Business Associations - Paul A. Quiros, Lynn S. Scott, and Jane E. Ledlie

• Publication year: 2011

Business Associations

by Paul A. Quiros* Lynn S. Scott** and Jane E. Ledlie***

I. Introduction

This Article surveys noteworthy cases in the area of corporate, limited liability company, partnership, agency, and joint venture law decided between June 1, 2010 and May 31, 2011, by the Georgia Supreme Court, the Georgia Court of Appeals, the United States Court of Appeals for the Eleventh Circuit, and the United States District Courts located in Georgia.¹ In addition, this Article provides an overview of important enactments during the 2011 session ofthe Georgia General Assembly to the official Code of Georgia Annotated (o.C.G.A.) with respect to banking, finance, contracts, corporation, partnership, and business associations statutes.

* Partner in the firm of King & Spalding LLP, Atlanta, Georgia. Furman University (B.A., cum laude, 1979); Mercer University, Walter F. George School of Law (J.D., 1982). Member, Mercer Law Review (1980-1982); Lead Articles II Editor (1981-1982). Member, State Bar of Georgia.

** Partner in the firm of Arnall Golden Gregory LLP, Atlanta, Georgia. University of Georgia (B.S., 1971); Mercer University, Walter F. George School of Law (J.D., magna cum laude, 1988). Member, Mercer Law Review (1986-1988); Research Editor (1987-1988). Member, State Bar of Georgia.

*** Associate in the firm ofArnall Golden Gregory LLP, Atlanta, Georgia. Washington and Lee University (B.A. & B.S., magna cum laude, 2003); Washington and Lee University School of Law (J.D., 2008). Member, State Bars of Virginia and Georgia.

1. For an analysis of Georgia business associations law during the prior survey period, see Paul A. Quiros et al., Business Associations, Annual Survey of Georgia Law, 62 Mercer L. Rev. 41 (2010).

II. Corporations

A. Issues of First Impression

1. Court of Appeals Holds that a Dissolved Corporation Could Not Initiate a Negligence Action After Expiration of Statutory Period for Asserting Claims. In GC Quality Lubricants, Inc. v. Doherty, Duggan & Rouse Insurors,² the Georgia Court of Appeals examined an issue of first impression in Georgia-whether a dissolved corporation may initiate a negligence action after the expiration of the statutory period for asserting the claims of a dissolved corporation.³ On February 11, 2005, GC Quality Lubricants, Inc. (GC) claimed an electrical storm damaged its office equipment. On July 9, 2005, the Georgia Secretary of State (the secretary) administratively dissolved GC because GC had failed to pay its annual fees. On February 15, 2008, GC filed suit against Doherty, Duggan & Rouse Insurors and Georgia Power Company (the defendants). GC asserted that it was a Georgia corporation and alleged that the defendants were liable for the damaged office equipment. Almost four years after its dissolution, on April 28, 2009, the secretary granted GC's application for reinstatement of the dissolved corporation.⁴

In March 2008, the defendants filed a motion for summary judgment based on O.C.G.A. § 14-2-1410,⁵ the two-year survival statute that allows a dissolved corporation to assert claims.⁶ The defendants argued that the two years for GC to assert a claim had expired on July 9, 2007, two years after the secretary dissolved GC on July 9, 2005.⁷ In its response to the motion, GC argued that the language of O.C.G.A. § 14-2-1422(d)⁸ controlled; thus, GC's lawsuit was validly filed due to the secretary's reinstatement.⁹ Pursuant to O.C.G.A. § 14-2-1422(d), "[w]hen the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution and the

2. 304 Ga. App. 767, 697 S.E.2d 871 (2010).

3. Id. at 769, 697 S.E.2d at 872.

4. Id. at 767-68, 697 S.E.2d at 871-72.

5. O.C.G.A. § 14-2-1410 (2003).

6. GC Quality Lubricants, 304 Ga. App. at 768, 697 S.E.2d at 872; see also O.C.G.A.

§ 14-2-1410.

7. GC Quality Lubricants, 304 Ga. App. at 768, 697 S.E.2d at 872.

8. O.C.G.A. § 14-2-1422(d) (2003 & Supp. 2011).

9. GC Quality Lubricants, 304 Ga. App. at 768, 697 S.E.2d at 872.

corporation resumes carrying on its business as if the administrative dissolution had never occurred."¹⁰

In relying on O.C.G.A. § 14-2-1410, the trial court granted the defendants' motion for summary judgment because a lawsuit filed by a corporation while it is administratively dissolved must be within two years of dissolution to be valid.¹¹ Further, the trial court found that the four-year statute of limitation for the property damage claims had expired on February 11, 2009, before GC was reinstated or filed a valid lawsuit.¹² In rejecting GC's interpretation of O.C.G.A. § 14-2-1422(d), the trial court noted such an understanding ofthat statute would render the two-year survival statute, O.C.G.A. § 14-2-1410, meaningless.¹³

