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Georgian company share sale and purchase

Irakli

RegHub Georgia Specialist

Selling or buying a share is a corporate transaction with legal consequences. The company acquires a different set of partners, and the corporate rights tied to the share pass to a new holder. Statutory rules govern such a deal, and so do the charter of the company concerned and any arrangements its partners have agreed among themselves. A Georgian company share is disposed of under rules specific to it. It is at once an object of ownership and the legal basis on which a partner exercises a range of corporate rights.

Once a properly documented transaction puts the share in the buyer's name, the extent of the new holder's participation changes, along with the rights and duties that attach to it. For this reason, the parties should keep an outright alienation distinct from the other routes by which membership can change. They must also formalise the transfer of corporate rights correctly and submit the corresponding data for registration in the prescribed manner.

Legal framework of the transaction

Whenever a Georgian company share changes hands, the applicable rules derive from corporate and civil law alike. Chief among them are the Law of Georgia on Entrepreneurs (the Entrepreneurs Law), the Law of Georgia on Public Registry (the Public Registry Law) and the Civil Code of Georgia. Where the structure of the deal calls for it, the parties must also consider the Tax Code of Georgia and the rules governing electronic documents and electronic trust services.

LLC and JSC: two regimes for alienating a share

Few company forms in Georgian practice are as widespread as the limited liability company (LLC). Entrepreneurs favour it for its relatively simple management structure, for not requiring any elaborate system of corporate bodies and for its latitude in allocating participation among several persons. A partner's share comprises a set of corporate rights and obligations. Its size fixes the extent of the holder's participation in the capital. Where statute and the company's own documents so provide, the holder's votes and portion of distributed profit also reflect the size of the share.

LLC shares take the form of percentages that together amount to 100%. A prospective buyer of a Georgian LLC share must first carry out legal due diligence covering both the company and the asset itself. The inquiry should test whether the seller is in fact a registered partner. It should also bring to light any restriction on alienation of the share and any pledge or other encumbrance over it.

Joint-stock companies (JSCs) differ from LLCs in that their capital is divided into shares that qualify as securities. Each such share evidences the holder's participation in the issuing company and confers a defined set of property and corporate rights. The scope of those rights differs from one class to another, and under Georgian legislation a share may be common or preferred. Counting the shares to be acquired, or expressing them as a percentage of all issued securities, does not suffice. A buyer must also identify the class concerned and what it entitles the holder to.

Both forms pursue the same economic aim, yet a Georgian company share sale takes a materially different shape in each. An LLC partner transfers a share in the capital. A JSC shareholder transfers securities, each one an independent corporate instrument.

In an LLC deal, the charter carries particular weight, as do the identity of the partners and any restriction on alienation that the charter imposes. A JSC buyer identifies the relevant class of shares and examines the entitlements it carries. Equal attention goes to the shareholders' register and to the requirements of securities legislation. The registered data must record every change in an LLC's membership. In a JSC, title to shares passes under the procedure that governs the recording and registration of rights in securities.

Who may sell or buy a Georgian company share

An individual who lawfully owns a share is entitled to dispose of it. Before the transaction, the buyer should compare the individual's details with what the company's registration documents record.

The check should establish:

• whether the seller is registered as a partner;

• how large the seller's share is;

• whether any restriction applies to its transfer.

Where the seller is married, the buyer will need to assess the matrimonial property regime, depending on the circumstances of the deal. A separate check covers pledges and attachments over the share and any further encumbrance. Such restrictions impede the share's free alienation or call for additional approvals from the persons concerned.

Where an individual intends to sell a Georgian company share, the agreement must set out as precisely as possible:

• subject matter of the transaction;

• size of the share;

• its price;

• payment procedure;

• each party's registration obligations;

• consequences of a breach of its terms.

Particular attention should go to the moment at which title passes and to the procedure for recording the corresponding changes with the registry. Equally, the buyer should confirm that the seller in fact has the necessary powers.

Sellers include legal entities as well. Such sellers are typical of investment holdings and corporate groups, and equally of projects in which one entity owns shares in several operating companies. Where a legal entity sells, the buyer must establish its legal capacity and its registration status. Its ownership structure and the authority of whoever signs the alienation agreement require the same verification.

Of particular significance are the seller's corporate documents. Depending on its legal form and internal rules, the approving decision will come from the director or the board of directors, from the partners or from another authorised body. The buyer must be satisfied that whoever represents the entity is in fact entitled to conclude the agreement. Where the director signs, the buyer checks the director's powers. If the transaction requires a special corporate decision, the parties should obtain that document before completion.

Buyers are often individuals resident in Georgia, who must have the necessary legal capacity and prove identity in due form. A deal of this kind may take place between two existing partners or between a partner and a third party. It may equally arise within a restructuring of ownership in an operating business.

A resident buyer acquiring a share from another partner should check how large the asset is and what the registry records about the company, and should confirm whether any restriction on transfer applies. Particular attention goes to the charter, since it is the charter that sets any additional rules on the alienation of a partner's holding. The share's legal status warrants verification before signing.

A foreign investor buying a Georgian company share may acquire it directly in the investor's own name. Alternatively, the investment can go through a holding structure if such a model suits the investor's goals. An individual will need documents that prove identity. A foreign company will need documents that evidence its registration and legal capacity and confirm its representative's authority. Where the buyer is outside Georgia, a representative acting under a power of attorney can handle much of the procedure remotely.

A foreign legal entity may likewise acquire a share in a Georgian enterprise. The model is common in building international corporate structures and in expanding operations, and foreign entities also rely on it to acquire local businesses. In that case, the parties must establish the legal status of the foreign company and confirm the authority of its representative before the transaction.

