Corporate Governance 2024 Comparisons

The principal forms of corporate/business organisations in the Georgian jurisdiction are:

• limited liability company;
• joint stock company;
• joint liability company;
• general partnership;
• co-operative;
• sole proprietor.

Limited liability companies and joint stock companies are most widely used. They both provide shareholders with limited liability.

The principal sources of corporate governance requirements for companies in Georgia are provided by statutory provisions or orders/ordinances of various regulatory authorities. The Law of Georgia on Entrepreneurs (adopted on 2 August 2021) is the principal source of law on corporate governance requirements and regulates all forms of business organisations existing in Georgia. Furthermore, the Law of Georgia on Securities (adopted on 14 January 1999) regulates securities and entities trading on capital markets. A prominent example of a regulatory order is the Corporate Governance Code adopted by the National Bank of Georgia.

Companies with shares that are publicly traded shall be set up with a two-tier board system. Generally, in companies, other than banks, there is no requirement to have independent board members or to observe gender quotas. However, supervisory boards are required to have an audit committee. The law further regulates the liability of board members and conflicts of interest.

Companies are further required to keep and publish their financial statements. Some companies are required to engage an independent auditor and issue audited financial statements.

There are no particular key or topical corporate governance rules and requirements to be drawn out in the Georgian jurisdiction. The Russian sanctions regime has had an impact on internal decisions of the banks. There are no developments in green/sustainability reporting.

Georgian commercial banks and other financial institutions are required to disclose environmental, social and governance (ESG)-related information in a relevant, useful, consistent and comparable manner. The National Bank of Georgia has developed ESG Reporting and Disclosure Principles. These principles contain detailed guidelines for reporting entities to ensure that their disclosures are fair and comprehensive but concise, strategic, forward-looking and stakeholder-oriented.

The governance and management of a company usually involves general meeting of shareholders and a board of directors, in some cases also a supervisory board.

The general meeting of shareholders holds the authority to make material decisions. While many decisions can be passed with a simple majority vote, certain key resolutions may require a more substantial majority, typically three-quarters of the voting shareholders present.

The management structure may be one- or two-tier.

• One-tier structure – In this model, the company’s management is undertaken by managers or directors forming a single management body. This structure blends the management and oversight functions, with these individuals directly overseeing the company’s operations.
• Two-tier structure – Distinguished by a division of roles, the management tasks in a two-tier structure are carried out by one or more managers. Simultaneously, the supervisory board is responsible for overseeing the company’s strategic direction, ensuring alignment with laws and the company charter. Unlike managers, the supervisory board does not engage in day-to-day management but oversees the managers’ activities without issuing binding directives.

Managers in both structures are endowed with the authority to make decisions concerning daily operations. They, along with the supervisory board members in a two-tier system, are bound by fiduciary duties to prioritise the company’s best interests.

The general meeting of shareholders typically decides issues material to the operation and governance of the legal entity. It holds specific exclusive powers, such as the following:

• amendment of company charter;
• company liquidation or reorganisation;
• increase or reduction of company’s capital; and
• distribution and payment of dividends.

The management powers can be divided between the two boards. Any executive decision may be made by the board of directors. The directors are further empowered to represent the company before third parties. If the company has established a two-tier structure, it is likely that some material agreements and material decisions will be subject to approval of the supervisory board. The supervisory board can appoint and dismiss directors. In the one-tier structure, this power lies with the general meeting of shareholders.

The general meeting of shareholders shall hold meetings to make a decision or unilateral written resolutions can also be adopted without a meeting. The meetings may be ordinary or extraordinary. Companies are obliged to hold an ordinary assembly at least once a year.

The notice on convening the general meeting of shareholders shall be submitted no later than 14 days before the day of holding the general meeting. The general meeting of shareholders may not make decisions on issues that are not on the agenda, unless all shareholders with voting rights attend the general meeting and unanimously accept the change in the agenda.

The quorum of the general meeting of shareholders consists of shareholders who own more than half of the total number of shares with voting rights, and who are present, are represented by representatives or have voted by ballot.

Each director or a shareholder or a group of shareholders holding at least 5% of the outstanding shares may call an extraordinary general meeting.

Sessions of a board of directors and a supervisory board are subject to regulation under the company’s articles of association. Decisions are usually made by half of the board members. There are no mandatory rules in this respect and regulation of board sessions and decision-making are within the company’s discretion.

Boards of directors may be composed of any number of directors. The number of members of the board of directors is determined by the company’s articles of association. The members of the board of directors shall be elected for a period of not more than three years, although they can be re-elected.

Each member of the board of director has the same role. There are no differences among individual board members. Although companies may wish to assign specific titles to directors, such as finance director, operational director, etc, this will not affect their voting power or responsibility before the company.

In commercial banks, the Corporate Governance Code mandates gender diversity and independent directors. Moreover, board members are required to fulfil qualification requirements. There are no requirements for legal entities other than commercial banks.

Directors are usually appointed and removed by a decision of the general meeting. In two-tier structures, this power lies with the supervisory board. Directors may be dismissed at any time without cause.

There are no general restrictions on who may be appointed as director of a company. However, in financial institutions directors have to satisfy qualification requirements.

The corporate governance code applicable to financial institutions defines directors’ independence as their ability to function objectively and independently without influence or potential influence from any third parties.

