A Law for One – The Case of Caucasus Online

It happened nine years ago…

Yet it seems like it was only yesterday. In a historical sense, nine years is not a long time, especially when we talk about stories that received wide coverage. Those of us in the media who actively reported on such cases, still remember them very well.

Bidzina Ivanishvili first announced his intention to enter Georgian politics as an opposition figure on 5 October 2011. The governing party’s offensive against him began almost immediately. Mr. Ivanishvili’s citizenship was suddenly revoked on 11 October.

Following the outcry surrounding this issue, the Parliament introduced legislative changes that were blatantly devised to hinder Mr. Ivanishvili’s ambitions. Amendments to the Tax Code and the Law on Enforcement Proceedings, which were adopted on 28 October, were specifically aimed against and applied almost exclusively to, Cartu Bank.

In spite of Cartu’s protests, the Ministry of Internal Affairs only began investigating this issue after the elections, uncovering a scheme that was devised to force Cartu Bank into bankruptcy. Having achieved this aim, the aforementioned law was amended once again in April 2012, reverting to its original form. According to Bidzina Ivanishvili, his bank lost more than $114 million as a result of the legislative changes.

The MIA investigation established that the criminal scheme that was aimed towards bankrupting Cartu Bank involved joint and organized actions by several businesspeople and various state bodies, including the Georgian Parliament and the ministries of justice, finance, and the economy together with their subdivisions and agencies.

Some of the individuals involved in the aforementioned criminal scheme cooperated with the investigation and gave statements regarding the scheme. On 21 December 2013, Georgian commercial banks belatedly expressed their support for Cartu Bank.

Bidzina Ivanishvili’s Georgian citizenship was only restored by presidential decree after the elections. The law that was introduced for one person and one company alone remained a stick for the Georgian Dream to beat its political opponents for a long time. 

The campaign against Cartu Bank was deemed to be an act of putting the business under pressure, with the Prosecutor’s Office taking the case to criminal court.

Several years have passed since then, but neither the supporters nor the opponents of the Georgian Dream have forgotten the main promise under which the party swept into power in 2012 – a free business environment without pressure from the state.

It is therefore only natural that each time the government intervenes in private property matters, it is reproached in the same manner that its own members used to reproach the previous administration not so long ago.

Recently, one of the main causes of reproach has been the controversial legislation that introduced amendments to the Law on Electronic Communications. According to former Georgian Dream parliamentarian Levan Koberidze, who later became an opposition figure, the Parliament has been turned into a notary bureau.

In an interview with Ipress, Mr. Koberidze stated that the Parliament was mobilized to an unprecedented level and every possible exception was allowed in order to ensure that the law was passed.

“We spent parliamentary sessions discussing a piece of legislation that had not even been presented to us in print. We had to learn about the amendments verbally. This was not a parliamentary hearing, but a circus. I am certain that most members of the governing party who supported this bill did not actually know what they were voting for. It is sad to see that Saakashvili’s practice of running the Parliament as a notary bureau has been copied by Georgian Dream in recent years,” Mr. Koberidze said.

It was billed as government legislation, but in reality, it was an initiative that belonged to the Communications Commission. This is how the service providers were misled.

It all started with the Georgian National Communications Commission (GNCC) adopting resolution N19-18/605 on 17 October 2019, ruling that Caucasus Online had acted unlawfully by selling 49% of shares of the ultimate beneficial owner of Nelgado Limited without GNCC’s prior approval. Caucasus Online was reprimanded and told to reverse the transaction and restore the pre-sale status quo.

According to the CEO of Caucasus Online Revaz Kopaladze, it was impossible for his company to comply with GNCC’s demands: “The identity of the founding companies of Caucasus Online (ION and Nelgado) never changed. One of the firms in question acquired a new ultimate beneficial owner (UBO) as a result of the investment carried out by the large international corporation NEQSOL Holding, whose UBO is the Azerbaijani businessman Nasib Hasanov. Since the Caucasus Online shareholders are companies that were founded outside Georgia, it is simply not possible for the management of Caucasus Online to acquire information about the sale of shares in other countries. We were therefore not in a position to inform GNCC in advance.

