Dechert OnPoint: New Regulations for Agricultural Cooperatives

Dechert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ruslan Akhalaia and Irakli Sokolovski, as well as Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.

New Regulations for Agricultural Cooperatives

The legal framework for the organization of agricultural cooperatives in Georgia is a relatively new development. It was adopted in August 2013 after being introduced by the Law of Georgia on Agricultural Cooperatives (the “Law”). Related legal issues have been, generally, regulated by the Law of Georgia on Entrepreneurs, which mainly deals with the business registration process and overall management of cooperatives. In 2013, the Georgian Government prioritized the development of agricultural business and introduced tailored rules to govern the legal aspects of agricultural cooperatives. Over the past two years, the Law has been regularly updated to reflect issues arising during its practical application.

The Parliament of Georgia is currently working on another set of amendments (the “Amendments”), aimed at better serving the interests of farmers and harmonizing applicable rules with the best international practices. The Amendments have now passed two readings at the Parliamentary sessions without any particular resistance from voting members, which gives the impression that they will most likely achieve final passage at the third and final parliamentary reading.

The Amendments are accompanied by an explanatory note setting out the main changes and their respective purposes (the “Explanatory Note”). The Explanatory Note provides that the correct agricultural cooperative practices could lead to rapid economic development of the country, which is why the Amendments aim to introduce more legal regulations in this sector. Such regulations are expected to guarantee that agricultural cooperatives, unlike other business entities, are focused more on optimization of labor forces than receiving profit from invested material resources. The Explanatory Note also mentions that since the Law entered into force in 2013, 1,000 new agricultural cooperatives have been registered. Therefore, it is apparent that the internal business relations of agricultural cooperatives require further regulation. For these purpose the Amendments focus on several structural changes, which are set out below.

Members of Agricultural Cooperatives

Under the Amendments, agricultural cooperatives shall have associated members in addition to general members. The general members participate in the agricultural activities of the cooperative and hold respective stakes, while associated members hold stakes but are not involved in agricultural activities. General as well as associated members are natural and legal persons in Georgia, including foreign citizens and corporations registered abroad. Every cooperative is obligated to have an up-to-date member registry compliant with specific rules established by the Minister of Agriculture of Georgia.

Individual membership in the cooperative may be terminated in cases when a member leaves the cooperative, is expelled, dies or if the cooperative itself ceases to exist. Members may be prevented from leaving the cooperative if they have not made their due contributions. Members may only be expelled by the decision of the general assembly of the cooperative if: (i) they breached their obligations; or (ii) they committed a material breach of the cooperative statute or decision of the directors, supervisory board or general assembly of the cooperative.

Membership Contributions

General members are obligated to make mandatory contributions to the cooperative fund. The cooperative fund is the sum of the accumulated contributions, and can be used only by the decision of the cooperative’s general assembly. The amount of mandatory contributions by a general member is calculated before the start of each financial period, taking into account the estimated volume of work to be performed by the member and the value of products/services to be provided to said member.

Members can also make additional contributions, provided they have fully covered the mandatory contributions. The terms of contributions to be made by associated members are established by the general assembly of the cooperative, the Law and specific agreements concluded between the cooperative and the associated members. Property used to make either mandatory or additional contributions to the cooperative fund shall be subject to prior evaluation. Such property may not be placed under any restrictions and may not be disposed of without prior written consent of the member who made the contribution.

Other Rights and Obligations of Cooperative Members

Rights and obligations of cooperative members are separately regulated by the Law, with the Law prescribing different rights and obligations for general and associated members. In comparison with general members, associated members are prevented from participation in the management of the cooperative. On the other hand, they have prevailing rights during dividend distribution.

Other general rights and obligations of cooperative members are the right to use the services of the cooperative, the right to information, including the right to request auditory checks of financial documents, the right to dividends, the right to receive part of the property remaining after liquidation of the cooperative and/or after the termination of the member’s membership with the cooperative.

All cooperative members are legally obliged to: (i) comply with the requirements of the Law and the statute of the cooperative; (ii) make any mandatory and voluntary contributions as set out in the internal documents and agreements between the cooperative and the member; and (iii) comply with any other obligations set out in the statute of the cooperative, the Law and any other legal acts and regulations adopted under Georgian legislation.

Distribution of Dividends

According to the Explanatory Note, one of the main changes proposed in the Amendments relates to the mandatory regulation of dividend distribution by the cooperative. In particular, the dividends shall firstly be distributed to the associated members. The Amendments set forth two structures available for distribution of dividends to the associated members: on the one hand, the associated member may agree with the cooperative to receive the dividends pro rata with its contributions. In such cases, dividends distributed to associated members shall not be more than 15% of the total value of the contributions made by the associated member for the given financial year. On the other hand, the general assembly may decide, in accordance with the individual agreement between the cooperative and the associated member, to distribute dividends based on the yearly profit of the cooperative. In such cases the Amendments provide that no more than 30% of the annual profit made by the cooperative may be distributed as dividends in total for the given financial year. Similar rules apply to distribution of dividends to general members, with the condition that the associated members have already received their share of dividends.

Agricultural Cooperative Development Agency

LEPL Agricultural Cooperative Development Agency (the “Agency”) is a legal entity of public law established under the Ministry of Agriculture of Georgia in order to manage and oversee the development of agricultural cooperatives on the Georgian market. The Agency is the main registration authority, carrying out the administrative process for granting relevant cooperative status to legal entities of private law. The Agency is also tasked with monitoring the activities of those private legal entities which were given the status of cooperatives. Notably, the cooperatives enjoy tax advantages, which mostly serve the sole purpose of supporting the practical cooperation among farmers. For the same purpose, the Amendments intend to broaden the authorizations of the Agency by empowering it with the authority to issue grants to agricultural cooperatives. The Amendments do not provide, however, the rules directly applicable to this authority of the Agency. Most likely the process will be subject to requirements of the Law of Georgia on Grants, adopted on 28 June 1996, as amended.

Conclusions

The new regulations intend to support development of the agricultural sector in Georgia. The existing legal framework might not be able to deal with all obstacles which exist in the sphere; however, it is evident that legislators are constantly working to improve the situation by observing and assessing problems arising during the practical implementation of the law. Legal provisions are being accordingly adapted to best suit the primary interests of natural and legal persons active in this sector. In our view, the Law provides reason to be optimistic about the future of the Georgian agricultural sector.

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Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.