Georgia’s Law on Entrepreneurs: AmCham Georgia’s advocacy for better laws for businesses

The Law on Entrepreneurs has been revised several times, most recently in 2021. Through the Commercial Law and Tax Committee, AmCham Georgia is working with its members to propose improvements to the law that will strengthen the business climate and streamline processes for companies.

The evolution of the Law on Entrepreneurs

The Law on Entrepreneurs serves as Georgia’s fundamental legal framework that lays out the requirements for company registration and general corporate governance requirements. The first version of the law was introduced in 1994, significantly revised in 2008 to streamline various processes, and ultimately replaced by the 2021 version, which aims to align closely with EU standards.

The 2008 changes to the law sought to reduce the number of regulations. While the liberal approach simplified a lot of corporate matters, it also attracted a lot of criticism as the lack of regulations made it difficult for the court to deal with corporate matters, including disputes between shareholders in absence of shareholders agreement for example.

Professor Giorgi Jugeli, Legal Expert at the Investors Council and co-author of the Law on Entrepreneurs, explains, “Over time, the initially liberal approach of the earliest version of the law revealed significant gaps that gave rise to numerous court disputes. These disputes often became protracted and challenging to resolve, as the absence of a formal case law system and the lack of clear, detailed provisions within the legislation made it difficult to establish consistent legal practices.”

The 2021 amendments to the law introduced comprehensive regulations on corporate processes, including corporate registration, general meetings, the requirements of standard incorporation documents, management body duties and responsibilities, service agreements for managers, fiduciary obligations of management, rights of minority shareholders, subscribed capital and specific provisions.

“One of the key objectives of the new law is to promote the establishment of a uniform and consistent court practice in resolving corporate disputes,” explains Professor Jugeli. “By fostering a more standardized approach, the new law seeks to enhance the fairness, efficiency, and reliability of judicial outcomes, thereby providing greater clarity and confidence to businesses and stakeholders. This emphasis on uniformity is expected to contribute to a more stable legal environment, reducing uncertainties and supporting the broader development of corporate governance and dispute resolution practices.”

Despite these advancements, practical challenges remain. Key issues include the misapplication of supervisory board provisions to limited liability companies (LLC), unclear rules for brand name registration, and ambiguities in the fiduciary duties of joint stock company (JSC) supervisory boards. Additionally, privacy concerns arise from mandatory publication of draft decisions, while restrictive interpretations hinder shareholder efficiency in decision-making. Modernization is also needed, such as allowing digital general meetings and proxy participation to simplify processes.

These challenges highlight the need for further clarification and adaptation to ensure the law is practical and user-friendly. Reforms are critical to fostering a predictable and transparent corporate environment, boosting investor confidence, and strengthening the economy.

As the law undergoes a “probation period,” consistent application by courts and practitioners will be essential to refine its provisions and establish a robust, modern legal framework for businesses in Georgia.

AmCham Georgia’s work to improve the law

AmCham has created the Commercial Law and Tax (CLT) Committee to bring together many of the most senior lawyers in the country. Committee members regularly discuss challenges, clarify provisions, and propose possible amendments to the Law on Entrepreneurs.

“AmCham and its CLT Committee have been actively involved since the drafting phase of the law and later during the post-adoption review, offering firsthand insights on how specific provisions could be optimized to ensure the law remains effective and aligned with current practices,” Professor Jugeli says.

The CLT Committee has identified several challenges related to issues of misapplying rules across JSC and LLCs, ambiguities over the application of rules, and inflexibility of rules for modern business practices

Challenge #1: JSC Rules Applied to LLCs

The current version of the law applies rules that make sense for JSCs, which are typically more rigid, to LLCs, which are generally more flexible. JSCs usually require stricter corporate governance rules because their shares might be publicly traded in the future. This means they must meet higher standards of compliance and accountability compared to other types of legal entities.

However, the law sometimes puts the same requirements on both groups. For instance, there have been cases where the article in the law extends supervisory board provisions from JSCs to LLCs. Registration authorities have apparently interpreted the law as requiring LLCs to follow the same supervisory board regulations as JSCs.

As Irakli Pipia, Head of Office from SCHNEIDER Group, argues, “Due to the fundamentally different nature of these two legal entities, applying the same rules to both is impractical. This issue could be effectively resolved with a minor amendment explicitly clarifying that LLCs may regulate supervisory board matters differently through their articles of association, in order to avoid ambiguity.”

