The number of M&A transactions in Georgia in 2019 has decreased compared to 2018 and 2017. However, telecommunications, fast-moving consumer goods (FMCG) and the education industry have seen a steady increase.
However, due to the spread of COVID-19 in the beginning of 2020, Georgia has declared a State of Emergency till April 21st, with a high likelihood of further extension. In order to combat the spread of the virus, the government has introduced a range of restrictions on various economic activities, which are likely to negatively impact economic growth in the country. Thus, it is also expected that M&A activities in Georgia will substantially decrease in 2020, compared to previous years.
At the beginning of 2019, a highly valued M&A transaction took place in Georgia. Paddy Power Betfair acquired a controlling share in one of the leading Georgian betting and gambling groups, Adjarabet. The transaction was valued at GBP101 million.
In July 2019, Royal Swinkels Family Brewers acquired a minority stake in JSC Argo, one of the leading manufacturers of beer in Georgia. Lastly, in 2019, JSC Georgia Capital has been active in the education industry.
The construction industry remains one of the fastest-growing industries in Georgia.
As for the communications sector, based on information received from the Georgian National Communications Commission (GNCC), in 2019 the GNCC approved 19 cases of acquisition of shares of regulated companies. Two cases involved acquisition of operational assets and eight involved acquisition of shares/mergers. On the other hand, in 2018 the GNCC issued 20 approvals for acquisition of shares, seven were issued for acquisition of operational assets of companies and eleven for acquisition of shares/mergers. Consequently, it may be concluded that the above figures demonstrate a slight decrease in M&A activity within the communications industry.
Significant M&A activity has not been observed in the Georgian banking sector in 2019. The last significant banking-sector merger was between JSC TBC Bank and JSC Bank Republic, approved by the National Bank of Georgia (NBG) in 2017. In February 2020, Crystal (a microfinance organisation) made public its intention to acquire JSC Finka Bank. The NBG has yet to approve the acquisition. The only merger yet made within the microfinance sector was in 2017, between MFO SiSi Loan and MFO Continental City Loan. In 2018, JSC Credo Bank acquired JSC BIG Microfinance.
The year 2019 witnessed an increase in M&A deals within the education industry. JSC Georgian Capital applied to the Competition Agency requesting clearances for its market concentration and in all cases, the Agency approved the transactions.
Although, a range of restrictions have been introduced due to the spread of COVID-19 in Georgia, several key industries such as banking, education, and construction have been relatively less affected in this regard. Notwithstanding this, and due to a generally negative economic outlook, it is highly likely that these industries will experience less M&A activity compared to previous years.
The acquisition of the controlling shares of a company remains one of the most widespread means of acquiring a company. In practice, prior to purchasing a controlling stake, a vast majority of companies acquire minority shares in a target company and supervise that company’s business activities by various means. Mergers between companies are also commonplace. Lastly, the acquisition of operating assets is also worth noting.
Under Georgian law, there is no single regulatory body overseeing the execution of M&A transactions. Several regulatory bodies in Georgia have exclusive competence in their respective spheres. However, in some cases authorities have shared authority.
The Competition Agency of Georgia (the Agency) is responsible for overseeing the concentration of a market and compliance with competition law, unless an issue concerns a regulated market where industry regulators have exclusive authority. In the case of regulated concentration, the agency must be notified in advance about such concentration. Currently, the authority of the Agency and the scope of sanctions available to it under the law are relatively limited compared to its European counterparts. However, legislative amendments that are expected in 2020 may introduce heavier sanctions and broaden the powers of the Agency.
The NBG is a regulatory body in the banking sector. Under Georgian law, to acquire shares or execute a merger within the banking sector, prior consent must be sought from the NBG, which ultimately approves or disallows the transaction.
The Georgian National Communications Commission (GNCC) is a regulatory body in the communications sector. The GNCC supervises M&A deals, as well as the sale of operational assets of companies within the communications sphere.
The Georgian National Energy and Water Supply Regulatory Commission does not have exclusive competence in the supervision of M&A deals. However, in co-operation with the Competition Agency, this Commission supervises regulated transactions in the energy and water supply sectors.
The LEPL Insurance State Supervision Service of Georgia must be notified regarding mergers in the insurance industry, and the applicant must provide a justification for and the conditions of the planned transaction.
