Legal Foundations of Equity Incentive Plans
Equity incentive plans — the granting of shares or options to employees, management and related persons — rest on several institutions of the Law of Georgia on Entrepreneurs. The starting point is the system of share classes. Under article 158 of the law, unless the charter provides otherwise, a share may be ordinary or preferred. One ordinary share secures one vote at the general meeting, while a preferred share does not secure voting rights, except in cases provided for by law or the charter. The number of preferred shares must not exceed half of the number of placed shares. A preferred share gives its holder the advantage defined in the charter with respect to the dividend rate and the order of payment. The rights attached to shares of any class must be reflected in the charter before the placement of that class, and their later change is admissible only with the consent of three quarters of the holders of that class.
Capital Increase by the Issue of Additional Shares
Delivering shares under a plan normally requires an increase of capital. Under article 164, unless the charter provides otherwise, a decision to increase the capital by issuing additional shares is taken by the general meeting with at least three quarters of the votes of the participants in the voting. The decision must indicate the number and type of the shares to be placed, as well as the procedure and conditions of their placement. Shares issued upon an increase of capital must be paid up at the moment of placement to the extent of at least 25 per cent of the nominal value, and where the shares are issued at a price above that value, the difference must be paid in full. Where shares are issued against a non-cash contribution, the contribution must be effected in full within 5 years of the decision to increase the capital, and it must be valued and disclosed in the manner established by the law. These requirements define the financial corridor within which an incentive issue must be planned.
Pre-emptive Rights and the Carve-Out for Incentive Plans
The central norm for equity incentive plans is article 167 of the law. As a general rule, when new shares are issued, the holders of shares of the same class first, and then the other shareholders, have the pre-emptive right to subscribe for the new shares in proportion to their existing holdings. That right may be cancelled by a decision of the general meeting taken under the conditions defined by the law, with the representation of shareholders holding at least two thirds of the total votes. For incentive plans the decisive provision is different: the pre-emptive right does not apply to shares issued for the remuneration of the members of the governing organ, representatives, employees and related persons of the company or its subsidiary — including for the satisfaction of their rights arising from options. If such shares are not used for that designated purpose, the pre-emptive right applies to them again. Where the right applies, shareholders holding at least 1 per cent of the voting shares must be notified by insured letter and have at least 14 days to exercise it.
Buyback of Own Shares and the Coverage of Obligations
The other side of implementing a plan involves the company's own shares. Under article 161, the company may acquire and alienate its own shares subject to defined conditions. A buyback requires the authorisation of the general meeting, which must indicate the maximum number of shares to be bought back, the validity period of the authorisation of no more than 5 years and, in the case of a buyback for consideration, the minimum and maximum prices. The buyback must not reduce the net assets below the placed capital recorded in the last approved financial report, and it is inadmissible where the company is insolvent or could face the danger of insolvency as a result. Only fully paid shares may be bought back, and the nominal value of the company's own bought-back shares must not exceed 25 per cent of the placed shares. Where the rules are breached, the company is obliged to alienate the shares within 1 year, failing which they must be cancelled and the placed capital reduced; no shareholder rights arise from the company's own shares.
Frequently Asked Questions
May shares be granted to employees without breaching the shareholders' pre-emptive rights?
Yes. The right does not apply to shares issued to remunerate the members of the governing organ, representatives, employees or related persons, including for satisfying rights arising from options; if the shares are not used for that purpose, the right revives.
Which majority is needed for a capital increase?
Unless the charter provides otherwise, a decision to increase the capital by issuing additional shares is taken by the general meeting with at least three quarters of the votes of the participants in the voting.
How many preferred shares may be issued?
The number of preferred shares must not exceed half of the number of placed shares, and preferred shares do not carry voting rights except in cases provided for by law or the charter.
Under what conditions does the company buy back its own shares?
With the authorisation of the general meeting defining the maximum quantity, a validity period of no more than 5 years and price limits; the nominal value of bought-back own shares may not exceed 25 per cent of the placed shares, and a buyback is forbidden where the company is insolvent or risks insolvency.
How We Help on Legal.ge
The team of Legal.ge will help you design the architecture of the plan, prepare the amendments to the charter, formalise the decisions of the general meeting and the notifications to shareholders, and define the legal conditions of the grant. Contact us and we will build your plan within the boundaries set by the law.