The Composition of the Second Chamber:

Besik Loladze – Chairman of the Hearing, Judge Rapporteur

Otar Sichinava - Member

Joni Khecuriani – Member

The Secretary of the Hearing: Darejan Chaligava

The Title of the Case: Citizens of Georgia Zaur Elashvili, Suliko Mashia, Rusudan Gogia and Others and Public Defender of Georgia v. The Parliament of Georgia.

Subject of the Dispute: The constitutionality of art. 53³ of the Law on Entrepreneurs with respect to art. 14 and art. 21 of the Constitution of Georgia.

Participants of the Hearing: The claimants Zaira Natroshvili, Ioseb Natsvlishvili, Elene Feradze, Darejan Mtvarelishvili (N370 Constitutional Claim) and their representative Kakha Kukava; the claimant Zaur Elashvili (N382 Constitutional Claim) and his representatives Rusudan Mtchedlishvili and Nino Elbakidze; the claimants Suliko Mashia and Rusudan Gogia ( N390 Constitutional Claim); the claimant Anzor Mandzulashvili (N402 Constitutional Claim) and his representatives Zurab Marakvelidze and Irakli Xorbaladze; the claimants – Public Defender’s representative George Mshvenieradze; Respondent – the representative of the Parliament of Georgia, Batar Chankseliani. Witnesses: State Minister in the Reform Coordination Issues – Kakha Bendukidze, Senior Adviser to the state minister in the Reform Coordination Issues Keti Qoqroshvili; Specialist – Director of the Law School of Social Sciences University, professor Levan Izoria.

I

1. The disputed norm, art. 53³ of the Law on Entrepreneurs (compulsory sale of stocks) was adopted by the Parliament on the 24^th of May, 2005. Pursuant to it, the stockholder who has in his possession more than 95% of voting stocks (subsequently majority stockholder) has a right to purchase remaining stock with equitable price. The stockholder whose stocks are purchased (subsequently minority stockholder) has a right to accept the equitable price.

Art. 53³(1) of the Law on Entrepreneurs indicates to art. 53²(2) of the same law, pursuant to which there are two procedures for establishing equitable price. The procedure may be established by the charter of a joint stock company. If a charter does not regulate the issue, then the price is fixed by independent expert or by brokerage company. An independent expert or a brokerage company must create purchase account, in which purchase circumstances backed by relevant documents, the method for establishing equitable price and the stock price derived through this method will be indicated. An independent expert and a brokerage company are responsible with their whole property for any harm done to stockholders. The lower limit of an equitable price is fixed – it shall not be less than the higher price, which was paid by the purchaser stockholder within the last 20 months in the stocks of this company.

Pursuant to the art.53³ of the Law on Entrepreneurs, the decision regarding the purchase of stocks is made by the majority stockholder. The majority stockholder place an announcement in the printed media, which should contain information regarding the purchase conditions and procedures, the address of the registrar, where one can read report of independent expert of or brokerage company, as well as purchase date on which the purchase will be legally acknowledged. The majority stockholder on the day of the announcement will provide to registrar an application regarding the purchase and an account developed by an independent expert or a brokerage company. He/she is also obliged to send insured letter about the purchase to each of the stockholders listed in the registry. The person responsible for registry, creates the so called “purchase registry” where all registered stockholders are indicated, their names and address, the number of stocks in their possession. After the majority stockholder presents to the registry all documents evidencing exercise of the activities given by art.53³(1), the registry transfers all stocks in his/her possession.

The minority stockholder may not agree with the price fixed by an independent expert or a brokerage company and can apply to the court with the request to establish a different price within 90 days after publication of a purchase announcement. In case minority stockholder delays transfer or if his/her address is unknown, the obligation of a majority stockholder may be terminated by depositing.

The compulsory sale of the stocks may be followed by transformation of stock company into the limited liability company without mandatory informing of creditors.

