Shareholders' Rights & Shareholder Activism 2024 Comparisons

Foreign investors generally use a limited liability company (LLC) and joint stock company (JSC) because of limited liability. The liability of the LLC and JSC to its creditors is limited to the property of the enterprise and the owners of the enterprise are not liable by their personal property.

The primary reason for choosing an LLC is that it gives limited liability without over-complication of the business and administrative complexity of the corporation, such as boards, shareholder meetings, etc. Moreover, depending on the industry, goods, and services, customers usually consider LLC to be more reliable than an individual entrepreneur or a partnership. As for the JSC, foreign investors may be attracted to choose this form as the shareholding of JSC is not publicly disclosed.

Foreign investors generally use a limited liability company (LLC) and joint stock company (JSC) because of limited liability. The liability of the LLC and JSC to its creditors is limited to the property of the enterprise and the owners of the enterprise are not liable by their personal property.

The primary reason for choosing an LLC is that it gives limited liability without over-complication of the business and administrative complexity of the corporation, such as boards, shareholder meetings, etc. Moreover, depending on the industry, goods, and services, customers usually consider LLC to be more reliable than an individual entrepreneur or a partnership. As for the JSC, foreign investors may be attracted to choose this form as the shareholding of JSC is not publicly disclosed.

The main types of shares issued by companies formed in Georgian jurisdiction are:

• Subscribed shares – shares that are issued by a company to other persons in consideration of the respective contribution. In this respect, it does not matter whether the price for issued shares is already paid to the limited liability company (LLC) or not. Similarly, in the case of a joint-stock company (JSC) shares are subscribed on condition of payment of monetary or other consideration;
• Issued shares – shares that shareholders or other relevant body of an LLC decided to subscribe, in accordance with the shareholders’ decision or the statute of the LLC. It is mandatory to register the issued shares in the Registry of Entrepreneurial and Non-entrepreneurial (Non-commercial) Legal Entities. Unless subscribed to by shareholders, no rights or liabilities arise from the issued shares. In case of a JSC, the conditions of the subscription of the issued shares should be determined by the decision of a relevant body of a JSC issuing the shares;
• Authorised shares – shares that may be issued and subscribed in the future by shareholders, in accordance with the instrument of incorporation of an LLC. The latter should additionally include detailed information about the number, class, the nominal value (if any) and the portion in the LLC’s capital of the authorised shares. In the instrument of incorporation of a JSC, the number of authorised shares is limited to the maximum number of shares to be subscribed.

The companies may issue different classes of shares, such as:

• Common/ordinary shares – one share granting to its holder one vote at the shareholders’ meeting;
• Preferred shares – granting a preference to their holder in respect of a rate and order of receiving dividends. Preferred shares do not provide their holder with a voting right, unless otherwise provided for by law or the statute of a company.

The rights attached to shares are usually set out in the statute of the company. The specific issues may also be regulated in the shareholders’ resolution regarding the subscription/issuance/authorisation of shares.

Shareholders’ rights and conditions for their variation are generally prescribed by the statute of the company. Variation of shareholders’ rights may also depend on the class of shares the relevant shareholder holds.

The change of shareholders’ rights related to their shares after the shares are subscribed is subject to the consent of at least three quarters of the holders of shares of that class, unless otherwise provided for by the statute of a company.

Except for the joint-stock company, the minimum share capital is not defined for the companies listed in 1.1. In the case of a joint-stock company, the minimum amount of share capital shall amount to at least GEL 100 000 at the time of registration of the joint-stock company.

For the types of companies listed in 1.1 there are no mandatory requirements regarding a minimum number of shareholders, neither are they required to be residents of Georgia. However, it should be noted that if a joint-stock company has more than fifty shareholders, they are obliged to keep the shareholders’ register through a licensed securities registrar. In case of having fifty or less than fifty shareholders, a joint-stock company is entitled to keep such registration records internally.

