Changes of Georgian Corporate Law
Georgian corporate law undergoes substantial changes from 1 Jan 2022. Georgian Law on Entrepreneurs in fact is completely re-written. This was caused by various reasons. For the first time introduced in 1994 the law on entrepreneurs notwithstanding the number of amendments during many years, still remained blurry and old-fashioned. Uncertainty made it necessary to regulate Georgian corporate law in a new way and, most importantly, to adopt EU corporate legislation.
On 2 August 2021 Georgian Parliament approved the new Law on Entrepreneurs, which is effective since 1 Jan 2022. Corporate law experts were working many years on these changes, however, the main driving force to finally implement them was Georgian obligation under DCFTA to approximate Georgian legislation to the legislation of EU. In this analysis, we mainly discuss those changes and innovations that were not presented in the previous Law on Entrepreneurs or the ones that existed but now have more detailed regulation than before.
Founders’ Agreement
“Founders’ Agreement” – this new collocation has emerged in the new law. In order to establish an enterprise, it is necessary now to submit the Founders’ Agreement of the enterprise to the registration body.
The Founders’ Agreement of the enterprise has written form and is signed by all the founding partners of the enterprise. The founding agreement consists of the charter and other mandatory data determined by law. As the new law explanatory card states, the charter should be a “constitution” of an enterprise, which rarely has changed, whereas the other part of the foundation agreement is relatively flexible and subject to more frequent changes.
The law sets the minimum data, which shall be reflected in the Founders’ Agreement, but not in a charter part. The minimum data coincides with the previous law: brand name, information on partners, etc.
As for the charter part, the law obliges entrepreneurs to define:
a) the legal form of the enterprise;
b) the subject of activity of the enterprise. The activity can be indicated in general, or specific activity;
c) restrictions of the partners on share ownership rights (if such a restriction exists);
d) information on the existence of an agreement between the partners (if such an agreement exists).
From the list mentioned above, we should note that now mentioning the activity of the company becomes mandatory.
Standard Charter
The new law introduces the concept of a standard charter. Before these changes, the companies were also using the template of the charter provided by the NAPR. However, the new “standard charter” does not include individualizing elements and for its usage, the applicant shall simply indicate that the enterprise chooses to use the Standard charter, so no need for the provision of its own version of the charter. Standard charter is already approved by the Ministry of Justice of Georgia and its contents differentiate depending on the form of the legal entity.
Entrepreneur’s Brand Name
The regulation related to the brand name of the enterprise (the name under which the entrepreneur carries out its activities) has also been changed.
Just as before, a brand name can be any name. However, it is important that a new law has imperative requirements stating what can not be used as a brand name. Here are the main prohibitions established by law:
1. Anti-state / discord or violence approval / inciting / propaganda word or collocation;
2. Discriminatory or against public order / universally recognized moral norms word or collocation;
3. Misleading additional words;
4. Name identical or similar to the state or governmental institution, where such institutions or state has no equity participation;
5. Physical person’s name, without his/her consent;
6. Identical or similar name that is already registered by other legal entity in Georgia or which is universally known in Georgia, without his/her consent;
7. Censored or offensive word or collocation;
The law also defines the responsibility of a person, who illegally uses another legal entity’s brand name. In such a case, this person is obliged to stop such use at the request of the authorized person and to compensate for the damage caused by the illegal use.
An authorized person can claim or require to concede income received by the breaching party for the unauthorized use of the brand name.
There are a lot of identical or very similar brand names in Georgia, including the names of famous brands. We assume that this is the reason why the law grants a two-year period for the entities to get in compliance with the new legislation. After two years the entities that still are not in compliance with the law will receive 3 months period to fix that. If within that three months the entity still does not change the name – it will be regarded as dissolved.
Individual entrepreneurs now may indicate in their title their name and/or surname, but previously it was required to mention both (name and surname together).
Business Letter and Website
Also, new legislative innovation is related to business letters and websites.
According to the changes – all business letters and websites of the entity (a limited liability partnership, limited liability company, joint-stock company) should indicate at least the following information: company name, legal address and identification number.