2. On 16^th March 2006, the citizens of Georgia D. Mtvarelishvili, E.Feradze, N. Kalandadze, I. Natsvlishvili and Z. Natroshvili applied to the Constitutional Court of Georgia with the constitutional claim (registration N 370). They were stockholder of the Joint Stock Company Telenet. The majority of them was working in the company for a long time and has received the stocks as staff members. Part of the stock was purchased with the savings of the stockholders. The compulsory sale of the stock in accordance with the art. 53³ of the Law on Entrepreneurs have taken place in respect with the Claimants. The announcement of the majority stockholder is attached to the constitutional claim, in which the purchase date is fixed to be the 26^th of September, 2005, while the price of a stock is estimated as 0.4 GEL. According to the Claimants, while estimating the price of the stock, the stock was not being quoted at the stock exchange. It appears from the letter of the independent registrator of securities, LLC Company Center, by the 2^nd of February the claimants were not stockholders of Telenet any more. By recording Notice of N2/3/370 of the 29^th of March 2006 the Second Chamber of the Constitutional Court admitted for examination on merits N370 constitutional claim regarding the constitutionality of 53³ of the Law on entrepreneurs with respect to art14 and art.21 of the Constitution.

The citizen of Georgia Z. Elashvili submitted a constitutional claim (registration No382) to the Constitutional Court on the 25^th of April, 2006. The claimant was a stockholder of the Joint Stock Company “David Sarajishvili and Eniseli”. He has acquired stocks through voucher in 1992. The received dividends constituted significant income for him as a pensioner. The majority stockholder in the newspaper “Resonance” on 13^th February 2006 published an announcement regarding the purchase of stocks and on 14^th February served the notice to minority stockholders. The purchase date was fixed as 10^th March 2006. On 10^th May 2006 the Second Chamber of the Constitutional Court By recording notice N2/4/382 admitted for examination on merits the constitutional claim N 383 regarding constitutionality of art.53³ of the law on entrepreneurs with respect to the art. 21 of the Constitution of Georgia.

On the 1^st of June 2006 the citizens of Georgia S. Mashia and R Gogia submitted a constitutional claim (registration No 390) to the Constitutional Court of Georgia. The claimants were minority stockholders of the Joint Stock Company Ekrani. In that case also the procedure established by art.53³ of the Law on Entrepreneurs has taken place. On 16^th June 2006 the second chamber of the Constitutional Court of Georgia by recording notice N2/6/390 admitted for examination on merits the constitutional claim N390 regarding the constitutionality of 53³ of the Law on entrepreneurs with respect to art.14 and art.21 of the Constitution.

On the 15^th of August, 2006 the constitutional claim N402 of the citizen of Georgia A. Mandzulashvili v. The Parliament of Georgia was registered at the Constitutional Court of Georgia. The claimant was stockholder of the Joint Stock Company “Kaspicement”. It appears from the notice given by the LLC Company Center on the 4^th of May, 2006. He possessed 503 stocks and nominal value of each constituted 1.30 GEL. In the announcement of majority stockholder regarding the purchase of stocks, the date of purchase is fixed as May 4, 2006, while the price of a stock is 0, 26 GEL. By N2/10/402,405 recording notice of the 30^th of October, 2006 the Constitutional Court has admitted for examination on merits the constitutional claim N402 in the part which concerned constitutionality of 53³ of the Law on Entrepreneurs with respect to art.21(1) and art.21(3) of the Constitution of Georgia.

On the 18^th of August, 2006 Public Defender’s constitutional claim N405 v. the Parliament of Georgia was registered at the Constitutional Court of Georgia. On the 30^th of October, 2006 by recording notice N2/10/402,405, the Constitutional Court admitted for examination on merits the constitutional claim N405 regarding the constitutionality of 53³ of the Law on entrepreneurs with respect to art.21(1) of the Constitution of Georgia. With the same recording notice the of art. 53³ of the Law on Entrepreneurs was suspended until the final judgment of the Court.

3. In the process of preparation of the case for examination on merits, the Second Chamber of the Constitutional Court of Georgia has requested from the Parliament stenographic recordings and explanatory notes for the Law on Privatization of State Property and the Law on Amendments and Supplements to the Law on Entrepreneurs, which introduced art. 53³. The materials related to the Law on Amendments and Supplements to the Law on Entrepreneurs were sent to the Chamber by the Deputy of Parliamentary Secretary of the President.

The examination on merits of the constitutional claims N370, N382, N390, N402, N405 by the Second Chamber of the Constitutional Court took place on the 20^th, 21^st, 22^nd and 27^th of March, 2007.

4. The representative of the claimants on N370 constitutional claim, Mr. K. Kukava thinks that the opinion that right to property means not right to specific object, but right to the value of an object is incorrect. a substitution of a property object with certain amount of money is an exception and not a rule and necessitates proper justification.