Shareholders’ agreements/joint venture agreements are commonly used for private companies. They are mostly confidential agreements negotiated by the parties and unlike the company’s statute, may be governed by non-Georgian law. Shareholders’ agreements/joint venture agreements are not binding on the company unless a company is a party to it.

Generally, shareholders agree on their rights and obligations, distribution of dividends, contribution to the capital and other issues. Shareholders agreements usually also include pre-emptive rights related to the shares and certain sophisticated drafts also cover drag-along and tag-along rights, even though these are not specifically set out in the relevant legislation. Moreover, shareholders’ agreements may provide a list of reserved issues and consent matters as well as rules for resolving any deadlocks.

Such agreements are usually confidential and not disclosed to public. They are generally enforceable to the extent the relevant provisions are in line with mandatory statutory requirements.

A limited liability company needs to hold an annual general meeting (AGM) not later than within six months after drawing up the annual balance sheet and a joint-stock company needs to hold an AGM not later than three months after the end of the business year.

The notice on convening annual general meeting shall be submitted no later than 14 days before the day of holding the AGM. A different notice period may be established by the statute but the notice periods established under the law cannot be shortened.

In addition, it is mandatory for joint-stock companies to publish a decision on convening the general meeting on the electronic platform of the registration authority not later than 21 days before the day of the general meeting. The published information shall contain the brand name and legal address of the company; the place, date and time of the general meeting; an indication as to whether it is a regular or an extraordinary general meeting; the record date of the general meeting and an indication that only the persons who are shareholders on that date shall have the right to participate and vote in the general meeting; the agenda of the general meeting.

General meeting of shareholders typically decides material issues related to the operation and governance of the legal entity. It holds specific exclusive powers, such as amendment of company charter, company liquidation or reorganisation, increase or reduction of company’s capital, distribution and payment of dividends.

Apart from an annual general meeting a company can/should hold an extraordinary meeting of shareholders, which may be convened by the management body or a shareholder or a group of shareholders holding at least 5% of the outstanding shares. The right to request the convening of an extraordinary general meeting may be exercised at least one month after the last general meeting.

The rules for notice of a general meeting (other than AGMs) are the same as for the annual general meeting. For the rules that govern the notice of general meeting see Section 2.1.

Generally, general meeting should be convened by the management body of the company. Shareholders may request holding of a general meeting if they hold at least 5 % of the voting shares of a company. The management body shall publish a decision on convening a general meeting within 10 days after receiving such request.

A request to call a general meeting shall be submitted to the management body in writing and shall include the necessity, purpose and reasons for calling the meeting, as well as the agenda of the meeting.

It should also be noted that a court may grant the applicant shareholder/shareholders the power to convene a general meeting if the request is not granted by the management body.

The right to participate in the shareholders’ meeting is of great importance, as it is closely related to other rights, such as the right to vote, the right to appeal and the right to express an opinion. All shareholders are entitled to receive a notice of a general meeting.

The law determines formal rules for holding a general meeting, including the issue of calling a meeting by shareholders (for detailed information on this issue, see section 2.1).

The law grants shareholders a general right to request information from the company’s management regarding the company’s activities and to receive copies of company documentation (company documentation, including financial state materials, reports, concluded transactions, etc.). Such information shall be provided to the shareholder within a reasonable period unless the management refuses disclosure referring to significant interests of the company which may be put under risk by disclosure of the requested information or documents.

Moreover, holders of at least 5% of all outstanding shares have the right to have a special auditor appointed for inspection of the company’s (LLC or JSC) activities or financial statements.

Information about shareholders of an LLC is publicly available. In a JSC, a shareholder is not entitled to inspect the company’s shareholder register. LLC or JSC incorporated in Georgia does not hold any other official company registers.

Shareholders’ meetings can be held remotely pursuant to the law, or in the cases provided for by the statute. It is also possible for the shareholder to vote by way of written resolutions (instead of participating in a meeting in person).

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.

There are different types of resolutions. Ordinary resolutions are passed by a majority vote (more than 50% of all outstanding voting shares), while special resolutions require at least ¾ of all shareholders voting in the meeting. Some special resolutions and thresholds for passing them are established under the law (eg changing the company’s statute), however, mostly qualification of ordinary and special resolutions and relevant thresholds for passing them are provided in the company’s statute.

