Company Formation under the New Law of Georgia on Entrepreneurs
The new Law of Georgia on Entrepreneurs (the “Law”) became effective on 1 January 2022 and replaced its predecessor the Georgian Law on Entrepreneurs which was enacted in 1994.
The Law aims to create a uniform and transparent legal framework for corporations, their shareholders, directors, creditors, and other stakeholders. Notably, the Law derives from the European Union’s respective directives.
Among other novelties, the Law lays down new regulations from companies’ operational perspective. For instance, an electronic portal permitting enterprises to publish mandatory information, such as details on reorganization, has been developed. Notably, new regulations also apply to company names. A new legal entity is no longer permitted to use a firm/business name that is already in use by at least one other company. As for the management of the enterprises, the Law clearly establishes that contracts between a director and the company are not employment agreements. This highly likely implies that the directors are not protected by any of the social guarantees envisaged under the Georgian Labor Code and should negotiate individual contractual terms with the company and its shareholders.
For the purposes of the present article, set out below are the main novel regulations under the Law related to a limited liability company (“LLC”) and a joint-stock company (“JSC”) in terms of formation of a company and its capital requirements. Notably, the Law provides legal entities incorporated under the laws of Georgia with a 2-year grace period to amend their corporate structure as well as the documents to fully comply with the novel legal requirements established under the Law.
We note at the outset that the Law upheld the rules for capital contribution envisaged by its previous counterpart – the capital of the company is formed by contributions of the shareholders.
Under the Law a contribution may be monetary, or non-monetary (in kind) and the latter includes the transfer of tangible and intangible assets. A shareholder of an LLC may also perform certain works or provide certain services to a company to discharge this obligation. However, the new Law has explicitly prohibited performance of works or provision of services as an appropriate form of contribution into a JSC.
The Law further stipulates that a monetary contribution is completed upon the transfer of amounts to the bank account of a company, while a non-monetary contribution is deemed fulfilled upon the transfer of ownership title over the respective asset.
The aim of the Law is to simplify the procedure to attract new capital in an LLC. Noting that the capital requirements of an LLC are more flexible than the respective requirements regulating a JSC. Among other aspects, such flexibility is reflected in novel regulation permitting an LLC to issue different classes of shares. It is anticipated that the changes envisaged under the Law will support an LLC to the maximum extent possible to adjust its subscribed shares to the investor’s requirements, including to issue shares with nominal value or no-par value shares.
At its choice, an LLC may form a subscribed capital in any amount. In essence, subscribed capital is the same as statutory capital, legal capital or charter capital of an entity. Subscribed capital of an LLC, if formed, shall not be less than total sum of the nominal value of the subscribed shares.
An LLC may have both – shares with nominal value and no-par value shares. The Law also determines the requirements towards the amount of subscribed capital when an LLC has shares only with nominal value or no-par value shares, or both.
The Law also enshrines the requirement for LLCs to maintain their capital in GEL – the Georgian national currency.
The Law envisages important changes applicable to JSCs, including, but not limited to their capital contribution. Such changes aim to respond to the market economy and to support the attraction of investments as well as the development of the capital market.
According to the new Law, a JSC is required to have a minimum subscribed capital of GEL 100,000 (one hundred thousand Georgian Lari) (roughly EUR 25,000), 25% of which shall be contributed by the respective shareholders immediately upon incorporation.
JSCs are free to determine their subscribed capital in any currency.
As mentioned above, in accordance with the international best practices, the Law excluded the possibility to make contributions through performance of works or provision of services to a JSC. Any non-monetary contribution at the stage of incorporation of a JSC or during increase of its capital shall be evaluated by an independent auditor. The report issued upon such evaluation shall be published on the official electronic portal of the Georgian Public Registry.
The Law envisages certain measures to ensure that the shareholders make timely contributions in the capital of LLCs and JSCs.
If a shareholder of an LLC and/or a JSC fails to make the capital contribution within the period determined by the parties, the shareholder is charged with a double amount of the annual interest rate established by the National Bank of Georgia of the value of the outstanding amount of the contribution.
The management body of the company may initiate the process of share forfeiture if a shareholder of an LLC or a JSC fails to make capital contribution in timely manner. In this case, the respective shareholder shall be granted with at least 30 (thirty) days to make the capital contribution. If the shareholder fails to do so, such shareholder loses the shares as well as any partial capital contributions made in the company.
Having an effective corporate law framework is one of the main elements for further development of the Georgian market economy. The Law endeavors to approximate its regulations to the European standards and international best practices. In addition, the rapid growth of market economy and development of capital market is also anticipated due to enactment of the Law.