“Europeanization” of the Corporate Law in Georgia

The new Law of Georgia on Entrepreneurs, effective since January 2022, reflects a comprehensive modernization of Georgian company law.

Since 2016, the Investors Council intensively engaged in the preparation process of the legislation led by the Ministry of Justice.

A notable feature of the new Law is its detailed regulation of the corporate processes, encompassing the aspects such as the general meetings, standard statutes, management duties and responsibilities, shareholder rights, and the procedures for reorganization, dissolution, and liquidation. This approach is anticipated to provide valuable guidance for business communities, legal professionals, and judges, fostering the establishment of consistent practices.

A crucial aspect of the Law’s mission also was aligning Georgian legislation with the corporate law of the European Union.

The European Commission’s conclusion on November 8, 2023, as outlined in the European Commission Report on Georgia, 2023 (p. 70 et seq.), attests to the successful harmonization achieved by the country.

The Investors Council and its Secretariat actively oversees the practical implementation of the law, maintaining the communication with the involved parties such as the Council members, business organizations, and the National Public Registry. This engagement aims to address the challenges inherent in significant legal reforms. The monitoring platform collected the comments and recommendations from the stakeholders, focusing on the potential difficulties associated with the adapting to the new legal framework.

Over the two years since the enactment of the Law, areas of ambiguity and inconsistent application in practice have been identified. In some instances, there is a potential for improvement, clarification, or simplification of specific rules.

Consequently, the Investors Council Secretariat established a working group on company law, engaging the Council members and experts in corporate law and the securities market. The group actively discussed numerous recommendations, emphasizing the areas where contemplating improvements to the law is warranted. These considerations are reflected in the comprehensive recommendations put forth by the working group.

The mentioned recommendations can be grouped into several categories:

The refinement of dispositional and imperative aspects in specific articles: article I of the Law stipulates that, except for in case of the joint-stock company, the legislator supports the principle of dispositional arrangement. This implies that the founders in the founding agreement may deviate from legal provisions. However, certain imperative provisions, mainly safeguarding the creditors and minority partners, are also identified. Practice has revealed the instances where the nature of provisions, whether imperative or dispositional, introduces ambiguity. Clarity, especially concerning the deadlines and majorities, is deemed crucial in practice, therefore, relevant clarifications would enhance the predictability of the law.

Issues pertaining to both initial and subsequent registration encompass considerations related to the capital structure of limited liability companies and the feasibility of registration in the business register. This category further involves defining concepts tied to capital (capital, share capital, paid-in capital, cashed-in capital), distinguishing the data of the charter and other founding agreement regarding the majority of votes needed for alterations, and the obligation to submit a consolidated text. Critical issues, such as determining the number of shares, have been evident in practice. Greater clarity on the alteration of invested capital and its registration is also deemed beneficial.

General meeting: The concerns related to the procedure for convening the regular and extraordinary meetings, exceptional cases determining the chairman of the meeting in a joint-stock company, the concept of accounting day, and the representative powers of managers and the members of the supervisory board at the meeting garnered attention from those interested in this domain and the members of the working group.

Rights of partners: Ensuring the effective realization of the rights by partners and shareholders warrants particular attention, with a focus on clarifying and simplifying the conditions for the admissibility of derivative lawsuits and expediting the exercise of the right to access information and documents.

Dissolution of society by partner’s lawsuit: This emerging institution is gradually gaining prominence as a final recourse for resolving conflicts among partners. Consequently, a more detailed regulation of the procedure would prove beneficial for both legal and judicial practices.

The Heads and the members of the supervisory board: A noteworthy recommendation, supported by the court representatives, is to incorporate the legal definition of the duty of loyalty in the general part of the law. Given its significance, attention to the procedure for deal-making in the event of a conflict of interest is also essential.

In the future, it is noteworthy to consider the recommendations outlined in the aforementioned report of the European Commission concerning the corporate law. Specifically, moving closer to European corporate law in terms of the rules governing the enterprise acquisition (takeovers) and the realization of shareholders’ rights, as well as embracing digital means in international reorganizations (transformation, merger, division), and corporate procedures.

Gender Impact Assessment (GIA) of the Law of Georgia “on Entrepreneurs”

Given the expanding entrepreneurial landscape in Georgia, empowering women entrepreneurs is pivotal for fostering equal economic participation—a key driver for sustainable growth and an inclusive economy. In light of this, the Investors Council Secretariat has initiated a Gender Impact Assessment (GIA) of the Law of Georgia “On Entrepreneurs.” The objective is to analyse the law through a gender lens and gauge the gender impact of the proposed changes. Currently, the law lacks a gender perspective, overlooking the unique challenges and opportunities for women entrepreneurs.

The analysis will concentrate on pinpointing the gaps in the law that may disproportionately affect female entrepreneurs. This includes scrutinizing the language and the definitions that might inadvertently hinder women’s engagement in entrepreneurship and assessing the practical implications of specific provisions on women’s entrepreneurial endeavours.

In addition to identifying these gaps, the gender impact assessment will generate the recommendations to rectify any discerned gender inequalities. These recommendations may encompass proposed amendments to specific provisions, advocacy for supplementary support measures, or the introduction of the initiatives aimed at fostering a more inclusive business environment.