Shareholders’ approval typically is required for matters such as: appointment/dismissal of managers, establishment of a governing body, establishment of a supervisory board, changes in the statute, approval of financial statements and distribution of dividends, company reorganisation, liquidation, change in capital, and other structural decisions.

As a rule, decisions in the company are made by the majority of votes, ie by more than half of the votes of the participants in the voting, although there are exceptions, for example, making changes to the charter and changing the rights related to any class of shares, in this case a majority of 3/4 of the participating votes will be required.

Technical requirements for voting are usually provided by a statute of a company.

Georgian legislation allows exercising the right to vote through a representative. The prerequisite for exercising a shareholder’s voting rights through a proxy generally involves the validity of the representative’s authority and informing the company about the appointment of the representative.

Voting may be conducted by show of hands or on a poll if permitted under the company’s statute. Weighted voting rights are also allowed but not a common practice in Georgia.

Regarding the electronic voting, pursuant to the statute, or in the cases provided for by law, upon a decision of the management body of a company, a shareholder may be permitted to vote at a general meeting without attending the general meeting, including by electronic means. It is significant that the possibility to identify a person and the safety of the electronic communication system shall be ensured by the management body of a company. Furthermore, a vote submitted electronically shall be certified by a notary public or an electronic signature.

Shareholders have the right to discuss a special issue and request a decision on it through the powers of initiating changes to the meeting agenda and by way of convening an extraordinary meeting.

After the agenda of issues to be discussed at the general meeting is sent to the shareholders, they can request to make changes to the said agenda. Such request shall be submitted in writing at least three days before the meeting.

In addition, as mentioned in section 2.1, shareholders have the right to convene an extraordinary meeting, within which they choose the agenda of the issues to be discussed.

The shareholder can challenge a resolution passed at a general meeting if they attended that general meeting and voted against such resolution, or (in the case of a joint-stock company), additionally included their opposite opinions in the minutes of the general meeting or have submitted to a court evidence that their opposite opinions have unreasonably not been included in the minutes of the general meeting.

The shareholder who did not attend the general meeting can challenge a resolution as well if they had not been allowed to attend the meeting without appropriate legal grounds, or if the general meeting had been convened in violation of the established procedure, and/or the issue on which the decision was made had not been included in the agenda.

The ability of a shareholder to monitor the company is provided by the supervisory rights they possess. Specifically, among these types of rights, the following are particularly noteworthy:

• The right to control and access to information - this right is a prerequisite for the effective implementation of other fundamental rights of the shareholder. In this regard, the right to initiate a special audit of the annual financial statements can be highlighted, as it serves as a special control mechanism for examining the management body.
• The right to vote - it is the main tool for shaping the will of the company, as the decision-making of the general meeting depends on the implementation of the right to vote;
• The right to appeal - this right is one of the powerful mechanisms for monitoring the actions of the company’s governing body. The appeal mechanism allows the shareholder both individually and on behalf of the company (derivative action) to seek a remedy to the relevant breach.

Georgian legislation does not recognise the concept of holding shares through nominees. The closest concept to this issue is the appointment of a manager of a shareholder’s shares which requires the shareholder’s respective decision as well as the consent of that manager. The law of Georgia on entrepreneurs does not specify any rights of the shareholders in that respect. However, appointing a manager of the shareholder’s shares might be associated with the institute of entrusting property. Accordingly, shares should be managed in the interests of the shareholder in relation with voting, as well. The manager should be obliged to provide the shareholder with the required information and keep them informed regarding the assigned tasks.

In certain situations, specified by the statute, it is not necessary to convene the general meeting. A body/person authorised will send the agenda and a draft resolution to the shareholders either by mail or electronically.

Such notice shall include:

• The deadline for submitting written positions on the draft resolution (15 days from receipt);
• All necessary information and documents needed for the decision.
• Any additional documents or information required by the statute of the company.