On 5 August 2019, GNCC officially told us to update the information about our shareholders. We supplied this information during the same month, but the commission used it to start administrative proceedings against us,” stated Mr. Kopaladze.

Caucasus Online was fined three times. The final step would have been to revoke the company’s license, which would have had a catastrophic effect on the market. In spite of the ongoing legal proceedings, GNCC decided not to await their outcome and instead resolve the issue through legislative changes.

Telecommunications infrastructure owners whose interests were directly affected by the aforementioned bill only found out about it on 1 July 2020 during an online meeting with the Communications Commission. GNCC member Vakhtang Abashidze told the participants of the meeting that the bill was initiated by the government, rather than the commission. The bill concerns critical infrastructure and affords GNCC the power to appoint a special manager for the service providers (operators) and sell the latter’s shares through an auction in certain cases.  

The telecom operators appealed to the government through a letter which states that all their questions and requests during the meeting were rejected by GNCC on the grounds that the commission did not initiate the legislative changes and did not have access to the final draft of the bill or any additional information on this issue. At the same time, the stakeholders were publicly promised by the commission that they would be given an opportunity to examine the bill and that active discussions and preparatory works would take place before the legislation was adopted. Instead, the bill was published on the official website of the Georgian Parliament on 6 July 2020 – six days after the meeting. None of the operators had been given a chance to read the draft bill or to share their opinion with the individuals and bodies involved in initiating and devising the legislation.

Moreover, the bill was presented at the parliamentary hearing not by the government but by GNCC Chairman Kakha Bekauri.

The letter, which was signed by the 8 largest service providers (telecom operators) and addressed to the Georgian government and Prime Minister Giorgi Gakharia, highlights and objects to the following circumstances:

(a) GNCC is listed as the co-author of the published legislative changes, together with the Administration of the Government of Georgia;

(b) The operators first found out on 6 July that not only did GNCC have access to the bill, but was involved in drafting it;

(c) GNCC presented the bill at the government session on 25 June 2020. The chairman and other members of the commission will also be presenting the bill at parliamentary committee sessions;

(d) The bill received government approval at the 25 June 2020 session. Furthermore, the decision to send the bill to the Parliament was taken during the same session, indicating that GNCC had access to the final draft of the bill as early as 25 June 2020;

(e) Based on GNCC’s documented request (letter 20-03/2048, 24/06/2020), the Georgian government adopted Ordinance N 1102, 1/07/2020, which excluded the bill from regulatory impact assessment duty and from being published on the Legislative Herald of Georgia website, even though the operators were promised by GNCC to be given the opportunity to familiarise themselves with such a document during the working stage of the legislative process.

It is evident that the operators were lied to. According to the chairman of the Georgian Young Lawyers’ Association, Sulkhan Saladze, it was wrong for the government to fast-track this bill without having an impact assessment document on hand. The bill was not included on the list of legislative projects initiated by the government that were due to be presented at the spring session. The reasons for such a sudden appearance of the bill have never been explained.

Mamuka Andghuladze of Transparency International Georgia adds that the whole process lacked transparency from the very beginning: “The exclusion of the stakeholders, i.e. those who were directly affected by the legislation, meant that the process was not transparent. Operators did not know what the government was going to legislate. It later transpired that this was a government bill in name only. In reality, it was initiated by the Communications Commission. GNCC does not publicly admit that its actions were motivated by the Caucasus Online case, but the process related to this company began several months earlier.

“This is a serious issue for which the state, and more specifically the Ministry of Economy and the Communications Commission, cannot evade responsibility. If you analyze the legislation and admit that this is a problematic matter, then why do you not include it in the annual report, and why do you not speak to the public about it?”

The issue is certainly problematic, as the legislative changes include the introduction of a dangerous mechanism that allows the state to control businesses by appointing a temporary manager.

Unprecedented mobilization of the Parliament, and committee sessions lasting until 2 a.m.

