Introduction

Georgia has sought over the past 15 years to have one of the most modern, user-friendly legal systems among the countries of the former Soviet Union. Many amendments are driven by the desire to conform to international standards, while others originate in Georgia's legal reform commitments under its Association Agreement with the European Union, which came into force on July 1 2016.

Amendments have recently been made to the Law on Entrepreneurs, which is the principal source of law in relation to all business entities, including companies, partnerships and unincorporated sole traders. The amendments impose new requirements for single-member companies and strengthen the pre-emption rights of shareholders.

Single-member companies

The amendments relating to single-member companies were made pursuant to Georgia's Association Agreement obligations and implement EU Directive 2009/102/EC regarding single-member private limited liability companies. The two principal elements of the amendments are the requirement for the details of a sole shareholder to be filed and the formalisation of written resolutions.

The filing requirement is triggered both for new and existing single-member companies and companies which become single-member companies. This represents no significant change for limited liability companies: the details of all their members have long been subject to public filing. It is far more significant for single-member joint stock companies. All joint stock companies have their own register of members, either maintained by the company itself or by an independent, private registrar. This usually affords members a high degree of confidentiality. For single-member joint stock companies, however, while they will continue to maintain a separate register, the details of the sole member must be filed in a publicly accessible register.

The formalisation of the decision-making process within single-member companies is a welcome advance. Previously, there was no requirement for the resolutions of a sole member to be evidenced in writing except where the resolution was subject to registration with the authorities. The powers of the member in a single-member company are now clearly stated to be equivalent to those of a members' meeting. All decisions by a sole member must be made in writing, as must any agreement between a single-member company and its sole member, other than agreements concluded in the ordinary course of business.

The new single member company requirements are now in force; however, a company whose annual turnover does not exceed the lari equivalent of €1 million is not obliged to implement the requirements for written resolutions until September 1 2018.

Pre-emption rights

The new measures in relation to the pre-emption rights of shareholders in joint stock companies have been introduced for the purpose of implementing the relevant provisions of the Second Company Law Directive (77/91/EEC) in respect of public limited liability companies. Those in relation to limited liability companies were introduced with the intention of bringing Georgian company law into conformity with international best practice.

Joint stock companies

Shareholders in a joint stock company have pre-emption rights to participate pro rata in any issue of new shares. Two amendments have been made in this context, the first in relation to notification of shareholders and the second in relation to the abrogation of pre-emption rights on the issue of new shares.

Notification requirements

A company is now obliged to notify shareholders of their pre-emption rights before any issue of new shares. There was previously no notification requirement. The company is obliged to use specified means of communication, depending on the percentage shareholding of the relevant shareholder. Pre-emption rights will not apply, however, to public offerings and, unless the charter specifies otherwise, issues of shares in respect of in-kind contributions, staff remuneration packages and the sale of treasury shares.

Abrogation requirements

Shareholders' pre-emption rights may be abrogated in respect of one or more issues of shares provided a 75% majority of members attending the general meeting resolve to do so. The latest amendments to the law provide for greater minority shareholder protection by requiring that any resolution to do so be made on the basis of a written report of the company's director or supervisory board, explaining the reasons for cancelling pre-emptive rights over the new issued shares.

Limited liability companies

The law previously regulated pre-emption rights in a limited liability company in relation to an increase in share capital, giving each shareholder the right to participate pro rata in such increases. It did not, however, affect the sale of existing shareholdings, which could leave minority shareholders unable to control the entry of new, unknown partners into the business.

Statutory pre-emption rights have now been introduced in relation to the sale of existing shareholdings through the creation of an obligation for any shareholder selling shares to offer those shares to the remaining shareholder(s) pro rata at the same price and other conditions as to the proposed buyer.

A selling shareholder is obliged to inform the other shareholders by notice in writing, which must include the following information:

  • the percentage shareholding to be sold;
  • the purchase price;
  • the deadline for payment of the purchase price; and
  • the deadline for exercising pre-emption rights.

If the whereabouts of one or more of the shareholders are unknown, the notice must also be published in the official gazette.

Notwithstanding these amendments, shareholders can still alter statutory pre-emption rights or disapply them in their entirety.

Comment

While the amendments described in this update represent a positive development in Georgian corporate law, both in transparency and minority shareholder protection, a number of the new provisions still lack precision as to how they will be implemented and penalties for non-compliance.

In respect of single-shareholder companies, the amendments provide no detail as to matters such as the requirements for filing information on a sole shareholder or the place and retention period for written resolutions and agreements.

On the question of pre-emption rights, the wording of the provisions for abrogation of pre-emption rights falls short of the standard set by the EU directive. Whereas the directive requires that the report be presented to the general meeting, the Georgian wording more loosely requires that the members pass a resolution "on the basis of" such a report, which could in theory allow a company to present shareholders with no more than edited highlights. Further, under the Georgian amendment, no price justification is required in the report, although this is mandated by the directive.

It can therefore be anticipated that further minor amendments will be made to these provisions as the authorities implement them.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Benjamin Paine or Mary Kopaleishvili at Paine Stevens by telephone (+995 32 290 3211) or email (benjamin.paine@painestevens.com or mkopaleishvili@painestevens.com). The Paine Stevens website can be accessed at www.painestevens.com.