These requirements of corporate law apply for both material and electronic forms of a business letter. It is quite unclear though what does the business letter mean exactly. Conservative interpretation of this collocation might lead us to any sort of document/file made on behalf of a company, including any sort of email correspondence with any person.
An enterprise that is in process of liquidation shall mention “in process of liquidation” next to its brand name in any business letter.
The same rule applies to a person which undergoes insolvency procedures. This person is obliged to indicate “in process of insolvency” or indicate particular regime of insolvency it has – “recovery regime” or “bankruptcy regime”. The foreign country’s branch office in Georgia should indicate in each of its business letters the registration authority and its registration number.
Information about the company mentioned in the business letter shall also be mentioned on the website of the company (if it has a website). So from 1 Jan 2022, it is mandatory to have at least the following data on the website of the company: a company brand name, identification code and legal address. The administrative responsibility in accordance with Georgian legislation will rely on the person managing and representing a company for the non-fulfilment of these obligations.
This is one of those changes, which will also have an impact on all the legal entities. Compliance with it is required for all Georgian enterprises.
Rules for Submitting Notification by The Registration Authority
The new law consists of rules for the delivery of notification by the registration authority.
The notification will be considered as delivered will be considered in the following cases: 1. Once the entrepreneur reads the notification; 2. From the moment of delivery of the notification to the legal address or 3. On the 15th day after posting the notification on the electronic address.
Registration authority has created an electronic portal for communication and electronic services. The electronic address is the authorized page of the enterprise within this electronic portal.
We assume that it will be a webpage similar to the one we use for communication between the taxpayers and the Revenue Service of Georgia https://rs.ge, which has successfully worked in Georgia for many years.
The existence of electronic addresses will make communication with regulation authorities much more convenient. Most likely, from now on the physical delivery of the notification will be conducted in rare cases which will make regulation of corporate matters much easier and effective.
Management Body / Person
The concept of the director is no longer found in the new Law on Entrepreneurs. Instead of it, the new law has the following collocation – management body/management person. Management of the enterprise can be conducted jointly or severally, as it was before.
There is important change related to emphasizing the management person’s responsibility in front of the enterprise. Particularly, the article on freedom of business decision states that the management person is exempt from the obligation of compensation of damages if it was acting based on sufficient and trustworthy information, based on the interests of the enterprise, freely and without conflict of interests or others’ influence. This exemption does not apply if the management person was acting against the obligations determined by the charter of the company or the state laws.
The new corporate law announced the types of liability for violation of the competition rules by the management person. The maximum possible term for the violation of the competition rules is increased to 3 years after the resignation from the position. Competition Rules prohibits the management person from being involved/being a manager in the same business activity in another company without the consent of the shareholders.
In case of violation of the competition rules, the enterprise can claim compensation from the management person for the damages together with the agreed interest. Alternatively, in accordance with the corporate law changes the enterprise may claim transfer of the funds/benefits or the rights to claim benefits received from the conclusion of an agreement on behalf of the enterprise or a third party. Mentioned claims are not effective in case the person appointing management person knew that the management person is involved in other business with the same activity.
It should also be noted, that any reservation related to restriction on appointment or resignation of management person/management body (even under an agreement) is considered invalid. We assume that this clause is made to prevent any situation when the company is frozen due to the lack of a director or obligation to have the existing one.
Employment (service) Contract
A novelty is also an employment (service) contract that is concluded between the enterprise and the person authorized to represent an enterprise.
Once the decision on appointing of a management person on its position is made (which is enough in order to grant representative rights) – in parallel an employment (service) contract is made between Georgian LLC / JSC / LLP and the management person. Notably, labour law does not apply to such an agreement.
Employment (service) agreement consists of rights and obligations, remuneration rules etc. related to management person. This agreement is subject to civil code norms instead of labour laws.
Service contract for the implementation of the heads of individual rights – responsibilities, compensation rules and others. This contract is not an employment contract and it is subject to the norms of the Civil Code.