Provided the shareholders make a decision without convening the general meeting, the majority of votes shall be calculated from the total number of votes of all shareholders. Furthermore, the body authorised to convene the general meeting shall sign such a resolution and send its copies, containing the date of the adoption of such resolution, to the shareholders within not later than five days after its adoption.

Existing shareholders have pre-emption rights in the case of an issue of new shares. A company is obliged to offer its shareholders to acquire the newly issued shares under the same conditions that would have been set for any third parties willing to subscribe to new shares. In a joint-stock company (JSC), shareholders holding the shares of the same class in which the new shares are being issued are initially entitled to use their pre-emption rights and only then are other shareholders allowed to do the same pro rata to their existing shares. Notably, the existing shareholders should have been granted with a reasonable timeframe, which shall not be less than 14 days, for deciding whether they want to exercise their pre-emption right.

As a rule, pre-emption rights may be exercised to purchase shares in such numbers which are proportional to the existing shares. However, shareholders are entitled to agree otherwise and/or determine different procedure for the exercise of pre-emption rights.

It should also be considered that there may be several occasions when existing shareholders cannot exercise pre-emption rights, in particular:

• The statute of a company excludes shareholders’ pre-emption rights;
• A shareholder waives their right of pre-emption in favour of any third party within the timeframe mentioned above;
• A shareholders’ decision made by a majority of at least three quarters of the votes of participants in the voting restricts or excludes the exercise of pre-emption rights in relation to new shares. In such a case, the decision should substantiate the value of the transfer of shares and be based on a report by the management body of a company mentioning reasonable grounds for the restriction or exclusion of pre-emption rights. In a JSC, such a shareholders’ decision should be published. Besides, a decision annulling pre-emption rights may also be made by a management body of a JSC if the management body had been authorised priorly by a general meeting of shareholders to adopt a decision on the issuance of new shares within the set limits.

Additionally, in a JSC, unless otherwise provided for by the statute of a JSC, pre-emption rights do not apply if:

• shares are issued in order to pay consideration to the members of the management body, representatives, employees and related persons of a JSC or its subsidiary. This rule also is applicable to shares that are issued to satisfy the rights attached to their own securities convertible into shares, or options;
• shares are issued in exchange for contributions in kind;
• a JSC offers redeemed shares for re-subscription.

There are several legal and regulatory restrictions on the transfer and disposal of shares depending on the types of companies.

•       A Limited Liability Company (LLC)

Generally, Shareholders of an LLC are entitled to freely transfer their shares without the consent of other shareholders and an LLC. Only if the relevant shareholder agrees in writing, transfer of shares by such shareholder may be limited, prohibited and/or be subject to the consent of the shareholders or an LLC. The transferring shareholder is obliged to notify the LLC regarding the transfer of shares upon the conclusion of a respective agreement. The instrument of incorporation of an LLC may contain further restrictive provisions (if any) regarding the transfer of shares.

Transfer of shares by a shareholder requires a written agreement. If at the time of the transfer the transferring shareholder had any outstanding obligations arising from the transferred shares, the transferring shareholder as well as the purchasing shareholder shall be jointly and severally liable to the LLC for such obligations, unless otherwise provided for by the statute of an LLC.

•       A Joint-Stock Company (JSC)

Special conditions (if any) limiting the alienation of shares might be specified in the instrument of incorporation of a JSC.

Joint and several liability of transferring and acquiring shareholders for any outstanding obligations with respect to the shares are the same as in an LLC. These rules may be modified by the statute of the JSC.

•       Cooperative

The shares in a cooperative may be transferred at any time, being subject to the consent of the management body as well as pre-emption rights of other members of a cooperative, depending on the provisions of the statute of the cooperative.

Notably, the transfer of all shares by a member of a cooperative leads to the termination of their membership in a cooperative.

•       Limited Partnership

Partners whose liability to the creditors of a general partnership is limited to a guaranteed amount (the Limited Partners) are allowed to transfer their shares by virtue of a written agreement or transfer by succession which is not subject to the consent of other partners, unless otherwise provided for by the statute. Notably, the management powers shall not be transferred together with the shares.