In affirming the trial court's decision, the court of appeals stated the issue on appeal was whether a lawsuit for which a corporation lacked capacity to file at the time of its filing was rendered valid by the secretary's reinstatement of that corporation.¹⁴ The court of appeals determined the lawsuit was a legal nullity since GC lacked capacity to bring the action after the running of the two-year survival statute.¹⁵ Thus, "there was no lawsuit to validate, amend, or revise" upon GC's reinstatement in April 2009.¹⁶ Further, the court of appeals stated that the running of the four-year statute of limitation before GC obtained reinstatement resulted in GC's failure to bring a valid lawsuit for the property damage claims.¹⁷ The court of appeals stated that holding otherwise would improperly extend the four-year statute oflimitation.¹⁸

The decision in GC Quality Lubricants is important because it serves as a reminder to Georgia corporations and the counsel that serve them of the importance of both maintaining the corporation's status with the secretary as well as keeping track of the statutes of limitations for potential claims.

2. Court of Appeals Opines that Statute Permitting a Corporation to Limit Minority Shareholders' Right of Inspection

Abrogates Any Common Law Right of Inspection. In Mannato v.

10. O.C.G.A. § 14-2-1422(d).

11. GC Quality Lubricants, 304 Ga. App. at 768, 697 S.E.2d at 872; see also O.C.G.A. § 14-2-1410.

12. GC Quality Lubricants, 304 Ga. App. at 768, 697 S.E.2d at 872.

13. Id.

14. Id. at 769, 697 S.E.2d at 872.

15. Id. at 770, 697 S.E.2d at 873.

16. 17. 18.

Id. Id. Id.

SunTrust Banks, Inc.,¹⁹ the court of appeals, in another case of first impression, ruled that a Georgia statute permitting corporations to limit shareholder access to its corporate records replaced any common law right a shareholder had to inspect corporate records.²⁰ In March of 2008, Edward Mannato asked SunTrust Banks, Inc. (SunTrust) to take legal action against its officers and directors for breach of fiduciary duty in connection with the housing market collapse. In a written response to Mannato, SunTrust's board of directors denied the request. SunTrust informed Mannato that, following an independent investigation by a special committee and independent counsel, it determined Mannato's claims had no factual basis, and litigation against its officers and directors would not be in the best interest of SunTrust.²¹

Mannato then attempted to use his position as a shareholder of SunTrust to inspect and copy SunTrust's books and records.²² Because Mannato's shares ofSunTrust's totaled less than two percent, SunTrust's counsel refused the demand pursuant to O.C.G.A. § 14-2-1602(e)²³ and SunTrust's own bylaws.²⁴ In an effort to enjoin SunTrust from continuing its refusal to allow him access, Mannato filed a complaint in equity. SunTrust moved to have the complaint dismissed because only a shareholder owning more than two percent of SunTrust's shares was permitted access to its books and records.²⁵ In granting SunTrust's motion to dismiss, the trial court concluded that "[O.C.G.A.] § 14-2-1602(e) permits corporations to limit the right to inspect certain corporate records and books to shareholders owning more than two percent of the corporation's outstanding shares."²⁶

On appeal, Mannato argued that the enactment of O.C.G.A. § 14-2-1602(e) did not abrogate the Georgia common law right ofall shareholders to inspect corporate books and records.²⁷ After reviewing documentation from the legislative session in which O.C.G.A. § 14-2-1602(e) was passed, the court of appeals disagreed with Mannato, determining that "the General Assembly intended to supersede any common law rights of

19. 308 Ga. App. 691, 708 S.E.2d 611 (2011).

20. Id. at 693, 708 S.E.2d at 612-13; see also O.C.G.A. § 14-2-1602(e) (2003 & Supp.

2011).

21. Mannato, 308 Ga. App. at 691, 708 S.E.2d at 612.

22. Id. at 691-92, 708 S.E.2d at 612.

23. O.C.G.A. § 14-2-1602(e) (Supp. 2011).

24. Mannato, 308 Ga. App. at 692, 708 S.E.2d at 612.

25. Id.

26. Id.

27. Id.

inspection with the passage of [the statute]."²⁸ Holding otherwise, the court concluded, would render O.C.G.A. § 14-2-1602(e) meaningless.²⁹

B. Shareholder Rights

1. A Shareholder May Only Bring a Direct Action Against Shareholders Instead of a Derivative Action Against a Closely Held Corporation in the Case of a Special Injury or When the Reasons for Bringing a Derivative Action Do Not Apply. In

Barnett v. Fullard,³⁰ the court ofappeals held that a shareholder lacked standing to bring his claims in a direct action against individual shareholders, instead of a derivative action against the corporation.³¹ Stephen Barnett, a minority shareholder in Earthwise Industries, Inc. (Earthwise), a closely held Georgia corporation, brought suit against Earthwise and its three corporate directors-Andrew Fullard, Adena Fullard, and Jane Hix (collectively, Fullard)-who also comprised the majority shareholders of Earthwise. Subsequently, Barnett voluntarily dismissed Earthwise as a defendant and pursued his lawsuit against Fullard.³² Barnett alleged that Fullard

refus[ed Barnett's] demand to inspect corporate records[,] . . . misappropriated corporate assets for...