Legal Services for Business Do Not Begin and End with Company Registration When it comes to incorporating a Limited Liability Company (LLC) in Georgia, novice entrepreneurs often make one fatal error: they rely solely on the standard Charter and fail to execute a Shareholders’ Agreement (SHA). This article serves as a comprehensive guide for business owners, detailing how to avoid corporate disputes, protect your investment, and why retaining a qualified attorney is essential for regulating partnership relations. If you plan to launch a business or already own a company, this information is vital for your commercial success.

What is a Shareholders’ Agreement and How Does it Differ from the Charter?

Many clients ask us: "Why do I need an additional agreement if I already have the LLC Charter?" This is a legitimate question, yet the answer lies in the security of the business.

The LLC Charter is the company’s founding document, mandatory for registration with the Public Registry. In 90% of cases in Georgia, entrepreneurs utilize the standard, template Charter offered by the Registry. While this template fully complies with the Law of Georgia "On Entrepreneurs," it is a "bare" legal framework. It does not account for the specifics of your business, private arrangements between partners, or mechanisms for crisis management. Furthermore, the Charter is a public document accessible to any interested party.

In contrast, the Shareholders’ Agreement (SHA) is a confidential document. It remains exclusively between the partners and the company. This is the instrument where you may stipulate any condition (provided it does not contravene the law), including:

• How actual profits are distributed;

• Allocation of obligations (who contributes capital and who contributes labor/intellectual resources);

• Procedures regarding a partner's exit from the business.

Why is a Verbal Agreement Insufficient?

At the inception of a business, euphoria is high. Partners are often friends or relatives. The phrase "We are brothers, why do we need paperwork?" is the most dangerous sentence in business law. Statistically, 80% of disputes between partners arise when the company either generates significant profit or enters a crisis. At such times, "brotherhood" often recedes to the background, and arduous litigation ensues, lasting for years and leading to corporate paralysis. 

Key Issues Regulated by the Shareholders’ Agreement

1. Resolving Deadlocks – The 50/50 Problem

The most common model for LLC registration in Georgia involves two partners with a 50%-50% equity split. This is a "ticking time bomb." Imagine the scenario:

• Partner A believes the Director must be replaced.

• Partner B believes the Director must stay. Since both hold equal voting power, a decision cannot be reached. The company enters a Deadlock. The bank freezes accounts, employees are left in limbo, and the business faces bankruptcy.

The Solution: The SHA includes Deadlock Resolution Mechanisms. For example:

•  One partner names a price at which they are willing to sell their share. The other partner is then obligated to either buy at that price or sell their own share at the same price. This ensures fair pricing and a rapid resolution to the conflict.

• The pre-agreed involvement of a neutral third party (e.g., a mediator or arbitrator).

2. The "Sleeping" Partner and Dividends

It is common for two individuals to start a business where one contributes capital and the other contributes intellectual resources and labor. Initially, both are active, but over time, one partner ceases working or moves to other activities while continuing to demand 50% of the profits.

Legal Risk: Under a standard Charter, dividends belong to the owner of the share, regardless of their active participation. The Solution: The agreement may stipulate Vesting (gradual acquisition of rights) or Good Leaver / Bad Leaver principles. For instance, if a partner leaves the company without fulfilling their obligations (Bad Leaver), they may be obligated to sell their shares to the remaining partners at a nominal price or at a discount to market value.

3. Restriction on Share Alienation (Pre-emption Rights)

Do you want your partner to sell their share to a complete stranger or an undesirable individual? By law, this is possible unless the Charter prohibits it. The SHA establishes a Right of First Refusal (ROFR). This means that if a partner wishes to sell their share, they must first offer it to you under the same terms. Only after your refusal may they transact with a third party.

4. Tag-Along and Drag-Along Rights

These terms are essential if your goal is to attract investment or sell the company in the future (Exit Strategy).

• Drag-Along (Right to Force Sale): Protects the majority shareholder. If a buyer appears who wishes to purchase 100% of the company, the majority partner can "force" the minority partner to sell their share at the same price. This facilitates large-scale transactions.

• Tag-Along (Right to Co-Sale): Protects the minority shareholder. If the majority partner sells their share, the minority partner has the right to demand that the buyer purchase their share under the same conditions. This protects the minority partner from being left behind with an unfamiliar new owner.

The New "Law on Entrepreneurs" and Its Impact

Georgia has enacted a new Law on Entrepreneurs, which implements European standards. This law has increased the fiduciary duties of directors and altered the rules of the game.

Under the new legislation, the Shareholders’ Agreement has acquired even greater significance. Judicial practice indicates that judges increasingly rely on private agreements between partners rather than merely the dry text of the Charter. Consequently, legal consultation in this area is no longer a luxury it is a necessity.

If your LLC is registered under the old law and you have not updated your documentation, you are at risk. Harmonization with the new law is a mandatory process, making this the ideal time to implement a Shareholders’ Agreement.

Why You Need a Lawyer, Not a Downloaded Template

Many free templates can be found online, but business law is not a "Copy-Paste" process. Every business is unique.

• Specific Risks: A construction company faces entirely different risks than an IT startup. A template cannot account for the nuances of your industry.

• Enforceability: An improperly drafted agreement may be declared void by the court. An experienced attorney uses formulations that stand firm on the basis of Georgian legislation.

• The Negotiation Process: A lawyer is not just a drafter; they are a mediator. They ask the "uncomfortable questions" that partners hesitate to ask each other, helping them find a compromise before a conflict occurs.

Frequently Asked Questions (FAQ) – Business Law

1. Is it mandatory to register the Shareholders’ Agreement with the Public Registry?

No, the Shareholders’ Agreement is not a public document. It is not uploaded to the Public Registry, which ensures the confidentiality of your business decisions. Only the Charter is uploaded to the Registry.

2. What is the cost of drafting a Shareholders’ Agreement?

The price depends on the complexity of the business, the number of partners, and the required provisions. This is a one-time investment that is significantly cheaper than the thousands of Lari spent on subsequent litigation.

3. Can I enter into a Shareholders’ Agreement for an already operating company?

Certainly. An SHA can be executed at any stage: during incorporation, when attracting investment, or even years later when partners decide to formalize their relationship.

4. How does a Director’s Agreement differ from a Shareholders’ Agreement?

A Director’s Agreement is an employment or service contract between the manager and the company. A Shareholders’ Agreement regulates the relationship between the owners (shareholders). Often, the shareholder and the director are the same person, yet these are two distinct legal statuses.

5. How are dividends distributed if we do not have an agreement?

If no special agreement or provision exists in the Charter, under the Law on Entrepreneurs, dividends are distributed in proportion to the partners' shares (e.g., 50% share = 50% dividend), regardless of who performed the work. A Shareholders’ Agreement is necessary precisely to eliminate this potential inequity.

Take the Step Toward a Stable Business

Doing business in Georgia involves many risks, but conflict with a partner should not be one of them. A Shareholders’ Agreement is your guarantee of peace of mind. It allows you to focus on development, sales, and strategy, rather than expending energy on internal misunderstandings.

Do not wait for the first conflict. Prevention is always more profitable than a cure.

Disclaimer: The information provided in this article is for informational purposes only and does not constitute individual legal advice. For specific cases, please consult an attorney.