Directors who have a conflict of interest should disclose such interest and abstain from voting. A director may be deemed to be an interested person if they or persons related to them, in the case of the entry into a transaction by a public company or its subsidiary (a company in which the reporting company holds more than 50% of shares), meets one of the following conditions:

• is the other party to the transaction;
• directly or indirectly holds 20% or more of the total number of votes of the other party to the transaction;
• is a member of the governing body of the other party to the transaction;
• is appointed/elected as a member of the governing body of the reporting company upon the proposal of the other party to the transaction or of the holder (holders) of 20% or more of the total number of votes of the other party to the transaction;
• receives monetary or any other benefits on the basis of the transaction, which are not related to the ownership of shares in the reporting company or to membership of the governing body; and
• is considered an interested person under the charter of the reporting company.

Conflict of interest cases may be further regulated by the company’s articles of association as well as the service agreement concluded with the director.

The principal legal duties of directors and officers of a company are the duty of care and the duty of loyalty. The directors and the members of the supervisory board shall conduct the company’s business in good faith. In particular, they shall take care as an ordinary person of sound mind in a similar capacity and under similar circumstances would, acting in the belief that their action is in the best interest of the company. If directors fail to fulfil the above obligation, they shall be jointly and severally liable for damages incurred by the company. Moreover, while managing the company, directors shall not have personal interests that conflict with the interests of the company. Directors shall not be entitled to make decisions in accordance with their interests or interests of related persons with respect to the opportunities of the company. In the event of conflict, the interest of the company shall prevail.

The directors owe their duties to the company. They are not required to take into account the interests of anyone else when discharging their duties. In some cases, directors may be required to comply with the instructions of shareholders. However, their primary duty is still owed to the company and, if following the shareholders’ instructions may damage the company’s interests, the directors will be liable for breach of duty.

Breach of director’s duties can be enforced by the company directly or by its shareholders acting derivatively by filing a derivative suit. The company can claim compensation for damages suffered as a result of the director’s breach. Directors can be dismissed from their position immediately.

Other bases for claims or enforcement against directors or officers for breaches of corporate governance requirements may be contractual. Companies usually sign service agreements with their directors and officers. Those agreements will set out the director’s obligations as well as their liabilities. The agreements may also envisage penalties. The company may rely on the agreement to seek compensation for its breach. The same agreement may limit the director’s liability to a specific sum. Although not common, a director’s liability insurance may also be procured.

No approvals are required in connection with the remuneration, fees or benefits payable to directors and officers. The director’s remuneration is usually set by the general meeting of shareholders. Reporting entities and entities trading on stock markets will likely have adopted a remuneration policy. They may even have a remuneration committee in their supervisory board.

A company does not have to make disclosures in relation to the remuneration, fees or benefits payable to directors and officers.

As a general rule of limited liability, shareholders of a joint stock company and of a limited liability company shall not be liable for the obligations of the company. However, shareholders of a joint stock company and of a limited liability company shall be liable if they abuse the rule of limited liability, in which case their joint and unlimited liability for the company obligations may be determined by the competent court.

Shareholders can be actively involved in the management of a company. As a rule, they adopt material decisions regarding the company, such as its reorganisation, liquidation and decisions relating to its capital. However, the shareholders may wish to undertake a more active role in the management. In such a case, the articles of association may envisage operational decisions that cannot be taken without shareholder approval, such as the following:

• investments;
• taking out loans;
• selling the company’s business; and
• certain transactions with a value higher than a specific threshold.

The shareholders are to direct the management of a company to take, or refrain from taking, certain actions in the business. However, directors may refuse such instructions if they do not benefit the company’s interests.

Shareholder meetings are required unless a unanimous written decision is taken by all shareholders. For the rules that govern the holding and conduct of such meetings, see 3.3 Decision-Making Processes.

Shareholders may have claims against the company for breach of any of their rights, eg, late payment of dividends, refusal to give them access to the company’s documents and information. Shareholders may claim damages or seek specific performance by the company or directors.

If a director breaches fiduciary duties, a shareholder may launch a derivative suit on behalf of the company and seek from the director reimbursement of damages to the company.

There are no direct disclosure obligations on shareholders in publicly traded companies. However, in regulated entities any acquisition or transfer of shares may be subject to regulatory approval. Moreover, ultimate beneficial ownership information shall be supplied to commercial banks and insurance providers.

In accordance with Georgian legislation, companies must prepare and submit reports to the regulatory authorities annually, by October 1st of the year following the reporting period.

The financial statements include the following forms:

• balance;
• report about income and material losses;
• explanations on the movement of funds in the accounts of the organisation;
• annual results of the economic activity of the company;
• current financial position; and
• explanatory note.

Disclosures on corporate governance arrangements in financial reports usually follow the reporting standards. Georgia uses International Financial Reporting Standards (IFRS) for financial reporting.

A company in Georgia is required to file the following information with the Georgian registry:

• any updates in the company’s shareholding structure or management;
• updates introduced to the company’s articles of association; or
• any decisions adopted regarding the company’s reorganisation or liquidation.

The filings are publicly available. If the company fails to make relevant filings, the consequences may differ but in some cases the company’s registration may be suspended by the Public Registry and the company may be subject to mandatory liquidation.

Certain reporting companies (eg, commercial banks) must appoint external auditors in connection with their financial statements. Their names must be disclosed. The right to appoint the external auditor is reserved to the general shareholders’ meeting. External auditors are allowed to provide non-auditing services and this might undermine their independence. Rotation of the external auditor is not required.

Requirements prescribed by Georgian law in relation to directors in connection with the management of risk and internal controls in the company are provided in 4.6 Legal Duties of Directors/Officers, 4.8 Consequences and Enforcement of Breach of Directors’ Duties and 4.9 Other Bases for Claims/Enforcement Against Directors/Officers.