VSI ENTERPRISES, INC. v. Edwards

• Decision Date: 01 June 1999
• Docket Number: No. A99A0705.,A99A0705.
• Citation: 518 S.E.2d 765,238 Ga. App. 369
• Parties: VSI ENTERPRISES, INC. v. EDWARDS et al.
• Court: Georgia Court of Appeals

518 S.E.2d 765

238 Ga. App. 369

VSI ENTERPRISES, INC. v. EDWARDS et al.

No. A99A0705.

Court of Appeals of Georgia.

June 1, 1999.

Smith, Gambrell & Russell, Edward H. Wasmuth, Jr., Jason S. Bell, Atlanta, for appellant.

William G. Leonard, Atlanta, for appellees.

ELDRIDGE, Judge.

On June 28, 1996, Integrated Network Services, Incorporated ("INS") merged with INS Acquisition Company, the wholly owned subsidiary of VSI Enterprises, Incorporated ("VSI"). The INS shareholders received VSI shares as a result of the merger. Appellants are VSI and INS Acquisition Company.

Following the merger, INS delivered to its shareholders a notice explaining their right to dissent to the merger. The cover letter of the notice of dissenters' rights was dated June 27, 1996. The notice stated that shareholders had a right to refuse to accept the consideration offered for their shares in the merger and to invoke their dissenters' rights to seek a higher value for their shares. The notice included pertinent portions of the Corporation Code. The notice stated: "If you elect to demand payment for your shares under Article XIII of the Code, the payment demand must be sent to the offices of INS as set forth below and certificates evidencing shares of stock in INS must be deposited at said corporate offices on or before August 9, 1996."

Peggy Edwards, plaintiff-appellee, was a stockholder of INS. On August 9, 1996, Peggy Edwards through her counsel gave notice to the company that she was invoking her dissenters' rights. Her counsel did not include with the notice her stock certificates to INS because she did not have them.

In either May or June 1996, Ms. Edwards delivered to INS her old stock certificates of INS so that she could be issued new certificates, but she never received the replacement certificate. She believed that INS still possessed her shares.

Ms. Edwards' dissenters' notice stated that "INS already has possession of the stock certificate held by Peggy Edwards; she presented them to the company several months ago in order to have them reissued in her name, but INS failed to deliver new certificates to her." However, in fact, INS, without Ms. Edwards' knowledge, sent the replacement stock certificate to Ms. Edwards, former counsel, James Johnson, on June 24, 1996, which was four days prior to the merger. She did not know that Johnson had possession of the certificate, and Johnson failed to deliver the certificate to her after he ceased to represent her.

After receipt of Ms. Edwards' payment demand, appellants by letter acknowledged her demand and made a cash offer for her stock. Appellants made no objection to the lack of tender of the stock certificate, did not deny possession of the certificate; and did not tell her who had possession of her stock, but instead treated Ms. Edwards as if she were in full compliance with notice regarding dissenters' rights. Appellants made a further offer to purchase her stock and advised her for the first time that her stock certificate had been delivered to Mr. Johnson. She was further advised by the appellants regarding how to treat the certificate as lost in the event that it could not be found by executing an affidavit and that the stock certificate would be replaced. The appellants never took the position with Ms. Edwards that she had lost her dissenters' rights by failing to tender the stock certificate timely during the period to dissent.

When Ms. Edwards learned from appellants where the stock certificate was, she promptly retrieved it. On November 4, 1996, Ms. Edwards immediately tendered the stock certificate and a demand for $140,156 for her stock to appellants. On November 22, 1996, appellants in writing acknowledged receipt of the stock certificate and the demand and renewed the cash offer.

Appellants did not file suit within 60 days of the demand to determine the value of the stock. On January 17, 1997, Ms. Edwards filed this complaint, seeking payment of $140,156 for the shares, plus interest and attorney fees. In its answer, appellants raised only the defense of failure to timely tender her stock certificate when she first demanded payment.

On March 26, 1998, judgment was filed on the cross motions for summary judgment, the trial court ruled for Ms. Edwards and against appellants. Held:

1. Appellants contend that the trial court erred in granting summary judgment in favor of Ms. Edwards and denying it to them. We do not agree.

(a) OCGA §§ 14-2-1323 and 14-2-1324 of the Georgia Business Corporate Code were written to be construed in pari materia. OCGA § 14-2-1323 deals with a situation wherein a dissent is conditioned upon the timely tender of the stock certificate when the dissenter has possession of the stock certificate so that a tender can be made. OCGA § 14-2-1324, however, deals with a situation where the dissenter does not have possession of the stock certificate and cannot sell it.

