HB 1185: Courts; certain shareholder claims to be brought before the Georgia State-wide Business Court; provide

House Bill 1185 (AS PASSED HOUSE AND SENATE)

By: Representatives Efstration of the 104th, Gambill of the 15th, Wade of the 9th, Seabaugh of the 34th, Gunter of the 8th, and others

A BILL TO BE ENTITLED

AN ACT

To amend Titles 14 and 15 of the Official Code of Georgia Annotated, relating to corporations, partnerships, and associations and courts, respectively, so as to provide for certain shareholder claims to be brought before the Georgia State-wide Business Court; to permit a corporation's bylaws or articles of incorporation to require certain claims to be heard by the Georgia State-wide Business Court; to provide for removal of certain claims to the Georgia State-wide Business Court; to provide for attorney's fees and costs; to exempt payment of attorney's fees and costs in certain situations; to provide for definitions; to provide for an effective date and applicability; to provide for related matters; to repeal conflicting laws; and for other purposes.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF GEORGIA:

SECTION 1.

Title 14 of the Official Code of Georgia Annotated, relating to corporations, partnerships, and associations, is amended in Chapter 1, which is reserved, as follows: "CHAPTER 1

14-1-1.

As used in this title, the term 'internal entity claim' means a claim, action, or proceeding of any nature arising out of this title, including, but not limited to, a claim in the right of the entity, a claim that is based on a violation of a duty by a current or former director, officer, shareholder, member, or partner that is based on, arises from, or relates to the internal affairs of the entity, a valuation proceeding, or a proceeding related to the court ordered inspection of an entity's records by a shareholder, member, or partner; provided, however, that any action, claim, or proceeding brought by a shareholder or member challenging the sufficiency of an entity's disclosures or otherwise alleging a breach of any duty of disclosure against an entity organized under this title, or any director or officer of such entity, shall be considered an internal entity claim, regardless of whether such action, claim, or proceeding is characterized as derivative. Reserved."

SECTION 2.

Said title is further amended in Chapter 2, relating to business corporations, by revising paragraphs (4) and (5) of subsection (b) of Code Section 14-2-202, relating to articles of incorporation, and by adding a new paragraph to said subsection to read as follows: "(4) A provision eliminating or limiting the liability of a director or officer to the corporation or its shareholders for monetary damages for any action taken, or any failure to take any action, as a director or officer, except liability:

(A) For any appropriation, in violation of his or her duties, of any business opportunity of the corporation;

(B) For acts or omissions which involve intentional misconduct or a knowing violation of law;

(C) For the types of liability set forth in Code Section 14-2-832; or

(D) For any transaction from which the director or officer received an improper personal benefit, provided that no such provision shall eliminate or limit the liability of a director or officer for any act or omission occurring prior to the date when such provision becomes effective; and

(5) A provision that, in discharging the duties of their respective positions and in determining what is believed to be in the best interests of the corporation, the board of directors, committees of the board of directors, and individual directors, in addition to considering the effects of any action on the corporation or its shareholders, may consider the interests of the employees, customers, suppliers, and creditors of the corporation and its subsidiaries, the communities in which offices or other establishments of the corporation and its subsidiaries are located, and all other factors such directors consider pertinent; provided, however, that any such provision shall be deemed solely to grant discretionary authority to the directors and shall not be deemed to provide to any constituency any right to be considered; and

(6) Consistent with applicable law, a provision requiring any or all internal entity claims, including, but not limited to, proceedings related to the court ordered inspection of corporate records by a shareholder, to be brought solely and exclusively in the Georgia State-wide Business Court."

SECTION 3.

Said title is further amended in said chapter by adding a new subsection to Code Section 14-2-206, relating to bylaws, to read as follows:

"(c) The bylaws of a corporation may require, consistent with law, that any or all internal entity claims, including, but not limited to, proceedings related to the court ordered inspection of corporate records by a shareholder, be brought solely and exclusively in the Georgia State-wide Business Court."

SECTION 4.

Said title is further amended in said chapter by revising Code Section 14-2-741, relating to standing, as follows:

"14-2-741.

