The Principle of Equality and the Duties of a Partner
The Entrepreneurship Code shapes the ethical foundation of enterprise relations: a partner, in exercising his or her rights, must take into account the lawful interests and rights of the enterprise and of the other partners. In equal conditions partners have equal rights and duties, and a derogation from this principle is allowed only where it is directly provided for by law or the charter and is necessary in the interests of the enterprise. The charter may determine shares and differing rights and duties independently of the partners' contributions. The logic of oppression claims begins here: where one party uses its position to the detriment of the others, this balance is violated and the law gives the injured party instruments of protection.
The Abuse of a Dominant Position
A separate article of the Code concerns precisely the violation of this balance. Where the dominant shareholder of a joint stock company has deliberately used its dominant position to the detriment of the company, it must compensate the damage caused. A dominant shareholder is a shareholder, or group acting together, with the practical possibility of decisively influencing the result of the vote at the general meeting. This shareholder or group is obliged, in addition to the damage caused to the company, to compensate also the damage caused to a shareholder, except for the damage that befell the shareholder as a consequence of the damage caused to the company, including through the decrease in the value of his or her shares. A person who deliberately used its power against the company and influenced a member of its governing organ to commit a harmful action is likewise liable; the member of the governing organ who failed to perform a duty answers jointly with such a person, and the approval of the action by the supervisory council or the governing organ does not release the member from the obligation to compensate. A person who received profit as a result of the damaging action and deliberately exerted influence answers jointly as well. Notably, a leading person is not obliged to compensate damage where his or her action was based on a decision of the general meeting adopted in accordance with the law, while the obligation to compensate damage to a creditor is not voided by the company's refusal of the respective claims or by a reference to the decision of the meeting.
The Buyout of Shares at the Demand of a Shareholder
An effective remedy for oppression is the buyout of shares. Under the respective article, a shareholder may demand from the company the valuation and buyout of his or her shares where he or she did not support a decision of the general meeting that unjustifiably and substantially violates his or her rights or concerns the reorganization of the company. Within 45 days of the adoption of such a decision the shareholder may demand the buyout in writing; this right does not exist where the shareholder has not fully paid the contribution or acquired the shares after the notice. A share must be bought out at least at its market value, determined without taking into account the change of value caused by the act that gave rise to the right of buyout. The governing organ decides on the quantity and price within 30 days of the expiry of the term, and the amount must be paid no later than 30 days from that decision unless the parties agree otherwise. A shareholder dissatisfied with the refusal or conditions may apply to the court within 30 days of the notification. The buyout is inadmissible where the amount payable exceeds 25 percent of the company's own capital or where the company is insolvent or may face the threat of insolvency as a result; where more shares are offered than allowed, they are bought out proportionally from different sellers.
The Mandatory Squeeze-Out of Minority Shareholders
A further article regulates the mirror situation: where a shareholder owns at least 95 percent of the votes as a result of an acquisition, this shareholder — the buyer — may buy out the shares of the others at a fair price. The decision is taken by the court under the procedure established by the civil procedure legislation, which also determines the fair price and the record date of the buyout. Before applying to the court the buyer publishes, no later than 1 month in advance, an announcement on the mandatory buyout containing its reasons and procedures. The registrar notifies all nominal holders no later than 5 days before the record date, establishes the buyout register, and from the record date transactions with these shares are suspended until completion. Re-registration occurs upon the buyer's submission of all confirming documents, including confirmation of the full deposit of the amount; the buyer reimburses the registrar's costs, places the amount on a nominal account and hands over the register.
Frequently Asked Questions
Who is a dominant shareholder?
A shareholder, or a group of shareholders acting together, that has the practical possibility of decisively influencing the result of the vote at the general meeting.
Within what period may a buyout be demanded?
Within 45 days of the decision, by a written demand; a shareholder dissatisfied with the governing organ's refusal or conditions applies to the court within 30 days of the notification.
When is a buyout inadmissible?
Where the amount payable exceeds 25 percent of the company's own capital, or where the company is insolvent or faces the threat of insolvency.
With how many votes can a squeeze-out occur?
The holder of at least 95 percent of the votes may buy out the shares of others at a fair price, subject to a court decision.
How We Help on Legal.ge
Our team will assess your position, help you establish and document the damage, prepare the buyout demand or the statement of claim and represent you in court. Contact Legal.ge and we will defend your shareholder interests.