Investors purchase shares to obtain return on their investment. They expect to obtain profit on their investment in the form of regular dividends. In many cases for minority shareholders the dividends are the only form of return on specific business investments. Minority shareholders have limited control over the decisions of the corporate directors and the majority shareholders. The corporate directors and the majority shareholders play significant role in the dividend distribution process. They oversee the preparation of the annual accounts and are responsible for calling and holding a shareholder’s meeting that decides the declaration of the dividends out of the company’s profits. In closely held corporations the majority shareholders are often directors themselves or at least they are in a position where they can appoint loyal directors. Such allocation of power and control leaves out the minority shareholders who depend on dividends as a return on their investment.
The disputes between shareholders of Georgian business enterprises relating to non-payment or incorrect declaration and payment of dividends have increased in number over the past few years. Due to these developments the Georgian courts have had to make important clarifications and to establish a case law which explains and applies the Georgian company law provisions governing the declaration and payment of dividends.
The case law of the Georgian courts has been homogenous in various aspects, as will be summarized and discussed in the following paragraphs.
Shareholder’s Right to Dividends under Georgian Company Law
The Law of Georgia on Entrepreneurs (the “Law on Entrepreneurs”) recognizes the right of shareholders to receive dividends and grants the right to the general meeting of shareholders to decide the distribution of interim or annul profits to the company’s shareholders. The Law on Entrepreneurs further states that the procedure for the payment of dividends shall be established in the company’s articles of association.
The Supreme Court of Georgia has explicitly stated in the recent decisions that the distribution of company’s interim or annual profits as dividends is a matter that is subject to the discretion of the general meeting of shareholders. The court explained that the general meeting is entitled to discuss the matter and to decide to declare and pay dividends to shareholders. However, the general meeting of shareholders is not legally obligated to determine the matter in favor of dividend distribution. This discretion of the general meeting includes the discretion to decide the amount of dividends to be paid.
Discretion of the General Meeting of Shareholders
The Supreme Court of Georgia has additionally examined the discretion of the general meeting to determine its scope and application. The court analyzed the relevant provisions of the Law on Entrepreneurs. In this examination the Supreme Court of Georgia has referred to similar rules and provisions operating in other jurisdictions, including the United States and the United Kingdom.
The Supreme Court of Georgia has indicated that generally the discretion of the general meeting of shareholders is free from court intervention. The Law on Entrepreneurs does not envisage any limitations on distribution of dividends. It does not establish any mandatory minimum dividend payments either. Any limitations on this power may be imposed by the company’s articles of association.
Nevertheless, the Supreme Court of Georgia has established that the discretion of the general meeting of shareholders to decide the declaration and payment of dividends is not unlimited. The court may intervene if it finds, based on the allegations of the claimant shareholder, that the general meeting has exercised its power dishonestly and the court has grounds to presume that the actions of the general meeting of shareholders were “in bad faith, deceitful or observing personal interests”.
The Supreme Court of Georgia has recognized that the shareholders have legitimate expectations to receive dividends from the company’s profits. According to the court’s reasoning, the non-declaration of dividends out of company’s profits imposes on the right of shareholders. Therefore, the non-declaration of dividends by the general meeting shall serve a legitimate corporate purpose.
Recourse of the Shareholder Seeking Payment of Dividends
According to the case law of the Supreme Court of Georgia, the shareholder may have a recourse against the company if the general meeting decided against distribution of dividends or incorrectly established the amount of dividends to be paid. Firstly, the shareholder, who disagrees with the decision of the general meeting, must express his position by voting at the general meeting. Secondly, the claimant shareholder must allege before courts that the actions of the other shareholders were “in bad faith, deceitful or observing personal interests”. The court has to be convinced that the decision adopted on the general meeting did not serve the legitimate corporate purpose.
Obligation of the Director
The general meeting decides the declaration of dividends based on the annual profits of the company. According to the Law on Entrepreneurs as well as we the case law of the Supreme Court of Georgia, it is the duty of the director to prepare the annual accounts. If the director fails to observe this duty, it may be the ground for director’s personal liability.
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The case law of the Georgian courts develops along the corporate relations between business entities and their shareholders. The recent disputes have given the court an ample opportunity to advise the corporate players on their rights and obligations under Georgian company law. The subsequent shareholder activism is likely to play a significant role in establishing a clear and coherent practice relating to declaration and payment of dividends as well as other related corporate matters.
