Introduction

 

Setting up a company in Georgia (the Republic of Georgia, not the U.S. state) is remarkably efficient, limited liability company registration with the National Public Registry can be completed within a single business day. However, registration is only the first step. Practical experience consistently shows that the vast majority of partner disputes in Georgian companies, including those that ultimately destroy entire businesses, could have been prevented if the partners had signed a proper Shareholders' Agreement (SHA) at the outset.

This guide is written for entrepreneurs who:

• Are planning to start a business in Georgia with one or more partners;
• Already own a Georgian company and want to strengthen its legal governance framework;
• Are preparing to bring in an investor or restructure existing ownership;
• Are preparing the company for sale, merger, or other corporate reorganization.

I cover each significant mechanism in depth, with concrete examples and practical recommendations. The article is comprehensive — use the table of contents below to jump directly to the section relevant to your situation.

 

Table of Contents

 

1. Fundamentals: What Is a Shareholders' Agreement

2. Deadlock and Mechanisms to Resolve It

3. Restrictions on Share Transfers

4. Tag-Along and Drag-Along Rights

5. The "Sleeping Partner" Problem and Vesting

6. Decision-Making and Corporate Governance

7. Share Valuation Mechanisms

8. Dividend Distribution

9. Protective Mechanisms: Anti-Dilution, Non-Compete, Non-Solicitation

10. Dispute Resolution Mechanisms

11. Georgia's New Law on Entrepreneurs and Compliance

12. Common Mistakes in Drafting a Shareholders' Agreement

13. Sample Clauses and Illustrative Language

14. Steps for Drafting a Shareholders' Agreement

15. Frequently Asked Questions (FAQ)

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1. Fundamentals: What Is a Shareholders' Agreement

 

1.1. Legal Nature of the Shareholders' Agreement

 

A Shareholders' Agreement (often abbreviated as SHA) is a private contract between the co-owners of a single company that governs the rights and obligations between them, the management framework of the company, and the mechanisms for resolving conflicts. In Georgian law, the same instrument applies to both limited liability companies (LLCs, in Georgian: შპს) and joint-stock companies (JSCs, in Georgian: სს), although the practical content may differ based on company type.

An SHA is not a mandatory document for company registration. This is precisely why its absence is so often overlooked. However, its function differs fundamentally from other corporate documents: it covers practical and personal matters that either cannot or should not be included in the articles of association.

 

1.2. SHA vs. Articles of Association — Fundamental Differences

 

The articles of association are filed with the National Public Registry and are accessible to any interested party. The SHA is filed nowhere, it remains only with the parties and their legal counsel. This confidentiality matters because internal financial decisions, strategic plans, and ownership economics should not be exposed to competitors, suppliers, or third parties.

 

1.3. Legal Foundation Under Georgian Law

 

The legal foundation for shareholders' agreements is found in the Law of Georgia on Entrepreneurs and in the Civil Code of Georgia. The framework is regulated, but it grants significant freedom to the parties  the content of the agreement is largely a matter of contractual freedom, provided that it does not contradict mandatory legal norms or public policy.

This distinguishes it from the articles of association, which must align strictly with the structure prescribed by law. In an SHA, parties may include almost any provision, so long as it does not contradict Georgian law or public order.

 

1.4. When Should a Shareholders' Agreement Be Signed?

 

There are three primary moments when signing an SHA is particularly important:

At company formation — this is the optimal time. The partners still maintain a positive working relationship, the financial stakes are still modest, and the risk of tension is low. As a result, negotiating difficult provisions is significantly easier.

When bringing in an investor — whenever a new investor joins the company and acquires equity, an SHA must be drafted or updated. The investor will typically demand one, as their interests cannot be adequately protected through the articles of association alone.

When existing conflict or ownership changes arise — if tension is already building inside the company, or if the ownership structure is changing for any reason, an SHA can help formalize positions before the matter escalates to litigation.

 

2. Deadlock and Mechanisms to Resolve It

 

2.1. What Is Deadlock?

 

A significant share of businesses in Georgia are founded by two partners holding equal (50/50) ownership. At first glance, this structure seems fair, equal contribution, equal reward. In reality, it is one of the most dangerous structures in corporate law.

Deadlock arises when partners cannot agree on a decision that is critical to the company's operations. With a 50/50 structure, if one partner votes "yes" and the other votes "no," no decision can be reached. The result is a complete paralysis of the company.

Typical scenarios include:

• Disagreement on appointing or removing a director;
• Disagreement on strategic direction (entering a new market, changing product lines);
• Disagreement on significant financial commitments;
• Disagreement on dividend distribution or reinvestment strategy.

