GSB Vol. 12, No. 6, Pg. 12. 2006 Amendments to Georgia's Corporate Code and Alternative Entity Statutes.

• Author: by Bruce D. Wanamaker

Georgia Bar Journal

Volume 12.

GSB Vol. 12, No. 6, Pg. 12.

2006 Amendments to Georgia's Corporate Code and Alternative Entity Statutes

GSB JournalVolume 12, No. 6April 20072006 Amendments to Georgia's Corporate Code and Alternative Entity Statutesby Bruce D. WanamakerOn May 5, 2006, Gov. Sonny Perdue signed into law a bill(fn1) that amended various provisions of the Georgia Business Corporation Code(fn2) (the "Corporate Code"), the Georgia Revised Uniform Limited Partnership Act(fn3) (the "LP Act") and the Georgia Limited Liability Company Act(fn4) (the "LLC Act"), all effective July 1, 2006. This legislation (collectively, the "2006 Amendments"), which was based on proposals that were initiated by the State Bar's Business Law Section, enhances the flexibility, predictability and utility of Georgia's business organization statutes. The 2006 Amendments include significant changes to provisions of the Corporate Code governing mergers, indemnification, advancement of expenses andactions of a Georgia corporation in bankruptcy, as well as numerous other changes to the Corporate Code and the LP and LLC Acts that facilitate entity conversions under Georgia law.(fn5) The following discussion highlights the most noteworthy aspects of these changes.

Amendments Affecting Mergers

Exceptions to the Board's Obligation to Recommend Approval

Since July 1, 1989, the Corporate Code has included a provision obligating a corporation's board of directors to recommend approval when submitting a plan of merger to shareholders for approval, unless the board elects to withhold a recommendation because of conflicts of interest or other special circumstances.(fn6) In such a case, the board must describe the conflict or circumstances and communicate the basis for its election when presenting the proposed plan to the shareholders.(fn7) The 2006 Amendments clarify that the board has the authority not only to refrain from recommending approval when submitting a plan of merger for shareholder approval because of conflicts of interest or other special circumstances, but also to recommend that the shareholders reject or vote against it.(fn8)

"Force the Vote" Provisions

Merger agreements governing acquisitions of publicly held Georgia corporations normally include a variety of provisions designed to discourage competing offers from third parties after the merger is publicly announced and to deter the target's board from abandoning the merger in favor of an alternative transaction. For example, the acquiring entity will typically insist that the target agree to a "no shop" provision that prohibits the target and its representatives from soliciting or encouraging competing offers and negotiating an alternative transaction with other potential buyers.(fn9) Other deal protection devices customarily proposed by acquiring entities include provisions obligating the target to hold a shareholders' meeting for purposes of voting on the merger,(fn10) requiring that the related proxy statement include the recommendation of the target's board that the shareholders vote to approve the merger,(fn11) and prohibiting the target's board from withdrawing or modifying its recommendation of the merger in a manner adverse to the acquirer.(fn12)

The target's board will typically accede to the acquiring entity's request to include these defensive measures if the merger agreement also contains limited exceptions (or "outs") that permit the target's board to respond to unsolicited offers and to withdraw its recommendation in favor of the merger when such actions are required in order for the board to comply with its fiduciary duties under applicable law.(fn13) The target's board also will frequently bargain for the inclusion of a "fiduciary out" termination right that allows it to withdraw the merger agreement from shareholder consideration if warranted by certain changed circumstances such as receipt of an acquisition proposal containing termsthat the target's board has determined in good faith to be more favorable to the target's shareholders than the transactions contemplated by the merger agreement.(fn14)

Occasionally, the acquiring entity will insist that the merger agreement include a "force the vote" provision that prohibits the target's board from exercising any right to accept a superior proposal until after the target's shareholders have voted on the planned merger, even if the target's board decides to withdraw its recommendation of the merger.(fn15) Such a provision gives the acquiring entity a timing advantage over other bidders that helps reduce the likelihood of competing bids. Section 14-2-305 of the Corporate Code was adopted in response to practitioners' concerns regarding the validity of these "force the vote" provisions. This new section clarifies and confirms that the target's board may authorize the target to agree with an acquiring entity to submit a merger agreement to the target's shareholders for their approval, while reserving the ability to change the board recommendation that such merger agreement be approved.(fn16)

Disparate Treatment in the Manner or Basis of Share Conversion

A Georgia corporation may structure a merger to provide certain of its shareholders with equity and other holders of the same class or series of shares with cash in furtherance of a variety of rational business objectives.(fn17) Although the comments to the section of the Corporate Code governing statutory mergers recognize the right to treat holders of the same class or series of shares in a merger differently,(fn18) some practitioners had expressed concern that such disparate treatment might be viewed as conflicting with the language in other sections of the Corporate Code providing that all shares of the same class or series must generally "have preferences, limitations, and relative rights identicalwith those of other shares of the same [class or series]."(fn19) The 2006 Amendments addressed this concern and clarified existing law by expressly recognizing the possibility of different treatment of shareholders in a plan of merger.(fn20)

The 2006 Amendments require that when holders of the same class or series of shares are treated differently in a plan of merger, the plan must set forth the manner and basis for the conversion of shares of each such class, series or group of shareholders.(fn21) In addition, section 14-2-1302 of the Corporate Code was amended to provide additional protection to those shareholders who are treated differently by adding a new provision that excludes such shareholders from the "market exception" of this section, which eliminates dissenters' rights for transactions involving the issuance of shares of a public corporation to shareholders of a publicly held Georgia corporation.(fn22) This new provision preserves dissenters' rights for shareholders who were required under a merger to accept any shares listed on a national securities exchange or held of record by more than 2,000 shareholders that are different than the share consideration to be provided to other holders of any shares of the same class or series of shares held by that shareholder.(fn23)

Merger Agreement Amendments

Merger agreements customarily include a clause expressly authorizing the parties to amend, modify or supplement the agreement subject to (or to the fullest extent permitted by) applicable law. Such clauses normally permit amendments at any time prior to the effective time of the merger, whether before or after shareholder approval. These clauses, however, also typically provide that once shareholder approval has been obtained, no amendment requiring further shareholder approval under applicable law shall be made without first obtaining shareholder approval.(fn24)

Although the Corporate Code included no provision for the amendment of an agreement or plan of merger, most practitioners held the view that under Georgia law a merger agreement could be amended in any respect prior to obtaining shareholder approval. The 2006 Amendments added a new clause to subsection (c) of section 14-2-1101 of the Corporate Code that confirms the authority of a corporation to include provisions in a plan of merger that permit it to amend the plan in any respect prior to shareholder approval.(fn25) This provision also permits the inclusion of clauses that authorize a corporation to enter into amendments after shareholders have approved the merger agreement.(fn26) After shareholder approval, however, changes to the following items are prohibited absent express prior authorization by the shareholders:(fn27) (i) the amount and kind of consideration to be received in the merger if such changes would adversely affect such shareholders,(fn28) (ii) the terms of the articles of incorporation (or comparable governing document) of the surviving corporation or other entity (except to the extent involving changes that a corporation would be permitted make without the necessity of obtaining shareholder approval under section 14-2-1002 of the Corporate Code or that would not adversely affect such shareholders)(fn29) or (iii) any other terms and conditions of the merger agreement if such changes would adversely affect such shareholders in any material respect.(fn30)

Amendments Regarding Indemnification and Advancement of Expenses

Entitlement to "Fees on Fees"

A Georgia corporation has authority under the Corporate Code to reimburse its directors, officers, employees and other agents for reasonable expenses...