Parliamentary activities surrounding the legislation unfolded in intensive mode. Chairman of the Sector Economy Committee, Roman Kakulia, may have been nervous as he knew what he was dealing with, but that did not stop him from organizing committee sessions that lasted until 2 a.m. in order to deliver the required outcome.

“This was truly an exceptional case – during the 8 years of Georgian Dream government, there was literally no precedent for parliamentary sessions to continue for days without a break. I would have been delighted if this became the normal working rhythm for the whole parliamentary year. However, it was evident that this was a party-political exercise. The Parliament and the committee had been tasked with fast-tracking this bill without even consulting the business sector, experts, and members of parliament,” states Levan Koberidze.

During the aforementioned few days, the Sector Economy Committee came under intense scrutiny, as objections were raised during the sessions even by those businesspeople from whom this was not expected based on their lifestyle and relationship with the government. One of them was Magticom owner Gia Jokhtaberidze, who challenged GNCC Chairman Kakha Bekauri:

“My statement had nothing to do with party politics. I have never been and will never be a member of any party. My criticism was directed towards this piece of legislation, GNCC, and its members. Two large transatlantic companies have left Georgia due to their actions. People no longer want to invest here. Luckily, one of these companies was absorbed by the Georgian group Silknet, but now Beeline wants to leave as well. They are fed up with GNCC and want to get out, but are struggling to find a buyer,” Mr. Jokhtaberidze explained.

The Magticom owner told the GNCC chairman directly that the law was being devised specifically for Caucasus Online: “More than a year has passed since the change in Caucasus Online shareholding. The company has continued to operate normally, increasing its number of subscribers in Georgia and withstanding the disruptions created by the coronavirus pandemic. The question is, does Caucasus Online constitute critical infrastructure? How many independent fibre networks are coming into Georgia, and does this critical infrastructure concern Caucasus Online at all?” 

Mr. Bekauri was also challenged by Irakli Rukhadze, another businessman with close ties to the government, who criticized the legislation in harshest terms. “The more we listen to you, Mr. Bekauri, the more questions we have. For example, I am a Magti shareholder. Gia Jokhtaberidze and I conduct business outside Georgia, but we have a large contract that regulates our relationship as majority and minority shareholders of Magticom in Georgia. Let us imagine that Mr. Jokhtaberidze breaks the law and jeopardizes public security. He sells his shares abroad and the transaction cannot be reversed. What will you do? Sell Gia’s 54% stake in Georgia? I would naturally take every possible legal action against you. I have a valid contract in the United States, and I would not allow you to bring an outside party into this agreement. Would anyone be able to sign an agreement in the United States under these circumstances? This is madness, folly, and utter idiocy,” Mr. Rukhadze told Kakha Bekauri.

On his part, Mr. Bekauri insisted that GNCC was acting in the best interests of the country and its security: “The purpose of this legislation and the proposed changes in electronic communications is to create an effective mechanism for the state to act in a scenario in which companies with critical infrastructure break the law. When we talk about critical infrastructure, it is no longer a matter of private business only. The state has a responsibility here. We realize that critical infrastructure affects the market, but it is also vital for the consumer. We must protect the interests of the consumer and ensure that companies with critical infrastructure do not abuse their powers.”

A fateful slip of the tongue – a law devised for one company

The GNCC chairman’s insistence that the committee’s main concern was to protect consumer interests was undone by the chairman of the Sector Economy Committee, Roman Kakulia, who admitted that the law was being adopted specifically for one company – Caucasus Online. Speaking to the media on 17 July 2020, Mr. Kakulia stated that the existing legal framework was not sufficient for tackling the company’s actions, leading to the changes in legislation:

“The main problem was that we had a company that acted against the country’s best interests, and the existing laws did not allow us to challenge these actions. We could have resorted to the extreme measure of suspending their license, but that would have had negative consequences for the consumer. The regulators, therefore, decided to introduce milder measures to resolve this issue,” Roman Kakulia stated.

The Georgian Parliament adopted the changes in the Law on Electronic Communications at the third hearing on 17 July 2020. The law was signed by the president and published in the Legislative Herald on the same day. Thus, the law is already in force.