If the SHA does not include a mechanism for resolving deadlock, the company may remain stuck for months. Often, the only remaining solution is litigation a slow and inadequate tool for urgent commercial decisions.

 

2.2. Shotgun Clause (Russian Roulette)

 

The Russian Roulette mechanism, also called a Shotgun Clause, is one of the most effective ways to break a deadlock quickly. Its mechanics are as follows:

One partner (the Offering Party) sends a formal notice to the other partner (the Receiving Party) specifying a price per unit of equity. The Receiving Party then has a choice:

• Either buy the Offering Party's shares at the stated price;
• Or sell their own shares to the Offering Party at the same price.

This mechanism forces the offering partner to set a "fair" price, because they don't know whether they will end up as buyer or seller. Setting the price artificially low or artificially high creates personal risk for them.

Concrete example: Partner A submits an offer to Partner B with a stated price of GEL 200,000 for a 50% stake. Partner B has 30 days to decide either to purchase or to sell. If B believes the company is worth more, B will buy. If B believes the price is high, B will sell. In either scenario, the deadlock is resolved within 30 days.

This mechanism works only when both partners have comparable financial capacity. If one partner is significantly wealthier than the other, the mechanism may be inequitable  the wealthier party will always have an advantage.

 

2.3. Texas Shootout (Sealed-Bid Auction)

 

Texas Shootout is a similar but more sophisticated mechanism. Here, both partners simultaneously submit sealed written offers each stating the price at which they are willing to acquire the other's shares. The envelopes are opened simultaneously. Whichever partner submits the higher price acquires the other's shares at that price.

This mechanism incentivizes both parties to bid at fair market value  bidding low risks losing the company, while bidding high risks overpaying.

 

2.4. Dutch Auction

 

In a Dutch Auction, the price starts low and gradually increases until one party agrees to "buy." This mechanism is less commonly used between individual partners but is sometimes used when a third party is also involved in the process.

 

2.5. Mediation and Arbitration

 

These are softer mechanisms that attempt to resolve conflicts without imposing financial "penalties" on either party.

Mediation involves a neutral third party (the mediator) who facilitates dialogue between the partners and helps them reach a mutual agreement. The mediator does not impose a decision — their role is to facilitate communication. Mediation centers operate in Georgia and can be designated in advance in the SHA.

Arbitration is a stronger mechanism an arbitrator (or panel) considers the dispute and issues a binding decision. Arbitration is faster than litigation, is confidential, and its decisions are nonetheless enforceable.

 

2.6. Cooling-Off Period

 

This is a precondition that delays the activation of stronger mechanisms. For example: before a Shotgun Clause can be triggered, the partners must observe a 30-day "cooling-off period" during which they attempt to resolve the dispute through direct negotiation or mediation. Only after this period has expired can the stronger mechanism be invoked.

 

2.7. Which Mechanism to Choose

 

Situation	Recommended Mechanism
Two partners with comparable financial means	Shotgun Clause (Russian Roulette)
Multiple partners; precise market pricing matters	Texas Shootout
Partners have significantly different financial means	Mediation + Arbitration
Strategic disagreement rather than financial	Mediation, formation of a neutral advisory board

 

The best practice is to write a multi-tier mechanism: first negotiation, then mediation, then Shotgun or arbitration. This allows softer mechanisms to resolve the issue before resorting to the financially heaviest options.

 

3. Restrictions on Share Transfers

 

3.1. The Underlying Problem

 

Imagine the following scenario: you and your partner each own 50% of an LLC. One day, you learn that your partner has sold their shares to a complete stranger and now you are co-owner of a company with someone you've never met, someone with whom you must now share management decisions.

If the SHA does not include restrictions on transfers, this scenario is entirely possible. By default, under Georgian law, a partner can freely dispose of their shares  the right of property protects their ability to sell to any third party.

This is precisely why pre-arranged transfer restrictions are essential.

 

3.2. Right of First Refusal (ROFR)

 

ROFR is the most commonly used mechanism. Its mechanics are as follows:

• Partner A receives a concrete third-party offer from a potential buyer (Buyer X) specifying both price and terms.
• Before A can complete the sale to X, A must first offer the same shares to Partner B at the same price and on the same terms.
• Partner B has a set deadline (typically 30 days) to decide.
• If B refuses or fails to respond within the deadline, A is free to complete the sale to X at the contractual terms.

ROFR's primary function is to give existing partners priority  keeping ownership concentrated within a "known" circle.

