The following article describes several problematic corporate governance issues regulated by a new law of Georgia on „entrepreneurs“, which will enter into force from 1 January of 2022. There are reviewed the following themes: several specifications of attitudes between the directorate and the shareholders, compensation for the damage caused by an irrational act of dominant partners and convening of the general meeting of shareholders at Joint Stock Companies (JSC).
All these issues are compared with the core principles of corporate governance and corporate law. There are found out several legislative gaps or improperly regulated legal norms. Instead of the existing regulation, the article presents subjective alternatives to change problematic clauses to ensure better legal mechanisms of mentioned topics.
Attitudes between directorate and shareholders
In capital-based corporations, there is a strictly defined internal structure among the governing bodies of the company. Based on the best practice of corporate governance, if a company doesn’t have a supervisory board, an executive board is directly appointed by the general meeting of shareholders. The principal-agent theory foresees good faith and loyalty of the director not only for the company but also for its shareholders and it doesn’t contain to perform such actions, which are under the specific authority of the shareholders. One of these authorities is partners’ possibility to decide of the permitted form of voluntary contribution at the company, which may be formulated at the partners’ agreement and/or company’s charter.
A new law of Georgia on “entrepreneurs” regulates this issue in a different manner, which contradicts the above mentioned. Particularly: “A partner may upon the consent of a director make an additional voluntary non-financial contribution even if the charter does not provide an obligation to make it” (clause 4 of article 140).
Quoted legal norm doesn’t contain the real meaning of the principal-agency theory and the described authority of shareholders. The best solution is to formulate this clause in a new manner when the director doesn’t have the right to accord the shareholder to make an appropriate form of the voluntary contribution.
Compensation for the damage caused by the dominant position of the shareholder
According to the law of Georgia on “entrepreneurs”: “2. A dominant shareholder is a shareholder or a group of shareholders acting together, who has a practical opportunity to influence on the results of the voting results on a general meeting. Such shareholder/group of shareholders shall, in addition to the damage inflicted on a JSC, compensate for the damage inflicted on a shareholder as well, except for damage inflicted on the shareholder which is a result of the damage inflicted on the JSC, including by reducing the value of the shares. 3. A person who deliberately used power against JSC or influenced a member of the management body of the JSC to commit such an act against the company that caused the damage shall compensate for such damage to the JSC. Such person shall, in addition to the damage inflicted on JSC, compensate for the damage inflicted on a shareholder as well, except for damage inflicted on the shareholder which is a result of the damage inflicted on the JSC, including by reducing the value of the shares. (Clauses 2 and 3 of article 176).
Described norms contain mutually opposed meanings. Particularly, both clauses on the one hand foresee a possibility to impose compensation for the damage, which was a cause of action of the dominant shareholder and on the other hand it makes possible to avoid such damage because of the damage inflicted on the JSC, including by reducing the value of the shares. In any case, the aim of this norm is to balance and compensate for the consequences caused by an irrational act of a dominant partner. These actions harm interests as the JSC and interests of the separate partners, especially the minority partners. To adequately defend the interests of the minority shareholders is one of the main goals of corporate governance. Therefore, to assume the preconditions, which may cause averting the legal responsibility against such a dominant partner should have a solid meaning. If the best interests of the JSC separate shareholders and the creditors of the company and it have more legal strength, than the interests to defend the dominant partner and not to impose a legal liability against his/her irrational action, we would be able to conclude, that such exception has a solid justified argument. On the opposite to this assumption, not only do we have such approved interests, but also, we have the inconsistent meaning of these described clauses.
To avoid such misunderstandings, which may cause turbulence especially during disputes, it would be better to take from these clauses an exception, which allows not to impose appropriate legal liability against the dominant partner, whose actions caused a decreased market price of the shares of another (especially minority) partners.
Convening of the general meeting of shareholders at JSC
A new law in a detail regulates issues of convening, organizing, and performing the general meetings at JSC’s. This section of the article describes the consequences when the executive body of the company doesn’t organize such meetings and the law presents an alternative source to organize a partner’s general meeting.
