pre-incorporation transactions entered into by a promoter. The fact that the promoter entered into the transaction to benefit a future corporation is not sufficient to hold the corporation liable.

Because a corporation is not necessarily in existence during a pre-incorporation transaction, a principal-agent relationship does not exist between the corporation and the promoter.

Question 31

What is the exception to general rule regarding a promoters pre-incorporation transaction liablties?

Answer 31

The corporation can be liable when the corporation adopts, accepts, or ratifies the contract made by the promoter. If the corporation accepts the benefits of the contract, then it is generally required to perform the obligations of the contract.

Question 32

How does a corporation adopt a promoter’s contracts?

Answer 32

Adoption of a contract can be express or implied.

Adoption takes place when the corporation accepts the benefits of the transaction or gives an express acceptance of liability for the debt, such as through board resolution after incorporation.

Question 33

Who is an incorporator? What liablities do an incorporator accept?

Answer 33

An incorporator is a person who signs and delivers the articles of incorporation to the secretary of state for filing.

By performing these acts, an incorporator does not engender liability for a contract entered into by a promoter of the corporation.

Question 34

What are the two types of securities offered by a corporation?

Answer 34

Traditionally, there are two broad types of securities by which a corporation secures financing for its endeavors—stocks, which carry ownership and control interests in the corporation, and debt securities (such as bonds), which do not.

Question 35

Must a corporation issue stock?

Answer 35

Every corporation is required to have stock that:

• entitles the holder to vote on matters of corporate governance (e.g., the election of directors to the board) and
• represents the basic ownership interest in a corporation (e.g., the right to receive net assets on dissolution).

Question 36

The articles of incorporation may authorize what classes of stock?

Answer 36

The articles of incorporation may authorize classes of stock that

• have conditional or limited voting rights,
• entitle the holder to particular distributions, and
• have preference over other classes with respect to distributions.

Question 37

What are “common stock”?

Answer 37

Stocks that provide the holder with voting rights and ownership rights.

Question 38

What are “preferred stock”?

Answer 38

Stocks having preference over other stock to such items as distributions.

Question 39

Who is authorized to issue stock?

Answer 39

Unless otherwise specified in the articles of incorporation, the issuance of stock must be authorized by the board of directors.

Question 40

How many shares may a corporation issue?

Answer 40

A corporation may issue as many shares as allowed under the articles of incorporation.

Question 41

May a corporation issue “fractional shares”? Scrip?

Answer 41

A corporation may issue fractional shares.

The corporation may also issue a scrip that represents a fractional share, which entitles the holder to a full share upon surrendering enough scrip to equal a full share.

Question 42

What rights do fractional shareholders possess?

Answer 42

A fractional shareholder has all the rights of a full shareholder. Nevertheless, a scrip holder may not exercise any shareholder rights unless the scrip specifically allows for such rights.

Question 43

May the board of directors place restrictions on scrip?

Answer 43

The board of directors may place conditions on a scrip, including making the scrip void if not exchanged by a specific date for full shares, or allowing the shares for which the scrip is exchangeable to be sold to others, with the proceeds going to the scrip holders.

Question 44

What is “par-value stock”?

Answer 44

A corporation may, but is not required to, issue par-value stock.

For such stock, the corporation is required to receive at least the value assigned to that stock (i.e., par value), which need not be its market value, before the stock can be issued.

The amount of par value may be specified in the articles of incorporation.

Question 45

What is “watered stock”? Can a corporation issue it?

Answer 45

Water stock is stock issued for consideration less than par value.

Because stock is deemed validly issued, paid in full, and non-assessable once the corporation receives adequate consideration (as determined by the board of directors), the GBCC does not recognize the issue of liability for watered stock.

Question 46

What revocability does stock subscriptions possess?

Answer 46

A written, pre-incorporation subscription is irrevocable for six months from the date of the subscription, unless the subscription agreement provides otherwise or all the subscribers agree to revoke it.

Question 47

What occurs if the subscription defaults?

Answer 47

If the subscriber defaults, the corporation may collect the amount owed as any other debt.

In the alternative, unless the subscription agreement provides otherwise, the corporation may rescind the agreement and sell the stock to someone else if the debt remains unpaid more than 20 days after the corporation sends written demand for payment to the subscriber.

Question 48

What is the mandatory “Annual Meeting”?

