Dechert OnPoint: Improving Regulations, Amendments to the Law on Entrepreneurs

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’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice.

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. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.

INTRODUCTION

As a step toward further improvement of Georgia’s business environment, the Parliament of Georgia recently passed amendments (the “Amendments”) to the Law of Georgia on Entrepreneurs (the “Law”). The Amendments enhance existing protections of the rights of minority shareholders, increase transparency of corporate management and control of enterprises and, subsequently, facilitate access to financial resources on the part of enterprises.

This week’s edition of Dechert OnPoint examines the key aspects of the Amendments and provides an overview of the Law’s amended clauses with regard to dividend distribution, capital increases, changes to voting rights, the right to purchase shares in an enterprise and requirements regarding the supervisory boards of enterprises.

OVERVIEW

Dividends

According to the Amendments, interim and annual dividends in a limited liability company or joint stock company may be distributed according to the decision of the company’s general assembly. The Amendments require that the timeframe for distribution of profits after making the respective decision be defined in the company’s charter, however, such timeframe is limited to a maximum of 9 months. The purpose of this Amendment is to ensure that dividends are paid within the same calculation period as covered in the profit tax statement.

Capital Increase

The Amendments support and regulate the established practice of increasing a partner’s share in a limited liability company through contribution to its capital. This, like realization of other similarly significant partners’ rights, requires a decision of the general assembly. In particular, in case of a capital increase in a limited liability company, the partners shall be entitled to participate in the capital increase in proportion to their shares by paying the full amount of the respective contributions into the company’s capital within the timeframe defined by the general assembly. Exceptions can occur in cases when the partners agree on some other rule for exercising such right. Additionally, if any of the partners do not exercise such right fully or partially, following the capital increase a new distribution of shares may be effected.

Voting Rights

The Amendments provide that the decision of a company’s general assembly on changing the voting rights of holders of a certain class of shares, either by cancelling and/or reducing and/or granting such rights, shall enter into force only with the consent of more than 75% of the holders of the class of shares whose voting rights are to be affected by the decision.

Share Purchase

For the purpose of ensuring maximum protection of the interests of shareholders, the Amendments provide that if new shares are issued by a company, respective shareholders shall have preferential rights to purchase them in proportion to their current shareholding. However, this right may be cancelled by decision of the shareholders’ general assembly.

According to the Amendments, if an enterprise accountable under the Law of Georgia on the Securities Market and with its securities listed on a Stock Exchange holds at least 50% of the shares of another enterprise, such other enterprise shall not have the right to purchase shares in the above mentioned accountable enterprise. This restriction shall not apply to securities brokers defined by the Law of Georgia on the Securities Market.

Supervisory Board

Pursuant to the Amendments, an individual cannot simultaneously be a member of the supervisory board and director of the same company. The Amendments require those enterprises which are in conflict with this requirement to make necessary changes in their management bodies no later than 2 years from the date of entry into force of the Amendments.

A new clause introduced by the Amendments provides that a joint stock company, as an accountable enterprise as defined by the Law of Georgia on the Securities Market and with its securities listed on a Stock Exchange, must have on its supervisory board at least one member who is an independent person not equipped with representative powers (i.e., is not a director of the same company). For the purposes of this clause, a person is deemed independent if s/he does not hold shares of the company and does not receive any salary or other economic benefit from the company except for compensation received for membership on the supervisory board. Those enterprises which do not have an independent member of the supervisory board upon enactment of the Amendments shall be subject to the requirement in question within 2 years from enactment of the Amendments and upon the first instance of its changing of the membership of the supervisory board.

CONCLUSION

On a final note, one can observe that the Amendments serve to improve Georgia’s entrepreneurial and investment environment on the one hand, while on the other protecting the interests of minority shareholders by granting them more rights and legislative guarantees. These, along with other amendments recently made to Georgian legislation, make Georgia stand out in the region as a country taking significant steps toward improving and advancing corporate governance, and thus improving its business environment.

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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.