If there is no information about the remuneration of the management person in this contract, it is assumed, that the person conducts its activities free of charge. Resignation of the management person automatically leads to termination of employment (service) contract, if not agreed otherwise under the contract.
Reorganization
The new corporate law of Georgia regulates the industry reorganization in detail: types of reorganization, procedures, the satisfaction of creditors, purchase of the shares by the partner.
There is a lot of innovations and specifications in this part of the corporate law. Based on this, a separate article will be written by our law firm on this issue.
Termination of the Enterprise
The new law on entrepreneurs mentions three stages of termination of the enterprise:
Enterprise Dissolution
The basis for the dissolution of the enterprise may be the decision of the partners; Violation of the requirements of the law related to the mandatory number of partners; Enforcement of the criminal court verdict; enforcement of the decision of the court on the basis of partner’s application/lawsuit; Other basis provided by the charter.
The novelty is the basis when the partner’s application/lawsuit may be ground for dissolution. For such dissolution, the partner shall have an important basis, which shall be determined in each case individually. The important basis might be considered when one of the partners intentionally or due to gross dismissiveness violates the law or obligations under the charter of the company. Another case might be when the partner cannot execute its obligations and it becomes impossible to reach the goal of the enterprise.
At the same time, the interest of other partners in extending the existence of the enterprise should be taken into account as well. Enterprise dissolved on the basis of partner’s decision might still continue existence if 3/4th of votes of the general meeting agrees with it and process of transfer of assets of the company is not yet initiated.
Liquidation of the Enterprise
The liquidation process starts after the dissolution of the enterprise and a respective liquidator is appointed, who shall satisfy the requirements of the managing person. During the liquidation process, the enterprise still has a status of a legal entity, however, the brand name of the enterprise shall also be mentioned: “under liquidation process”.
The law requires the liquidators to publish on the electronic address or on their own webpage a statement and simultaneously inform the creditors about the dissolution of the enterprise and invite them for the satisfaction of their claims. The enterprise that is under liquidation process shall distribute assets of a company on partners pro-rata to their shares in the company. A particular date is specified for this depending on the basis of the dissolution of the company.
Termination of Registration
The liquidation process is completed after the full distribution of the enterprise’s property. Liquidators shall apply to the registration authority to register liquidation of the enterprise, on the basis of which registration authority terminates the registration of the enterprise.
If after the liquidation process it turns out that there is property left in the name of the company or that the liquidation process is not finalized – the court will appoint a liquidator again in order to finalize the liquidation procedure.
Limitation Period and Rescission, Right and Timeframe of Appeal
A separate chapter in the law deals with the statute of limitation period and statutes of rescission, powers and deadlines for appeal. Novelty is the determination of rescissions rights separately. Term for rescissions was determined for up to 6 months. The norm defines the list of persons who has a right to rescission with respect to the decision of the general meeting, board of directors and management body/ person decision. The claim for rescission shall be submitted within 1 month (no later than 6 months after the decision), however, if the general meeting was invited and conducted with gross violation of the law or charter the term for the rescission increase up to one year.
The law imperatively stipulates that the missed timeframe for appealing a decision shall not be resumed.
Limited Liability Company (LLC)
Types of shares of LLC
Important changes that the new Law on Entrepreneurs has brought is the easiness of attracting capital in the enterprise. Particularly it is done through granting LLC a possibility to issue authorized shares and other types/classes of shares.
The capital structure became more flexible and it became more similar to the characteristics of the Joint Stock Company structure. These novelties will make the process of financing the company easier for the investors through participation in equity.
The law stipulates the division of the shares of the capital of LLC on subscribed shares, issued and authorized shares.
The subscribed share – such share is considered as placed, if it is issued by the LLC to the other person in return for remuneration, irrespective of the fact of its payment. The subscribed share should be distinguished from the subscribed capital, whose main function is to form the initial capital of the company (i.e.: The authorized capital (statutory capital, legal capital, charter capital, subscribed capital) and is mandatory only in case of the joint-stock company.
Issued shares – shares the decision of issuance of which was made by the body determined by the decision of the partners or by the charter or made by the partners. The issued shares are registered in the register and do not give rise to any rights and obligations before placement. The placement of shares is carried out by the head of the LLC.