Answer 48

A corporation is required to hold a shareholders’ meeting each year.

Generally, the time and place of the meeting are specified in the corporate bylaws.

The primary purpose of the annual meeting is to elect directors, but any business that is subject to shareholder control may be addressed.

Question 49

When may a corporation host a special meeting?

Answer 49

A corporation may also hold a special meeting, the purpose of which must be specified in the notice of the meeting.

Generally, a special meeting may be called by the board of directors or shareholders who own at least 25% of the shares entitled to vote at the meeting. The articles of incorporation or bylaws may set a higher or lower percentage.

For a corporation that has 100 or fewer shareholders, a special meeting may be called by shareholders who own at least 25% of the shares entitled to vote, or a lower percentage as set forth in the articles of incorporation or bylaws.

Question 50

What is the notie requirement for a special meeting and annual meeting?

Answer 50

Shareholders entitled to vote at a meeting must be given notice of either type of meeting.

Notice of a special meeting must include a description of the purpose for which the meeting is called. The notice must include the time, date, and place of the meeting. Usually, notice must be given no less than 10 days and no more than 60 days before the meeting date.

A shareholder may waive notice either in writing or by attending the meeting.

Question 51

What alternative may a corporation use to take shareholder action instead of the voting at a meeting?

Answer 51

Instead of voting at a meeting, all shareholders may take any action that could have been undertaken at a meeting by unanimous written consent.

Question 52

What is required to vote at a shareholder meeting?

Answer 52

There are two basic issues regarding shareholder voting:

1. who the owner of the stock is and
2. when such ownership is measured.

Question 53

How does a corporation handle the “ownership” issue regarding shareholder voting rights?

Answer 53

A corporation must maintain a list of shareholders who are entitled to vote (i.e., record owners).

A beneficial owner is generally not entitled to vote at a meeting of shareholders. A person who is not a record owner may nevertheless be entitled to vote.

Similarly, a guardian for an incompetent or a personal representative of a decedent’s estate may compel the corporation to allow her to vote in lieu of the record owner.

Voting rights issues may also arise when stock is jointly held.

Question 54

How does a corporation handel the transfer issue?

Answer 54

A record date for determining shareholders who are entitled to notice of and who are entitled to vote at an annual or special meeting is established; typically, the record date is fixed by the board of directors. The bylaws may also fix the record date or provide the manner for fixing the record date.

Question 55

Under Georgia Corporate law, what is the temporal requirement for the record date?

Answer 55

The record date may not be more than 70 days before the meeting. The owner of the stock at the close of business on the record date has the right to vote the stock at the upcoming meeting.

If not otherwise set, the record date is the close of business on the day before the first notice of the meeting is delivered to the shareholders.

Question 56

What is the general quorum requirements for voting?

Answer 56

For a decision made at a shareholders’ meeting to be valid, there must be a quorum of the shares entitled to vote present at the meeting. Generally, the required quorum is a majority of the votes entitled to be cast on a matter. A share that is present for any purpose at a meeting, other than to object to the holding of the meeting or transacting business at the meeting, is deemed present for quorum purposes.

The articles of incorporation or a bylaw adopted by the shareholders may provide for a greater or lesser quorum but cannot set quorum at less than one-third of the votes entitled to be cast.

Question 57

What is required to appoint a shareholder proxy?

Answer 57

A proxy appointment must be executed in a signed writing or an electronic transmission form and delivered to the corporation or its agent. A proxy is valid for 11 months unless otherwise specified.

Question 58

Is a shareholder proxy agreement revokable?

Answer 58

A proxy is revocable unless it expressly provides that it is irrevocable and the appointment of the proxy is coupled with an interest. When that interest is extinguished, the proxy is considered revoked.

Question 59

What are considered “proxy coupled with an interest”?

Answer 59

An appointment of a proxy coupled with an interest includes the appointment of:

• A pledgee;
• A person who purchased or agreed to purchase the shares;
• A creditor of the corporation who extended it credit under terms requiring the appointment;
• An employee of the corporation whose employment contract requires the appointment; or
• A party to a voting agreement.

Question 60

What is cumlative voting?

Answer 60

When more than one director is to be elected, corporations can allow shareholders to cumulate their votes and cast all those votes for only one (or more than one) of the candidates.

The right of a shareholder to cumulate votes means that the shareholder is entitled to multiply the number of votes she is entitled to cast by the number of directors for whom she is entitled to vote.