Under Georgian law, foreign investors may freely invest in Georgia. Furthermore, in May 2018 a Law on Public Private Partnerships (PPP) entered into force, which introduced the possibility of setting up PPPs in various industries. However, under the Constitution and the Georgian Law on Promotion and Guarantees on Investment Activities, several restrictions apply to foreign investors:
These include restrictions on acquisition of agricultural land. In May 2019, the Parliament of Georgia adopted a new organic Law on Ownership of Agricultural Land, which restricts the ownership of agricultural land in Georgia by foreign citizens, though allowing for some exceptions (such as having an investment plan approved by the government of Georgia).
Other restrictions, applying in specific industries include, under the Law on Promotion and Guarantees on Investment Activities (Article 9), investing in certain industries, such as research related to human cloning; development, production and distribution of nuclear, bacteriological and chemical weapons; the construction of military facilities for testing nuclear, bacteriological and chemical weapons; and the import of nuclear and hazardous waste from foreign countries for recovery and disposal, which is fully prohibited. However, in certain cases, such as activities related to the application of nuclear energy for peaceful purposes, and activities related to railway transport control, investments can be made only if the foreign investor does not acquire managing rights in such undertakings.
Business combinations are subject to competition clearances depending on the industry sector.
Generally, unless otherwise regulated, concentrations are subject to clearance by the Competition Agency of Georgia. The Georgian Law on Competition, Article 11.1 requires that in the case of market concentration, a prior notice must be sent to the Competition Agency and the latter has the authority to approve the transaction. As for the definition of concentration, under the law (Article 11.1), it is defined as:
Furthermore, under the law and in certain circumstances, even in the case of joint ventures, a notification shall be made to the Agency. Transaction values or threshold percentages that trigger the obligation of notification are further defined by the by-laws of the Agency. Under the law, the Agency is required to issue decisions within one month of receiving a notification of a concentration. However, this period may be extended by two weeks. If a decision is not reached at this point, the decision is deemed positive, approving the concentration.
National Communications Commission
Regarding the communications industry, a clearance from the Georgian National Communications Commission is required in the following cases:
Under the law, the Commission may, on the basis of a substantiated decision, request that the conditions of a merger or acquisition be amended, or it may prohibit the merger or the acquisition of the ownership interest, shares, or operating assets of the authorised person if the Commission considers that the merger or acquisition will significantly distort competition in the relevant segment of the market. Under the law, the GNCC will investigates the merger or acquisition in the following cases:
If the Commission establishes that the activities of an authorised person do not conform to the provisions of the law for ensuring competition in the field of electronic communications, or that the authorised person has not fulfilled one or more obligations imposed on it as an authorised person with significant market power in the relevant segment of the service market, or that the authorised person has not fulfilled one or more obligations imposed on it during the merger or the acquisition of an ownership interest, the Commission may apply sanctions.
Other Regulatory Bodies
Lastly, the NBG, as well as Georgian National Energy and Water Supply Regulatory Commission (in co-operation with the Competition Agency), supervises concentrations and executions of regulated M&A deals. For further details, see 7.1 Making a Bid Public.
Under Georgian law, the creation of unions is voluntary. Furthermore, clearance from labour unions is not required to execute an M&A transaction. However, while acquiring the company, the following shall be considered:
Termination of the Agreement
The Labour Code of Georgia does not apply to the relationship between the company and members of a supervisory board (Supreme Court Decision, Case No as-23-23-2016) or between the company and the directors, except for notification requirements and certain basic rights (Supreme Court Decision, Case No as-225-214-2017). Thus, the previously mentioned relationships are primarily regulated by the contract, the charter of the company and the Georgian Law on Entrepreneurs. However, if the termination notice under the Labour Code is not sent to the directors, they may claim damages for breach of contract. As for other cases, the Labour Code applies. Under the law, a mere fact of change of ownership, or other organisational changes, may not be sufficient grounds for termination of an employment contract. Dismissals based on organisational changes will only be justified if those changes give rise to objective circumstances that require downsizing.
Adoption of New Regulations
Recently, several new labour regulations were adopted. On 1 January 2019 a Law on Labour Safety entered into force, which introduced various obligations and restrictions concerning employment in spheres that are considered to be of increased danger, harmful and hazardous.
