The success of a limited liability company strongly depends on cooperation and mutual trust among its shareholders. However, a shareholder may sometimes fail to fulfil fundamental obligations or engage in conduct that seriously harms the legal entity. Such conduct can endanger the company’s proper functioning and the interests of the other shareholders and creditors. In these exceptional circumstances, protecting the company’s interests may require the exclusion of a shareholder whose conduct has caused such harm.
The legal framework governing the exclusion of shareholders in Georgia is established by the Law of Georgia on Entrepreneurs (the “Law on Entrepreneurs“). This article provides an overview of the legal grounds for shareholder expulsion and the procedural requirements governing this process under Georgian law.
Georgian law provides two distinct mechanisms for expelling a shareholder from a limited liability company. The first applies where a shareholder’s conduct seriously harms the company and permits judicial expulsion on significant grounds. The second is based on a shareholder’s failure to make the agreed capital contribution and results in forfeiture of the shareholder’s shares. Although both procedures ultimately result in the loss of shareholder status, they differ considerably in their legal basis, procedural requirements, underlying objectives and consequential outcomes.
Expulsion on Significant Grounds
A shareholder may be expelled where significant grounds exist. Significant grounds arise where the shareholder’s continued participation can no longer reasonably be tolerated because their conduct seriously prejudices the company’s interests or significantly impedes the achievement of its objectives and the shareholder was warned of possible expulsion, but did not comply with that warning. These grounds are independent from each other, and the existence of any one of them may be sufficient to justify exclusion. Examples of significant grounds include a serious breach of a shareholder’s obligations, abuse of trust, criminal conduct affecting the company, persistent obstruction of the company’s activities, or other conduct that makes continued cooperation impossible. Whether significant grounds exist depends on the specific circumstances of each case.
Expulsion on significant grounds requires judicial involvement and is subject to several procedural safeguards. Once significant grounds exist under any of the bases described above, the remaining shareholders may adopt a resolution authorising the company to initiate judicial proceedings. The shareholder whose expulsion is initiated is excluded from voting on this resolution.
After adoption of the resolution, the company must file a lawsuit with the competent court within 30 days. Otherwise, the company will no longer be able to file a lawsuit based on this resolution and must adopt a new one before proceeding. The court will then determine whether significant grounds for expulsion exist. If the court grants the claim, the shareholder is expelled once the judgment becomes legally effective.
Once the judgment becomes legally effective, the shareholder loses ownership of the shares and all corporate rights attached to them. However, the expelled shareholder is entitled to receive the fair value of their shares.
Forfeiture of the Shares
Most companies require capital to conduct their business, and shareholders typically undertake an obligation to make capital contributions. If a shareholder fails to make the agreed contribution, the company’s financial position is weakened. Moreover, this places an unfair financial burden on the remaining shareholders. For this reason, Georgian law allows the forfeiture of a defaulting shareholder’s shares.
However, a shareholder may not be expelled merely for refusing to make an additional contribution. A shareholder who did not approve an amendment introducing additional contribution obligations has the right to withdraw from the company. Therefore, exclusion or forfeiture on this ground is possible only where the shareholder has not exercised the right to withdraw from the company and subsequently fails to make additional contributions.
The procedure begins when the management body initiates forfeiture proceedings against the shareholder’s shares. First, the shareholder must be notified in writing that the forfeiture procedure has commenced and must be granted an additional period of at least 30 days to make the contribution. This notice requirement is based on the principle of good faith and ensures that forfeiture remains a measure of last resort rather than an automatic consequence of a temporary default. If the shareholder still fails to make the required contribution within this additional period, the company may issue a final written notice declaring forfeiture of the shares.
However, it should be noted that, notwithstanding the existing statutory framework, certain legal theories maintain that judicial intervention remains necessary even in cases where a shareholder fails to fulfil their contribution obligations. This issue remains ambiguous within Georgian judicial practice, making it difficult to anticipate how it will ultimately be interpreted and resolved by the courts.
Upon forfeiture, the shareholder loses ownership of the shares and all corporate rights attached to them. In the case of partially made contributions, the company is not obliged to repay the shareholder, and the company’s claims relating to the unpaid contribution remain unaffected. Additionally, unless the shareholders have agreed otherwise, annual default interest accrues on the value of the overdue contribution at a rate equal to double the refinancing rate set by the National Bank of Georgia for the relevant period.