•       General Partnership

In a general partnership, the alienation of shares is subject to the prior written consent of all other partners, unless otherwise provided for by the statute. Executing a written agreement is also required for the alienation of shares by a partner.

Shareholders are generally entitled to grant security interests over their shares.

Both LLCs and JSCs are obligated to establish a shareholder register upon their incorporation and keep such register up to date. Register of an LLC is kept publicly in the Registry of Entrepreneurs and Non-Entrepreneurial (Non-commercial) Legal Entities and any changes in the shareholding shall be duly registered, otherwise the change will not be effective. JSCs are entitled to keep these records internally unless they have more than 50 shareholders. The information in the shareholder register of a JSC is not accessible by third parties. Information about shareholders in a JSC may be disclosed if required by law or regulations. Notifications to regulatory authorities may be required in certain cases. Since the change in the shareholding leads to concentration of companies from the viewpoint of competition law, the Competition Agency of Georgia should be notified thereon. Moreover, fulfilment of obligations to notify and/or obtain a consent from a regulatory authority is generally required in regulated sectors, such as finance, insurance, gambling, communications, etc.

Shares can be cancelled after their issuance. In particular, in the case of failure to subscribe shares under certain conditions, the unsubscribed shares may be cancelled, which may result in the reduction of the number of issued shares by the number of cancelled shares. Moreover, shares acquired by a company in its own capital also might be cancelled, and the decision on cancelling such shares shall be made by the shareholders. The management body of the company is entitled to initiate the process of forfeiture of shares in case of overdue contributions by the shareholders, as well.

In turn, the compulsory cancellation of subscribed shares by the company shall be admissible if expressly provided for or authorised by the statute before the subscription to those shares.

The company is allowed to buy back its own shares, but this is subject to certain conditions. In particular:

• The general meeting shall issue a permit for the redemption/buy back of its own shares, specifying the maximum number of shares to be redeemed, the validity period of the permission (no more than five years), the minimum and maximum prices for the redemption/buy back of shares;
• The redemption/buy back of shares must not reduce the company’s net assets below the subscribed capital, or the non-distributable reserves stated in the last approved financial statements.
• The redemption/buy back is allowed only of the share which have been paid up in full.

Dividends are distributed on the basis of the company’s financial condition, by resolution of the general meeting. There may be annual and interim dividends paid Dividends are usually determined in proportion to the shares held by the shareholders of the company.

As for the specific procedure for the distribution of dividends, the management body/director shall prepare a financial report and a proposal on dividend distribution, which shall be submitted to the shareholders. In the case of a joint-stock company, the supervisory board is also involved in the process, which shall approve the proposal before submitting it to the shareholders or prepare an alternative proposal. The general meeting votes on these proposals and may decide not to distribute dividends. If dividends are declared, then the relevant resolution will provide timing and other details of payment.

Dividend distribution is not permitted if:

• The net assets of the company are below the subscribed capital or legal or statutory reserves.
• The dividends exceed the net profit from the last financial statement, or any carried-forward profits and reserves, minus losses and required reserves.
• The company is or will become insolvent due to the dividend distribution.

The above analysis is carried out by the management body which may be required to sign and submit to the general meeting a solvency statement.

Shareholders can appoint and remove directors usually by a decision of the general meeting, except in two-tier governance structure this power lies with the supervisory board.

Directors shall be appointed for a maximum initial term of three years, with the right to reappointment.

Directors may be dismissed at any time without cause. Directors may have a service agreement with the company which may provide additional rules and requirements applicable upon director’s dismissal.

Appointment as well as dismissal of directors shall be registered with the Registry of Entrepreneurial and Non-entrepreneurial (Non-commercial) Legal Entities.

In general, the shareholder can challenge a decision by using the appeal mechanism on decisions made in relation to the company. Specifically, shareholder can initiate individual, derivative, and class action lawsuit.