 

3.3. Right of First Offer (ROFO)

 

ROFO is a slightly different mechanism, though it is often confused with ROFR:

• Before Partner A receives any third-party offer, A must first offer to sell their shares to Partner B at a specific price.
• If B declines, A may then sell to a third party, but only at a price higher than the one offered to B.

 

3.4. ROFR vs. ROFO — Critical Differences

 

This fundamental distinction is often overlooked in drafting, yet it has significant impact on the mechanics of an actual sale.

The fundamental difference between these two mechanisms lies in who sets the initial price. Under ROFR, the initial price is set by a third party, an outside buyer after which the selling partner is required to offer the same terms first to the remaining partner. ROFO works the opposite way: the selling partner sets the price themselves and approaches the other partner before any outside buyer enters the picture.

This naturally affects the timing of when the other partner becomes involved. ROFR is triggered only after a concrete offer is received from a third party, whereas ROFO activates as soon as the price is proposed at the stage when no actual buyer has yet been identified.

The mechanical difference has direct consequences for the third party. Under ROFR, the outside buyer operates with significant uncertainty: they know that the entire negotiation and agreed terms may be voided at the last moment if the inside partner decides to acquire the shares on identical terms. Under ROFO, the third party is shielded from this risk, but cannot offer a price lower than what the selling partner already proposed internally.

The practical takeaway is straightforward: ROFO favors the selling partner, because they retain control over the price. ROFR protects the interests of the remaining partner, since the price is established through a genuine market process reducing the risk that shares change hands at an artificially low valuation.

In practice, ROFR is more commonly used, since a third-party offer serves as an objective indicator of market price.

 

3.5. Lock-Up Period

 

A lock-up period is a time-based restriction during which partners are entirely prohibited from selling their shares. This is common in startups, where founders commit long-term, typically meaning that for at least 3-4 years, no founder may exit the business.

Breach of a lock-up provision typically triggers financial penalties or contractual forced transfer of the shares.

 

3.6. Permitted Transfers

 

Any restriction must be reasonable. As a result, practical SHAs typically include certain permitted transfer exceptions:

• Transfer to immediate family members (spouse, children, parents);
• Transfer into a trust or holding vehicle under the partner's full control;
• Transfer through inheritance (in case of death);
• Transfer to an affiliated company.

These exceptions must be clearly defined in the contract to avoid disputes over interpretation later.

 

4. Tag-Along and Drag-Along Rights

 

4.1. Tag-Along — Protecting the Minority Partner

 

Tag-Along (the right to participate in a sale) protects the interests of the minority partner. The logic is simple: if the majority owner sells their shares, the fundamental nature of the company changes, a new owner enters, with whom the minority partner may have no working relationship.

Tag-Along grants the minority partner the right to sell their shares alongside the majority partner, on the same terms. This ensures the minority is not "stranded" with an unknown new majority owner.

Concrete example: A 70% majority owner agrees to sell their entire stake for GEL 700,000 (i.e., GEL 10,000 per 1%). The minority partner (30%) exercises their Tag-Along right and demands that the buyer also acquire their stake at the same price (GEL 300,000). The buyer must either acquire both stakes or abandon the deal.

 

4.2. Drag-Along — The Majority's Right to Force a Full Sale

 

Drag-Along (forced co-sale) is the inverse mechanism, it protects the majority partner from being "blocked" by an unwilling minority.

Imagine this situation: a buyer emerges who wishes to acquire 100% of the company. The buyer is not interested in a partial acquisition. The majority partner is willing to sell, but the minority refuses. Under a Drag-Along provision, the majority partner can compel the minority to sell their shares on the same terms.

This mechanism is essential in M&A transactions, it ensures that a single minority partner cannot block a deal that benefits the company as a whole.

 

4.3. Setting Thresholds

 

Drag-Along is typically triggered only when the majority partner holds at least a certain threshold (often 75%, sometimes 50%+1). This ensures that a thin majority cannot force the minority into a forced sale.

It is also important to set a minimum price, Drag-Along should not be activated if the offered price is significantly below the company's true value. This protects the minority from bad-faith forced sales.

 

4.4. Practical Comparison

 

Tag-Along and Drag-Along are mirror-image mechanisms, one is designed to protect the interest of the minority partner, the other to protect the majority partner and the integrity of the overall deal structure.

Tag-Along gives the minority partner the right to join the majority's transaction on the same terms. It is a right, not an obligation  the minority partner decides for themselves whether to exercise it. In practice, the mechanism is triggered when the majority partner is partially or fully exiting the company: at that moment, the minority partner is no longer forced to remain alongside an unknown new majority owner and can instead sell their own shares together with the majority's, at the same price. Tag-Along has no minimum shareholding threshold and applies regardless of the size of the partner's stake.

