Executive Compensation Structuring in Georgian Law
Structuring the compensation of a chief executive in Georgia is regulated most concretely in the context of the accountable enterprise. This corpus defines the transparency of incomes toward shareholders, the control of compensation decisions through the conflict-of-interest regime, and the duty standard against which bonus schemes are approved. The American practice of advisory votes on pay, deferred-compensation tax regimes and clawback mechanisms has no Georgian equivalent — these are non-Georgian constructs. The Georgian carrier is the regime of income transparency and conflict-of-interest control that binds accountable issuers.
Disclosure of Governing-Body Members' Incomes
A shareholder of an accountable enterprise has the right to receive information about the salary and other incomes received from the enterprise by directors or members of the board of directors and members of the supervisory board. At the same time, the shareholder is prohibited from disclosing this information to third parties. The enterprise is not obliged to provide the shareholder with this information separately if it is already included in the enterprise's last annual report or semi-annual report that is accessible to shareholders. This exception means executive incomes must be fully reflected in the core reporting.
Compensation and the Conflict-of-Interest Regime
A compensation-related decision may be treated as an interested transaction. A governing-body member and/or a shareholder owning directly or indirectly 20% or more of the total votes is an interested person if he or a related person is the other party to the transaction, owns 20% or more of the other party's votes, manages the other party, was appointed on its recommendation, receives under the transaction a benefit not connected with share ownership or board membership, or is defined as interested by the charter. The interested person must immediately notify the supervisory board in writing of the fact of the interest and of the nature and volume of the transaction, and — where the general meeting approves the transaction — must declare it to the meeting as well. A governing-body member must notify the supervisory board in writing immediately upon learning of a conflict.
Interested persons are prohibited from voting, and the remaining votes are treated as the full number of votes. Notably, these requirements do not apply to a transaction concluded between the accountable enterprise and its 100% subsidiary or its 100% shareholder.
Approval Thresholds, Supervision and Liability
A transaction with interested persons worth 10% or more of the enterprise's assets, or a smaller charter amount, is examined by an auditor or certified accountant, who records whether it is concluded on substantially the same terms as between uninterested persons. Such a transaction is approved by the supervisory board or the general meeting, while a transaction whose value exceeds 50% of the value of the enterprise's assets is approved only by the general meeting. Upon approval, the enterprise immediately notifies the National Bank of Georgia of the volume, nature and essential terms and publishes the information within 5 days; it also enters the information in its current and annual reports.
A person who knew or should have known of the interest and failed to declare it must compensate the company for the damage caused by the transaction and return the personal benefit received from it, provided it is proven that the conflict of interest harmed the company and that, absent the interest, the transaction would have been concluded on better terms. Governing-body members who knew or should have known and failed to declare the conflict, or supported a transaction concluded in violation, are jointly and severally liable together with the interested person. Within 18 months of the conclusion of the transaction, a governing-body member and a shareholder or group holding 5% or more of the total votes may apply to the court and seek invalidation of the transaction, compensation of damage and return of the personal benefit.
The Duty Standard Applied to Compensation Decisions
Members of the governing body must act in good faith, exercise the care of an ordinary prudent person in a like position under like circumstances, and act in the belief that their action is in the best interests of the enterprise and the holders of its securities. This triad is the yardstick for approving bonus schemes. Members supporting a decision in breach of these duties bear joint liability for the damage. A member may rely on a professional's reports unless he has information undermining such reliance, and a security holder may bring a claim against a governing-body member for breach of these duties.
Frequently Asked Questions
Below we summarise the questions that arise most often in practice on this topic.
Who may request information about the chief executive's income?
A shareholder of the accountable enterprise, who may obtain data on the salaries and other incomes of directors and board members but is prohibited from disclosing it to third parties.
When does the information not need to be provided separately?
When the income information is already included in the enterprise's last annual or semi-annual report and that report is accessible to shareholders — in that case the enterprise is not obliged to supply the data again.
Which transactions require an auditor's examination and general-meeting approval?
An interested transaction whose value amounts to 10% or more of the value of the enterprise's assets is examined by an auditor or certified accountant, and a transaction exceeding 50% of the asset value is approved only by the general meeting.
What happens if the conflict-of-interest rules are violated?
The interested person and the violating members must compensate the damage and return the benefit; court invalidation is possible within 18 months.
How We Help on Legal.ge
Structuring executive compensation requires simultaneous attention to transparency, conflict-of-interest control and duty standards. Our team will help you design the compensation package, identify interested transactions and prepare approval procedures. Contact us on Legal.ge — we will plan your compensation scheme in full compliance with the law.