OCGA § 14-2-1324 provides a method in which a corporation can prevent a dissenter from using the dissent as a way to hedge against the market by restricting transfer from the date of the demand. In this regard, the Comment to OCGA § 14-2-1323 states that the intent of the legislature for the tender of the stock certificate was to prevent a specific abuse:

The deposit of share certificates is necessary to prevent dissenters from giving themselves a 30-day option to make payment if the market price of the shares goes down, but sell their shares on the open market if the price goes up. If this kind of speculation were possible, all sophisticated investors might be expected to file demands that they would not intend to carry through unless the price should fall. If the shares are not represented by certificates, the corporation can prevent speculation by restricting their transfer, as authorized by section 14-2-1324.... Subsection (c) provides that a person who ... does not deposit his share certificates as required by Section 14-2-1324(a) loses his status as a dissenter entitled to payment for his shares.... The Code creates a bright line rather than leave the matter uncertain for extended periods.¹

Thus, the legislature expected there to be situations where the dissenter lacked actual physical possession of certified shares and provided a method to prevent the evil that delivery of the stock certificates was intended to prevent. Under OCGA § 14-2-141(c), appellants failed to deliver the stock certificates to Ms. Edwards at the "shareholder's address shown in the corporation's current record of shareholders."

[I]t is the duty of officers of a corporation to see that all transfers of its shares are properly made on its stock books, either by the stockholders themselves or persons having authority from them. A corporation transfers stock at its peril, and must be sure that the person to whom it issues the certificate is the true owner.

(Citations and punctuation omitted.) Frye v. Commonwealth Inv. Co., 107 Ga.App. 739, 741-742(2), 131 S.E.2d 569, aff'd, 219 Ga. 498, 134 S.E.2d 39 (1963).

Thus, INS' actions deprived Ms. Edwards of physical possession of her stock certificate and made actual delivery to her dependent upon a third party, her former attorney. It was the fault of INS that Ms. Edwards did not know where her stock certificate was; at a minimum, INS should have copied her with the transmittal letter to let her know that the certificate had been issued and that it had been sent to her former attorney. Absent a written authorization from Ms. Edwards in INS' records, the stock certificate should not have been delivered to Mr. Johnson. As successors to INS, appellants as fiduciaries created this situation. See Rank Organization Ltd. v. Pathe Labs., 33 Misc.2d 748, 227 N.Y.S.2d 562 (N.Y.Sup.1962). Appellants seek to take advantage of a situation of its own creation.

Facts and circumstances may arise, as in this case, where a dissenter has no stock certificate in his physical possession to surrender, although dissenting is the shareholder's intent. Those circumstances may include situations where the stock was pledged as security, lost, destroyed, physically inaccessible, under a court order, stolen, wrongfully converted, or held by a third person. In such circumstances, 30 days is an insufficient time within which to re-acquire physical possession to make a physical tender. Of course, the dissenter could make out an affidavit describing why the share is beyond his control and request that the corporation issue a new certificate; however, the corporation, by delay, has the power to make such issue of a new stock certificate outside the time to tender. Therefore, to request a new certificate would be a futile act. For all practical purposes, the inaccessibility of the shares to make a physical tender also renders the shares inaccessible to transfer on the open market. The circumstances render such shares the functional equivalent of uncertified shares under OCGA § 14-2-1324 and permit the corporation to protect itself by blocking transfer. Therefore, a notice of dissent, absent tender when tender is impossible, acts as substantial compliance with the statutory requirement and the true legislative purpose.

Under OCGA § 1-3-1(c), "[a] substantial compliance with any statutory requirement... shall be deemed and held sufficient, and no proceeding shall be declared void for want of such compliance, unless expressly so provided by law." See O'Neal v. Spencer, 203 Ga. 588(1), 47 S.E.2d 646 (1948); City of College Park v. Atlantic S.E. Airlines, 194 Ga.App. 637, 639, 391 S.E.2d 460 (1990). OCGA § 14-2-1324 prevents OCGA § 14-2-1323(c) from being "expressly so provided by law" under the circumstances of this case, because the statutory purpose has been satisfied without causing a legislative absurdity, i.e., unjust treatment when delivery is beyond the control of the dissenter. Bd. of Trustees of the Policemen's Pension Fund v. Christy, 246 Ga....