Another example is the requirement that if a company has more than one director, it must establish a management board with a chairperson. This poses challenges, particularly for LLCs, which are valued for their flexibility. Many companies may prefer to appoint multiple directors with equal powers rather than adhere to formal board establishment requirements.

“This issue becomes especially relevant when majority and minority shareholders each have the right to nominate directors. In such cases, the rules governing a management board may not align with the company’s preferred governance structure,” Pipia explains.

“Companies should have the flexibility to appoint any number of directors with specific powers and responsibilities, without being compelled to establish a management board if they do not wish to incorporate related rules and procedures into their constitutive documents.”

In addition, the law extends fiduciary duty provisions to members of a JSC’s supervisory board, including duty of care in special circumstances—the obligation to file an application for insolvency proceedings. Supervisory board members, unlike directors, do not automatically have the authority to represent the company. Consequently, obligations such as filing for insolvency proceedings are unsuitable for them. “Therefore, there may be a ‘technical mistake’ in terms of listing provisions applicable to the supervisory board members. Such mistake, if not corrected, may cause serious legal risks about imposing the liability on a supervisory board member. Revising these provisions to clarify their applicability could resolve the issue,” says Sophie Natroshvili, Legal Director at BGI.

In contrast, the well-known doctrine “business judgement rule” does not apply to the supervisory board member according to the law. This introduces ambiguity since such a rule should naturally also apply to the members of the supervisory board in order for them to benefit from this rule as long as they act in the best interest of the company.

“In practice, the extension of “business judgment rule” to supervisory board members may be crucial to determine their personal liability and assess whether they were in compliance or in breach of statutory provisions while adopting certain decisions within their capacity as supervisory board members,” Natroshvili explains.

Challenge #2: Challenges of Definition and Clarity

The CLT committee has identified many areas where new regulations have been developed with definitions of terms that are particularly prone to misinterpretation. For example, in an attempt to create greater disclosure and transparency practices, the law has often created procedures which, if interpreted a certain way, can create unnecessary and impractical burdens on companies.

Brand name registration can also create problems for the same reason. Authorities can reject a name if it deems it resembles an existing one. However, currently there is not a sufficiently clear definition of “similarity,” and this can cause unnecessary rejections and delays.

Another challenge relates to disclosures. The new law requires publishing the draft of shareholders’ decisions to promote transparency. However, it does not specify what information must be disclosed, leading to concerns about whether sensitive documents, like financial statements or agreements with third parties, must also be published. Balancing transparency with confidentiality is essential to safeguard investor privacy while maintaining compliance.

Challenge #3: Inflexible Demands on Meetings of Partners/Shareholders

A third problem is that the law sometimes demands shareholders to have physical meetings, where common sense might suggest alternatives would be better. For example, the law lacks provisions explicitly allowing JSC shareholders to adopt decisions without convening a general meeting, even with unanimous consent. This omission has led authorities to reject such decisions, due to non-compliance with the existing law. Therefore, explicitly permitting the adoption of decisions without convening a general meeting could reduce bureaucratic hurdles and align the law with practical corporate needs.

In today’s digital age, it is also crucial for LLCs to have flexible rules for partner/shareholder meetings and decision-making in general. Currently, it is unclear whether the law allows LLCs to notify partners via email, meet remotely, or vote by email. These practical issues could be regulated by LLC articles of associations. Fortunately, discussions are underway to clarify the provisions of the law and enable electronic methods for meetings, notifications, and remote voting.

As Nino Suknidze, Managing Partner at Suknidze & Partners, explains, “If these proposals are integrated into the current legislation, the result would be a much more efficient, predictable, and swift process for conducting meetings of partners/shareholders that will significantly enhance the overall experience for shareholders, ultimately aligning the legal framework with the needs of modern businesses.”

The work of the AmCham Commercial Law and Tax Committee on this law provides a treasure trove of practical insights for legislators. Corporate law in Georgia has improved immeasurably in recent years, but with so much change, it has created areas where lack of clarity and unforeseen consequences can undermine the effectiveness of the new law. Moving forward, by integrating our input, we are hopeful that the corporate governance environment will continue to improve.