Drag-Along, by contrast, is the majority's instrument and imposes an obligation on the minority partner, to sell their shares on the same terms as the majority. It is used almost exclusively in full exit (Exit) scenarios, where an outside buyer is acquiring the entire company and the minority partner's refusal to sell would derail the transaction. For that reason, the activation of Drag-Along is tied to a required ownership threshold often 75% or 50%+1, so that its use is grounded in a genuine majority decision rather than a single partner's unilateral action.

Tag-Along is a minority partner's right that activates upon a partial exit and requires no shareholding threshold. Drag-Along is a minority partner's obligation, designed for full-exit scenarios and subject to a defined ownership threshold.

Best practice is to include both rights in the SHA, this provides transactional flexibility regardless of how the future exit unfolds.

 

5. The "Sleeping Partner" Problem and Vesting

 

5.1. The Underlying Legal Problem

 

One of the most common problems in Georgian small business is the "sleeping" or disengaged partner. The scenario plays out repeatedly:

• Two or more individuals start a business together. One contributes capital; another contributes know-how, labor, and connections.
• The business grows. After a few years, one partner gradually stops working. They remain a formal owner but cease meaningful participation.
• The working partner continues operating the company and driving its growth. Yet 50% of the profits still go to the disengaged partner, because formal ownership remains intact.

This is an inequitable outcome but is legally normal, shares represent ownership, not active contribution. Standard articles of association do not include any mechanism that ties share ownership to ongoing contribution.

 

5.2. The Fundamentals of Vesting

 

Vesting (gradual acquisition of ownership rights) is the mechanism that prevents this problem in advance. The concept is straightforward: shares are formally recorded in the contract from day one, but the partner gains full ownership of those shares gradually, based on time elapsed or milestones achieved.

If the partner leaves the company before fully vesting, the company (or the remaining partners) gains the right to repurchase the "unvested" portion at a pre-agreed price.

 

5.3. Cliff vs. Gradual Vesting

 

Two primary models exist:

Cliff Vesting — until a certain date, the partner cannot vest any shares. This date is often set at 1 year. If the partner remains with the company for the full year, they vest a substantial portion at once (e.g., 25%). This protects the company against someone "joining, receiving shares, and leaving shortly after."

Gradual Vesting — shares vest incrementally (often monthly). Under a 4-year vesting plan, 1/48 of the total shares vest each month.

Combined model is the most common in startups: a 4-year vesting plan with a 1-year cliff. During the first 12 months, no shares vest; at the 12-month mark, 25% vests at once; thereafter, 1/48 vests monthly over the remaining 36 months.

 

5.4. Good Leaver vs. Bad Leaver

 

For vesting to function properly, the contract should also specify Good Leaver and Bad Leaver scenarios:

Good Leaver — a partner who leaves the company for objective reasons beyond their control (serious illness, death, or company-initiated termination of duties). In such cases, the partner retains the vested portion and is often bought out at fair market value.

Bad Leaver — a partner who leaves the company for subjective reasons or due to their own conduct (voluntary departure, breach of duties, misconduct). In such cases, the partner is required to sell back even the vested portion at a symbolic or significantly discounted price.

 

5.5. Concrete Numerical Example

 

Imagine the following situation: two founders start a company, Founder A and Founder B, each holding 50%. The SHA includes a 4-year vesting plan with a 1-year cliff.

Founder B leaves the company in month 18, on their own initiative, after a period of conflict, meaning they qualify as a Bad Leaver.

Calculation:

• Vested at the end of month 12: 50% × 25% = 12.5%
• Additional vested during the next 6 months: 50% × (6/48) = 6.25%
• Total vested: 18.75%
• Unvested: 50% − 18.75% = 31.25%

Result: Founder B retains 18.75% (though, as a Bad Leaver, the buyback price is discounted), while 31.25% returns to the company or to the remaining partners.

 

5.6. Enforceability of Vesting Under Georgian Law

 

Vesting is not explicitly regulated under Georgian law, but its mechanics align with the principle of contractual freedom under the Civil Code. In practice, vesting is implemented through derivative share transfer agreements combined with appropriate amendments to the articles of association.

Specific nuances, particularly the mechanics of price calculation and the speed of judicial enforcement, require individual consultation with a qualified attorney.

 

6. Decision-Making and Corporate Governance

 

6.1. Reserved Matters — Strategic Decisions

 

Typically, day-to-day management is handled by the director, and shareholder decisions are taken by majority vote. However, certain decisions are sufficiently important that they should require a qualified majority (e.g., 75%) or unanimous consent.

