2020 Georgia Code
Title 14 - Corporations, Partnerships, and Associations
Chapter 2 - Business Corporations
Article 12 - Sale of Assets
§ 14-2-1201. Sale and Mortgage of Assets Not Requiring Shareholder Approval

1. As used in this Code section, the term "insolvent" means:
   1. The corporation would not be able to pay its debts as they become due in the usual course of business; or
   2. The corporation's total assets would be less than the sum of its total liabilities.
2. A corporation may, on the terms and conditions and for the consideration determined by the board of directors:
   1. Sell, lease, exchange, or otherwise dispose of all or substantially all of its property if:
      1. The corporation is insolvent and a sale for cash or its equivalent is deemed advisable by the board to meet the liabilities of the corporation; or
      2. The corporation was incorporated for the purpose of liquidating such property and assets;
   2. Mortgage, pledge, dedicate to the repayment of indebtedness, whether with or without recourse, or otherwise encumber any or all of its property whether or not in the usual and regular course of business;
   3. Transfer any or all of its property to a corporation all the shares of which are owned by the corporation; or
   4. Sell, lease, exchange, or otherwise dispose of less than all or substantially all of its property. Assets shall be deemed to be less than substantially all of a corporation's property if the fair value of the assets as of the date of the most recent available financial information does not exceed two-thirds of the fair value of all of the assets of the corporation, and the annual revenues of the corporation for the most recent fiscal year for which such financial information is available represented or produced by such assets do not exceed two-thirds of the total revenues of the corporation for that period. This subsection is intended merely to create an irrebuttable presumption with respect to transactions described in this subsection and shall not create any inference that the sale of assets exceeding the amounts described in this subsection is the sale of substantially all of the property of the corporation.
3. Unless the articles of incorporation require it, approval by the shareholders of a transaction described in subsection (b) of this Code section is not required.

(Code 1981, §14-2-1201, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 1989, p. 946, § 57.)

- For article discussing issuance of debt securities under the Georgia Business Corporation Code, see 3 Ga. L. Rev. 11 (1968). For article, "The Acquisition Process and the Closely-Held Corporation: Selected Legal Aspects," see 36 Mercer L. Rev. 567 (1985).

Source: Model Act, § 12.01; former § 14-2-230.

The Model Act provisions were amended to delete the reference to sales in the usual and regular course of business. Georgia rejected the "ordinary course of business" distinction as not helpful in 1968, and focused on a more detailed description of transactions where no shareholder vote was required. The Code generally follows the approach of prior law, § 14-2-230.

Subsection (a)(1) was added to the Model Act from former Georgia law, § 14-2-230(a)(3), and preserves the approach of providing a specific list of transactions where no shareholder vote is required.

Subsection (a)(2), permitting mortgage or pledge of all corporate property to secure debt repayment or for other purposes, without shareholder approval, is substantially the same as former § 14-2-230(a)(1).

Subsection (a)(3) allows transfer of any or all a corporation's property to a wholly owned corporation. There was no counterpart in former Georgia law. This provision, however, may not be used as a device to avoid a vote of shareholders by a multiple-step transaction.

Subsection (a)(4) is new, having no counterpart in either prior law or the Model Act. Where the Model Act, in § 12.01(a)(1), permitted sales approved by the board of all or substantially all its property, if in the usual and regular course of business, Georgia has historically rejected the "usual and regular course of business" test as subjective difficult to apply. Instead, Georgia has selected a quantitative approach, permitting the sale of less than all or substantially all assets, regardless of the circumstances, without shareholder approval.

The phrase "all or substantially all" is intended to mean what it literally says. The phrase "substantially all" is synonymous with "nearly all" and was added merely to make it clear that the statutory requirements could not be avoided by retention of some minimal or nominal residue of the original assets. A sale of all the corporate assets other than cash or cash equivalents is normally the sale of "all or substantially all" of the corporation's property. A sale of several distinct manufacturing lines while retaining one or more lines is normally not a sale of "all or substantially all" even though the lines being sold are substantial and include a significant fraction of the corporation's former business. If the lines retained are viewed only as a temporary operation or as a pretext to avoid the "all or substantially all" requirements, however, the statutory requirements of Part 12 must be complied with. Similarly, a sale of a plant but retention of operating assets (e.g., machinery and equipment), accounts receivable, good will, and the like with a view toward continuing the operation at another location, or leasing back the plant, is not a sale of "all or substantially all" the corporation's property.