A shareholder may not commence or maintain a derivative proceeding unless the shareholder:

(1) Was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time; and

(2) Fairly and adequately represents the interests of the corporation in enforcing the right of the corporation; and

(3) For a corporation with one or more classes of shares described in subsection (c) of Code Section 14-2-601 listed on a national securities exchange, at the time of the act or omission complained of, owns a number of the shares described in paragraph (2) of subsection (c) of Code Section 14-2-601 sufficient to meet an ownership threshold to commence a derivative proceeding in the right of the corporation identified in the corporation's articles of incorporation or bylaws, provided that the ownership threshold established by the corporation in its articles of incorporation or bylaws does not exceed 1 percent of the outstanding shares described in paragraph (2) of subsection (c) of Code Section 14-2-601."

SECTION 5.

Said title is further amended in said chapter by revising Code Section 14-2-746, relating to payment of expenses, as follows:

"14-2-746.

(a) On termination of the derivative proceeding, the court may:

(1) Order the corporation to pay the plaintiff's reasonable expenses, (including attorneys' fees), incurred in the proceeding if it finds that the proceeding has resulted in a substantial benefit to the corporation; or

(2) Order the plaintiff to pay any defendant's reasonable expenses, (including attorneys' fees), incurred in defending the proceeding if it finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose.

(b) For the purposes of subsection (a) of this Code section, the term 'substantial benefit to the corporation' does not include additional or amended disclosures made to shareholders, regardless of materiality."

SECTION 6.

Said title is further amended in said chapter by revising Code Section 14-2-747, relating to applicability to foreign corporations, as follows:

"14-2-747.

In any derivative proceeding in the right of a foreign corporation, the matters covered by this part shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation except for Code Sections 14-2-743, and 14-2-745, and paragraph (2) of subsection (a) of Code Section 14-2-746."

SECTION 7.

Said title is further amended in said chapter by revising subsection (a) of Code Section 14-2-916, relating to court action to compel purchase, as follows: "(a) If an offer to purchase shares made under Code Section 14-2-915 is rejected, or if no offer is made, the person exercising the compulsory purchase right may commence a proceeding against the corporation to compel the purchase in the superior court of the county where the corporation's registered office is located or the Georgia State-wide Business Court. The corporation at its expense shall notify in writing all of its shareholders, and any other person the court directs, of the commencement of the proceeding. The jurisdiction of the court in which the proceeding is commenced under this subsection is plenary and exclusive."

SECTION 8.

Said title is further amended in said chapter by revising subsections (a) and (b) of Code Section 14-2-940, relating to court action to protect shareholders, as follows: "(a) 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 or the Georgia State-wide Business 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.

(b) 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 or the Georgia State-wide Business Court. The jurisdiction of the court in which the proceeding is commenced is plenary and exclusive."

SECTION 9.

Said title is further amended in said chapter by revising subsection (b) of Code Section 14-2-1330, relating to court action, as follows:

"(b) The corporation shall commence the proceeding, which shall be a nonjury equitable valuation proceeding, in the Georgia State-wide Business Court or the superior court of the county where a corporation's registered office is located. If the surviving corporation is a foreign corporation without a registered office in this state, it shall commence the proceeding in the county in this state where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located."

SECTION 10.

Said title is further amended in said chapter by revising subsection (g) of Code Section 14-2-1602, relating to inspection of records by shareholders, as follows: "(g) For purposes of As used in this Code section, the term:

(1) 'Proper purpose' shall not include:

(A) An active or pending derivative proceeding in the right of the corporation that is, or is reasonably expected to be, instituted or maintained by the shareholder; or

(B) An active or pending civil lawsuit to which the corporation and the shareholder are, or are reasonably expected to be, adversarial named parties.

(2) 'Shareholder' 'shareholder' includes a beneficial owner whose shares are held in a voting trust or by a nominee on his or her behalf."

SECTION 11.

Said title is further amended in said chapter by revising subsections (a), (b), and (c) of Code Section 14-2-1604, relating to court-ordered inspection, as follows: "(a) If a corporation does not allow a shareholder who complies with subsection (b) of Code Section 14-2-1602 to inspect and copy any records required by that subsection to be available for inspection, the superior court of the county where the corporation's registered office is located or the Georgia State-wide Business Court may summarily order inspection and copying of the records demanded at the corporation's expense upon application of the shareholder.

