(Code 1981, §14-2-621, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1993, p. 1231, § 4.)
Law reviews.- For article discussing the consideration required by the issuance of par and no-par shares under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article discussing issuance of debt securities under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article discussing treasury shares and restrictions placed upon their use by the corporation, see 3 Ga. L. Rev. 11 (1968).
COMMENT
Source: Model Act, § 6.21. This replaces former §§ 14-2-84 &14-2-85.
Subsection (a) is roughly comparable to former § 14-2-84(d), in allowing the articles to reserve to the shareholders the power to fix consideration for shares.
Subsection (b) specifically authorizes receipt of promissory notes and contracts for services to be performed, reversing the prohibition of former § 14-2-85(b). Shares may also be issued for "any tangible or intangible property or benefit to the corporation," as consideration for the present issue of shares. The term "benefit" should be broadly construed to include, for example, a reduction of a liability, a release of a claim, or benefits obtained by a corporation by contribution of its shares to a charitable organization or as a prize in a promotion.
Subsection (c) merely requires the board to determine that the consideration received for shares to be issued is adequate, in fulfillment of its general fiduciary duties to the existing shareholders. Accounting principles are not specified in the Code, and the board of directors is not required by the statute to determine the "value" of noncash consideration received by the corporation (as was the case in former § 14-2-84(h), requiring each corporation to keep a record of the consideration for all shares issued, and of the number and par value, if any, of the shares issued therefor). Thus, the board need not make a value determination for purposes of accounting entries on the balance sheet, although it may elect to do so. In many instances, property or benefit received by the corporation will be of uncertain value; if the board of directors determines that the issuance of shares for the property or benefit is an appropriate transaction that protects the shareholders from dilution, that is sufficient under Section14-2-621. But subsection (c) only protects the validity of shares issued; it does not protect such decisions from charges that they unfairly dilute the investment of existing shareholders. The board of directors does not have to make an explicit "adequacy" determination by formal resolution; that determination may be inferred from a determination to authorize the issuance of shares for a specified consideration.
Section 14-2-621 reflects the elimination of the legal capital concepts of former Georgia law. Thus, payment of par value is not required to make shares fully paid and nonassessable; only payment of the agreed consideration. Since shares need not have a par value, there can be no "watered stock" liability for issuing shares at too low a price. As subsection (d) provides, shares are fully paid and nonassessable when issued for the consideration authorized by the board of directors. Creditor protection no longer rests on formalistic notions of capital dedicated through a legal capital system to the firm; creditors obtain their protections from the more realistic limitations on distributions contained in Section 14-2-640.
Where shares are issued for notes or promised future services, subsection (e) authorizes, but does not require, placing the shares in escrow until the payment is received, and canceling them to the extent payment is not received.
The subsection also defines the rights of the corporation with respect to these shares. If the shares are issued without being restricted as provided in this subsection, they are validly issued insofar as the adequacy of consideration is concerned. See Section 14-2-622 and its Comment.
Note to 1993 Amendment The 1993 amendment adds statutory authority to the interpretation formerly noted only in comments that the board of directors does not have to make an explicit determination as to the adequacy of consideration and that such a conclusion may be inferred from the determination to issue shares.
Cross-References Certificateless shares, see § 14-2-626. Certificates for shares, see § 14-2-625. Committees of the board, see § 14-2-825. Director standards of conduct, see § 14-2-830 et seq. Distributions, see § 14-2-640. Liability of subscribers and shareholders, see § 14-2-622. Par value shares, see § 14-2-202. Preincorporation subscriptions for shares, see § 14-2-620. Share dividends, see § 14-2-623. Share options, see § 14-2-624. Share transfer restrictions, see § 14-2-627.
JUDICIAL DECISIONS
Editor's notes.
- In light of the similarity of the statutory provisions, decisions under former Code 1933, § 22-506 and former Code Section 14-2-85, which were repealed by Ga. L. 1988, p. 1070, § 1, effective July 1, 1989, are included in the annotations for this Code section.
Full payment presumed following board resolutions.
- Although a corporation may issue shares and share certificates to a person who is not entitled to them by reason of a full payment, full payment becomes conclusively presumed when, in the absence of bad faith, the board of directors issues a resolution as to the fair value of the consideration to the corporation. In re Delk Rd. Assocs., 37 Bankr. 354 (Bankr. N.D. Ga. 1984) (decided under former § 14-2-85).
Board must value property given for stock on transfer or stock issuance.- Board of directors of a corporation must by resolution place a value upon property contributed by a stockholder in payment of stock upon the date of transfer or stock issuance. Super Valu Stores, Inc. v. First Nat'l Bank, 463 F. Supp. 1183 (M.D. Ga. 1979) (decided under former Code 1933, § 22-506).
Failure to value property at time of transfer.
- When stock in corporation is issued in consideration of transfer of patent rights to the corporation, and no resolution is made by the directors setting a value in dollars on the patent rights, and when the corporation later comes into a court of equity seeking to cancel such shares, it is necessary for the court to make a determination as to the relative value of the stock issued and the property transferred, as of the time of the transaction. In such action by the corporation against the stockholder, the burden would be on the corporation to show that the property transferred to the corporation by the stockholder was overvalued. Crowder v. Electro-Kinetics Corp., 228 Ga. 610, 187 S.E.2d 249 (1972) (decided under former Code 1933, § 22-506).