Question 61

What are “staggered terms”?

Answer 61

Some corporations provide for the election of fewer than all of the directors, thereby staggering the terms of the directors, which provides for some continuity on the board from election to election.

Question 62

What are “voting pools”?

Answer 62

A voting pool provides for the manner in which shareholders will vote their shares. Under such an agreement, shareholders retain ownership of their stock.

Question 63

What limitations are placed on voting pools?

Answer 63

• Such an agreement is a contract that may be specifically enforced.
• It does not need to be filed with the corporation.
• The duration of the voting agreement cannot exceed 20 years.
  
  • If the voting agreement states that it will last for more than 20 years or if it does not state its duration, then the agreement remains valid, but its duration will be limited to 20 years.
• A voting agreement may be renewed by agreement of all the shareholders to the voting agreement, for a period not exceeding 20 years from the date of the renewal.

Question 64

What is a “voting trust”?

Answer 64

A voting trust constitutes a separate legal entity to which the shareholders’ stock is transferred.

Although the shareholders retain beneficial ownership of their shares, legal ownership is transferred to the trustee, who votes the shares and distributes the dividends in accordance with the terms of the trust. The trustee owes a fiduciary duty to the trust and the beneficial owners of the stock.

Question 65

What limitations are placed on voting trusts?

Answer 65

• A voting trust must be in writing and filed with the corporation, and it is limited to 10 years.
• The voting trust may be extended for additional terms not exceeding 10 years each by written consent of all or some of the parties to the voting trust.

Question 66

What may shareholder agree to by a management agreement?

Answer 66

Matters that shareholders may alter include:

• Elimination of the board of directors or restrictions on the discretion or powers of the board of directors;
• Authorization or making of distributions;
• Determination of who is a member of the board of directors, the manner of selection or removal of directors, and the terms of office of directors;
• The exercise or division of voting power by or between the shareholders and directors or by or among any of them, including director proxies;
• The terms and conditions of any agreement for the transfer or use of property, or provision of services, between the corporation and any shareholder, director, officer, or employee of the corporation;
• A transfer to one or more shareholders or other persons all or part of the authority to exercise corporate powers or to manage the business and affairs of the corporation;
• The dissolution of the corporation at the request of one or more shareholders, or upon the occurrence of a specified event or contingency; or
• The manner or means by which the exercise of corporate powers or the management of the business and affairs of the corporation is affected.

Question 67

What is the proper form for a management agreement?

Answer 67

The agreement must be set forth either

• in the articles of incorporation or the corporate bylaws and approved by all persons who are shareholders at the time of the agreement, or
• in a written agreement that is signed by all persons who are shareholders at the time of the agreement and is made known to the corporation.

The agreement may be amended only by persons who are shareholders at the time of amendment.

Question 68

What is the limits on the length of a managment agreement?

Answer 68

The agreement is valid for 20 years and may be renewed for another 20 years by agreement of all the shareholders at the date of renewal.

Question 69

Can one rescinda purcashe of stock in a corporation operating with a managment agreement?

Answer 69

A person who purchases stock in a corporation with a management agreement without knowledge of the agreement can rescind the purchase.

Question 70

What types of corporation can use a managment agreement?

Answer 70

A management agreement cannot be entered into for a corporation with shares that are listed on a national securities exchange or regularly traded in a market maintained by securities dealers or brokers, and the agreement ceases to be effective for a corporation when its shares are listed on such an exchange.

Thus, management agreements will generally only be found in closely held or close corporations.

Question 71

What effect does a managment agreement have on liability?

Answer 71

If the agreement limits the discretion or powers of the board of directors, then the directors are relieved of liability for acts or omissions to the extent of the limitation, and the persons in whom such discretion or powers are vested are subject to liability.

The existence of the agreement is not a ground for imposing personal liability on shareholders for corporate acts or debts, even though the shareholders, by virtue of the agreement, fail to observe the corporate formalities.

Question 72

Who possesses shareholder inspection rights?

Answer 72

Generally, not only a shareholder of record but also a beneficial owner of the shares enjoys inspection rights.

Question 73

What records are subject to shareholder right to inspection?

Answer 73

Generally, a shareholder can inspect any corporate records, but the inspection may be limited to certain records, such as excerpts from the minutes of a board meeting or accounting records of the corporation.