These important decisions belong to a category known as Reserved Matters. A recommended list:

• Amendments to the articles of association;
• Increases or decreases in share capital;
• Issuance of new shares;
• Reorganization, merger, or division of the company;
• Liquidation of the company;
• Significant financial expenditures (above a certain threshold, often a percentage of revenue);
• Taking on debt above a defined threshold;
• Disposal of substantial assets;
• Entering a new business line;
• Appointment or removal of the director;
• Selection of the auditor;
• Decisions on dividend distribution;
• Establishment of strategic partnerships;
• Material licensing or sale of intellectual property.

This list should be appended to the SHA as a separate schedule. Each item should be specific, "significant expenditure" is too vague; "one-time expenditure exceeding GEL 50,000" is concrete.

 

6.2. Director Appointment Rights

 

If multiple partners exist, the SHA must address who has the right to appoint a director or board member. Common approaches:

• Proportional rights — each partner appoints a director proportional to their ownership (e.g., 30% ownership = 30% of board seats);
• Joint consent — appointment of any director requires consent of all partners;
• Guaranteed minority seat — at least one seat is reserved for the minority, regardless of share size.

 

6.3. Veto Rights

 

A veto right, the ability of one partner to unilaterally block a specific decision, is a powerful mechanism that must be used carefully. Often it is built into Reserved Matters: certain decisions require consent of a specific partner.

 

6.4. Information Rights for the Minority

 

Under default law, the minority has limited information about company operations, which is often inadequate to protect their interests. The SHA can expand these rights:

• The right to receive financial reports (quarterly, monthly);
• The right to inspect accounting records;
• The right to attend board meetings (even without voting rights);
• The right to advance notice on significant decisions.

 

7. Share Valuation Mechanisms

 

Any mechanism involving share transfer, exit, or vesting only functions if the SHA includes a fair price calculation mechanism. Without it, valuation becomes a source of disputes.

 

7.1. Book Value

 

This is the simplest mechanism, share value is calculated as the company's net assets (assets minus liabilities) multiplied by the relevant ownership percentage. For example, if the company has net assets of GEL 1,000,000 and the partner owns 30%, the Book Value of their shares is GEL 300,000.

Advantage: Simple, objective, not subject to dispute.

Disadvantage: Does not account for the company's true market value, particularly its future potential, brand value, relationships, or intellectual property.

 

7.2. EBITDA Multiple

 

This mechanism values the company by multiplying its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by a specific multiplier.

Example: the company's annual EBITDA is GEL 200,000. The SHA specifies a 5x multiplier. The company's total value = 200,000 × 5 = GEL 1,000,000. A 30% stake = GEL 300,000.

The multiplier depends on the industry, IT startups typically use higher multiples than traditional small businesses.

 

7.3. Discounted Cash Flow (DCF)

 

This is a more complex mechanism that values the company based on its projected future cash flows. In practice, DCF is rarely used for small businesses because it requires sophisticated financial modeling and depends heavily on assumptions, which themselves can become the source of dispute.

 

7.4. Independent Valuer

 

A common mechanism is to specify that the price will be determined by an independent valuer. The SHA should specify:

• Who may initiate the valuation;
• Which valuer or which firm will be retained;
• Who pays the valuer's fee;
• The timeframe within which the valuation must be delivered.

 

7.5. Hybrid Mechanisms

 

In practice, hybrid mechanisms are often used, for example, the price is the higher of EBITDA Multiple and Book Value, or an average of both. This reduces the risk of extreme outcomes.

 

7.6. Disputed Valuation

 

If the parties cannot agree on the valuation, the SHA should specify a resolution mechanism in advance. A common approach is to engage two independent valuers (each party nominates one); if the gap between them exceeds a defined percentage, a third valuer is brought in (often selected jointly by the first two).

 

8. Dividend Distribution

 

8.1. Pro-Rata Distribution

 

Under the default rule, dividends are distributed in proportion to share ownership. A 40% shareholder receives 40% of total dividends.

However, this does not always align with the business logic. SHAs frequently include more sophisticated mechanics.

 

8.2. Preferred Dividends

 

When attracting investors, preferred shares often come into play, the investor receives dividends with priority over ordinary shareholders. For example: from the company's annual profit, the first portion goes to the investor as an 8% preferred dividend; only after this is the remainder distributed pro-rata.

This mechanism protects the investor's financial interest and is often a precondition for receiving venture capital investment.

 

8.3. Distribution Timeline and Mechanics

 

The SHA must clearly specify:

• When dividends are distributed (one-off, quarterly, annually);
• The timeframe between the decision and the actual payout;
• Who makes the decision;
• The minimum and maximum percentage of profit that will be distributed.

