Business combinations with interested stockholders

(a) Notwithstanding any other provision of this chapter (except for the provisions of subsection (b) of this Code section and Code Section 14-2-1133), a resident domestic corporation shall not engage in any business combination with any interested shareholder for a period of five years following the time that such shareholder became an interested shareholder, unless: (1) Prior to such time the resident domestic corporation’s board of directors approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder; (2) In the transaction which resulted in the shareholder becoming an interested shareholder, the interested shareholder became the beneficial owner of at least 90 percent of the voting stock of the resident domestic corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by: (A) persons who are directors or officers, their affiliates, or associates; (B) subsidiaries of the resident domestic corporation; and (C) any employee stock plan under which participants do not have the right (as determined 436 14-2-1132 exclusively by reference to the terms of such plan and any trust which is part of such plan) to determine confidentially the extent to which shares held under such plan will be tendered in a tender or exchange offer; or (3) Subsequent to becoming an interested shareholder, such shareholder acquired additional shares resulting in the interested shareholder being the beneficial owner of at least 90 percent of the outstanding voting stock of the resident domestic corporation, excluding for purposes of determining the number of shares outstanding those shares owned by (A) persons who are directors or officers of the resident domestic corporation, their affiliates, or associates; (B) subsidiaries of the resident domestic corporation; and (C) any employee stock plan under which participants do not have the right (as determined exclusively by reference to the terms of such plan and any trust which is part of such plan) to determine confidentially the extent to which shares held under such plan will be tendered in a tender or exchange offer, and the business combination was approved at an annual or special meeting of shareholders by the holders of a majority of the voting stock entitled to vote thereon, excluding from said vote, for the purpose of this paragraph only, the voting stock beneficially owned by the interested shareholder or by (A) persons who are directors or officers of the resident domestic corporation, their affiliates, or associates; (B) subsidiaries of the resident domestic corporation; and (C) any employee stock plan under which participants do not have the right (as determined exclusively by reference to the terms of such plan and any trust which is part of such plan) to determine confidentially the extent to which shares held under such plan will be tendered in a tender or exchange offer. (b) The restrictions contained in this Code section shall not apply if a shareholder: (1) becomes an interested shareholder inadvertently; (2) as soon as practicable divests sufficient shares so that the shareholder ceases to be an interested shareholder; and (3) would not, at any time within the five-year period immediately prior to a business combination between the resident domestic corporation and such shareholder, have been an interested shareholder but for the inadvertent acquisition. (Code 1981, § 14-2-1132, enacted by Ga. L. 1988, p. 158, § 2; Ga. L. 1989, p. 946, § 55; Ga. L. 1990, p. 257, § 19.) COMMENT Source: Del. Code Ann. tit. 8, § 203, as added by Del. Laws 1988, Ch. 204. This succeeds the identical provisions of the former Code, O.C.G.A. § 14-2-237 (Supp. 1988). This provision is designed to encourage any person, before acquiring 10% of the outstanding voting stock of a resident domestic corporation, to seek approval of its board of directors for the terms of any contemplated business combination. By prohibiting a business combination with an interested shareholder for five years 437 14-2-1132 CORPORATIONS & PARTNERSHIPS 14-2-1132 (subject to the exceptions described below) the statute attempts to preserve the board’s independence and ability to negotiate freely on behalf of the resident domestic corporation. Subsection (a) prohibits any person who acquires 10% or more of the voting stock (an ‘‘interested shareholder’’) of a resident domestic corporation that has elected coverage under this article from thereafter engaging in any business combination with the corporation for a period of five years from the date that person became an interested shareholder, unless that person obtains approval of the transaction in one of three ways: (i) Prior to becoming an interested shareholder, the person obtains the consent of the board of directors; (ii) Becomes the owner of at least 90% of the outstanding shares in the same transaction in which the 10% interest was acquired, excluding certain ‘‘insider’’ shares defined in the subsection; or (iii) Subsequent to the 10% acquisition, acquires additional shares resulting in ownership of at least 90% of all the outstanding shares (including defined ‘‘insider’’ shares) and obtains the approval of the holders of a majority of the remaining shares, excluding the ‘‘insider’’ shares. Subsection (b) provides an exception for holders of 10% of the stock who ‘‘inadvertently’’ become such, and who immediately divest themselves of sufficient shares to drop below the 10% ownership level. Those who do may then seek approval of a business combination under subparagraphs (i) and (ii) above. Inadvertent ownership could occur because the issuer has engaged in share repurchases that result in an increase in the percentage ownership represented by a fixed number of shares, or because a shareholder purchased shares in reliance on the issuer’s public filings disclosing the number of outstanding shares, which did not reflect recent repurchases. Note to 1989 Amendment The 1989 amendment to subsection (a)(3) added the phrase ‘‘excluding for purposes of determining the number of shares outstanding those shares owned by (A) persons who are directors or officers, their affiliates or associates; (B) subsidiaries of the resident domestic corporation; and (C) employee stock plans in which employee participants do not have the right to determine confidently whether shares held subject to the plan will be tendered in a tender or exchange offer’’ after the first comma. The effect was to reduce the proportion of shares that must be acquired before approval of the remaining shareholders could be sought. Note to 1990 Amendment Prior to the 1990 amendment, paragraph (a)(1) provided for an exception to the application of the Business Combinations Act when, prior to the ‘‘date’’ that a shareholder became an interested shareholder, the resident domestic corporation’s board of directors approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder. The Georgia Business Combinations Act was modeled on Section 203 of the Delaware General Corporation Law. A recent Delaware Chancery Court decision, Siegman v. Columbia Pictures Entertainment, Inc., [Current] Fed. Sec. L. Rep. (CCH) ¶ 97, 796 (Del. Ch. Oct. 31, 1989), held that ‘‘date’’ means ‘‘time’’ for purposes of the same exception under the Delaware statute. Thus, if a target resident domestic corporation’s board approved an acquisition before the exact time at which an agreement is reached on a subsequent business combination, the three-year waiting period of the Act does not apply. The amendment’s substitution of the word ‘‘time’’ for ‘‘date’’ is intended 438 14-2-1133 to eliminate any ambiguity and to assure that the result of the Delaware case is explicitly required by the Georgia statute. The 1990 amendment also changed paragraphs (a)(2) and (a)(3) as such provisions relate to shares held under employee stock plans. The statute provides that shares held under such plans which do not meet certain confidential tender or exchange election features are excluded from the ninety percent threshold that an interested shareholder must acquire to exempt a transaction from the Business Combinations Act. The amendment clarifies that the determination as to whether such a plan provides participants with the requisite rights is to be made exclusively by reference to the plan’s governing instruments. Cross-References Additional approval of business combination, see § 14-2-1111. Bylaws increasing quorum or voting requirements for shareholders, see § 14-2-1021. Greater quorum or voting requirements for voting by shareholders, see § 14-2-727. Mergers, action on plan, see § 14-2-1103. Recapitalization, voting rights of groups, see § 14-2-1004. Reclassification, voting rights of groups, see § 14-2-1004. Sales of assets, action on plan, see § 14-2-1202. Share exchanges, action on plan, see § 14-2-1103. 14-2-1133. Inapplicability of requirements of this article unless specifically provided by corporate bylaw; repeal of bylaw; adoption of other provisions. (a) The requirements of this part shall not apply to business combinations with interested shareholders unless the bylaws of the resident domestic corporation specifically provide that all of such requirements are applicable to the resident domestic corporation. Such a bylaw may be adopted at any time in the manner provided in this chapter and shall apply to any business combination with an interested shareholder after the date of the bylaw’s adoption, provided that such bylaw shall not apply to restrict a business combination between the corporation and an interested shareholder of the resident domestic corporation if the interested shareholder became such prior to the effective date of the bylaw. Such a bylaw shall be irrevocable except as provided in subsection (b) of this Code section. Neither the adoption nor the failure to adopt such a bylaw shall constitute grounds for any cause of action against any of the directors of the resident domestic corporation. (b) Any bylaw adopted as provided in subsection (a) of this Code section may only be repealed by the affirmative vote of at least two-thirds of the continuing directors and a majority of the votes entitled to be cast by voting shares of the resident domestic corporation, other than shares beneficially owned by an interested