2020 Georgia Code
Title 14 - Corporations, Partnerships, and Associations
Chapter 2 - Business Corporations
Article 9 - Close Corporations
Part 5 - Judicial Supervision
§ 14-2-940. Court Action to Protect Shareholders

1. Subject to satisfying the conditions of subsections (c) and (d) of this Code section, a shareholder of a statutory close corporation may petition the superior court for any of the relief described in Code Section 14-2-941, 14-2-942, or 14-2-943 if:
   1. The directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to the petitioner, whether in his capacity as shareholder, director, or officer of the corporation;
   2. The directors or those in control of the corporation are deadlocked in the management of the corporation's affairs, the shareholders are unable to break the deadlock, and the corporation is suffering or will suffer irreparable injury or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally because of the deadlock; or
   3. There exists one or more grounds for judicial dissolution of the corporation under Code Section 14-2-1430.
2. A shareholder must commence a proceeding under subsection (a) of this Code section in the superior court of the county where the corporation's principal office (or, if none in this state, its registered office) is located. The jurisdiction of the court in which the proceeding is commenced is plenary and exclusive.
3. If a shareholder has agreed in writing to pursue a nonjudicial remedy to resolve disputed matters, he may not commence a proceeding under this Code section with respect to the matters until he has exhausted the nonjudicial remedy.
4. If a shareholder has dissenters' rights under this article or Article 13 of this chapter with respect to proposed corporate action, he must commence a proceeding under this Code section before he is required to give notice of his intent to demand payment under Code Section 14-2-1321 or to demand payment under Code Section 14-2-1323 or the proceeding is barred.
5. Except as provided in subsections (c) and (d) of this Code section, a shareholder's right to commence a proceeding under this Code section and the remedies available under Code Sections 14-2-941 through 14-2-943 are in addition to any other right or remedy he may have.

(Code 1981, §14-2-940, enacted by Ga. L. 1988, p. 1070, § 1.)

- For article, "The Development of the Shareholder's Direct Action Damage Remedy," see 28 Ga. St. B. J. 195 (1992).

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.

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 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.

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.

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 14-2-1302. If the shareholder does file a timely proceeding under this section, the court must first determine whether relief under this section is warranted. If the court finds that a share purchase is the appropriate remedy, the proceeding should be treated as a valuation proceeding in a dissenters' rights case and consolidated with any other similar dissenters' rights proceedings involving the same transaction.

Section 14-2-940(e) makes clear that the remedies available under this and Sections 14-2-941 through 943 are cumulative and are in addition to any other remedies the petitioner may have, except as otherwise provided in Sections 14-2-940(c) and 940(d).

Cross-References Dissenters' rights, see Article 13. Judicial dissolution, see § 14-2-1430. Principal office: defined, see § 14-2-140; designated in annual report, see § 14-2-1622. "Proceeding" defined, see § 14-2-140. Registered office: designated in annual report, see § 14-2-1622; required, see § 14-2-501. Relief, see § 14-2-941 et seq. Shareholder agreements, see § 14-2-920.

Inspection rights separately governed by O.C.G.A. § 14-2-1602. - Language of O.C.G.A. § 14-2-940(b), governing closely held corporations, did not preclude a shareholder from availing oneself of the provisions of O.C.G.A. §§ 14-2-1602 and14-2-1604, relating to inspection of corporate records, in a separate suit despite the shareholder's pending action against the corporation for breach of fiduciary duty. Advanced Automation, Inc. v. Fitzgerald, 312 Ga. App. 406, 718 S.E.2d 607 (2011).

Fraud and justifiable reliance were not required to rescind a president's additional shares of stock that were obtained by telling a director that the director had had sexual relations with an employee at a company party and that the employee was threatening to sue the close corporation; the president's actions were illegal, oppressive, and unfairly prejudicial. Gallagher v. McKinnon, 273 Ga. App. 727, 615 S.E.2d 746 (2005).

- President's motion for a directed verdict was properly denied as fraud was not required in an O.C.G.A. § 14-2-940 suit; the president acted in an illegal, oppressive, and unfairly prejudicial manner, in falsely telling a shareholder that the president had had sex with an employee and that the employee was threatening to sue the corporation for sexual harassment, which forced the shareholder to agree to the transfer of sole control of the corporation to the president. Gallagher v. McKinnon, 273 Ga. App. 727, 615 S.E.2d 746 (2005).

There is no requirement under O.C.G.A. § 14-2-940 and O.C.G.A. § 14-2-941 that all elements of fraud must exist before relief can be granted; O.C.G.A. § 14-2-940 explicitly states that relief may be sought if a corporate director has acted in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial. Gallagher v. McKinnon, 273 Ga. App. 727, 615 S.E.2d 746 (2005).

President's claim, that a finding that the president fraudulently concealed information from a shareholder was improper, was rejected because a finding of fraud was not required to rescind the issuance of shares to the president under O.C.G.A. §§ 14-2-940 and14-2-941. Gallagher v. McKinnon, 273 Ga. App. 727, 615 S.E.2d 746 (2005).

- Trial court erred in denying a corporation's motion for summary judgment on an employee's claim seeking the removal of directors and officers pursuant to O.C.G.A. § 14-2-941 because the employee failed to carry the burden on summary judgment of coming forward with rebuttal evidence to demonstrate the existence of a genuine issue of fact on the employee's claim of fraud; the employee did not point to specific evidence showing that the corporation falsely reported income and did so with knowledge that the report was false. VanRan Communs. Servs. v. Vanderford, 313 Ga. App. 497, 722 S.E.2d 110 (2012).

RESEARCH REFERENCES

ALR.

- Inherent power of equity, at instance of a stockholder, to appoint receiver for, or to wind up, a solvent, going corporation, on ground of fraud, mismanagement, or dissensions, 61 A.L.R. 1212; 91 A.L.R. 665.

Arbitration of disputes within close corporation, 64 A.L.R.2d 643.

What amounts to "oppressive conduct" under statute authorizing dissolution of corporation at suit of minority stockholder, 56 A.L.R.3d 358.

Relief other than dissolution in cases of intracorporate deadlock or dissension, 34 A.L.R.4th 13.

Use of marketability discount in valuing closely held corporation or its stock, 16 A.L.R.6th 693.