Shareholder Agreements

1. Law
2. Georgia Code
3. Corporations, Partnerships, and Associations
4. Business Corporations
5. Shareholders
6. Voting Trusts and Agreements
7. Shareholder Agreements

1. An agreement among the shareholders of a corporation that complies with this Code section is effective among the shareholders and the corporation even though it is inconsistent with one or more other provisions of this Code in that it:
   1. Eliminates the board of directors or restricts the discretion or powers of the board of directors;
   2. Governs the authorization or making of distributions whether or not in proportion to ownership of shares, subject to the limitations of Code Section 14-2-640;
   3. Establishes the directors or officers of the corporation, or their terms of office or manner of selection or removal;
   4. Governs, in general or in regard to specific matters, the exercise or division of voting power by or between the shareholders and directors or by or among any of them, including use of weighted voting rights or director proxies;
   5. Establishes the terms and conditions of any agreement for the transfer or use of property or the provision of services between the corporation and any shareholder, director, officer, or employee of the corporation or among any of them;
   6. Transfers to one or more shareholders or other persons all or part of the authority to exercise the corporate powers or to manage the business and affairs of the corporation, including the resolution of any issue about which there exists a deadlock among directors or shareholders;
   7. Requires dissolution of the corporation at the request of one or more of the shareholders or upon the occurrence of a specified event or contingency; or
   8. Otherwise governs the exercise of the corporate powers or the management of the business and affairs of the corporation or the relationship among the shareholders, the directors, and the corporation, or among any of them, and is not contrary to public policy.
2. An agreement authorized by this Code section shall be:
   1. Set forth:
      1. In the articles of incorporation or bylaws and approved by all persons who are shareholders at the time of the agreement; or
      2. 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;
   2. Subject to amendment only by:
      1. An amendment to the articles of incorporation or bylaws approved by all persons who are shareholders at the time of the amendment; or
      2. An agreement in writing by all persons who are shareholders at the time of the amendment, unless the agreement provides that it may be amended by less than all the shareholders; and
   3. Valid for no more than 20 years. Failure to state a period of duration or stating a period of duration in excess of 20 years shall not invalidate the agreement, but in either case the period of duration shall be 20 years. Any such agreement may be renewed for a period not in excess of 20 years from the date of renewal by agreement of all the shareholders at the date of renewal.
3. The existence of an agreement authorized by this Code section shall be noted conspicuously on the front or back of each certificate for outstanding shares or on the information statement required by subsection (b) of Code Section 14-2-626. If at the time of the agreement the corporation has shares outstanding represented by certificates, the corporation shall recall the outstanding certificates and issue substitute certificates that comply with this subsection. The failure to note the existence of the agreement on the certificate or information statement shall not affect the validity of the agreement or any action taken pursuant to it. Any purchaser of shares who, at the time of purchase, did not have knowledge of the existence of the agreement shall be entitled to rescission of the purchase. A purchaser shall be deemed to have knowledge of the existence of the agreement if its existence is noted on the certificate or information statement for the shares in compliance with this subsection and, if the shares are not represented by a certificate, the information statement is delivered to the purchaser at or prior to the time of purchase of the shares. An action to enforce the right of rescission authorized by this subsection must be commenced within the earlier of 90 days after discovery of the existence of the agreement or two years after the time of purchase of the shares.
4. An agreement authorized by this Code section shall cease to be effective when shares of the corporation are listed on a national securities exchange or regularly traded in a market maintained by securities dealers or brokers. If the agreement ceases to be effective for any reason, the board of directors may, if the agreement is contained or referred to in the corporation's articles of incorporation or bylaws, adopt an amendment to the articles of incorporation or bylaws, without shareholder action, to delete the agreement and any references to it.
5. An agreement authorized by this Code section that limits the discretion or powers of the board of directors shall relieve the directors of, and impose upon the person or persons in whom such discretion or powers are vested, liability for acts or omissions imposed by law on directors to the extent that the discretion or powers of the directors are limited by the agreement.
6. Except as provided in subsection (e) of this Code section, the existence or performance of an agreement authorized by this Code section shall not be a ground for imposing personal liability on any shareholder for the acts or debts of the corporation even if the agreement or its performance treats the corporation as if it were a partnership or results in failure to observe the corporate formalities otherwise applicable to the matters governed by the agreement.
7. Incorporators or subscribers for shares may act as shareholders with respect to an agreement authorized by this Code section if no shares have been issued when the agreement is made.