 

8.4. Reinvestment Policy

 

Many growing companies do not distribute all profits, a portion is reinvested for expansion. This must be documented, otherwise one partner may demand full distribution while another demands full reinvestment.

Best practice is to specify in writing that a fixed percentage of profit (e.g., 30%) will always be distributed as dividends, while the remainder is reinvested, or that this decision requires a qualified majority.

 

9. Protective Mechanisms: Anti-Dilution, Non-Compete, Non-Solicitation

 

9.1. Anti-Dilution Protection

 

Share dilution occurs when the company issues new shares. If the new shares are issued at a lower price than the price at which an existing investor entered, the investor's stake loses significant value.

An anti-dilution clause protects the investor, it ensures that, in the event of new share issuance, the investor's stake is automatically adjusted (typically by issuing additional shares for free).

Two main formulas exist:

• Weighted Average — partial, market-friendly protection;
• Full Ratchet — full protection, though sometimes too restrictive for the company's future fundraising.

 

9.2. Non-Compete for Partners

 

A non-compete provision obligates the partner not to engage in competing business, neither independently, nor as an employee, nor as an investor.

Georgian law recognizes this concept, but its enforceability is limited by the reasonableness principle:

• The restriction must be geographically reasonable (a worldwide restriction in place of one limited to the relevant market may be declared invalid by the court);
• The duration must be reasonable (5 years is often excessive; 1-2 years is reasonable);
• It must specify a concrete business sector (not "any business," but "the specific industry");
• Compensation should be reasonable (consideration is often recommended in exchange for the restriction).

 

9.3. Non-Solicitation

 

Non-solicitation prohibits the partner from poaching the company's employees, clients, or suppliers, not offering them alternatives, not recruiting them into the partner's new venture.

This is typically more effective and more easily enforceable than a non-compete, as it does not interfere with the partner's fundamental right to work.

 

9.4. Confidentiality Obligations

 

Every partner is exposed to the company's internal information, financial data, business strategy, customer lists, intellectual property. The SHA should specify:

• What information is considered confidential;
• For how long the confidentiality obligation applies (often indefinitely or for a defined period after leaving the company);
• What penalty applies for breach.

 

10. Dispute Resolution Mechanisms

 

10.1. Negotiation Obligation

 

The first step in resolving any dispute should be direct negotiation. The SHA should specify:

• The parties are obligated to issue a formal notice when a dispute arises;
• A minimum negotiation period is set (often 30 days);
• Negotiation must be conducted according to specific principles (in good faith, with the aim of reaching agreement);
• The outcome of negotiation, either resolution or formal declaration that the issue could not be resolved.

 

10.2. Mediation

 

If negotiation fails, the next step is mediation. Mediation centers operate in Georgia and can be engaged. The SHA should specify:

• Which mediation center or who will select the mediator;
• The duration of the mediation process;
• The mechanism for sharing costs.

 

10.3. Arbitration vs. Litigation

 

A dispute may be resolved through either the Georgian courts or through arbitration. Each has its own advantages and disadvantages:

The two mechanisms differ fundamentally in nature and offer distinct advantages depending on the type of dispute.

Court proceedings are comparatively inexpensive but significantly slower  a single instance can take anywhere from 7 to 24 months, and the subsequent appellate and cassation stages extend this timeline further. The process is public, which is often problematic in corporate disputes, as case materials and the final ruling become accessible to a wide audience. On the other hand, enforcement of a court judgment within the country is automatic and requires no additional procedure. Judges typically have a general civil and commercial practice rather than narrow sector-specific expertise.

Arbitration offers the opposite trade-off. The process is more expensive, arbitrator fees and administrative costs are substantially higher than court fees, but it is significantly faster (3 to 12 months) and confidential. The substance of the dispute, the parties involved, and the final award are not made public, which is a decisive advantage in disputes involving commercial secrets, reputational risk, or sensitive competitive information. Arbitrators are typically appointed from within the relevant field, experts in corporate law, finance, or the technology sector, which raises the quality of the decision. However, enforcement of an arbitral award requires a separate procedure, and appeals are generally unavailable: the award is final.

Arbitration is generally recommended when confidentiality and speed are priorities, and when the dispute carries significant financial weight.

 

10.4. Governing Law and Jurisdiction

 

The SHA must specify:

• Which country's law governs the contract (typically Georgian law);
• Which jurisdiction handles disputes (a specific court or arbitration body);
• The language of the agreement (typically Georgian; if a foreign language is used, the contract must specify which language version prevails in case of conflicting translations).