Trial court properly found that the issuance of the controlling shares in a corporation to its president breached the president's fiduciary duties to the shareholders because the president made no attempt to determine the value of the shares and was interested in control of the corporation, not the well-being of the shareholders; as the president failed to make any real determination that the consideration for the shares was adequate, he breached his fiduciary duties to the existing shareholders. Gallagher v. McKinnon, 273 Ga. App. 727, 615 S.E.2d 746 (2005).
Issuance of controlling shares of stock in close corporation to president breached the president's fiduciary duties to the corporation's shareholders as prior to the issuance of the shares, there was no attempt to determine their value and as the president was interested in his control of the corporation, not the well-being of the shareholders; as the president failed to make any real determination that the consideration for the issued shares was adequate, the president breached his fiduciary duties to the existing shareholders. Gallagher v. McKinnon, 273 Ga. App. 727, 615 S.E.2d 746 (2005).
Shares not validly issued when no board approval.
- As shares of stock issued to a brother in a small, family-owned corporation were not approved by the board of directors, as required by the corporate bylaws, the shares were not validly issued; accordingly, there was no cause to consider whether the issuance of the disputed stock certificates was supported by adequate consideration. Furthermore, the evidence did not support the brother's assertion that the corporation's settled course of business was to acquiesce in such issuance by the corporate president as the shares were not deemed to have been validly issued. Ward v. Ward, 322 Ga. App. 888, 747 S.E.2d 95 (2013).
Actual receipt of certificates not necessary.
- Grant of summary judgment to the defendants on the plaintiff's claim for breach of contract was reversed because an issue of fact remained as to whether or not timely performance of the agreement was waived as the trial court erred in ruling that the plaintiff's execution of a Share Subscription Agreement was insufficient to establish the plaintiff as a shareholder of the partnership since the plaintiff never paid the purchase price for the stock as one may have an ownership interest in a corporation without having received stock certificates. Laymac v. Kushner, 349 Ga. App. 727, 824 S.E.2d 768 (2019), cert. denied, No. S19C1091, 2019 Ga. LEXIS 871 (Ga. 2019).
RESEARCH REFERENCES
Am. Jur. 2d.
- 18A Am. Jur. 2d, Corporations, §§ 397 et seq.
C.J.S.- 18 C.J.S., Corporations, § 223 et seq.
ALR.
- Bona fide holder of negotiable paper given in payment of a subscription to corporate stock in violation of law, 4 A.L.R. 1330.
Liability upon stock subscription payable in services which are rendered unnecessary by the insolvency of corporation, or other cause, 6 A.L.R. 277.
Effect upon the validity of subscription to corporate stock, of failure to comply with statutory requirement of payment at the time of subscribing, 6 A.L.R. 1116.
Power to require nonassenting creditors or bondholders to accept securities of, or shares in, new or reorganized corporation, 28 A.L.R. 1196; 88 A.L.R. 1238.
Corporate stock without par value, 36 A.L.R. 791; 45 A.L.R. 1501; 65 A.L.R. 1347.
Construction of contract which fixes compensation of officer or employee with reference to dividends, 41 A.L.R. 871.
Right of corporation itself, in absence of fraud against it, to complain that stock issued as fully paid was based on overvaluation of property, or receipt of less than par value, 56 A.L.R. 396.
Duty of corporation upon presentation for transfer of stock standing in one's name as trustee or other fiduciary, 56 A.L.R. 1199.
Note as consideration for issuance of corporate stock under statute forbidding issuance of stock except for money paid, property received, etc., 58 A.L.R. 708.
Infant's rights and liabilities on subscription to or purchase of corporate stock, 64 A.L.R. 972.
Right of corporation to deny validity of stock issued by it in violation of statutory or constitutional provisions respecting receipt of consideration, as against subsequent bona fide purchasers or pledgees for value, 73 A.L.R. 1435.
Accrued dividends on preferred stock, 75 A.L.R. 1150.
Construction, application, and effect of statutes giving corporation a lien on shares of its stockholders for debts due from stockholders to corporation, 80 A.L.R. 1338.
Right of action to recover purchase price under sale of corporate stock where title has not passed as affected by provision of Sales Act, 99 A.L.R. 275.
Validity of release, cancelation, or compromise of unpaid subscription for stock by corporation or its representatives, 101 A.L.R. 231.
Instrument issued by a corporation as certificate of preferred stock or as evidence of indebtedness, 123 A.L.R. 856.
Implied obligation of purchaser of corporate stock to indemnify a vendor against future calls and assessments, 141 A.L.R. 1351.
Issuance by corporation of new stock certificates without requiring surrender of old, 150 A.L.R. 148.
Rights and liabilities of promoters or incorporators inter se under their contract for issuance of stock to them in return for services, 8 A.L.R.2d 722.
Meaning of "book value" of corporate stock, 51 A.L.R.2d 606.
Stock purchase or stock bonus plan as within provisions of federal labor relations acts requiring employer to bargain collectively, 58 A.L.R.2d 843.
Construction and effect of constitutional or statutory provisions precluding issuance of corporate stock in consideration of promissory notes, 78 A.L.R.2d 834.
Validity of agreement in conjunction with sale of corporate shares that majority of directors will be replaced by purchaser's designees, 13 A.L.R.3d 361.
Valuation of corporate stock under "buy-out" or "first option" agreement giving option to or requiring corporation or other stockholders to purchase stock of deceased or withdrawing stockholders, 54 A.L.R.3d 790.
Validity of obligation given by corporation incident to purchase of entire stock by sole shareholder, 71 A.L.R.3d 639.