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Legal analysis of Judgements regarding compulsory sale of stocks in Georgia

Legal analysis of Judgements regarding compulsory sale of stocks in Georgia
Giorgi Kekenadze, student

Ivane Javakhishvili Tbilisi State University, Georgia

Davit Kekenadze,

Batumi Shota Rustaveli State University, Georgia

Championship participant: the National Research Analytics Championship - "Georgia";

the Open European-Asian Research Analytics Championship;

Enactmen of regulation in the law of Georgia “on Entrepeneurs”concerning compulsory sale of stocks has caused altercation into the society. Constitutionality of Incorporation of compulsory sale of stocks was discussed even by the Constitutional court of Georgia. For the purposes of this research was carried outa study to discover how do courts put in practice regulation concerning above mentioned institution, scope of research was from 2008 to 2013 years.

Research gathers infromatian as well as concerns analytical issues. As a result of this research, author states that courts do not pay much attention tothe reasons of compulsory sale of stocks, there are also problems regarding determining fare price for the stock of minority share holders. The research also reveals, whether principles, determined by the constitutional court of Georgia, regarding executing compulsary sale of stocks are taken into the consideration by the Georgian common courts.

Authors conclude, that common courts of Georgia must pay more attention to the grounds for exercising right of compulsory sale of stocks, in order to prevent misuse of rigth to compulsary sale os stocks. Author also points out that the future interests of minority stockholders must be taken into the consideration, therefore given much more attention while drafting the judgmenets.

Keywords: Squeeze-out, Minority shareholders, Joint stock company, Georgia

 

The institute of the corporate law, which entitles the majority stockholder to acquire the stocks owned by minority stockholders in compulsory manner under certain terms and observing certain procedures is common in the legislation of foreign developed and developing countries. Foreign states regulate differently compulsory sale of stocks owned by the minority stockholders and thus squeezing out or expulsion of minority stockholders from a company.

On May 25, 2005, the law of Georgia “on Enterpreneurs” was amended to include a provision, according to which a shareholder, who owned over 95% of the shares in a joint stock company, shall be entitled to acquire shares from the remaining holders in spite of the consent. The redemption shall take place at a fair price. The shareowners who owns less than 5% of shares are known as the minority shreholders, while the individuals holding over 95% of the shares are the majority shareholder. (1)

    On may 18, 2007 the constitunional court of Georgia found above mentioned article unconstitutional and stated that: The existence of 95% or more of shares in the possession of one shareholder shall not in itself mean the emergence of public necessity for mandatory sale of shares; the mecanism shall be a necessary tool to ensure the proper functioning and development of the enterprise; the minority shareholder shall have the legal means to express his or her position; the legal means shall be so effective as to exclude the possibility of abuse of economic power by the majority shareholder(a fair balance should be struck between the parties). (2)

On March 14, 2008, the parliament of Georgia amended the Law “on Enterpreneurs” with article 534 “on mandatory sale of shares”. The first paragraph of the article expounds on the right of the shareholder to redeem stock from other shareholder at a fair price. The second paragraph illustrates the right of the Court to render a decision with regards to the mandatory sale of shares. This practice is set out in the civil procedure code of Georgia.

According to the article 534 of the law of Georgia “on Enterpreneurs” : “If as a result of purchase of stocks, the stockholder has morre than 95% of votes of the stock-company, then this stockholder (for the purposes of this article-“buyer”) will have the right to redeem the stocks of other sockholders at a fair price”.

According to the current civil procedure code of Georgia article 30910,a case regarding compulsary sale of shares is heard by Tbilisi city court or Kutaisi city court. The Jurisdiction is decided according to the residence of the respodent. The cases in which respodents have residency in the western part of Georgia are heard at Kutaisi city court and the cases arisen in the eastern part of Georgia are heard at Tbilisi city court.  