 

10.5. Cost Allocation in Disputes

 

A best practice is to include a "losing party pays the winner's costs" provision, this reduces the incentive to initiate frivolous disputes. The alternative, equal cost-sharing, is often less effective.

 

11. Georgia's New Law on Entrepreneurs and Compliance

 

11.1. Key Changes Under the New Law

 

The new Law of Georgia on Entrepreneurs entered into force on January 1, 2022, replacing the framework that had existed since 1994 and introducing European-style standards. A full description of the changes warrants a separate article, but the main changes relevant to shareholders' agreements are:

• More rigorous regulation of director and management fiduciary duties;
• Strengthened legal recognition of the shareholders' agreement;
• Expanded rights of minority shareholders;
• Formalization of corporate governance;
• Significant changes to the standard articles of association used by the registry.

 

11.2. Bringing Existing SHAs into Compliance

 

If your company was established before January 1, 2022, and you have an existing SHA, it may be partially out of date. A review should focus on:

• Whether director duties align with the new law;
• Whether share transfer mechanisms align with the new registration rules;
• Whether minority rights align with the strengthened legal framework;
• Whether dividend distribution rules remain compliant.

 

11.3. Timelines and Sanctions

 

When the new law came into force, a transition period was provided during which companies were required to bring their articles of association into compliance. Current information regarding deadlines and procedural matters should be verified directly, as extensions and amendments are common.

 

11.4. Changes to Be Made in the Contract

 

After the new law, particular attention in the SHA should be paid to:

• Specification of director fiduciary duties;
• Normalization of expanded minority rights;
• Concretization of information rights;
• Management of conflict of interest mechanisms.

 

12. Common Mistakes in Drafting a Shareholders' Agreement

 

Many SHAs I have reviewed in practice are structurally well-drafted but contain insufficiently concrete language, which becomes a source of disputes. Below are several common errors:

Vague language — phrases such as "within a reasonable period," "as appropriate," or "where possible" leave broad room for interpretation and often end up in court. Best practice is to include specific timeframes and metrics.

Omitting enforcement mechanisms — a contract may grant a right but say nothing about what happens if that right is breached. This effectively nullifies the contract's function. Each significant provision should include a penalty, compensation, or other enforcement mechanism.

Failing to specify timeframes and concrete numbers — "modest amount" should be replaced with "GEL 50,000," and "reasonable period" should be replaced with "30 days." Concrete numbers eliminate interpretive ambiguity.

Neglecting the amendment procedure — the contract is built on top of a developing business that will require changes over time. The procedure for making amendments should be specified in advance (whose consent is required, in what form changes are recorded).

Conflict with the director's contract — the SHA and the director's employment contract must not contradict each other. This becomes problematic when a partner is simultaneously serving as a director.

 

13. Sample Clauses and Illustrative Language

 

Below are short illustrative fragments showing how a particular mechanism might appear in an actual contract. These are for illustrative purposes only, drafting an actual contract requires individual analysis and consultation with a qualified attorney.

Shotgun Clause (illustrative): "Either partner (the 'Offering Party') may, at any time, deliver a written notice to the other partner (the 'Receiving Party') stating a per-share offer price. The Receiving Party shall have 30 (thirty) calendar days to decide: (a) to acquire the Offering Party's shares at the stated price, or (b) to sell their own shares to the Offering Party at the same price. Failure to respond shall be deemed an election under (b)."

Right of First Refusal (illustrative): "No partner shall be entitled to sell their shares to a third party unless they have first offered those shares to the remaining partners at the same price and on the same terms. The remaining partners shall have 30 (thirty) calendar days from receipt of such offer to accept or refuse in writing. Expiration of the deadline shall be deemed a refusal."

Vesting (illustrative): "Partner A's 50% stake shall be subject to a 4 (four)-year vesting schedule with a 1 (one)-year cliff, meaning: (a) during the first 12 months, no shares shall vest; (b) at the end of month 12, 25% of Partner A's stake (i.e., 12.5% of total company shares) shall vest as a single tranche; (c) over the remaining 36 months, 1/48 of the total stake shall vest monthly. In the event of Partner A's departure, any unvested portion shall return to the company."

 

14. Steps for Drafting a Shareholders' Agreement

 

14.1. Mapping Partner Interests

 

The first step is to articulate each partner's interests. What does each partner expect to gain? What financial outcome are they pursuing? How long do they intend to remain engaged in the business? What are their red lines?

This step is frequently skipped because it can feel "uncomfortable" to raise these questions during the early friendship phase. The lawyer's function is often precisely this, to ask the awkward questions in a structured way.