(Code 1981, §14-2-732, enacted by Ga. L. 2000, p. 1567, § 5; Ga. L. 2001, p. 4, § 14.)

Law reviews.

- For article, "2008 Annual Review of Case Law Development," see 14 (No. 6) Ga. St. B. J. 28 (2009). For article, "Business Associations," see 63 Mercer L. Rev. 83 (2011). For note on 2000 amendment of O.C.G.A. § 14-2-732, see 17 Ga. St. U. L. Rev. 46 (2000).

COMMENT

Source: Model Act, § 7.32. This Code section replaces former Code Section 14-2-731(c)-(h). This Code section is based on the Model Act § 7.32, which was adopted subsequent to the enactment of former Code Section 14-2-731.

This Code section is intended to add, within the context of the traditional corporate structure, legal certainty to shareholder agreements that embody various aspects of the business arrangement established by the shareholders to meet their business and personal needs. This Code section validates for nonpublicly held corporations various types of agreements among shareholders even when the agreements are inconsistent with the statutory norms otherwise contained in this Code.

This Code section varies from former Code Section 14-2-731(c)-(h) in that it allows nonpublicly held corporations a greater degree of flexibility by approving a wider breadth of shareholder agreements. Former Code Section 14-2-731(c)-(h) allowed for shareholder agreements that would eliminate the board of directors, authorize director proxies or weighted voting, restrict board power or discretion over business management as if it were a partnership, and arrange the relationships of shareholders in a manner that would be appropriate only between partners. Subsection (a) allows those types of agreements sanctioned by former Code Section 14-2-731 and also allows other types of agreements that generally restrict the discretion or powers of the board of directors; govern the authorization of distributions; establish who shall be a director or officer of the corporation, as well as the terms of office and manner of selection or removal for those positions; govern the use or transfer of property or services between the corporation and any shareholder, director, officer, or employee; transfer authority to exercise corporate powers, including deadlock resolution; and require the dissolution of the corporation upon shareholder request or the happening of a contingency.

Subsection (b)(3) differ from the Model Act in that it retains the duration limitations for shareholder agreements that were found in former Code Section 14-2-731(d). Under subsection (b)(3) the maximum duration for any shareholder agreement is 20 years. A shareholder agreement with a lesser term or no term at all will not be invalidated, but its duration will automatically be set for 20 years. Model Act § 7.32(b)(3) specifies no maximum duration for shareholder agreements and, in the event that no term is stated, the duration is set at 10 years.

The types of shareholder agreements sanctioned by this Code section require unanimous shareholder agreement (subsection (b)) and cease to be effective when the corporation becomes publicly held (subsection (d)). These provisions essentially adopt the interpretation of former Code Section 14-2-731(c) in Invacare Corp. v. Healthdyne Technologies, Inc., 968 F. Supp. 1578 (N.D. Ga. 1997), which held that the shareholders of a publicly held corporation cannot restrict the board of directors' powers or discretion (including the board's discretion as it relates to shareholders' rights plans) by amending the corporation's bylaws.

Cross-References Form and content of certificates, see § 14-2-265. Shares without certificates, see § 14-2-626. Voting agreements, see § 14-2-731. Articles of incorporation, see § 14-2-202. Bylaws, see § 14-2-206. Amendment of articles of incorporation, see § 14-2-1001 et seq. Amendments of bylaws, see § 14-2-1020 et seq. Requirements for and duties of board of directors, see § 14-2-801.

JUDICIAL DECISIONS

Twenty-year time limit did not apply retroactively to affect prior existing shareholder agreements.

- A 1992 shareholder's agreement that adopted the provisions of a 1987 shareholder's agreement did not expire in 2007, or 20 years after 1987, based on O.C.G.A. § 14-2-732(b)(3), because O.C.G.A. § 14-2-732 was not enacted until 2000 and did not operate retroactively to affect the prior agreements. Ansley v. Ansley, 307 Ga. App. 388, 705 S.E.2d 289 (2010).

Findings necessary for valuation of stock determination.