Authorized shares – a share that may be issued and placed in the future at the discretion of the partners. The amount of the allowed share, the class, the corresponding share in the capital of the limited liability company, as well as its nominal value (if such a value is established) shall be reflected in the founding agreement of the limited liability company.
Under the New Law on Entrepreneurs, shares may be of nominal value or without such value. If the LLC has only shared with a nominal value, the amount of capital invested should be the sum of the shares with a nominal value.
According to the charter, the shares may be divided into classes. Shares that give rise to identical rights and obligations are merged into one class of shares, hence the face value of all shares in one class must be the same.
The validity term for partners’ prevailing purchase right for shares issued by the LLC was increased from 10 to 14 days.
Dividend Distribution
The legislator has imposed new restrictions on dividend distribution: Dividend distribution on partners is not permitted if there is a high likelihood, that in the next calendar year it may lead to the impossibility to meet the due obligations within the execution of its ordinary and or planned activity. Also, it is prohibited to distribute dividends if the assets of the enterprise might not be enough to cover its obligations and placed capital amount.
Purchase of Own Share by LLC
Another important novelty is that the corporate law directly allowed LLC to purchase its own shares, for which the contribution is already fully made.
It is not allowed for the LLC to purchase such a share of it that grants unlimited vote rights or the right to get the property of the LLC after its liquidation. If LLC still conducts this action it shall sell its share or terminate it until the end of the calendar year when it was purchased.
Subscribed Capital
It is important that LLCs still don’t have a minimum subscribed capital amount requirement. However, of course, this still allows LLC to determine its minimum subscribed capital amount requirement.
The new law also establishes partners’ exit/firing prerequisites and procedures discussed below.
Withdrawal of a Partner From the Enterprise
Partner maintains a right to withdraw from the enterprise, just as in the previous version of the law. However, the new corporate law specifies the circumstances when the partner is allowed to withdraw from the enterprise. Particularly s/he can withdraw if her/his interests are under significant damage because of the actions conducted by other partners or managing person or there are other reasons, such as:
a) Activity of an enterprise changed dramatically;
b) LLC has not distributed dividends for the last three years, although the financial performance of the company was sufficient for such distribution;
c) LLC has made a decision with respect to changes of rights on the specific type of shares;
d) Other partners have made a decision to take the obligation of additional contribution, which also applies to the withdrawing partner;
The price of the shares of the withdrawing partner shall be determined by the agreement between the parties. The auditor might be appointed in case of disagreement.
Expulsion of a Partner From LLC
In case of existence of important basis – the expulsion of a partner from LLC is possible only in case of the lawsuit from the LLC and respective decision of the court.
The important basis exists when the actions of the partner have significant damage on LLC’s interests or remaining of such partner in shareholding of LLC might be damaging for its further activity. Importantly, LLC shall inform in advance such partner that not stopping mentioned activity might lead to his/her expulsion.
Such partner’s voting right or his/her other intangible rights might be paused on the basis of claim from LLC. Partner is deemed to be expelled from the moment when the decision of the court enters into legal force.
Property rights of the expelled partner are protected by the obligation of the LLC to pay him/her fair compensation in return for the shares.
An additional important novelty is the possibility to use technical means for voting in general meetings. The vote will be counted only in case the voting right of the person is sufficiently identifiable. Approval of notary or usage of electronic signature is mandatory during the electronic communication.
Joint Stock Company (JSC)
Management System
The new Georgian corporate law defined the monistic and dualistic system of governing the JSC. A management system is dualistic when the joint-stock company, in addition to the general meeting and the governing body, has a supervisory board. A management system is monistic when the JSC does not have a supervisory board. The decision on the choice of the management system is made at the establishment of the joint-stock company and is mentioned in the charter.
Contribution to the Subscribed Capital of JSC
According to the new Law on Entrepreneurs, at the moment of registration of the JSC or increase of the capital, the shareholder must make a cash deposit in the amount of at least 25% of the nominal value of the relevant issued share. In the absence of nominal value – in the amount of at least 25 percent. The minimum amount of subscribed capital in a joint-stock company at the time of company registration must be at least GEL100,000 (therefore minimum amount to be paid in cash initially is GEL25,000).