According to Levan Koberidze, Mr. Kakulia’s slip of the tongue will prove costly for Georgia during international arbitration: “I believe that his statement is incredibly damaging for the economy of a country where encroaching on property rights, placing limits on competition and departing from the principles of the market economy can have irreversible catastrophic effects. It is possible that Mr. Kakulia’s remark will form a serious argument against Georgian in the International Court of Arbitration.”

Constitutionalist Levan Alapishvili comprehensively explains why adopting legislative changes for one specific company is unconstitutional: “The Law on Electronic Communications was adopted in 2005, and until July 2020, it had never been suggested by GNCC that the range of possible sanctions against service providers was ineffective and that there was a need for heavy intervention such as appointing a special manager. It is concerning that the government and GNCC are openly indicating that these changes are necessary in order to implement measures against one specific operator.

“The bill enables the appointment of a temporary manager on the condition that GNCC has already used other sanctions, including financial penalties, against the operator. However, the law does not allow for a scenario where the operators appeal prior to sanctions in court. In effect, GNCC can choose not to await the outcome of such a legal dispute and appoint a temporary manager to enforce decisions that the operator is appealing in court, i.e. before the lawfulness of these decisions is established. Legal proceedings therefore become meaningless, and the constitutionally guaranteed right to a fair court process is being overridden.

“Through their joint actions, the Communications Commission, the government and the Parliament have seriously damaged not only one specific operator, but the country as a whole,” Mr. Alapishvili concludes.

Why is the law unconstitutional? – Caucasus Online states its case

Caucasus Online intends to appeal to the changes in the Law on Electronic Communications in the Constitutional Court. The company has already announced its intentions and publicly explained why it believes the legislative changes to be unconstitutional and damaging to the investment environment.

According to the company statement, the law allows a special manager to be appointed simply for failure by an authorized person to comply with the formal notification obligation, even though the main objective of norms regulating concentration levels (including the sending of a notification) is to ensure that GNCC conducts due to research and assesses the impact of a transaction on competition in the relevant market segment. For GNCC to appoint a special manager without carrying out market research, simply for failing to send a formal notification, would be incompatible with the objectives of the law.

“As you know, Caucasus Online has been requesting this research since 17 October 2019 and continues to do so today. However, GNCC has consistently refused to fulfill its functions in accordance with the law. Company shareholders are certain that such a study would reveal that the transaction did not affect competition on the telecommunications market in any way. The new ultimate beneficial owner does not have any other assets in Georgia and is not affiliated with any other telecommunications service providers in this country. He has a specific long-term plan for developing the company’s telecommunications infrastructure, which can only be beneficial to the development of the Georgian telecom market, as well as the country’s economy as a whole.

“Moreover, the law affords unlimited powers to GNCC with regards to intervening in the business activities of authorized persons and limiting their entrepreneurial freedom. Should a special manager be appointed, any action undertaken by the authorized person will require approval from the special manager and GNCC, regardless of whether that action relates to the decisions that the special manager has been tasked to enforce.”

Caucasus Online believes that if GNCC decides to use the new powers afforded to it by the legislation and appoint a special manager to enforce decisions that do not depend on the company’s actions and intentions, the commission will be grossly interfering in the company’s activities, as well as restricting entrepreneurial freedoms and property rights. The company, therefore, intends to use every possible means to protect its rights and avoid the irreparable damage which GNCC’s decisions could inflict upon it.

The company also intends to appeal to the Constitutional Court and argue that the law is incompatible with the Georgian constitution. It seems likely that the legal dispute will then continue at the International Court of Arbitration.

“We never said that the purchase of shares by a foreign national was the main threat” – GNCC responds to our questions.

Even though the suggestion that the purchase of critical infrastructure by a foreign investor threatens national security has been voiced on several occasions, GNCC insists that this factor is irrelevant.

Below are GNCC Chairman Kakha Bekauri’s responses to the questions put to him by us.