 

14.2. Scenario Modeling

 

The next step is scenario modeling:

• What happens if one partner leaves after one year?
• What happens if one partner leaves after five years?
• What happens if the company fails to become profitable within two years?
• What happens if the company grows 10x?
• What happens if one partner starts a competing business?
• What happens if one partner falls into alcohol abuse or gambling?

A mechanism must be specified for each scenario.

 

14.3. Drafting with an Attorney

 

Once interests have been mapped and scenarios modeled, drafting begins. This typically proceeds iteratively, first draft, comments, revisions, final version. In practice, the process usually takes 2-4 weeks; complex agreements can take significantly longer.

 

14.4. Signing, Notarization, and Filing

 

The final signing should be done in person, with all parties present. Notarization is recommended, it is not legally required, but it significantly strengthens the contract's legal weight.

One copy of the agreement should be retained by each partner, one by the company's accounting or legal department, and one by the drafting attorney.

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15. Frequently Asked Questions (FAQ)

 

1. Is a shareholders' agreement required to be filed with the National Public Registry?

 

No. A shareholders' agreement is not registered with the Public Registry. It remains confidential between the parties and the company, preserving the privacy of internal business decisions.

 

2. How much does drafting a shareholders' agreement cost?

 

The cost depends on the complexity of the business, the number of partners, and the specific provisions required. It is a one-time investment that is significantly less expensive than the cost of litigation later on.

 

3. Can a shareholders' agreement be signed for an existing company?

 

Yes. A shareholders' agreement can be executed at any stage: at formation, when bringing in an investor, to resolve an existing conflict, or even years after the fact.

 

4. What is the difference between a director's contract and a shareholders' agreement?

 

A director's contract is an employment or service contract between the manager and the company. A shareholders' agreement governs the relationship between owners. The same person can be both a director and an owner, but these are two different legal statuses.

 

5. How are dividends distributed if there is no agreement?

 

In the absence of a specific agreement, dividends are distributed pro-rata to share ownership, regardless of who contributed what. This is precisely the inequity that a shareholders' agreement is designed to address.

 

6. Can I force a partner to sign a shareholders' agreement?

 

No. A shareholders' agreement is a civil contract based on voluntary consent. A coerced signing would not be legally valid.

 

7. Will a shareholders' agreement written in English be enforceable in Georgian courts?

 

Yes,  but presentation to a Georgian court requires a notarized Georgian translation. Best practice is to draft the agreement in both languages (Georgian and English) and clearly specify which version prevails in the event of a translation conflict.

 

8. For how long should a shareholders' agreement be in effect?

 

Typically, a shareholders' agreement is open-ended, it remains in force as long as the company exists or until the parties agree to modify it. A specific term is possible but rarely practical.

 

9. Can I amend a shareholders' agreement unilaterally?

 

No. Any amendment requires consent of all parties or, if the contract includes a built-in amendment mechanism, the qualified majority specified there. Unilateral amendments are legally void.

 

10. What happens if the shareholders' agreement and the articles of association contradict each other?

 

This conflict should be avoided in advance. Best practice is to amend the articles of association in parallel when drafting the SHA. If a conflict does arise, the articles of association generally prevail in relations with third parties, while the SHA prevails in matters between the parties themselves.

 

11. Does the shareholders' agreement bind new partners who join the company later?

 

Formally, it binds only those who signed. However, best practice is to require any new partner to accede to the existing contract through a Deed of Adherence. This requirement should be built into the SHA.

 

12. In what circumstances would a court declare a shareholders' agreement void?

 

A court may invalidate a shareholders' agreement if it contradicts mandatory legal norms, violates public policy, or contains unreasonable individual provisions (e.g., an overly broad non-compete clause). Voiding of a single inadequate provision typically does not nullify the entire contract.

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Conclusion

 

A shareholders' agreement is not a luxury or a formality, it is the legal foundation of your business, determining what your efforts will yield in the years to come: stability or conflict.

Experience consistently shows that a substantial share of businesses started without a shareholders' agreement end up in litigation years later, often precisely when the company has become successful and the stakes are highest. By that point, conflict represents not only financial loss but lost momentum, decelerated growth, and often the complete paralysis of the business.

If you are:

• Planning to start a business;
• Already running a company without a shareholders' agreement in place;
• Operating under an old contract that is likely outdated;
• Considering bringing in an investor or preparing the company for sale.

We are ready to prepare a comprehensive shareholders' agreement tailored to the specifics of your business — one that will protect you against the conflicts that lie ahead.

Contact us for consultation →

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Author: Zurab Loria — Attorney at Law, Member of the Georgian Bar Association, Master of Corporate Law, Managing Partner at L&L Consulting.