The Criteria of „Independence“ of the Independent Member of the Supervisory Board

Legislative amendments concerning to the independent member of the supervisory board and also an independent member of an audit committee which is not the member of the supervisory board are a novelty for Georgian legislation. (Georgian laws about “Entrepreneurs” and „accounting, reporting and audit”).

According to Georgian legislation, there are foreseen the main criteria of the “independence”. Namely, an independent person is a person, who is not legally and economically dependent on the company, meanwhile, doesn’t own the shares of the company and doesn’t take any kind of reimbursement or other source of the economic benefit, except of the reimbursement determined for the supervisory board member.

In parallel, Georgian legislation regulates the issue of personal responsibility of the supervisory board members if the board member will not be an “honest” and/or “loyal”.

Unlike the CEOs, Georgian national court practice have not yet made a decision subordinating any kind of supervisory board member under the personal corporate legal responsibility.

Considering the different decisions of the supreme court of Georgia about the personal responsibility of CEOs, the only basis of the legal responsibility of independent supervisory board members is also breaking the universal principles of “honesty” and “loyalty”.

The main question of this article is the following: – If the independent member of the supervisory board and/or the independent member of the audit committee, who is not a member of the supervisory board, formally meets with the criteria of the envisaged legislative demands (the person is not legally and/or economically dependent on the company and is not a shareholder of this company), but there are some signs and/or “reasonably suspicions”, that the person’s actions are mostly “dependent” than “independent”, which harms the best interests of the company – how it is possible to assign the corporate responsibility of this person?

I describe two potential situations which maybe will be arisen in the future, but all of them were originated in the past:

1. Such a member gave a strategically important consultation in the past on behalf of the company, after a certain period of time the company has re-branded, it significantly changed the structure of ownership and also the company may have changed the corporate name and the logo, but the existing company is the classical legal successor of the past company, which took consultations from the existing independent member of supervisory board and/or the independent member of the auditor’s committee;
2. An existing independent member was the major or minor shareholder of the company and/or was the executive member of the supervisory board and/or an executive or non-executive member of the directorate. Acting legal regulation foresees the present status of the person and doesn’t include the possible past statuses, which were closely connected to the company.

Besides, there will be any kind of the “dependence”, which is out of the scope of the existing regulation, but it maybe originated in the future. This reason is quite subjective and in case of the court proceedings, the burden of assertion of the company will be more complex, than in case of the above mentioned two potential reasons.

There is no special described criteria of the “legal” and/or “economical” dependence in the law.

Anyway, during the court lawsuits against the independent board member, the burden of assertion lies on the complainant company, which should proof, that the board member “legally” and/or “economically” is partially or fully “dependent” and the eventuated situation harms the legal interests of the company, (especially it harms the interests of the minor shareholders).

Dealing with the fact, when the existence of the fully independent member of the supervisory board and/or fully independent member of the audit committee, which is not under the structural arrangement of the supervisory board is vital and strategically important for the accountable enterprises and/or other public interest enterprise, it is quite important to make some amendments in existing Georgian legislation, which will more concretely describes the scopes of the “legal” and/or “economic” independence. Moreover, Georgian legislation characterizes the very abstractive basis of the legal responsibility of any kind of supervisory board member like any kind of members of directorate. Namely the duties of “honesty” and “loyalty” is general and case by case only court practice describes whether or not one or another CEO breaks one of these duties or both of them.

Concretizing the full or approximate scopes of the described basis of “independence”, such as the “legal” and/or economic independence” will have very positive impact on the

1. Complainant Company, as there will be more material legal basis to proof that the board member was “dependent;
2. Supervisory board member and or the member of the audit committee, because there will be more specific reasons to effectively defense the legal positions during court hearings;
3. Justice/applicable judge(s), because while elaborating the court decision, there will be more objective legislative criteria to measure the capacity of the “independence”.

From time to time, Georgian entrepreneurial law is developed by the precedential decisions of Georgian Supreme Court. There is no guarantee, that in the future the main subject of the court hearing will be the personal corporate legal responsibility of the independent member of the supervisory board and/or the independent member of the audit committee.

Improved legislation will encourage the high quality of the court decisions and vice versa, the qualified court practice will develop the institute of an independent member of the supervisory board. Finally, this interaction will have the positive influence on the national practice of corporate governance.

Levan Kokaia

Master 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 40 publications. Guest lecturer and trainer at GIPA.