Georgian company share sale: the subject matter and its price

Share size ranks among the core elements of the deal. In an LLC, participation takes the form of shares whose size derives from the registered data and the company's instrument of incorporation. The seller transfers the whole share or part of it, provided the law and the company's corporate documents permit that operation. When the size is fixed, no discrepancy should remain between the agreement and the registered data.

An investor planning to buy a Georgian LLC share should review how the remaining participation will be structured after the deal. The investor should know in advance:

• who will own the remaining percentage;

• which rights the existing partners will retain;

• whether a corporate deadlock could arise over principal decisions.

A seller should determine how much of the holding is genuinely on offer. A sale of the entire share ends its holder's participation in the company, whereas a partial alienation preserves partner status and the rights attached to it.

In valuing the subject matter, the parties should distinguish the legal size of a share from its economic value. A percentage fixes the extent of participation without translating automatically into an equivalent sum of money. Nominal value describes capital or participation. Yet the parties set the transaction price by reference to the real economic worth of the business. Such a price differs materially from the nominal figures.

Pricing takes account of:

• size of the participation acquired;

• prospect of gaining corporate control;

• extent of voting rights;

• financial results of the company;

• value of the company's assets;

• real estate and other valuable property;

• debt and other financial liabilities;

• current contracts with principal counterparties;

• licences and permits;

• development prospects of the business;

• litigation and administrative disputes;

• tax liabilities;

• rights in trademarks, software and other intellectual property;

• structure of the remaining participation after the deal.

With the subject matter defined precisely, the parties can document each later step of the transaction on a secure basis.

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The agreement behind a Georgian company share transfer

Among the agreement's weightiest terms is the description of its subject matter. It must leave no doubt as to which share passes, whose it is on the signing date and which corporate rights go with it. Price and settlement currency are matters the parties must agree, as are the terms and deadlines for payment. Settlement may take the form of a single sum or of several instalments. For staged payment, a fixed date for each instalment and stated consequences of delay are advisable.

Particular care should go into fixing the moment at which corporate rights pass. The agreement must describe the parties' conduct once they have signed and oblige them to complete the required registration formalities. Warranties of title to the share are for the buyer to settle with the seller in advance. It falls to the seller to confirm its power to dispose of the holding and the absence of any undisclosed restriction on alienation.

In a cross-border deal, the parties agree separately on the payment currency and the bank details. They also agree on the procedure for evidencing payment. The parties must allow for possible bank charges and for financial monitoring requirements. Large deals typically use an escrow arrangement or a mechanism that ties the final payment to the seller's performance of specified obligations. The parties choose the structure to suit the character of the deal and their arrangements.

Among the seller's principal obligations are:

• confirming title to the share;

• providing corporate documents;

• disclosing known restrictions and encumbrances;

• obtaining the necessary corporate approvals;

• signing the agreement and the registration documents;

• assisting with registration of the transfer;

• meeting the agreed deadlines;

• delivering to the buyer the information and documents the agreement provides for.

A seller of a Georgian company share must make sure that the agreed terms stay consistent with the company's corporate documentation.

The buyer's core duty is timely payment of the agreed price, together with performance of whatever else the agreement requires. In return, the buyer may require the seller to honour its undertakings, hand over the stipulated documents and see the transfer through registration. Before the transaction, the buyer examines the company in legal and financial terms and reviews its tax position. The parties rely on those findings to agree the final price and to write any additional warranties into the agreement.

It is advisable to record in the agreement separate representations on:

• seller's ownership of the share;

• absence of unlawful restrictions on its alienation and of any undisclosed pledge or attachment;

• accuracy of the corporate documents provided;

• authority of the seller to enter into the transaction;

• absence of circumstances that would prevent registration of the transfer;

• accuracy of material information about the company;

• absence of undisclosed material liabilities, where the seller gives that warranty.

Depending on the type of business, the agreement often contains confidentiality provisions. The parties specify which information they undertake not to disclose to any third person and for how long that undertaking remains in force.

Registration of the transfer with the state registry

Before the deal is documented, the parties must obtain a current extract from the Registry of Entrepreneurial and Non-entrepreneurial (Non-commercial) Legal Entities and check the company's registered details. Next, the parties establish who exactly holds the power to dispose of the share. The incoming partner's details undergo the same verification. Where the buyer is a foreign national seeking to acquire a share, the parties prepare the buyer's identification documents in advance.

The agreement is best drafted to specify:

• company name in full;

• identification number;

• particulars of both parties;

• size and price of the share being alienated;

• currency and procedure of settlement;

• method of handing over corporate documents;

• representations and warranties given by the seller;

• whether any encumbrance exists;

• procedure for notifying the company and registering the transfer;

• allocation of costs;

• liability of the parties;

• dispute resolution procedure.

The law itself requires an agreement on a Georgian company share transfer to be made in writing. To amend the registered data, the parties apply to the registration authority.

Conclusion

A successful deal passes through several stages in sequence. For an investor buying a share, confining the review to the business's financial results falls short. The investor must also verify the legal status of the share and any encumbrance over it. Verification also covers company liabilities, court disputes and other such matters. Representations and warranties given by the seller merit separate attention, as do the terms of settlement, the parties' liability and any mechanism for compensating losses after completion.

A seller should settle an acceptable price for the holding and structure the contractual terms correctly. In particular, the seller should fix in advance:

• payment procedure;

• moment of transfer;

• warranties the buyer receives and their extent;

• deadlines for claims;

• ceiling on the seller's later liability.

Data on the company, its partners and their shareholdings must match the business as it actually stands.

With specialist support, a single procedure covers:

• due diligence;

• document preparation;

• contract structuring;

• registration.

In a Georgian company share sale, specialists can assist at every principal stage. Professional support is particularly relevant where one of the parties is outside Georgia.