There are no national security reviews of M&A transactions, except for supervision under the Georgian law on prevention of money laundering and financing of terrorism. However, in certain cases, if criminal proceedings related to the acquirer are pending, or regulatory bodies require screening of acquirers under the law, security reviews may be conducted in co-operation with the relevant authorities.
The Georgian Law on Entrepreneurs does not explicitly provide a basis for expulsion of shareholders from companies, except for in cases of failure to make a contribution to the capital of the company. However, the current court practice, which was reiterated and further elaborated in the decision of the Supreme Court of Georgia No as-1203-2018, dated 25 April 2019, has established that, under court scrutiny, shareholders may be expelled from a company, provided that the grounds for expulsion are sufficient and that they receive fair compensation in exchange for their shares. Furthermore, this decision determined the preconditions for exercising the right to expel a shareholder.
No significant recent amendments have been made to the laws relating to takeovers. However, under the Association Agreement concluded with the EU in 2014, which entered into force in 2016, Georgia undertook an obligation to align its legislation with certain EU Directives (eg, Directive 2004/25/EC on takeover bids and Directive 2007/36/EC on shareholder rights) within five years from the date the agreement entered into force. Regarding obligations deriving from the Association Agreement, relevant stakeholders are developing the package of amendments to the Georgian Law on Entrepreneurs. It is expected to include several new provisions based on EU Directives provided in Annex XXVIII of the Association Agreement.
In Georgia, it is not customary for a bidder to build a stake in a target business prior to launching an offer. Moreover, there are few transactions on the Georgian stock exchange and stakebuilding strategies are not yet well established.
However, in case of off-market transactions (when the stock exchange is not involved), it is common for the shareholders to purchase a minority stake first and then gradually reach the controlling stake in the company (see also 5.4 Standstills or Exclusivity).
Georgian law provides disclosure thresholds and filing obligations for acquiring listed and unlisted shares in a joint stock company. In addition, specific disclosure thresholds and filing obligations apply to regulated companies, such as commercial banks and electronic communication companies, as well as to transactions subject to non-competition (eg, concentration) regulations.
Generally, a person intending to acquire more than 50% of the voting rights in a joint stock company and/or more than 10% of the voting rights of listed securities, may do so by a tender offer in accordance with the procedure established by the NBG and subject to the exceptions prescribed by the law.
Where commercial banks are concerned, if the shareholding of a person in the capital of a commercial bank directly or indirectly exceeds 10%, 25% or 50%, the conformity declaration and the information about the beneficial owner of the shares must be presented to the NBG before their acquisition.
In the electronic communications sector, disclosure thresholds and filing obligations prescribed by the Georgian Law on Electronic Communications are applicable in the following cases:
Disclosure thresholds and filing obligations prescribed by the Georgian Law on Electronic Communications are not applicable to the acquisition of the ownership interest or shares of an authorised person, if the acquirer or the interdependent (affiliated) persons jointly acquire up to 5% of the ownership interest or shares of an authorised person.
In case of insurance companies, the company must notify the LEPL Insurance State Supervision Service of Georgia regarding the merger and provide justification for and conditions of the transaction.
If the transaction is subject to non-competition regulations (concentration), when the value of individual or aggregate assets or the annual turnover (according to the data for the previous financial year) of an undertaking/undertakings (with the exception of undertakings in a regulated sector of the economy) participating in the concentration in Georgia exceeds the limit established by the Procedure for the Submission and Consideration of Notifications of Concentration, certain obligations arise.
The following transactions are considered to be concentrations subject to disclosure thresholds, filing obligations and the prior approval of the Competition Agency:
The statutory reporting thresholds are mandatory. Thus, a company may not introduce different rules (eg, increase or decrease reporting thresholds) through the articles of incorporation or by-laws of the company.
In December 2019, the Parliament of Georgia adopted a new Law on Financial Lien, Mutual Payoffs and Derivatives, which introduced a regulatory framework for writing off payments, financial lien and derivatives.
Under the procedures established by the National Bank of Georgia (Decree No 21/01 and Decree No78/04), a reporting company (issuer of publicly held securities) is subject to certain reporting obligations. Furthermore, a new Law on Financial Lien, Mutual Payoffs and Derivatives (Article 6) provides that the National Bank of Georgia may retrieve information (regardless of it being confidential) from the parties to derivatives.