Question 74

What is the general rule regarding shareholder inspection rights?

Answer 74

A shareholder has a right to inspect and copy corporate records, books, papers, etc. upon five days’ written notice stating a proper purpose.

Question 75

What is the time and place limits on shareholder inspection rights?

Answer 75

The inspection right is restricted to regular business hours at a reasonable location specified by the corporation, usually the corporation’s principal place of business.

Five days’ advance written notice is required.

Question 76

What is the “proper purpose” limiation on shareholder inspection rights?

Answer 76

A shareholder’s inspection right is generally conditional on having a proper purpose.

A proper purpose is one that is good faith the value of one’s shares in a closely held corporation even though the shareholder does not plan to sell the shares. Improper purposes may include harassment of corporate officials or acquiring corporate secrets.

Question 77

What is the exceptions to the proper purpose limitaiton on inspection?

Answer 77

A shareholder’s inspection right is not dependent on his purpose when inspecting:

• the corporation’s articles or bylaws,
• resolutions adopted by either the board or the corporation’s shareholders that increase or decrease the number of directors, the classification of directors, and the names and addresses of all members of the board,
• board resolutions regarding share classifications,
• shareholder meeting minutes from the past three years,
• communications sent from the corporation to shareholders over the past three years,
• the current list of the corporation’s directors and officers, including their addresses, or
• a copy of the corporation’s most recent annual registration.

Question 78

How does a shareholder enforce his or her inspection rights?

Answer 78

Under the GBCC, a shareholder can obtain direct enforcement of his inspection right in an expedited court proceeding, with reimbursement for litigation costs.

Question 79

What are distributions?

Answer 79

A distribution is the transfer of cash or other property from a corporation to one or more of its shareholders.

Question 80

What is a dividend?

Answer 80

A dividend is normally a cash payment made to shareholders.

Question 81

How does a corporation authorize a distribution?

Answer 81

The power to authorize a distribution rests with the board of directors.

Having authorized a distribution and set sufficient parameters, the board may delegate to a board committee or corporate officer the power to fix the amount and other terms of the distribution.

Question 82

May a shareholder compel a distribution?

Answer 82

In general, a shareholder cannot compel the board of directors to authorize a distribution, because that decision is usually discretionary.

When a board acts in bad faith and abuses its discretion by refusing to declare a distribution, however, a court may order the board to authorize a distribution.

Question 83

Generally, what are the limitations on distributions?

Answer 83

A corporation may not make a distribution if it is insolvent or if the distribution would cause the corporation to be insolvent.

Question 84

How is insolvency determined regarding corporate distributions?

Answer 84

A corporation must pass two tests—an equity test and a balance-sheet test—to be deemed solvent and, as such, capable of making a distribution.

Question 85

Regarding corporate distributions, what is the “equity test”?

Answer 85

Under the equity test, a corporation must be able to pay off its debts as they come due in the usual course of business.

Question 86

Regarding corporate distributions, what is the “balance-sheet test”?

Answer 86

Under the balance-sheet test, a corporation’s total assets must exceed its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Question 87

Regarding distributions, what is the time measure of corporate solvency?

Answer 87

A corporation’s solvency is measured on the date the dividend is authorized if payment occurs within 120 days after the date of authorization, or on the date payment is made if payment occurs more than 120 days after authorization.

In the case of a stock purchase, it is the earlier of the date the purchase price is paid or the date the shareholder ceases to be a shareholder.

Question 88

When is a director liable for an unlawful distribution?

Answer 88

A director who votes for or assents to an unlawful distribution, in violation of the director’s duties of care and loyalty, is personally liable to the corporation for the amount of the distribution in excess of the lawful amount.

Question 89

How are dividends distributed?

Answer 89

Dividends are distributed to persons who are shareholders on the record date set by the board of directors.

If the board does not set a record date, then the dividend is payable to persons who are shareholders on the date that the board authorized the dividend.

Question 90

What are “outstanding stock”?

Answer 90

Stock authorized and issued by the corporation.

Question 91

Are stock divends a distribution?

Answer 91

A corporation may issue its own stock to current shareholders without charge in lieu of making a distribution of cash or other property.

These transactions do not alter the corporation’s assets or liabilities, nor do they constitute a distribution.

Question 92

What are the general limitation regarding the sell of personally owned stock?