While the Code rejects "ordinary course of business" formulations as too vague to be useful, it provides a "safe harbor" for asset sales involving no more than two-thirds of the corporation's assets, measured in two ways, at the time of the decision to sell. Thus, if the corporation has a separate division, with separate accounting records, it may be able to determine that a transaction meets the specific requirements of the safe harbor contained in subsection (a)(4), and does not require shareholder approval. Directors, in making such a decision, should be able to rely on the same kinds of records they are entitled to use in determining the legality of distributions, under Section 14-2-640. The subsection expressly states that failure to meet the safe harbor standards shall not create any inference that the sale involves substantially all the property of the corporation.

Under subsection (b) shareholder approval for transactions described in Section14-2-1201 is not needed unless the articles of incorporation provide otherwise. Former § 14-2-230(a) had the same requirement, but also provided that the bylaws could require shareholder approval.

Note to 1989 Amendment The 1989 amendment strengthens and clarifies the safe harbor introduced in 1988. The percentage of assets that may be sold without a shareholder vote was raised from 50% to 66 2/3%, and the measures of the value of assets have been clarified, by specifying the accounting periods for which revenues are to be measured, and by introducing the notion of "fair value," which also appears in Code Section 14-2-1302(a). References to "fair valuation" also appear in the comments to Code Section 4-2-640, where a balance sheet test limits distributions to shareholders. It also changed subsection (a)(4) to delete the words "all or" before "substantially all" in the second sentence, both before and after the proviso. The reference to "all" the assets was surplusage, since the safe harbor is clearly designed to apply to sales of less than all the assets. Finally, the safe harbor language was strengthened, by noting that the purpose of the safe harbor was merely to create an irrebuttable presumption about what transactions did not involve the sale of substantially all assets. The safe harbor is not intended to mean that all transactions involving slightly more than two-thirds of the corporation's assets require a shareholder vote.

The 1989 amendments added subsection (c), to provide a definition of "insolvent" for purposes of this Article. The definition of "insolvent" contained in section 14-2-640 is inappropriate for purposes of this section, since it protects preferred shares, rather than just creditors. No general definition of "insolvent" appears in Code Section 14-2-140.

Cross-References Articles of incorporation, see § 14-2-202 and Article 10, Part 1. Director standards of conduct, see §§ 14-2-830 &14-2-831. Sale requiring shareholder approval, see § 14-2-1202.

JUDICIAL DECISIONS

Date corporation deemed insolvent.

- The trial court erred in ruling that a subcontractor's claim against a county accrued on the day the subcontractor received notification about the contractor's cash flow problems when, for three months after the letter was written, the contractor continued to work on the project even though the county had only paid it 40 percent of the contract price, and there was also evidence that if the county had paid the contractor pursuant to the contract, the contractor would have paid its materialmen. Kelly Energy Sys. v. Board of Comm'rs, 196 Ga. App. 519, 396 S.E.2d 498 (1990).

Cited in Stewart v. Richardson, 201 Ga. App. 312, 411 S.E.2d 309 (1991); Augusta Surgical Ctr., Inc. v. Walton & Heard Office Venture, 235 Ga. App. 283, 508 S.E.2d 666 (1998).

RESEARCH REFERENCES

ALR.

- Power of directors to sell property of corporation without consent of stockholders, 5 A.L.R. 930; 60 A.L.R. 1210.

Trademark or tradename as asset in case of bankruptcy, insolvency, or assignment for benefit of creditors, 44 A.L.R. 706.

Validity, construction, and application of express restrictions on right of action by individual holder of one or more of a series of corporate bonds or other obligations, 108 A.L.R. 88; 174 A.L.R. 435.

Instrument issued by a corporation as certificate of preferred stock or as evidence of indebtedness, 123 A.L.R. 856.

Applicability of statutes regulating sale of assets or property of corporation as affected by purpose or character of corporation, 9 A.L.R.2d 1306.

Conditions accompanying or following dissolution of lessee corporation, as breach of covenant against assignment or sublease, 12 A.L.R.2d 179.

Valuation of stock of dissenting stockholders in case of consolidation or merger of corporation, sale of its assets, or the like, 48 A.L.R.3d 430.

Liability of director or dominant shareholder for enforcing debt legally owed him by corporation, 56 A.L.R.3d 212.

Loss on sale of securities by corporate taxpayer as fully deductible trade or business expense under 26 U.S.C. § 162(a) or uncompensated loss under 26 U.S.C. § 165(a), or as partially deductible loss incurred on sale of capital asset under 26 U.S.C. § 165(f), 34 A.L.R. Fed. 699.

When is nonbusiness debt "worthless" so as to be considered loss from sale or exchange of capital asset under 26 U.S.C. § 166(d)(1)(B), 169 A.L.R. Fed. 1