- In a suit between brothers over the valuation of the stock of the family business, the judgment of the trial court was vacated and the case was remanded with directions for the trial court to find the facts and state the court's conclusions of law, including whether the bylaws, buy-sell agreement, or any other document governed the parties' dispute to ensure appropriate appellate review. Wallace v. Wallace, 301 Ga. 195, 800 S.E.2d 303 (2017).

Cited in Wallace v. Wallace, 345 Ga. App. 764, 813 S.E.2d 428 (2018), cert. denied, No. S18C1329, 2019 Ga. LEXIS 42, cert. denied, No. S18C1332, 2019 Ga. LEXIS 48 (Ga. 2019), cert. denied, 2019 U.S. LEXIS 6165, 205 L. Ed. 2d 30 (U.S. 2019).

PART 4 DERIVATIVE PROCEEDINGS

Cross references.

- Class actions, § 9-11-23.

Law reviews.

- For article discussing liability of corporate directors, officers, and shareholders under the Georgia Business Corporation Code, and as affected by provisions of the Georgia Civil Practice Act, see 7 Ga. St. B. J. 277 (1971). For article, "Litigation Discovery and Corporate Governance: The Missing Story About the 'Genius of American Corporate Law,"' see 63 Emory L.J. 1383 (2014). For comment, "Dismissing Derivative Actions in the Federal Courts for Failure to Allege Demand Futility: Choosing a Standard of Appellate Review - Abuse of Discretion or De Novo?," see 61 Emory L.J. 201 (2014).

JUDICIAL DECISIONS

Editor's notes.

- In light of the similarity of the statutory provisions, decisions under former Civil Code 1910, § 2224, Code 1933, § 22-711, and § 14-2-123, which were repealed by Ga. L. 1988, p. 1070, § 1, effective July 1, 1989, are included in the annotations for this part.

Wrong by officers and directors is wrong done to corporation.

- Primarily the right to recover against defendants for a wrong was in the corporation itself, and not in its stockholders. The right to action against officers and directors to redress, or to recover damages for wrongs inflicted by them upon the corporation, is in the corporation and not in the stockholders. Greenwood v. Greenblatt, 173 Ga. 551, 161 S.E. 135 (1931) (decided under former Civil Code 1910, § 2224).

Condition precedent to minority stockholder's suit in equity.

- The conditions precedent with which a minority stockholder must comply before proceeding on behalf of oneself and other stockholders against the corporation, its officers, and those participating therein, when the minority stockholders are injured thereby are that the petitioner had made an earnest effort to obtain redress at the hands of the directors and stockholders, or why this could not be done, or that it was not reasonable to require it. Greenwood v. Greenblatt, 173 Ga. 551, 161 S.E. 135 (1931) (decided under former Civil Code 1910, § 2224).

It is a condition precedent to the maintenance of a suit in equity by a minority stockholder against the corporation and its officers that it be shown that the stockholder has made an earnest effort to obtain redress at the hands of the directors and stockholders, or why it could not be done, or that it was not reasonable to require it. Peeples v. Peeples, 193 Ga. 358, 18 S.E.2d 629 (1942); Chalverus v. Wilson Mfg. Co., 212 Ga. 612, 94 S.E.2d 736 (1956) (decided under former Code 1933, § 22-711).

Petitioners standing upon the single statement that, under the circumstances, seeking redress at the hands of the directors or stockholders would have been impracticable and useless was not sufficient. Peeples v. Southern Chem. Corp., 194 Ga. 388, 21 S.E.2d 698 (1942) (decided under former Code 1933, § 22-711).

Minority stockholder's duty to seek protection within corporation first.

- It is the duty of a minority stockholder to seek protection within the corporation, and whatever complaint the stockholder may have the stockholder will not be allowed to assert it in a court of equity unless the petition shows that the stockholder has made an earnest effort within the corporation, or shows why this could not be done, or that it would not be reasonable to require the stockholder to make such effort. Peeples v. Southern Chem. Corp., 194 Ga. 388, 21 S.E.2d 698 (1942) (decided under former Code 1933, § 22-711).

Claim for misappropriation of corporate assets to be brought on behalf of corporation.

- Minority shareholder's claims against other shareholders for refusing the minority shareholder's request to inspect corporate records was properly dismissed; such a claim could only be brought against the corporation pursuant to O.C.G.A. § 14-2-1604. The minority shareholder's claim for misappropriation of corporate assets was also dismissed because it was a derivative claim, required to be brought on behalf of the corporation pursuant to O.C.G.A. § 14-2-740 et seq. Barnett v. Fullard, 306 Ga. App. 148, 701 S.E.2d 608 (2010).