It should be mentioned, that From 2008 to July of 2012 years Tbilisi city court has settled 19 cases of compulsory sale of shares and all of them were decided in favor of the Majority shareholders, while Kutaisi city court has heard 17 cases, from which only 11 were decided in favor of the Majority shareholders, 2 were dissmissed and 4 found inadmissible. From 2007 to July of 2012 Tbilisi appeal court has decided 4 cases of which 3 were decided in favor of Majority shareholders and one was partially satisfied. According to the civil procedure code of Georgia article 30915 subparagraph 3 a case can be appealed only once to the Tbilisi appeal court or to the Kutaisi appeal court and their decisions are final. Despite restrictions, some claimants have appealed the decision of appellate court to the High court of Georgia of which all of them were found inadmissible. (4)

According to the statistics, some part of the minority shareholders haven’t denied the fairness of the share prices stated by the Majority shareholders, while the most of the minority shareholders undermined the unfairness of those prices  and declared that another expert report must be made In order to determine the fair price. It’s noteworthy, that Georgian civil procedure code states that the only way to determine the fair price of stocks is via expertise conclusion. In one case  the minority shareholder denied the fairness of share price and demanded conducting another expertise conclusion, unfortunately the request was denied by the judge, who lately decided case in favor of the majority shareholder. The case was appealed by the minority shareholder to the appellate court of Tbilisi. Appellant stated that  under the civil procedure code of Georgia the judge has a right but no obligation to use the given expertise conclusion to determine the price of stocks, Furthermore, It must be examined, taking into the consideration what kind of reports and evidences were used while making it. Sometimes, even experts evaluations are incorrect. The appellate court of Tbilisi upholded that judgment and stated that the court didn’t pay attention to the sources of expertise conclusion, while it was based on the information given by the majority shareholder and lacked examination.

Another problematic issue which was revealed by researching the pactice is that even though the court formally determines future income of the company, meanwhile it doesn't increase equitable price of the shares. Court has discretion to share an equitable price which is established by expert. The reports of experts and Brokerage companies itself, are based on various evidences and that's why the fair market price is being revealed by court according to them. According to the civil procedure  code of Georgia article 30914   while aproving equatable price of minoriy shares the court has to take into the consideration the following issues: the price of shares established by the market; Future incomees of the  Joint stock company;  actives and pasives, reserves as well as the  reputaion, perspectives, experience and the formal bonds.

In one of the cases, for instance, the court defined the price of regular shares, in the Joint Stock Company, as 10 lari and 89 tetri, which was based on the Report of the Brokerage company.

In fact, due to the last transaction the price of the action was almost tripled and considering the final price as a fair one, could have been positively evaluated, unless we mention future incomes of the company.  In this case, its controversial how real is it for future to get incomes and what kind of influence may it have on the price of shares. It is true that Judge doesn’t have special knowledge, but as we mentioned, Court has discretion to share a price which is established by the expert. If evidences show that the society is going to execute different kind of projects and plans to get some kind of profit, which is possible to get with high-quality of probability, That should have the impact on the prices of shares, because the main interest of small shareholders is to gain more economic benefits.

Another issue which must be mentioned is the breach of procedures while performing compulsary sale of shares by not giving reasons for executing it. According to the civil procedure code of Georgia, article 30913 judges have to review the case and study if the procedure was carried out according to the law, to be specific Law on Enterpreneurs article 534.  This article states that the an announcement about compulsory sale of contracts must be published 1 month before the procedure in the  media, which should contain information regarding the purchase conditions and procedures and the resesons conducting compulsary sale of stocks.

While discussing the constitutionality of the institution, The Constitutional Court of Georgia declared that the legislator shall construct the norm on compulsory sale of stocks in the manner, which would secure the fair balance between the parties and would exclude opportunity of abusing economic power. A minority stockholder is fully entitled to know the reasons, for which his own stocks shall be transferred to the ownership of majority stockholder. He shall be provided with legal remedies for expressing and asserting his position. The will of majority stockholder to own all the stocks of a company is clear and natural, though it cannot serve as justification for restriction of right to property. Concentration of more than 95% of voting stocks in ownership of one stockholder do not automatically evidence creation of social necessity for compulsory sale of stocks. Compulsory sale of stocks shall only be carried out if it constitutes the necessary means for normal functioning and development of the relevant company.

For the purposes of this research, notions published from 2007 to 2012 years were studied. (5)

Conducted study shows that in some cases Majority shareholders do state the reasons of compulsary sale of shares, such as: Improving possibility of negotiating with investors and improving the effectivness of governing Joint Stock Company. But in some cases, Majority shareholders didn’t write the reasons, howerer their requests were satisfied by the Tbilisi city court which concluded that the procedure wasn’t breched at all, while it was conducted in time and according to the civil procedure of Georgia.