The procedure and term of the deposit shall be determined by the law and the charter of the JSC, but upon its establishment or increase of the capital, the shareholder shall make the deposit within 5 years from the moment of registration of the JSC or increase of its capital.
Performing work or rendering services can not be the subject of a non-cash contribution to a joint-stock company, though other types of non-cash contributions are permissible, such as real estate. If the shareholder has violated the term of the cash deposit, the overdue cash deposit interest is accrued annually; In addition, the enterprise may request compensation for damages caused by the violation of this period.
In case of violation of the deadline for cash payment by the shareholder, the governing body of the JSC may initiate the process of foreclosure of the share, however, before this, an additional deadline must be set. After the expiration of the additional term, the shareholder loses the share, the contribution made and the related rights in favour of JSC by a notification sent by the governing body.
Significant Deal
In the new law emerged the concept of the significant deal. A significant transaction is a transaction, or several related transactions, that are directly or indirectly related to the acquisition, alienation or legal encumbrance of 25% or more of the JSC’s assets (book value of the company’s assets).
The law regulates the procedure for concluding a significant transaction. In particular, in the case of a monistic system, the consent of a non-executive person or the general meeting is required, and in the case of dualistic rule, the consent of the supervisory board or the general meeting is required.
According to the new law, the managing person, according to the management system of the JSC, is obliged to inform the relevant body about all such concluded or future concluded transactions, in respect of which he/she is the interested person, as well as to indicate the nature of his/her interest. The norm also lists the criteria for considering a manager as an interested person.
Dividend Distribution by the JSC
New restrictions were imposed on the distribution of dividends by the JSC, just like on the distribution of dividends by the LLC. In particular, it is not allowed to distribute the dividend by the JSC if:
Prior to the distribution of dividends or as a result of the distribution of dividends, the number of net assets mentioned in the recent financial statements of the joint-stock company will be less than the amount of capital invested and the number of reserves provided by law or charter, which may not be distributed to shareholders;
The amount of dividends to be distributed exceeds the amount of the net profit of the JSC specified in the last financial statement, or in the case of interim dividends, earned after drawing up the last financial statement, plus any profits brought forward and sum drawn from free reserves, less any losses brought forward and sums placed in reserve in accordance with law or the statute;
By the dividend payment day or as a result of the dividend payment, the joint-stock company will become insolvent or will be in danger of insolvency.
The decision on the payment of dividends (including the number of dividends and the form of dividends for each type of share) is made by the General Meeting. Dividends must be paid in cash unless the general meeting decides to pay the dividends through other property.
Additional Changes
Under the new corporate law, the possibility of registering a branch of a foreign individual entrepreneur is also a novelty. This is not explicitly written in the law, however, it is mentioned in the explanation card of the law, and it probably follows from the fact that the law allows the registration of any entrepreneur’s branch (irrespective of the form) in Georgia, and the entrepreneur is also considered a physical person who has an enterprise.
Obligation to Bring in Existing Charter Compliance With the New Law
It is important for all the Georgian existing enterprises that they shall fix the registration data in compliance with the requirements of the new law within 2 years after its entry into force.
Conclusion
The new corporate law except for many additional obligations (imposing a minimum capital for the JSC, placing mandatory information in business letters and websites, restrictions on names of the entrepreneur, etc.) imposed many rights that did not exist before (establishment of a branch of a foreign individual entrepreneur, issuance of different types of shares by the LLC and purchase of its own shares, existence of official correspondence with the register using a special portal, etc.).
In addition, the new law regulated many issues that were previously vague and sometimes offered an overly broad framework for interpretation. It is true that the way the implementation will be made is still unclear in practice, but we hope to see positive dynamics in the near future.
In conclusion, we believe that many of the ambiguities of the previous corporate law version have been eliminated and further formalization of corporate relations will have a positive impact on business and consumers.
