New Law of “Entrepreneurship” of Georgia in Several Points Defines Barred Proprietary Rights of the Shareholders

Introduction

Georgian new law on “entrepreneurship,” adopted on 2 August of 2021, will enter into force from 01.01.2022. The presented article will not describe all the novelties of this law but will focus on the several strategically critical points regarding the fundamental proprietary rights of the shareholders in LLCs and JSCs. From my viewpoint, these points defect, and they should be urgently corrected to adequately regulate the basic property rights of the different owners of one or another existing corporation in Georgia or companies registered from 01.01.2020.

Uninformed partners of LLCs and JSCs

All sources of the best practice of corporate governance unanimously declare that informational transparency of the company and issuing complete information for the company’s partners are the core principles of corporate governance. A new law at several points does not meet the real essence of these principles.

All kinds of property (material/nonmaterial) right with many specifications consists of getting the complete information about the subject of this right. Like material property, a share is also the subject of the property, and a new law declares it.

According to the law of “entrepreneurship” of Georgia:

1. The governing body of the LLC within a reasonable period upon request of the company’s partners is obliged to provide any information regarding the company’s activities and ensure to look through official documentation of the LLC for the partners. 2. To refuse to provide a piece of information is possible to protect the substantial interests of the LLC. The refusal should be made in a written form. Refusal to provide information is also permissible if the requested information is publicly available.” (First and second sub-clauses of 146th article).

Approximately the same condition is defined regarding the JSC’s. Particularly: “The governing body of JSC has the right to refuse to issue an information on behalf of the shareholder if: a) there is a possibility that an issued information may importantly harm the company; b) Issuing an information will cause disclosure of confidential information.” (“a” and “b” sub-clauses 3 of an article 202).

Besides, a new law regulates: “Shareholders holding 5 percent of the voting rights following this law or the company’s charter are authorized to request from the relevant governing body of the JSC the transactions concluded on behalf of the JSC. The relevant body is authorized, because of the interests of the company refuse to issue requested information.” (Sub-clause “a” of the first clause of an article 173).

All the described legal norms limit shareholders’ fundamental right to be informed appropriately about their own company. There is no defined what should be

1. “The substantial interest” of the LLC.
2. How can we measure a possibility to “harm the company interests,” and how can we imagine that the possession of the shares and being informed about own property may cause the “damage” for the company?
3. What is meant under “confidential information,” while the owner has the right to be fully informed about their property.

If a company has the “commercial secret” and this information is not allowed to the owner of the company, it means the destruction of the meaning of the possession of the nonmaterial good “shares;” d) the governing body of the corporation is appointed by the shareholders’ meeting and in some cases by the supervisory board. This appointment aims to serve the company’s best interests. One of the best interests is to inform shareholders about the company’s activity adequately. Suppose any shareholder appoints any director, and this director is authorized to hide information for the shareholder. In that case, it will demotivate another potential investor to integrate into one or another company, and as a result, it blocks the healthy lifecycle of the corporations.

Considering all the above mentioned, I recommend making adequate legislative amendments affecting these legal norms on behalf of the shareholders, as they should be properly and fully informed about their investment at any time.

The civil code of Georgia declares that: “1. A possessor of a claim or a right that can be assigned or pledged may transfer it to the ownership of another person. Claims and rights are transferred to a new owner in the same state in which they existed with the former possessor. 2. The former possessor shall hand over to the new possessor all the documents in their possession that are related to the claims and rights, as well as all information necessary for exercising those claims and rights”. (First and second clauses of an article 198).

In case of the above mentioned new legal norms are entered into force, and the shareholder of the company decides to sell their shares, they will not be able to fully meet the demands of the quoted norm from the civil code of Georgia, and it may cause additional adverse challenges for the shareholder.

Loss or cancellation of the partners’ shares

According to the law of “entrepreneurship” of Georgia: “the partner should notify the LLC about their decision concerning the withdrawal from the company and its reasons in a writing form. When the company receives notification, the governing body of the company shall notify other partners of the withdrawal of that partner, after which the partners decide to consent to the withdrawal of the partner from the company, as well as transfer their share for the benefit of the company, proportionally divide their shares to other partners or cancel the shares.” (Third clause of the 144 article).

As I mentioned above, Georgian legislation describes that the share is proprietary private ownership of the partner, and it has individual financial value. Defined legal norm nowhere considers possible prerequisites, which may be reasonable to get such a result. Particularly, if the share is the private property with the estimated financial value and the partner wants to withdraw by selling their private share, they lose everything connected to it because the legal norm has a strict meaning without prerequisites and exceptions. There is no answer to the questions: A) Why should these shares be divided on behalf of the company and/or on another partner. Moreover, if the company and/or other partners vice versa may have a different financial obligation for the benefit of this partner? Without any requirements and qualifications, this legal norm seizes the partner’s fundamental right to get compensation or get such compensation if the company financially estimates the value of the share and, after this procedure to pay compensation for the financial value of the share. B) Why company cancels the shares? The most dramatic scenario whiteout the good legal prerequisites, which the quoted legal norm is not described.

The best solution is to give a possibility for the shareholder to get fair financial compensation based on the independent valuation report of the partner’s share.

Levan Kokaia 

Master in Law. Attorney at Law. Legal consultant on corporate governance issues. Member of Georgian Bar Association. Author of more than 45 publications. Guest lecturer and trainer at GIPA.