One of the foundations for creating a functional market economy and encouraging trade is the existence of effective Corporate Law. In modern conditions, when relations of the entrepreneurial societies are developing daily and their functioning and interconnections become more complex, it is necessary to consider the relevant regulations of the existing environment in the legislation.
The previous Law of Georgia “On Entrepreneurs” was adopted in 1994, and even though it underwent many changes since its initial edition, it was no longer fully meeting its goals. After the development of this Law, the increase in the volume and complexity of corporate relations, as well as the rapid development of the business sector, made it necessary to develop more detailed regulations adapted to modern requirements and challenges.
In 2008, in order to simplify legislation, by minimizing the legislative regulations and canceling a handful of restrictions and requirements, large-scale changes were made to the Entrepreneurial law, as a result some critical issues of corporate governance were left out of regulation. The purpose of the simplification of the Law was to give more freedom of choice to the partners of the entrepreneurial societies to regulate their business relations based on their charters. However, in many cases, this Law was unable to resolve conflicts, which should have been its main purpose – to fulfill the role of a legal instrument regulating corporate relations. As a result, the partners often were no longer able to take advantage of the opportunity granted to them by law. Most of the charters of the entities are very general in nature and do not regulate many of the important issues, which is why these issues also no longer provided for by the Law, in fact, remain beyond regulation, and the law, which allows entrepreneurial societies to regulate legal relations at their own discretion, cannot help them in the event of a dispute. Gaps in the current law become particularly visible after disputes are referred to the courts what complicates the work of the Courts and becomes the main cause of long and expensive legal disputes.
The mentioned problems resulted in the necessity to implement the complex legislative measures in this area and develop a law adapted to modern business relations. For this purpose, New Law of Georgia “On Entrepreneurs” had been developed since 2013 and became effective on 1 January 2021.
It which serves to strengthen the role and purpose of the law in business relations, to improve the legal framework, to regulate internal corporate relations in more detail, and, along with the promotion of business freedom, to increase transparency in this field. The New Law also serves for the regulation of issues related to conflict of interest, obligation of good faith, partner’s expulsion/exit from the entrepreneurial society, reorganization and liquidation of the society, and other significant changes and innovations. The procedure will result in elimination of multiple “sleeping” non-active entities, since the companies which do not finalize this procedure within the set deadlines, will become subject to cancellation.
For distinct types of entrepreneurial societies, the New Law sets various requirements to align with.
According to this legislation, the registration of an entrepreneurial society necessitates the submission of a comprehensive set of documents referred to as the “foundation agreement.” This agreement includes vital elements such as the company’s charter and other specifics outlined by the New Law. From a broader perspective, the New Law adopts an approach suggesting that the charter should serve as a constitution for entrepreneurial societies, subject to occasional updates. Notably, the legislation introduces a standardized template for the charter, offering a helpful resource for Partners.
All entrepreneurial societies need to align with the New Law. For the existing entities, whose charters have already been registered with the Public Registry, the imperative to renew the charter may arise from the changes since the last charter registration, including but not limited to the changes in the address, electronic contact details, representatives, titles, or the rights of the representatives. In contrast, the initial registrations for new entities prove comparatively straightforward, as errors are more prevalent when making changes to existing entities.
Correction procedures reveal numerous common errors, necessitating adequate time for the process. Particularly frequent are the errors for non-profit legal entities since their registration requires a detailed description of the multiple levels of their governance structure.
With the introduction of new requirements, financial considerations come into play, including a registration fee of 200 GEL alongside additional costs for legal, notary, and postage fees. This financial burden may pose challenges, especially for individual entrepreneurs.
Although the new registration deadline was initially set for December 31, 2023, recent consultations with the Public Registry suggest the possibility of an extension.
To stay tuned with the employment landscape in Georgia, feel free to contact Eurofast professionals in Tbilisi at tbilisi@eurofast.eu
Elena Bitutskaia
Payroll Executive & Executive Administrator
Eurofast Tbilisi
tbilisi@eurofast.eu