Governance Policy: For Whom It Is Mandatory
For public issuers, the most concrete Georgian standard for developing a governance policy is given by the Georgian law on the securities market: an accountable enterprise is an issuer of public securities founded under the law on entrepreneurs. It is precisely this circle that the mandatory rules on the audit committee, governing duties and conflicts of interest cover. The issuer likewise secures equal treatment and the availability of information under the procedure set by the National Bank, so the policy text should be kept aligned with the bank's acts.
The comply-or-explain model of the British corporate-governance code is not Georgian law and cannot carry the page: an issuer’s governance policy must begin with the imperative requirements of Georgian law. Note that the National Bank may set differentiated or additional requirements, and certain categories of issuers may be exempted from individual requirements in light of the cost of compliance.
The Audit Committee
The supervisory board of an accountable enterprise creates an audit committee that controls the reliability of the issuer’s financial reporting, ensures the effectiveness of the internal-control system and the independence of internal audit, and manages the relationship with the auditor. The committee consists of supervisory-board members and at least 1 independent member, and is chaired by a board member who is an independent member as defined by law. Commercial banks and investment funds have a different regime for this requirement.
The Standard of Governing Duties
Members of the governing organ of an accountable enterprise perform their rights and duties in good faith, with the care of an ordinary, prudent person in a like office and conditions, and in the belief that their action is best for the enterprise and the holders of its securities.
Members who supported a decision followed by non-performance of these duties are jointly liable for the damage. A member may rely on the conclusions of an auditor, legal adviser or other professional where the matter falls within that profession’s competence — but reliance is not in good faith where the member had, or was obliged to have, information that would have invalidated the reliance. A holder of securities has the right to sue. In the case of a gross violation of legislation, the National Bank, through its representative, may attend the general meeting of shareholders (partners) as an observer in order to react accordingly.
Conflict-of-Interest Rules
The rules apply to enterprises that have issued public equity voting securities, where the interested person is a governing-organ member or a shareholder holding more than 20 percent of the votes; transactions between the enterprise and its 100-percent subsidiary or shareholder are exempt — the exception is easily explained: where the interests are in substance unified, the risk of conflict is minimal, though in every other case the rules apply in full. An interested person is one who is the other party, holds 20 percent or more of the other party’s votes, is a member of its governing organ, is elected on its nomination, or receives a benefit unrelated to the shareholding.
The interested person must immediately notify the supervisory board — or the general meeting, where it approves the transaction — in writing of the fact, nature and volume of the interest. Interested persons may not vote; the remaining votes count as the full number. A transaction worth 10 percent or more of assets is checked by an auditor or certified accountant and approved by the supervisory board or general meeting; above 50 percent — only by the general meeting.
Approval is immediately notified to the National Bank, and the information is published within 5 days of sending and included in current and annual reports. A transaction concluded in violation may be declared void upon the claim of a governing-organ member or a shareholder holding 5 percent or more, within 18 months of its conclusion; damages and personal benefit must be compensated and returned by those who breached.
Equal Treatment
The final building block of the policy is the equal-treatment requirement: the issuer must ensure equal treatment of all holders of securities in equal conditions, create the conditions for exercising their rights, and immediately make public any change in the terms of the securities or the rights attached.
Frequently Asked Questions
Below are the most frequent questions about developing a governance policy.
Who is an accountable enterprise?
An issuer of public securities founded under the law on entrepreneurs.
Is the audit committee mandatory?
Yes — created within the supervisory board with at least 1 independent member; banks and investment funds follow a different regime.
Which transaction needs the general meeting?
Above 50 percent of asset value — only the general meeting; from 10 percent — the board or the meeting.
Within what period can a transaction be avoided?
Within 18 months of conclusion, on the claim of a governing-organ member or a 5-percent-plus shareholder.
When is information on an interested transaction published?
Within 5 days of notifying the bank, and such transactions are also reflected in the reports.
How We Help on Legal.ge
The lawyers of Legal.ge help you develop an issuer’s governance policy: we shape the audit committee’s mandate, the standard of governing duties and the conflict-of-interest procedure within the law’s boundaries, and help harmonize it with the National Bank’s requirements. Contact us — a correct policy also simplifies relations with the regulator.