Legal Framework for Limiting Directors’ Authority

A director in Georgian corporate law is the executive body of a legal entity and is responsible for the day-to-day management of the company, as well as for representing it in relations with third parties. The director is vested with broad managerial and representative powers deriving from statutory law, the company’s charter, and internal corporate documents.

The legal status of a director is primarily regulated by the Law of Georgia on Entrepreneurs, as well as by the company’s charter and other corporate instruments. In performing his or her functions, the director is obliged to act in the best interests of the company, in good faith, and with due care.

Of particular importance are the director’s fiduciary duties, notably the duties of care and loyalty. These duties constitute the normative basis for imposing restrictions on the director’s powers and for holding the director liable in the event of their breach.

In Georgian corporate law, abuse of a director’s powers constitutes the use of the authority and opportunities granted to the director contrary to the interests of the company, for personal benefit, or in violation of the principles of good faith and reasonableness.

The most common forms of abuse include:

• entering into transactions in the presence of a conflict of interest;

• exceeding powers granted by the company’s charter or contractual arrangements;
• using company assets for personal purposes;
• concealing information from the company’s shareholders;
• causing losses as a result of bad-faith or negligent management.

Such actions undermine trust in corporate governance and necessitate the application of preventive legal mechanisms.

In Georgian corporate law, restrictions on a director’s powers may be mandatory or dispositive in nature and may be established:

• Directly by law (requirements to obtain approval from shareholders or supervisory bodies for certain transactions, as well as special rules governing related-party and conflict-of-interest transactions);
• By the company’s charter (the establishment of financial thresholds for transactions; the requirement of prior consent of shareholders or the general meeting; the allocation of exclusive competences to other corporate bodies); This will also  safeguard counterparties , as the restrictions will be publicly available on the website of the National Agency of Public Registry.
• By corporate agreements and internal rules (the introduction of collective or multi-tier decision-making mechanisms, including joint representation, dual-signature requirements, collegial executive bodies, and internal financial control).

A breach of the established restrictions gives rise to various forms of liability for the director. Primarily, this involves civil liability in the form of compensation for losses caused to the company.

In addition, in certain cases transactions may be declared invalid, and where the elements of an offence are present, the director may be subject to administrative or criminal liability. The institution of liability serves not only a compensatory but also a preventive function.

IMPORTANT: When imposing restrictions on the powers of an executive director, it is essential to clearly define the scope of the director’s functional authority. In practice, when a director performs any action related to the interests of the company, particular attention is paid to the specific powers vested in the director. 

This aspect is especially scrutinized in transactions involving banks, where due diligence commonly includes verification of transaction value limits in accordance with the director’s authorized powers to enter into such transactions.

Author: Melano Svanidze. Nino Zautashvili.

Our team will assist in addressing matters related to the limitation of the executive director’s powers and will assess the risks associated with this issue.