shareholder, in addition to any other vote required by the articles of incorporation or bylaws to amend the bylaws. Any action to repeal any bylaw in accordance with this subsection shall not be effective until 18 months after the shareholder vote to effect such repeal and shall not apply to any business combination between such resident domestic corporation and any person who became an interested shareholder of such resident 439 14-2-1133 CORPORATIONS & PARTNERSHIPS 14-2-1133 domestic corporation on or prior to such repeal. Once the bylaw has been repealed in accordance with this subsection, the resident domestic corporation shall not thereafter be entitled to adopt the bylaw in accordance with subsection (a) of this Code section. (c) Nothing contained in this part shall be deemed to limit in any manner a resident domestic corporation’s right to include in its articles of incorporation or bylaws any provision regarding the approval of business combinations which would not otherwise be prohibited by this chapter. (d) Nothing contained in this part shall be construed to alter in any manner the rights of a resident domestic corporation to adopt a bylaw pursuant to Code Section 14-2-1113. The requirements of any bylaw adopted under this part will be in addition to the requirements of any bylaw adopted pursuant to Part 2 of this article. (e) Nothing contained in Part 2 of this article shall be construed to alter in any manner the rights of a resident domestic corporation to adopt a bylaw pursuant to this Code section. The requirements of any bylaw adopted under Part 2 of this article will be in addition to the requirements of any bylaw adopted pursuant to this part. (Code 1981, § 14-2-1133, enacted by Ga. L. 1988, p. 158, § 2; Ga. L. 1989, p. 946, § 56.) COMMENT Source: Del. Code Ann. tit. 8, § 203, as added by Del. Laws 1988, Ch. 204. This succeeds the identical provisions of the former Code, O.C.G.A. § 14-2-238 (Supp. 1988). One major difference between the Code provisions and those of Delaware is that Delaware’s provisions apply automatically to all covered Delaware corporations unless they elected not to be covered by a specified date, while the Code requires affirmative action to elect coverage, under subsection (a). A bylaw electing coverage will not restrict business combinations with interested shareholders who became such prior to the effective date of the bylaw. Subsection (a) contains its own exculpatory provision for director action adopting or failing to adopt such a bylaw. This resolves any doubts about whether the exculpatory language permitted in articles of incorporation under § 14-2-202(b)(4) would preclude director liability. Once adopted as a bylaw, subsection (b) provides that it may only be repealed by a vote of the holder of a majority of the shares other than shares owned by an interested shareholder. Any repeal shall not be effective for 18 months and the repeal shall not apply to any business combination with any person who became an interested shareholder prior to such repeal. Subsection (c) provides that nothing in this article precludes other corporate action regarding approval of business combinations. Thus, articles of incorporation or a bylaw adopted pursuant to Code Section 14-2-1021 may provide similar protections, whether or not a bylaw has been adopted pursuant to this section. And adoption of a bylaw electing the coverage of the fair price provisions should not be 440 T.14, C.2, A.12 interpreted as repeal of any provisions of articles or bylaws setting higher voting or quorum requirements for business combinations. Subsection (d) provides that adoption of a bylaw electing coverage under this article is not exclusive. The article complements the Fair Price statute, found in Article 11, Part 2. These provisions have independent legal significance. Stock acquisitions by an interested shareholder, for instance, are not prohibited by this article. Such acquisitions may be subject to the provisions of the fair price statute, however. Additionally, after the expiration of the five-year period, an interested shareholder could engage in a business combination with a resident domestic corporation, but only if all other requirements are met, including, if applicable, the requirements of the fair price statute. Subsection (e) preserves the right of the corporation to adopt a bylaw electing to be covered by this article. Thus, the provisions of § 14-2-1021(b), prohibiting directors from adopting bylaws fixing greater quorum or voting requirements for shareholders do not limit the authority of the board to adopt a bylaw under this article. Note to 1989 Amendment References throughout the section to ‘‘article’’ were replaced with references to ‘‘part’’. Cross-References Articles of incorporation, amendment, see § 14-2-1001 et seq. Approval of business combinations, see §§ 14-2-1111 & 14-2-1112. Bylaws, amendment by board of directors or shareholders, see § 14-2-1020. Bylaws governing approval of business combinations, see § 14-2-1113. Directors’ duties generally, see § 14-2-830. ‘‘Continuing Directors’’ defined, see § 14-2-1110. ARTICLE 12 SALE OF ASSETS