Shareholders are not obliged to disclose the purpose of an acquisition and their intention regarding the control of the company, except when the acquisition is subject to declaration to the competition authority under the Georgian Law on Competition and/or is subject to approval by the relevant regulatory authorities.
Requirements for the disclosure and its timing vary based on the type of the company (private or public), the market (communication, banking and finance, etc) and the nature of the deal. Under the law, in the case of regulated M&A transactions (when approvals from regulatory bodies must be acquired) deals must be disclosed prior to the signing of the definitive agreements. It is not necessary to inform regulatory bodies on the commencement of negotiations, but in practice this does happen.
In practice, target companies usually provide the drafts of the definitive agreements for review. The regulatory bodies may then request that various provisions of the draft are amended and, after they approve the draft, parties execute the agreement.
Under their duty of care, a director is obliged to make an informed decision and provide sufficient information to shareholders for further decision making. The scope of due diligence varies on a case-by-case basis and depends on various factors, eg, the industry sector, the turnover of the company, the number of company employees, etc.
However, attention is always paid to restrictions or obligations that are registered at several public registries in Georgia, eg:
In addition, past or pending disputes of the target company are usually checked. It is common to request information from courts and administrative bodies regarding disputes that may affect the status of the company. However, in certain instances, information regarding pending disputes, and even court documents, is considered private and may not be retrieved unless approval from the target company has been granted.
During negotiations, standstill and exclusivity agreements are not commonly executed in Georgia. However, in certain cases, following the initial acquisition of the minority shares of a company, companies register certain obligations/restrictions at the Register of Entrepreneurs and Non-entrepreneur (non-commercial) Legal Entities, which restricts shareholders of the target company from selling shares until the final decision on acquiring the outstanding shares is reached.
It is neither restricted nor common for tender offer terms and conditions to be documented in a definitive agreement.
In general, the process of registration of the acquisition/selling of shares in a limited liability company and/or a joint stock company in Georgia can be completed within one business day, provided that all necessary documents are duly submitted to the registration authority – the National Agency of Public Registry and/or the independent register of shares, respectively.
In the case of commercial banks, the NBG approves or rejects the transaction within one month, upon submission of the declaration. The NBG may extend this term up to three months where it considers that the information regarding the beneficial owner is not sufficient or precise and requires additional examination.
Within the electronic communications industry, the Georgian National Communications Commission must verify the data on the merger or on the acquisition of an ownership interest, shares or operating assets indicated in the notification of an authorised person and the data presented by the applicant. If a notification of an authorised person does not contain the documents or information required by law, the Commission shall specify additional time for submitting documents or information, which must not exceed 15 working days. When authorised persons are merged or when an ownership interest, shares or operating assets are being acquired, the Commission may, for the purpose of assessing a potential impact on competition, request additional information on the activities carried out in the relevant market, future plans, the interest-holders or shareholders, registration numbers, etc. The Commission may, within 15 days of receipt of a complete notification of a merger or acquisition, issue consent to the merger or acquisition, or decide to commence administrative proceedings to investigate and determine the merger or acquisition’s potential impact on competition in the relevant market.
The duration of administrative proceedings must not exceed three months. A notification and accompanying documentation must remain confidential until the administrative investigative proceedings are commenced.
In cases of market concentration, the Competition Agency must review the application within one month and notify the applicant regarding the decision. Based on the complexity of the transaction, this term may be extended by a maximum of two weeks.
Within the insurance industry, the LEPL Insurance State Supervision Service of Georgia must give a substantiated refusal within ten days of receiving the notification, otherwise consent is deemed to be given.
Georgian law provides a mandatory offer threshold in case of the acquisition of more than 50% of the voting rights of the shares in a joint stock company.
In Georgia, payment in cash is commonly used as consideration.
Where a mandatory offer has been made, the offer conditions and the information provided by the offeror shall be the same for all owners of the securities. The price must be determined by an audit or a broker company and must not be lower than the price paid by a shareholder who made a bid for the shares of the company within the previous six months.
In the case of electronic communications companies, the Georgian National Communications Commission may, on the basis of a substantiated decision, request that the conditions of a merger or acquisition be corrected, or it may prohibit the merger or the acquisition of the ownership interest, shares, or operating assets of the authorised person if it considers that the merger or acquisition would significantly distort competition in the relevant segment of the service market.
