Purpose and Grounds for Creating a Supervisory Board
A supervisory (board of directors) body exists in a Georgian entrepreneur entity to exercise control over the activity of its governing organ or persons. Under the Georgian Law on Entrepreneurs, an entity may have a supervisory board in the cases provided by law or by its charter, while in the case defined by law — for state-owned enterprises operating critical infrastructure — the creation of the board is mandatory (Article 46, parts 1 and 7). The board controls the activity of the governing organ, yet the functions of the governing organ may not be transferred to it, except in a case provided by law (part 2).
For a limited liability company the rule is explicit: an LLC creates a supervisory board where the law or the charter provides for its existence (Article 125, part 1). The rules governing the supervisory board of a joint-stock company apply to such a board correspondingly, unless the charter provides otherwise (part 2). A board meeting is decisive if a majority of the members attend, and the board takes decisions by a majority of votes unless the charter requires a greater number (Article 46, part 3).
Composition, Term of Office and Delegation
The supervisory board of a joint-stock company must consist of at least 3 members, and the charter may set the maximum number of members (Article 212, part 1). A member may be either a natural person or a legal person (part 2). Members are elected by the general meeting by a majority of the votes of the participants in the voting, or through the delegation of a member to the board, unless otherwise determined by law or charter (part 3).
The right of delegation may be granted by the charter only to individual shareholders or to holders of particular shares, and the number of delegated members must not exceed one third of the board (part 4). Every member is elected for a term of not more than 3 years; after expiry the mandate is automatically extended until the holding of the general meeting and the election of new members on it, and a member may be re-elected for a new term (part 5). This combination of a numerical floor, a delegation cap and automatic continuity protects the board from paralysis during transition periods.
The Incompatibility of Positions
The law erects a clear barrier between supervision and management: a member of the supervisory board of a joint-stock company may not simultaneously be a member of the governing organ of the same company (Article 214, part 1). This excludes the situation where one person both oversees and performs management functions. In addition, the charter may determine a list of further positions the combination of which is prohibited for a board member (part 2) — allowing each company to tailor the restriction to its own governance risks.
Special Rules for State Participation
Where the state, the Autonomous Republic of Abkhazia or the Autonomous Republic of Ajara owns more than 50 percent of the total votes in an entity, a special rule applies to senior appointments: the appointment and dismissal of the head person of the enterprise must be agreed by the supervisory board with the shareholder owning more than 50 percent of the votes (Article 46, part 5). In such entities a supervisory board may also be created by decision of the respective government (part 4).
A representative of the state in such a board may be a public servant who has no conflict of interest with the enterprise; a member who is simultaneously a public servant performs the duties without appropriate remuneration, and this activity is not deemed an incompatibility of interests in the public institution (parts 4, 6 and 7). In an enterprise performing the function of an electricity transmission system operator or natural gas transmission system operator in state ownership, the creation of a supervisory board is mandatory, and the majority of the members of the board must not be public servants (part 7).
The Chairperson and the Deputy
The board elects the chairperson and the deputy from among its members by a majority of the votes of the participants in the voting; where candidates receive an equal number of votes, the oldest candidate becomes chairperson, unless the charter provides otherwise (Article 216, part 1). The chairperson coordinates the activity of the board, presides over its meetings and represents the board in relations with the other organs of the company, its officers and employees (part 2).
The chairperson must maintain a systematic relationship with the governing organ and discuss with it the development strategy of the company and the expected risks; the governing organ, in turn, must provide the chairperson with information about significant events that may influence the company's activity, together with an assessment of the expected results, and the chairperson must convey this information to the members and convene a meeting where necessary (parts 3 and 4). The deputy performs the chairperson's functions in the case of absence or inability to perform the duties (part 5).
Frequently Asked Questions
When is the creation of a supervisory board mandatory?
The board is mandatory in the cases defined by law, notably in a state-owned enterprise performing the function of an electricity or natural gas transmission system operator (Article 46, part 7). In other cases an entity may have a board where the law or the charter so provides.
Can a legal person be a board member?
Yes. A member of the supervisory board of a joint-stock company may be either a natural person or a legal person (Article 212, part 2). The charter may also set the maximum size of the board.
How many members serve and for how long?
The minimum composition is 3 members, each elected for a term of not more than 3 years, with the mandate automatically extended until new elections are held (Article 212). Delegated members may not exceed one third of the board.
May a board member also sit on the governing organ?
No. A supervisory board member may not simultaneously be a member of the governing organ of the same joint-stock company (Article 214). Additional prohibited combinations may be listed in the charter.
How We Help on Legal.ge
The legal advisers of Legal.ge assist companies at every stage of supervisory board formation: preparing the necessary charter amendments, checking the integrity of election procedures, reviewing delegation rules and incompatibility restrictions, and factoring in the special requirements that apply to state participation. We assess whether your governance structure complies with the law and help document decisions correctly. Contact us to discuss your specific situation and build a board composition that works.