Through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ana Kochiashvili, Tamar Jikia, associate Mariam Kalandadze, junior associates Ana Jikia, Lasha Machavariani and Nino Sakvarelidze, MG Law Office is partnering with GEORGIA TODAY to provide updated information regarding significant legal changes and developments in Georgia. In particular, we highlight significant issues which may impact businesses operating in Georgia.
On 9 February 2021, a new draft of the Law of Georgia on Entrepreneurs (the Draft Law) was initiated in the Parliament of Georgia. The Draft Law is intended to replace the Law of Georgia on Entrepreneurs which was enacted in 1994 (the Law on Entrepreneurs). Almost twice as extensive as the current Law on Entrepreneurs, the Draft Law brought further clarifications to questions like the governance and set-up of the company, its incorporation, operation, and reorganization.
In particular, the Draft Law aims to create a uniform and transparent legal framework for corporations, their shareholders, directors, creditors and other stakeholders. The new rules will be adapted to requirements of modern corporate relations. They will further improve the business climate and continue promoting entrepreneurial freedom. In addition, the Draft Law will bring the Georgian legislation closer to the European standards which will in turn facilitate closer business relations with Europe and create comfortable and familiar legal framework for foreign investors.
Apart from harmonizing the Georgian legislation with that of EU, the Draft Law seeks to achieve multiple objectives. With the view of strengthening shareholder rights and by offering detailed default rules, the Draft Law aims to modernize the Georgian corporate governance. These default rules can be revised and further refined by agreement between the shareholders. However, these rules will apply if the agreement cannot be reached on specific regulations of various issues in the company’s constitutional documents.
Considering that the Draft Law has recently been initiated and presented to the public by the Parliament of Georgia, it has not yet been voted in. However, we expect that the Draft Law will enter into force in 2021.
As the Draft Law reforms the Georgian corporate law in many areas and with the view of keeping the businesses informed and up-to-date about the new rules and amendments in corporate legal framework, MG Law has begun publishing series of articles reviewing key aspects of the Draft Law.
In this segment, we will discuss issues involving the formation and incorporation of companies and foreign branches in Georgia.
The series of our articles will additionally cover new rules for capital formation, including minimum capital requirements, duties of corporate managers and their liability, as well as shareholder rights and obligations, with a specific focus on derivative suits and piercing of corporate veil.
Incorporation and Registration of a Company
The Draft Law reflects most of the existing rules for incorporation of legal entities and offers several new requirements to be observed by founding shareholders. The National Agency of Public Registry of Ministry of Justice of Georgia (the Registry) will continue to manage and oversee the company registrations.
Documents needed for the company incorporation
Registration of a company will generally require submission of a written incorporation agreement duly signed by all founding shareholders.
The incorporation agreement shall consist of the following:
a. Company’s charter (can be standardized as well as personalized);
b. Company name;
c. Legal address of the company;
d. Identification details of founding shareholders:
• In case of natural persons – personal identification number, name and last name, place of residence;
• In case of legal persons – copy of the certificate of incorporation noting e.g., company name, legal address and the identification number.
e. Identification details of a company director and of an authorized person as well as the details and term of office of supervisory board members if applicable (similar to the current law, the Draft Law does not envisage citizenship requirements, any person is permitted to act as a director of a Georgian company).
f. Power of Attorney (POA) – in case the company is incorporated by an authorized representative of an interested party.
The Draft Law aims to maintain ease of starting up and doing business in Georgia. Foreign shareholders or directors can manage the registration procedures remotely by appointing an authorized representative. The authorized representative will act through a power of attorney and will be able to incorporate a legal entity in Georgia, approve its charter, select the company name and legal address, appoint directors. In terms of formal requirements existing notarization/legalization rules will still apply to documents issued and certified outside of Georgia.
Notably, the Draft Law does not impose any limitations on directors or company shareholders with respect to their citizenship or place of incorporation. Any natural or legal person can be a shareholder or a director in a Georgian company. A procedural prerequisite is to submit a copy of their passport or incorporation certificate to the Registry.
The Draft Law envisages additional requirements for specific legal entities:
• The incorporation agreement of a limited partnership needs to specify members that are limited partners;
• The incorporation agreement of a limited liability company needs to specify amount of subscribed shares and information on the number of shares that each partner holds (in the form of percentage of total shares);
• In joint stock companies (JSC) the incorporation agreement has to indicate both subscribed capital and authorized capital. In addition, a JSC may issue shares with nominal value and shall indicate such nominal value in the incorporation agreement. As incorporation of the JSC may entail certain expenditures, the Draft Law requires for all costs associated with the incorporation (e.g., license, permits, remuneration of individuals in connection with the incorporation process) to be recorded;
• In the incorporation agreement of a cooperative, nominal value of the units has to be specified.
Requirements Relating to the Charter
The Ministry of Justice of Georgia (the Ministry) will prepare several standardized charter forms designed to be adopted and used by various business entities. The standardized charters will be periodically updated by the Ministry in light of ongoing statutory amendments. Provision of standardized charters (e.g., Model Articles adopted in the United Kingdom) is a common occurrence in different jurisdictions.
Pursuant to the Draft Law, the company charter will regulate issues envisaged by the shareholders. In addition, it has to specify (i) legal form of a business entity; and (ii) economic activity of a company (both general and specific activities can be indicated).
Choosing the Company Name
Even though the Law on Entrepreneurs envisages provisions relating to selection of the name of the company, the Draft Law provides more specific regulations spread over at least ten different provisions. Primary considerations that shareholders have to keep in mind are intellectual property rights, use of the company business forms in its names, caution towards restricted phrases (entailing racism, sexism, enticing violence etc.).
Mandating Rules for Official correspondence
In terms of additional novelties, limited partnerships, joint stock companies and limited liability companies may be required to make changes to the design of their official documents or official websites. Namely, companies will have to include the company name, its legal address and identification number in every business correspondence (including electronic ones). Additionally, if the company is undergoing liquidation, rehabilitation or any other similar procedure, it will be required to make a note of it both on its written documents and on its website.
Incorporating the Branch of the Company
The Draft Law specifies incorporation procedure of the company branch and makes a distinction between registering a branch of a Georgian company (which does not require a formal registration process) and an incorporation of a branch of a foreign based company that envisages a similar registration process to that of the company registration. In addition, the registration of a branch of a foreign company requires the details of the parent company to be duly indicated (its applicable jurisdiction, relevant registry’s details, financial statements of the parent company, economic activity etc.). All relevant documents will have to be notarized, legalized or apostilled as required.
Pre-entrepreneurial Entity and the Question of Liability
The company is deemed to be established upon its registration at the Registry, however, both the Law on Entrepreneurs and the Draft Law acknowledge an existence of a pre-entrepreneurial entity prior to completion of official registration process. Even though the notion of a pre-entrepreneurial entity does not currently bear much practical utilization due to the pace and simplicity of the registration process, notable changes have been made in the Draft Law in this regard. The Law on Entrepreneurs merely specifies direct and an unlimited personal liability for any actions of those directly involved in the activities that have occurred on behalf of the pre-entrepreneurial entity and its director. In comparison, the Draft Law allows those acting on behalf of the company and creditors to agree on an alternative distribution of the liability. Further, it explicitly allows a transfer of the personal liability to the company upon its registration and company’s approval of the transactions that have occurred in its name before the official registration.