Answer 92

Generally, a shareholder is free to sell his stock to anyone at any time or price.

Such freedom is subject to two significant restrictions—limitations imposed on shareholders of closely held corporations and penalties imposed on transactions that violate federal securities law.

Question 93

What is the “conspicously noted’ requirement for closely-held company corporate stock?

Answer 93

If the corporation issuing the shares imposes a restriction on transferability, then the stock certificate must contain either a full and conspicuous statement of the restriction or a statement that the corporation will provide a shareholder with information about the restriction upon request and without charge.

Question 94

How are closely-held corporate stock restriction enforced?

Answer 94

A restriction in the transfer of a security, even if otherwise lawful, may be ineffective against a person without knowledge of the restriction.

Unless the security is certified and the restriction is conspicuously noted on the security certificate, the restriction is not enforceable against a person without knowledge of it.

Question 95

What stock transfer restrictions are valid?

Answer 95

Restrictions on the transfer of stocks can take various forms, including:

• Transfers requiring consent from the corporation or its shareholders;
• Options to buy the stock held by the corporation or its shareholders;
• A right of first refusal (i.e., stock must be offered to the corporation or its shareholders before selling it to another person);
• The corporation requires or has the right to buy back the stock;
• A buy-sell agreement with either the corporation or its shareholders being obligated to buy the stock; or
• A prohibition on the transfer to designated persons or classes, as long as the prohibition is not manifestly unreasonable.

Question 96

How may a shareholder challenge a limitation on transfering their stock?

Answer 96

Stock transfer restrictions have been subject to challenge as unreasonable restraints on alienation.

In Georgia, a restriction on the transfer of shares is authorized

• to maintain the corporation’s status when it is dependent on the number or identity of shareholders,
• to preserve exceptions under federal or state securities law, or
• for any other reasonable purpose.

Many of these restrictions are created through contractual arrangements, they may be subject to contractual defenses.

In addition, the restrictions may be narrowly interpreted and subject to equitable challenges such as abandonment, waiver, or estoppel.

Question 97

Who is bound by restrictions on stock transfer?

Answer 97

Parties to an agreement that restricts stock transfers are bound by the terms of the contract.

Other parties are not subject to a transfer restriction unless they are aware of it.

If the restriction is noted on the face of the stock certificate, then the restriction is binding on the holder or a transferee.

Question 98

What are the basic types of direct actions a shareholder may take against a corporation?

Answer 98

A shareholder may pursue two basic types of direct actions:

• an action to enforce shareholder rights or
• a non-shareholder action, the recovery from which is to the benefit of the indirect shareholder.

Question 99

What is an action to enforce shareholder rights?

Answer 99

A shareholder may sue the corporation for breach of a fiduciary duty owed to the shareholder by a director or an officer.

Typical actions are based on the denial of or interference with a shareholder’s voting rights, the board’s failure to declare a dividend, or the board’s approval of or failure to approve a merger.

Question 100

What are “non-shareholder actions”?

Answer 100

A shareholder may sue the corporation on grounds that do not arise from the shareholder’s status as a shareholder.

Question 101

What is a derivative action?

Answer 101

In a derivative action, a shareholder is suing on behalf of the corporation for a harm suffered by the corporation.

Although the shareholder also may have suffered harm, recovery generally goes to the corporation.

Question 102

Who may bring a derivative action lawsuit?

Answer 102

Generally, a shareholder may only commence a derivative action if he:

• Was a shareholder at the time of the act or omission; or
• Became a shareholder by a transfer by operation of law from a shareholder who was a shareholder at the time of the act or omission.

Question 103

Who has standing in a derivative lawsuit?

Answer 103

A shareholder must fairly and adequately represent the interests of the corporation, in enforcing the rights of the corporation through a derivative action.

To fairly and adequately represent the interests of the corporation, the shareholder must be a shareholder at the commencement of the suit and must continue to be a shareholder during the litigation.

Question 104

What is the “demand upon board” requirment in a derivative lawsuit?

Answer 104

The plaintiff in a derivative action must make a written demand upon the corporation (most frequently the board of directors) to take action.

The shareholder must then wait 90 days from the date of the demand before filing a derivative action.

If the shareholder has been notified that the demand has been rejected before the end of the 90-day period, then the shareholder may file suit before the expiration of the 90-day period.