On 17 October 2019, the Georgian National Communications Commission sanctioned Caucasus Online for failing to notify the commission in advance about the beneficial owner Khvicha Makatsaria’s decision to sell his stake in the company to a third party in the shape of Veko Investment, whose beneficial owner is Azerbaijani national Nasib Hasanov. GNCC demanded that the deal be reversed and the pre-transaction legal status quo be restored. In the past, have there been any similar cases where beneficial owners have failed to inform the commission about the sale of their stakes?

Kakha Bekauri: There have indeed been instances where authorized persons failed to follow their legal obligation to provide GNCC with advance notification about the sale of shares or a change in shareholder structure. In such cases, GNCC had the power to demand a reversal of transactions and restoration of the status quo. Only then did it become possible to conduct market research and check the compatibility with the competitive environment. However, there was no precedent for an authorized person to refuse to comply with the commission’s decision and restore the original conditions.

According to GNCC, the purchase of a 49% stake in Caucasus Online by Azerbaijani national Nasib Hasanov constitutes “a considerable threat to the interests of consumers in Georgia with regards to possible changes in the pricing policy and enhancing Georgia’s regional competitiveness by establishing a regional technology center in the country. This is due to the potentially radical changes in the telecommunications service provision strategy that could accompany the changing of the company’s authorized shareholders. This, in turn, could have irreversible consequences for the development of the telecommunications sector in Georgia.” Caucasus Online has already been operating for a year under the new circumstances. Has GNCC carried out market research to establish any threats posed by the new shareholder composition?

Kakha Bekauri: According to Article 27 of the Law of Georgia on Economic Communications, GNCC is authorized to carry out market research prior to the sale of shares by authorized persons. The law does not allow for research to be conducted after such transactions have already taken place illegally. GNCC will therefore not establish a precedent by circumventing the law and carrying out market research after the sale of shares, which would disadvantage the other players on the market.

The main reason why GNCC views the purchase of shares by Nasib Hasanov as a ‘real threat’ to local competition is that the new shareholder is a foreign national. At the same time, the commission raised no objections to the sale of Silknet, one of Georgia’s largest telecommunications operators, to a Kazakhstani national in November 2019 (i.e. after the decision regarding Caucasus Online was made). In another instance, after the telecommunications operator VEON Georgia changed beneficial ownership, GNCC simply requested a post-factum notification, without questioning the legality of the deal. The question is, how is the Caucasus Online case different from these two?

Kakha Bekauri: GNCC never said that the purchase of shares by a foreign national was the main threat regarding the illegal sale of Caucasus Online shares. The commission never made a statement to this effect. According to the law, we examine the compatibility of the transaction with the competitive environment, and the nationality of the person wishing to perform the transaction is irrelevant. Persons of any nationality would have been in breach of the legislation if they had sold shares without GNCC’s prior approval.

As for the two specific examples, in the case of Silknet, the commission was notified about the planned transaction in advance and was asked to provide prior approval. We, therefore, had the opportunity to assess the transaction. Our task was to determine if it was compatible with the local and international competitive environment. In our view, this was indeed the case with Silknet. Also, we are talking about a 27.55% stake in this case.

With regards to VEON Georgia, the commission also deemed this transaction to be compatible with the competitive environment due to its scale, as there was a change in 20% stake ownership. These circumstances can therefore not be viewed as similar to Caucasus Online, where we are talking about a 49% stake with an option to purchase the remaining 51%. It is also important to note that based on the 6 October 2016 decision 677/11 regarding the purchase of a 44% stake in Caucasus Online by Nelgado Limited, one of the preconditions for the approval was for the company to be required to submit a prior notification to GNCC about any intent to sell shares owned by the ultimate beneficial owner if the purchasing party and/or their affiliate ends up owning 5% of the authorized person’s shares as a result of the purchase.

The parting words…

“I will guarantee that business is no longer repressed, and so will the law. Everyone will soon feel the result. Our ideology is radically different from the previous government. Cohabitation will therefore be difficult, but it must happen” – Bidzina Ivanishvili, 12 February 20213.