Under Georgian law, if an offeror obtains consent to sell more securities than indicated in the tender offer, the offeror shall purchase securities based on proportionate allocation. This requirement shall also apply to consents received after the first publication of a notice of an increase in the sum offered to security holders. If a person changes the terms of a tender offer prior to the expiration of the offer by increasing the sum offered to security holders, the offeror shall pay the increased sum to each security holder who has accepted the terms of the offer, irrespective of whether this change was made prior to or after its publication.
Georgian law does not require a business combination to be conditional on the bidder obtaining financing.
The following deal security measures are widespread in Georgia: pledge, mortgage, surety, bank guarantee, contractual penalties, and option rights. The bidder may also seek other contractual security measures not contradicting Georgian law.
If the bidder does not acquire 100% of the shares, the shareholders can agree on additional governance rights under the shareholder agreement and/or charter of the company to the extent permitted by law.
Pursuant to Georgian law, a shareholder is allowed to vote by proxy.
Under Georgian law, the squeeze-out mechanism may be used to buy out shareholders that have not tendered, following a successful tender offer. After acquiring more than 95% of voting shares of a joint-stock company, the majority shareholder may initiate squeeze-out proceedings. The fair value of shares shall be determined under court scrutiny in accordance with the Civil Procedural Code of Georgia.
It is not common to obtain irrevocable commitments on the part of the principal shareholders of a target company to tender or to vote.
Based on Georgian law, a person intending to acquire a portion of the securities of a reporting company that may lead to the control of that company (ie, more than 10% of the voting rights of listed securities or more than half of the voting shares of a joint stock company), may do so by a tender offer in accordance with the procedure established by the NBG. The bidder shall apply to the NBG before the first publication of the copies of the offer or of the request or their transmission to securities holders. The bidder shall also publish information on the offer in a newspaper.
According to the procedure established by the NBG (Decree No 21/01), the main disclosure document is a notification regarding a tender bid. The notification shall include:
In the case of commercial banks, a person (the declarant), who intends to acquire a share in a commercial bank so that his or her own or his or her beneficial owner’s/owners’ participation exceeds 10%, 25% or 50% in the capital of the target bank, shall be obliged to submit a conformity declaration to the NBG (the Declaration). The following must be indicated in the Declaration:
Electronic communications companies must deliver, to the Georgian National Communications Commission, a notice of intent to merge or to acquire an ownership interest or shares or operating assets prior to the merger or acquisition. The obligation to notify will rest on the authorised person participating in the merger, or whose ownership interest or shares or operating assets are acquired. The notification to the Commission shall indicate the form of the acquisition or merger. The notification shall also include the following information regarding each authorised or related party to a merger or acquisition:
Georgian law does not provide specific disclosure rules for the issue of shares in a business combination. The general rules established by the Georgian Law on Securities Markets, along with the rules prescribed by the NBG, apply to the issuance of public securities in a business combination and to publication of a prospectus approved by the NBG.
Bidders do not need to produce financial statements (pro-forma or otherwise) in the disclosure documents.
Transaction documents do not have to be disclosed in full.
In Georgia, directors have two principal duties: a duty of care and a duty of loyalty (Supreme Court Decision, Case No as-687-658-2016). The director is also obliged to conduct the company's business in good faith, in particular, a director must take care of company matters as an ordinary person of sound mind in a similar capacity and under similar circumstances would, acting in the faith that their actions are in the best interests of the company.
The law further adopts the scope of the duty of loyalty and specifies that, unless approval from the company shareholders is acquired, a director may not engage in the same activity as the company is engaged in or participate in another similar company as a personally liable shareholder or director. Those duties apply not only in day-to-day situations, but also in business combinations. However, directors owe those duties to company shareholders and not to other stakeholders involved in the business combinations.
Setting up ad hoc committees is not common in Georgia. Usually, where there is a conflict of interest, or other circumstances preventing the directors from decision-making, directors recuse themselves and shareholders or members of the supervisory board decide on the issue.