According to the above mentioned, common courts of Georgia must pay more attention to the grounds for exercising right of compulsory sale of stocks, in order to prevent misuse of rigth to compulsary sale os stocks. Author also points out that the future interests of minority stockholders must be taken into the consideration, therefore given much more attention while drafting the judgmenets.

 

References:

  1. The substance of the right to own Shares in accordance with the case-law of the constitutional court of Georgia,Vakhusti Menabde, pg. 252, SCLJ 3/2012.
  2. Judgment N2/1-370,382,390,402,405 of may 18 2007 on the case“citizens of Georgia, Zaur elaShvili, Suliko Mashia, Rusudan Gogia and others and the Public defender of Georgia v. the Parliament of Georgia”.
  3. Comparative analysis of Eu, German and Georgian regulations on Squeeze-out.. Ani Nozadze. LL.M. SHORT THESIS. COURSE
  4. Markus Dollinger, The Fair Squeeze-Out Compensation, 2008
  5. https://matsne.gov.ge/index.php?option=com_ldmssearch&view=docView&id=1654648&lang=ge,date: 2013 25 February.
  6. Civil procedure code of Georgia, till 24 May, 2013
  7. Georgian Law on Enterpreneurs, until 24 May 2013
  8. Decision of Supreme court of Georgia, 2010 year, №??-570-537-2010.
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Comments: 9

Tsvetalina Petkova

Interesting study, which achieves its research objectives.

Minnekhanova Sania

Проблема, раскрытая в данной статье достаточно привлекательна с точки зрения практики ее применения.

Konoplytska Oksana

Статья ценна выделением пробленых вопросов по теме, над которыми нужно работать исследователям не только в отрасле права, но и других наук. Интерес вызывает также выводы и предложения, высказаные автором. Чтение статьи доставляет удовольствие, так как ценна она именно прикладной сторонной, а не голой теорией.

Zulfugarzade Teymur El'darovich

Весьма интересное исследование, касательно регионального аспекта подобная проблема исследуется автором одним из первых, что весьма примечательно и представляет повышенный интерес, прежде всего, для правовой компаративистики. Работа заслуживает весьма высокой позитивной оценки. С уважением, Теймур Зульфугарзаде

Chiladze George Bidzinovich

Тема актуальна, исследование заслуживает должного внимания

Minnekhanova Sania

Невозможно оценить. Хотелось бы получить текст на русском языке. Все таки русский язык является международным.

Ispenbetova L.

Выбранная автором тема научной работы актуальна, проведен анализ судебной практики и подведен итог исследования.

Puzikov Ruslan Vladimirovic

Статья написана на достаточно высоком уровне и определенно заслуживает высокой оценки.

Andrey Marenkov

Очень интересная статья. Раскрыты проблемы, причины принудительной продажи акций. Сделаны соответствующие выводы и предложения.
Comments: 9

Tsvetalina Petkova

Interesting study, which achieves its research objectives.

Minnekhanova Sania

Проблема, раскрытая в данной статье достаточно привлекательна с точки зрения практики ее применения.

Konoplytska Oksana

Статья ценна выделением пробленых вопросов по теме, над которыми нужно работать исследователям не только в отрасле права, но и других наук. Интерес вызывает также выводы и предложения, высказаные автором. Чтение статьи доставляет удовольствие, так как ценна она именно прикладной сторонной, а не голой теорией.

Zulfugarzade Teymur El'darovich

Весьма интересное исследование, касательно регионального аспекта подобная проблема исследуется автором одним из первых, что весьма примечательно и представляет повышенный интерес, прежде всего, для правовой компаративистики. Работа заслуживает весьма высокой позитивной оценки. С уважением, Теймур Зульфугарзаде

Chiladze George Bidzinovich

Тема актуальна, исследование заслуживает должного внимания

Minnekhanova Sania

Невозможно оценить. Хотелось бы получить текст на русском языке. Все таки русский язык является международным.

Ispenbetova L.

Выбранная автором тема научной работы актуальна, проведен анализ судебной практики и подведен итог исследования.

Puzikov Ruslan Vladimirovic

Статья написана на достаточно высоком уровне и определенно заслуживает высокой оценки.

Andrey Marenkov

Очень интересная статья. Раскрыты проблемы, причины принудительной продажи акций. Сделаны соответствующие выводы и предложения.
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