• Individual - we can consider the right of appealing the management body’s refusal to provide information, as an example of initiating an individual lawsuit. Accordingly, for instance, in joint-stock companies, the shareholder has 15 days to appeal the management body’s refusal to provide information.
• Derivative - In the case of initiating a derivative lawsuit, the shareholder(s) act against directors/the management body on behalf of the company. In order to initiate a lawsuit, it is necessary to comply with the prerequisites established by law, specifically, written communication with the company and adherence to the mandatory period (90 days). Besides, filing a derivative lawsuit should not contradict the prevailing interests of the company.
• Class action lawsuit - As for the class action lawsuit, in this case the shareholders of one class are collectively protected by the shareholders of the same class. Initiating a class action does not primarily require communication with the company, however, it is important to unite shareholders of one class and make information available.

In an LLC shareholder’s instructions may be binding on the director.

A decision on the selection, appointment and dismissal of an auditor shall be made by the general meeting of shareholders. It should be noted that the general meeting shall have the right to make a decision on the withdrawal from an agreement concluded with an auditor only when there is an appropriate ground to do so.

Directors have an obligation to answer the questions of shareholders and provide them with the requested information in full, which includes the company’s corporate governance arrangements.

Directors also are obliged to take an authorisation from shareholders regarding a material transaction exceeding 25% of the book value of the assets of a joint-stock company. Other cases where the shareholders’ consent is required to execute corporate governance arrangements might be established by the statute of the company, as well.

In Georgia, a controlling company does not have any specific statutory obligations towards the shareholders of the company it controls as such. Nevertheless, all dominant shareholders bear a responsibility with regard to abuse of authority or influence on the detriment of the company or other shareholders. Such a liability is also imposed on the controlling company when it not only deliberately exercised powers to the detriment of the company, but also influenced a member of the management body of the company in order for that member to act to the detriment of the company. In this case the controlling company should additionally be responsible for compensating a shareholder for the damage inflicted.

When a company is insolvent, shareholders’ rights are significantly affected due to the priority of creditors over shareholders in the distribution of the company’s assets. In addition, during the insolvency of the company, the shareholder does not have the right to receive dividends. However, shareholders retain other fundamental rights, such as access to information or voting rights. They can vote on restructuring proposals if applicable and they have the right to be informed about insolvency proceedings.

Shareholders have number of legal remedies against a company, such as initiating legal proceedings in court or arbitration when their rights are violated.

Shareholders can remove a member of the management body/director, at any time without providing a reason. They also can use individual and derivative lawsuits against company’s directors (see section 6.2).

Shareholders can act derivatively by filing a derivative lawsuit on behalf of a company in respect of a wrong done to the company. For detailed review of derivative lawsuit, see section 6.2,

In 2021, a new law on entrepreneurs was adopted in Georgia, which, among many other important changes, has expanded rights of shareholders.

In the current law, we find potential tool for promoting shareholder activism, such as: various mechanisms of appeal, namely derivative and class action lawsuits (for detailed review see section 6.2), the authority of the General Meeting of Shareholders to remove a member of the management body/ director without providing a reason, acquiring issued shares, and aggregate votes through shareholder agreements, etc.

However, the law also includes balancing mechanisms for this issue, such as determining various powers according to the classes of shareholders (majoritarian and minority shareholders), the rule for adopting decisions by a majority of votes and the statutory freedom which allows more detailed regulation of the issues.

However, we have not seen any particular activism and use of these rights by the shareholders. Usually, when there is a disagreement between the shareholders, the most common thing on the Georgian market is buyout of the shareholder.

Since shareholder activism is not common in Georgia, we are unable to provide further insights on this issue.

Since shareholder activism is not common in Georgia, we are unable to provide further insights on this issue.

Since shareholder activism is not common in Georgia, we are unable to provide further insights on this issue.

Since shareholder activism is not common in Georgia, we are unable to provide further insights on this issue.

Since shareholder activism is not common in Georgia, we are unable to provide further insights on this issue.

Since shareholder activism is not common in Georgia, we are unable to provide further insights on this issue.