There is no recent case law concerning the scope and use of the business judgement rule in takeover situations. However, generally Georgian courts rely on the rule. The Supreme Court has recently, in Case No as-687-658-2016, reiterated that the "business judgement rule" applies in Georgian law. The Court noted that the duty of care requires the director to make certain decisions that aim to increase the profits of the company. However, the court noted that “such decisions may be risky as well as wrong in certain cases. However, under the business judgement rule, if the company director acts in good faith and aims to safeguard the best interests of the company, while the director is informed in advance in a manner that is acceptable, then the director is shielded from the personal liability.”
Therefore, as the business judgement rule is generally accepted by the courts in Georgia, the actions of directors in takeover situations may also be shielded under this rule in certain circumstances.
Under the duty of care, the director is obliged to make an informed decision. Therefore, in certain cases, it is common for directors to request an audit or due diligence of the target company or to request further information regarding the deal.
The conflict of interest of governing bodies of companies has been subject to judicial scrutiny in Georgia. For instance, in one case, a director had concluded a contract on behalf of the company with himself (Supreme Court Decision, Case No as 281-270-2012). Furthermore, the Supreme Court of Georgia, faced with a violation of the duty of care of a director, often clarifies or reaffirms the existing practice concerning a director’s duty of loyalty.
Hostile tender offers are not common in Georgia. Georgian law does not specifically regulate such tenders.
Georgian law does not provide any specific provisions or restrictions with respect to the defensive measures that can be used where a hostile tender offer arises.
Common defensive measures are not established in Georgia, due to a lack of practice relating to hostile tender offers and trading of stocks in general.
According to the general rules prescribed by the Georgian Law on Entrepreneurs, the directors must comply with fiduciary duties (see 8.1 Principal Directors' Duties). Georgian law does not provide any specific duties of directors with respect to the defensive measures that can be used in the case of hostile tender offers.
Georgian law does not allow the directors to "just say no" and take action that prevents a business combination.
Litigation concerning M&A transactions (compliance with terms and conditions, performance, representations and warranties, etc) is not common in Georgia. However, there are a high number of court cases where interested parties argue on the nullity or termination of transfer of shares based on various grounds.
Apart from litigation, arbitration is also becoming popular in Georgia. In 2015, major legislative amendments were adopted into the Georgian Law on Arbitration that almost fully incorporated the UNCITRAL Model Law on International Commercial Arbitration. Georgian courts have also begun to adopt an arbitration-friendly approach by enforcing arbitration agreements. The Supreme Court of Georgia, for example, recently enforced an arbitration agreement that indicated that parties "may" refer the dispute to arbitration, concluding that in those circumstances, "may" meant "must" (Case No as-148-140-2017.
Lawsuits are usually brought to court post closure in Georgia. The number of pre-closure disputes is relatively limited. However, in certain cases, minority shareholders have tried, in the courts, to hinder the closure of M&A transactions.
Shareholder derivative suits are envisaged by Georgian legislation and are often filed by shareholders. Moreover, in the past, shareholders challenged not only corporate decisions (meetings of shareholders, request of information, etc) but legislative provisions too. For example, in 2005, a right to squeeze out was finally adopted in Georgian legislation. However, minority shareholders challenged the provisions at the Constitutional Court of Georgia, which eventually in 2007 found the regulation unconstitutional based on the absence of court scrutiny. Therefore, the Georgian Parliament adopted amendments into law that introduced court scrutiny into squeeze-out proceedings.
Whether activist shareholders support or denounce M&A transactions or spin-offs varies depending on the circumstances applying in each case. See 11.3 Interference with Completion.
Whether shareholders commence a dispute or interfere with the announced transaction is completely dependent on the particular shareholders in question and their interests. Although the rights of minority shareholders are relatively limited under law, in certain circumstances even minority shareholders, irrespective of the chances of their claim, may hinder the execution of the transaction, either by challenging the shareholder resolutions/decisions or by requesting information/audit reports from the company.
As an example, under Georgian law, if a shareholder owns more than 75% of shares, then convening a shareholders’ meeting is not necessary and the majority shareholder may make a decision that can be communicated to other shareholders. In one case (Case No as-115-108-2017) the majority shareholder, who owned more than 98% of the shares, made a decision without convening a shareholders’ meeting. The minority shareholder further challenged the decision and it took more than two years to resolve the issue. Moreover, in certain cases, shareholders may request that the execution of transaction or transfer of shares be frozen before resolution of the case by way of an interim injunction.