Estoppel.

- Nothing will call a court of equity into activity but conscience, good faith, and reasonable diligence. When these are wanting, the court is passive and does nothing; and when stockholders in a corporation participate in the performance of an act, or acquiesce in and ratify the act, they are estopped to complain thereof in equity. Chalverus v. Wilson Mfg. Co., 212 Ga. 612, 94 S.E.2d 736 (1956) (decided under former Code 1933, § 22-711).

Cited in Strickland v. Crutcher, 229 Ga. 310, 191 S.E.2d 55 (1972); Pickett v. Paine, 230 Ga. 786, 199 S.E.2d 223 (1973); Davis v. Ben O'Callaghan Co., 238 Ga. 218, 232 S.E.2d 53 (1977); Burnette v. Southern Consol. Inns, Inc., 240 Ga. 98, 239 S.E.2d 513 (1977); Kirk v. First Nat'l Bank, 439 F. Supp. 1141 (M.D. Ga. 1977); Comolli v. Comolli, 241 Ga. 471, 246 S.E.2d 278 (1978); Rose Hall, Ltd. v. Holiday Inns, Inc., 146 Ga. App. 709, 247 S.E.2d 173 (1978); Hall v. Churchwell's, Inc., 243 Ga. 852, 257 S.E.2d 272 (1979); Hasty v. Randall, 152 Ga. App. 365, 262 S.E.2d 626 (1979); Sherrer v. Hale, 248 Ga. 793, 285 S.E.2d 714 (1982); Computer Maintenance Corp. v. Tilley, 172 Ga. App. 220, 322 S.E.2d 533 (1984); Kenney v. Don-Ra, Inc., 178 Ga. App. 492, 343 S.E.2d 779 (1986); Nicholson v. Harris, 179 Ga. App. 35, 345 S.E.2d 63 (1986).

RESEARCH REFERENCES

ALR.

- Shares of corporate stock as within statute enabling assignee to maintain action in his own name, 23 A.L.R. 1322.

Refusal to deal with corporation as giving stockholder right of action, 59 A.L.R. 1099.

Motive as affecting stockholders' right to maintain suit against corporation or officer, other than to inspect books, 67 A.L.R. 1470.

Right as against corporation of stockholder who surrenders part of his stock in reliance upon agreement by other stockholders to do the same which they fail to carry out, 74 A.L.R. 1377.

Laches of stockholders in attacking sale of corporate assets, 70 A.L.R. 53.

Right to recover back amount paid on an illegal or unauthorized assessment on corporate stock, 131 A.L.R. 138.

Proceeding by stockholder in behalf of corporation for relief from judgment taken against it through fraud of officers or directors, 135 A.L.R. 838.

Stockholder's right to maintain (personal) action against third person as affected by corporation's right of action for the same wrong, 167 A.L.R. 279.

Dissolved corporation as an indispensable party to a stockholders' derivative action, 172 A.L.R. 691.

Estoppel of stockholder to recover back or to secure restoration of compensation of corporate officers claimed to be exorbitant or unauthorized, 16 A.L.R.2d 467.

Application to pending action or existing cause of action of statute regulating stockholders' actions, 32 A.L.R.2d 851.

Diversity of citizenship, for purposes of federal jurisdiction, in stockholders' derivative action, 68 A.L.R.2d 824.

Intervention by other stockholders in stockholders' derivative action, 69 A.L.R.2d 562.

Maintenance of second or successive stockholder's derivative action, 70 A.L.R.2d 1305.

Communications by corporation as privileged in stockholders' action, 34 A.L.R.3d 1106.

Dominant shareholder's accountability to minority for profit, bonus, or the like, received on sale of stock to outsiders, 38 A.L.R.3d 738.

Test in stockholder's actions as to reasonableness of compensation of corporate officers who as directors determine own compensation, 53 A.L.R.3d 358.

Allowance of punitive damages in stockholder's derivative action, 67 A.L.R.3d 350.

What business opportunities are in "line of business" of corporation for purposes of determining whether a corporate opportunity was presented, 77 A.L.R.3d 961.

Right to jury trial in stockholder's derivative action, 32 A.L.R.4th 141.

Download our app to see the most-to-date content.