According to clause 2 of article 186 of the law of Georgia on “entrepreneurs”: “If the management body of a JSC fails to fulfil its obligation to convene the general meeting, the supervisory board of the company is obliged to convene the general meeting”. Besides, clause 3 of article 187 of the law of Georgia on “entrepreneurs” declares: “If a request of a shareholder(s) to convene a general meeting is not granted, based on an application a court may grant an applicant shareholder(s) with the power to convene a meeting and to appoint the chairperson of the meeting”.
To flexibly organize and execute the shareholders’ general meeting when an executive body of the JSC doesn’t perform it, there may be found out the better solution, then it is regulated by a new law.
Relying on Article 186, if the management fails to fulfil its obligation to convene the general meeting, there is a solution to oblige the supervisory board to perform it, but if there is shareholders’ demand to perform the general meeting and this request was denied by the directorate, we don’t meet the same situation as it was described above. According to article 187, the only alternative is to apply to the court, which takes precious time for the interested shareholder(s) and we don’t remain a possibility to initiate and perform the shareholders’ general meeting by the supervisory board. To compare these two legal norms, I think that in case of breaking down of an executive body, the better solution would be to use already existing regulation enacted by the second clause of article 186. Moreover, in this case, the supervisory board takes a responsibility to perform the best interests of shareholders, to review and control the refusal of the directorate and to formulate its own position about it.
To appeal at the court for the only demand – to organize and perform shareholder’s general meeting should be the prerequisite of the possible failure of supervisory board’s attempt. Besides, if one of the main purposes of the new law is to adequately represent the legal interests of the minority shareholders and to reinforce JSC’s institution, it is important to give approximately the same opportunities to the minority shareholders to announce the organization of the shareholders’ next of out of turn meeting. It is significant, that the first clause of article 187 of a new law emphasizes the following: “If necessary, based on the written request of a shareholder(s) (group of shareholders) holding at least 5 % of the capital, the management body of a JSC shall publish a decision on convening a general meeting within 10 days after receiving such request”.
Besides, relying on the existing best practice of corporate governance and the principles of modern corporate law, one of the significant rights of a shareholder (moreover shareholder, which holds at least 5% of the capital if the partners’ agreement and/or charter doesn’t regulate this issue in a different way) is to demand, organize, participate, and vote on a general meeting of the JSC. Of course, voting right and its extent may be depended on the type of the share, but to demand an organization and performance of a general meeting is the fundamental associated right of the shareholder and it should be accomplished by the directorate and/or by the supervisory board. On the contrary court, the procedure takes a certain time. Based on the civil procedure code of Georgia: “The decision to convene on shareholders’ out of turn general meeting is a subject to the private appeal upon delivery.” (Clause 7 of article 30928), besides, according to the first clause of an article 419 of a civil procedure code of Georgia: “A decision on a private appeal shall be made by the court of a higher instance within 2 months after the receipt of the private appeal”.
If the minority shareholders of a group of shareholders ask for the conducting out of order session of the general meeting, there is a high probability, that they have a persuasive argument(s) of it. As it was mentioned, in case of the appeal an appropriate court decision, the higher instance of the court decides within 2 months. This is a large period because during this time there remains a high probability to radically change the situation within the corporation and it may lose a real picture of ongoing circumstances when the shareholder(s) demand to organize the general meeting of JSC.
To represent the interests of minority shareholders in a good faith I think, the better solution will be to make an appropriate legislative change and adapt the third clause of article 187 to the real interests of a shareholder and not to protract this process. To appeal this issue at the court should be the closing extreme stage after all possible attempts were properly used within the company.
Levan Kokaia – Masters in law. Attorney at Law. Legal consultant on corporate governance issues. Currently serves as a corporate lawyer at one of the energy companies. Member of Georgian Bar Association. Author of more than 45 publications. Guest lecturer and trainer at GIPA.
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