Question 105

What is the “fultility exception”?

Answer 105

In some states, a demand upon the board is not required if the demand would be futile.

Georgia, however, does not recognize a futility exception; in all derivative actions, the shareholder must first make a written demand on the corporation.

Question 106

What is the irreparable-injury excuse in a derivative lawsuit?

Answer 106

The plaintiff may be excused from waiting the 90-day period for the board to respond to the demand if the delay would result in irreparable injury to the corporation.

Question 107

What effect does the board rejecting the shareholder’s demand have on a derivative lawsuit?

Answer 107

If the board specifically rejects the demand, then the rejection is tested against the business-judgment rule.

Question 108

What is the “business judgment rule”?

Answer 108

The court may dismiss a derivative proceeding, on motion by the corporation, if it concludes that the corporation has made a determination in good faith after conducting a reasonable investigation that maintenance of the derivative suit is not in the best interests of the corporation.

The corporation has the burden of proving the independence and good faith of those who made the determination and the reasonableness of the investigation.

Such a determination must have been made by:

• a majority vote of disinterested directors present at a board meeting if the independent directors constitute a quorum,
• a majority vote of a committee consisting of two or more independent directors, or
• a panel of one or more independent persons appointed by the court upon motion by the corporation.

Question 109

What is “pierce the corporate veil”?

Answer 109

If a plaintiff can “pierce the corporate veil,” then a corporation’s existence is ignored, and the shareholders of the corporation are held personally liable.

Although courts are reluctant to hold a director or active shareholder liable for actions that are legally the responsibility of the corporation (even if the corporation has a single shareholder), they will sometimes do so if the corporation was markedly noncompliant or if holding only the corporation liable would be singularly unfair to the plaintiff.

Question 110

What is the general standard to determine whether to pierce the corporate veil?

Answer 110

Courts look at the totality of circumstances in deciding whether to pierce the corporate veil.

Courts generally look to whether the corporation is being used as a façade for a dominant shareholder’s personal dealings (i.e., whether the corporation is an alter ego of the shareholder).

Additionally, courts look to whether there is unity of interest and ownership between the entity and the members, such that the corporation in fact did not have an existence independent of the members.

Question 111

What factors do Courts take into account to determine whether to pierce the corporate veil?

Answer 111

• Undercapitalization of the corporation at the time of its formation;
• Disregard of corporate formalities;
• Use of corporate assets as a shareholder’s own assets;
• Self-dealing with the corporation;
• Siphoning of corporate funds or stripping of corporate assets;
• Use of the corporate form to avoid existing statutory requirements or other legal obligations;
• A shareholder’s impermissible control or domination over the corporation; and
• Wrongful, misleading, or fraudulent dealings with a corporate creditor.

Question 112

How are “controlling shareholders”?

Answer 112

When one shareholder—or a group of shareholders acting in concert—holds a high enough percentage of ownership in a company to enact changes at the highest level, the shareholder or group is a controlling shareholder.

Anyone controlling 50% of a corporation’s shares, plus one, is automatically a controlling shareholder.

A much smaller interest, whether owned individually or by a group in combination, can be controlling if the remaining shares are widely dispersed (as in a large, publicly traded corporation) and not actively voted.

Additionally, a corporation that requires a supermajority of shares to vote in favor of a motion can effectively grant control to a minority shareholder or block of shareholders that owns just more than one-third of the shares of the corporation. Thus, in some cases, a shareholder can essentially maintain control of a corporation with only 33.4% of the outstanding shares.

Question 113

What are “controlling shareholder’s” fiduciary obligations?

Answer 113

A fiduciary duty to the minority shareholders may arise if the controlling shareholder is

• selling that interest to an outsider,
• seeking to eliminate other shareholders from the corporation, or
• receiving a distribution denied to the other shareholders.

A controlling shareholder has a duty to disclose to the minority shareholder any information that it knew or should have known if it is information that a reasonable person would consider important in deciding how to vote on a transaction.

A controlling shareholder breaches its fiduciary duty to the minority shareholder if nondisclosure causes a loss to the minority shareholders.

A loss includes being deprived of a state remedy that would otherwise have been available.

Furthermore, when a majority shareholder purchases the interest of the minority, it has a fiduciary duty of fair dealing.

The controlling shareholder bears the burden of demonstrating that the process it employed was fair and the price it selected was fair.