(b) If a corporation does not within a reasonable time allow a shareholder to inspect and copy any other record, the shareholder who complies with subsections (c) and (d) of Code Section 14-2-1602 may apply to the superior court in the county where the corporation's registered office is located or the Georgia State-wide Business Court for an order to permit inspection and copying of the records demanded. The court shall dispose of an application under this subsection on an expedited basis.

(c) If the court orders inspection and copying of the records demanded, it shall may also, after a hearing if requested by a party, order the corporation to pay the shareholder's costs, (including reasonable attorneys' fees), incurred to obtain the order; provided, however, that in no event shall costs be awarded if unless the corporation proves that it refused inspection in good faith because it had a reasonable basis for doubt about the right of the shareholder to inspect the records demanded. If the court does not order inspection and copying of records demanded pursuant to Code Section 14-2-1602, it may, after a hearing if requested by a party, order the shareholder to pay the corporation's costs, including but not limited to reasonable attorneys' fees, incurred by the corporation in the proceeding if the court determines that the shareholder's inspection demand was not made in good faith or for a proper purpose that was reasonably relevant to his or her legitimate interest as a shareholder."

SECTION 12.

Said title is further amended in Chapter 9, the "Georgia Revised Uniform Limited Partnership Act," by revising subparagraphs (a)(3)(B) and (a)(3)(C) and subsection (b) of and adding a new subsection to Code Section 14-9-305, relating to inspection of partnership records and information, to read as follows:

"(B) Promptly after becoming available, a copy of the limited partnership's filed federal, state, and local income tax returns for each year; and

(C) Other information regarding the affairs of the limited partnership as is just, and reasonable, and requested for a proper purpose; provided, however, that a general partner shall have the right to keep confidential from limited partners for such period of time as the general partner deems reasonable, any information which the general partner reasonably believes to be in the nature of trade secrets or other information, the disclosure of which the general partner in good faith believes is not in the best interests of the limited partnership or could damage the limited partnership or its business or which the limited partnership is required by law or by agreement with a third party to keep confidential.

(b) If the limited partnership or a partner or agent of the limited partnership refuses to permit the inspection authorized by subsection (a) of this Code section, the limited partner demanding inspection may apply to the Georgia State-wide Business Court or the superior court for the county in which the registered office of the limited partnership is located, upon such notice as the court may require, for an order directing the limited partnership, its partners, or agent to show cause why an order permitting such inspection by the applicant should not be granted. The court shall hear the parties summarily, by affidavit or otherwise, or by a hearing if requested by a party, and if the limited partnership fails to establish that the applicant is not entitled to such inspection, the court shall grant an order permitting such inspection, subject to any limitations which the court may prescribe, and grant such other relief, including costs and reasonable attorneys' fees, as the court may deem just and proper. If the court does not grant an order permitting such inspection and determines that the request was not just, reasonable, or made for a proper purpose, it may order the limited partner requesting inspection to pay the limited partnership's costs and reasonable attorneys' fees.

(c) As used in this Code section, the term 'proper purpose' shall not include:

(1) An active or pending derivative proceeding in the right of the limited partnership that is, or is reasonably expected to be, instituted or maintained by the limited partner; or

(2) An active or pending civil lawsuit to which the limited partnership and the limited partner are, or are reasonably expected to be, adversarial named parties."

SECTION 13.

Said title is further amended in said chapter by revising Code Section 14-9-1002, relating to requirements for plaintiffs, as follows:

"14-9-1002.

(1) Except to the extent provided by the partnership agreement, in a derivative action, the plaintiff must be a limited partner at the time of bringing the action and: (1)(A) Must have been a partner at the time of the transaction of which he or she complains; or

(2)(B) His or her status as a partner must shall have devolved upon him or her by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the transaction.; and

(2) For a limited partnership with partnership interests listed on a national securities exchange, at the time of the act or omission complained of, the limited partner owns a number of partnership interests sufficient to meet the required ownership threshold to institute a derivative action in the right of the limited partnership identified in the limited partnership's governing agreement, provided that the required ownership threshold established by the governing agreement does not exceed 1 percent of the outstanding partnership interests of the limited partnership."

SECTION 14.

Said title is further amended in said chapter by revising Code Section 14-9-1004, relating to expenses, as follows:

"14-9-1004.

If a derivative action is successful, in whole or in part, or if anything is received by the plaintiff as a result of a judgment, compromise, or settlement of an action or claim, the court may award the plaintiff reasonable expenses, including reasonable attorneys' fees, and shall direct him or her to remit to the limited partnership the remainder of those proceeds received by him or her; provided, however, that the court shall not award plaintiffs reasonable expenses and attorneys' fees if the sole relief received by the plaintiff as a result of a judgment, compromise, or settlement of an action or claim is additional or amended disclosures made to the partners, regardless of materiality."

SECTION 15.

Said title is further amended in Chapter 11, relating to limited liability companies, by revising subparagraph (B) of paragraph (2) and paragraph (3) of and adding a new paragraph to Code Section 14-11-313, relating to records and information, to read as follows: "(B) Obtain from time to time upon reasonable demand:

(i) True and complete information regarding the state of the business and financial condition financial statements of the limited liability company;

(ii) Promptly after becoming available, a copy of the limited liability company's filed federal, state, and local income tax returns, if any, for each year; and

(iii) Other information regarding the affairs of the limited liability company as is just, and reasonable, and demanded for a proper purpose; and

(3) If the limited liability company refuses to permit the inspection authorized by paragraph (2) of this Code section, the member demanding inspection may apply to the Georgia State-wide Business Court or the superior court for the county in which the registered office of the limited liability company is located, upon such notice as the court may require, for an order directing the limited liability company to show cause why an order permitting such inspection by the applicant should not be granted. The court shall hear the parties summarily, by affidavit or otherwise, or by a hearing if requested by a party, and if the limited liability company fails to establish that the applicant is not entitled to such inspection, the court shall grant an order permitting such inspection, subject to any limitations which the court may prescribe, and grant such other relief, including costs and reasonable attorneys' fees, as the court may deem just and proper. If the court does not grant an order permitting such inspection and determines that the demand was not just, reasonable, or made for a proper purpose, it may order the member demanding inspection to pay the limited liability company's costs and reasonable attorneys' fees.

(4) As used in this Code section, the term 'proper purpose' shall not include:

(A) An active or pending derivative proceeding in the right of the limited liability company that is, or is reasonably expected to be, instituted or maintained by the member; or

(B) An active or pending civil lawsuit to which the limited liability company and the member are, or are reasonably expected to be, adversarial named parties."

SECTION 16.

Said title is further amended in said chapter by revising paragraph (4) of Code Section 14-11-801, relating to right of member to bring derivative action, as follows: "(4) The plaintiff:

(A) Is is a member of the limited liability company at the time of bringing the action,; and

(B) Was was a member of the limited liability company at the time of the transaction of which he or she complains, or his or her status as a member of the limited liability company has devolved upon him or her by operation of law from a person who was a member at the time of the transaction; and"

SECTION 17.

Said title is further amended in said chapter by revising Code Section 14-11-807, relating to applicability to foreign limited liability companies, as follows:

"14-11-807.

In any derivative action in the right of a foreign limited liability company, the matters covered by this article shall be governed by the laws of the jurisdiction of organization of the foreign limited liability company except for Code Sections 14-11-803 and 14-11-804 and paragraph subsection (b) of Code Section 14-11-806."

SECTION 18.

Said title is further amended in said chapter by revising subsection (b) of Code Section 14-11-1011, relating to court action, as follows:

"(b) The limited liability company shall commence the proceeding, which shall be a nonjury equitable valuation proceeding, in the Georgia State-wide Business Court or the superior court of the county where a limited liability company's registered office is located. If the surviving entity is a foreign entity without a registered office in this state, it shall commence the proceeding in the county in this state where the registered office of the domestic entity merged with the foreign entity was located."

SECTION 19.

Title 15 of the Official Code of Georgia Annotated, relating to courts, is amended in Chapter 5A, relating to the State-wide Business Court, by revising division (a)(1)(A)(xi) of Code Section 15-5A-3, relating to authority of court, as follows:

"(xi) That relate to the internal affairs of businesses, including, but not limited to, internal entity claims, as such term is set forth in Code Section 14-1-1."

SECTION 20.

Said title is further amended in said chapter by revising subsections (a), (b), and (c) of Code Section 15-5A-4, relating to process for bringing a claim before court and filings, as follows: "(a) Except as provided in subsection (b) of this Code section, all claims provided for under Code Section 15-5A-3 may only come before the Georgia State-wide Business Court by:

(1) Any party filing a pleading with the Georgia State-wide Business Court to initiate a civil action that is not already pending in superior court or state court unless any defendant within 30 days after receipt by all defendants, through service of process, of a copy of the initial pleading setting forth the claim for relief upon which such action is based objects and petitions the Georgia State-wide Business Court to transfer such action to the superior court or state court with which venue is otherwise proper. The judge of the Georgia State-wide Business Court shall then compel transfer of the case to such superior court or state court, unless the action involves:

(A) A a contract claim or dispute where all parties are business entities and such contract provides that such dispute shall come before the Georgia State-wide Business Court; or

(B) An internal entity claim, as such term is set forth in Code Section 14-1-1, if either:

(i) the entity’s articles of incorporation, articles of organization, certificate of limited partnership, written partnership agreement, bylaws, written operating agreement, or other governing document requires such claim or proceeding to come before the Georgia State-wide Business Court; or

(ii) the entity is a public company, a private company that conducts a Tier 2 offering under Regulation A of the Securities Act of 1933 or a sale of securities under Regulation D of the Securities Act of 1933, or an entity composed exclusively of individuals or entities who would otherwise qualify as accredited investors under Rule 501(a) of Regulation D under the Securities Act of 1933.

(2) All parties to a civil action already filed in superior court or state court agreeing to remove the action to the Georgia State-wide Business Court and then filing such agreement with the Georgia State-wide Business Court, provided that the petition for removal is filed within 60 days one year of such action being filed in superior court or state court; or

(3) Any party to a civil action already filed in superior court or state court filing with the Georgia State-wide Business Court a petition to transfer such action to the Georgia State-wide Business Court; provided, however, that:

(A) Such a petition to transfer is filed within 60 90 days after receipt by all defendants, through service of process as provided in Code Section 9-11-4, of a copy of the initial pleading setting forth the claim for relief upon which such action is based. The judge of the Georgia State-wide Business Court, after considering the petition to transfer and all timely responses from the other party or parties in the case, shall thereafter determine whether the case is within the jurisdiction of the Georgia State-wide Business Court, and with a presumption that the civil action remains in the court of filing, the judge may enter an order compelling the transfer of the case to the Georgia State-wide Business Court unless a party objects within 30 15 days of the filing of the petition to transfer; or

(B) Such a petition to transfer is filed within 60 days after receipt by all defendants, through service of process as provided in Code Section 9-11-5 or as otherwise provided by law, of a copy of an amended pleading, motion, order, or other document from which the party petitioning to transfer may first ascertain that the case is transferable. The judge of the Georgia State-wide Business Court, after considering the petition to transfer and all timely responses from the other party or parties in the case, shall thereafter determine whether the case is within the jurisdiction of the Georgia State-wide Business Court, and with a presumption that the civil action remains in the court of filing, the judge may enter an order compelling transfer of the case to the Georgia State-wide Business Court unless a party objects within 30 days of the filing of the petition to transfer; or

(4) The removal of a civil action involving an internal entity claim, as such term is set forth in Code Section 14-1-1, filed in superior court or state court or sent to the Georgia State-wide Business Court by such superior or state court, provided that the requirements of subparagraph (B) of paragraph (1) are met. Paragraphs (2) and (3) of this subsection shall not apply to claims, actions, or proceedings listed in this paragraph.

(b) Notwithstanding subsection (a) of this Code section, the Georgia State-wide Business Court may transfer to the appropriate superior court or state court any and all claims filed in the Georgia State-wide Business Court and may reject acceptance of any and all petitions to transfer or petitions for removal to the Georgia State-wide Business Court, even if such claims are within the jurisdiction of the Georgia State-wide Business Court unless such claims are internal entity claims, as such term is set forth in Code Section 14- 1-1, and the requirements of subparagraph (B) of paragraph (1) are met.

(c) Notwithstanding any other law, when the superior court or state court where a claim is pending receives a certified copy of an order issued by the Georgia State-wide Business Court transferring or removing such civil action to the Georgia State-wide Business Court pursuant to paragraph (2), (3), or (4) of subsection (a) of this Code Section, such superior court or state court shall certify the transfer or removal from the superior court or state court to the Georgia State-wide Business Court."

SECTION 21.

This Act shall become effective on July 1, 2026, and shall apply to all claims or proceedings initiated on or after such date.

SECTION 22.

All laws and parts of laws in conflict with this Act are repealed.