The right to property is enshrined in the art. 21 of the Constitution and the instances in which the right may be restricted is established by 2^nd and 3^rd paragraphs of the same article. In cases of restriction of the right there should be pressing social need or urgent necessity present. Deprivation of stocks to minority stockholders does not conform to the established criteria. Only a wish of a majority stockholder to hold 100% of the stocks of a company is a private and not a social interest.

Two aspects should be emphasized –the legitimacy of restriction, proportionality of public and private interests and balance between them. The representative of the respondent pointed to one legitimate aim – unfounded litigation by minority stockholders that causes harm to the reputation of the company and impedes its proper functioning. The witness K. Bendukidze added to the above mentioned further two aspects: The minority stockholder on the one hand impedes change of the legal form of a company and on the other hand prevent raising additional investments.

A right of the minority stockholders to access to court has formal nature in practice and does not create real obstacles to a joint stock company. Reasoning regarding the harm to the company or to social interests which is caused by exercise of this right by minority stockholders was not presented. The mechanism for prevention of an abuse of rights is already given in the Civil Code and in other acts and there is no need for additional restrictions.

The necessity of transforming joint stock company into the limited liability one was not substantiated. Presenting certain reports to national commission of securities is not such a burden to joint stock company, in which range of accounting and other types of documents are processed, that it necessitates its transformation into limited liability company.

Attracting additional capital to the company is clearly a legitimate aim; however arguments were not presented about the additional means for investment, that are created by the disputed norm. Investing may occur through increasing company capital and through emission of stocks. In such conditions the legislature should not introduce the means, that are burdensome and restrict a right.

The disputed norm would not have positive influence on the development of securities market in the context of Georgia. The majority of joint stock companies were formed through privatization of state property. If the state will clear market from the stocks of these companies, which constitute major part of stocks on the stock exchange, this will destroy stock exchange and joint stock company institute in general.

The procedure for fixing equitable price is not fair due to the following two reasons: 1. the right to fix the price is given to the majority stockholder and he/she will fix the price which is in his/her interests. 2. the price will not be fixed in accordance with the development of company, nor on the basis of prognosis of implemented investments. Where the stock exchange is developed, the fixed price is near to the real price and subjective assessment is prevented. It is noteworthy that witnesses also pointed to the need for developing this mechanism.

K. Kukava who is a Member of the Parliament stated that discussions regarding the social effect and purposes of the law had not taken place in the Parliament. He also stated that the working on the draft law, which will annul art.53³ of the Law on Entrepreneurs is ongoing in the Parliament.

As to constitutionality of the art. 53³ of the Law on Entrepreneurs with respect to art.14 of the Constitution, the claimant has declined his claim in this part in his concluding statement.

5. The representative of the claimant on the N382 constitutional claim R. Mchedlishvili decreased his request and indicated that the disputed norm violated only the art. 21(1) and art.21 (3) of the Constitution.

The concept of the right to property and its contents is defined in the Civil Code of Georgia. The right to property includes possibility to freely dispose of it, while the disputed norm as it appears from its title, obliges the minority stockholder to dispose of his/her stocks without his will.

The concept of property expropriation includes the relations provided for in the disputed norm, because it is nowhere concretized that the property should be expropriated by the state. The position of the representative of the Respondent, that there is no expropriation on the basis of the disputed norm because the minority stockholders are given proper compensation is not correct. Providing compensation for the property does not mean that expropriation has not taken place.

In cases provided for in the art. 53³ of the Law on Entrepreneurs there is no social necessity and application of this norm is unjustified. The Law on Rule of Property Expropriation for Pressing Social Need does not mention compulsory sale of stocks as pressing social need. Attracting investments is not social need and does not conform to the requirements of the art.21 of the Constitution.

The disputed norm is also in conflict with the art.1 of the 1 protocol of the European Convention on human Rights, which concerns right to property and is similar to the Constitution in the property expropriation part.

6. The claimant on the N390 constitutional claim - S. Mashia decreased claim request in connection with art.21 (2) of the Constitution and left into force his request concerning paragraph 1 and 3 of the same article.

The disputed norm annuls the universally acknowledged right of the minority stockholder to alienate his property in accordance with his will. Although it is true that the state does not directly participate in compulsory sale of the stocks, but it interferes through the law in the relationship of private individuals.

The art. 21(2) and art. 21(3) provide for restriction and expropriation of property, however the compulsory sale of stocks does not fall in either of these, because there is not social need in this case. During the proceeding no example was given of minority stockholders impeding majority stockholders in the management of the company. This is impossible in reality, because the minority stockholder can only attend general meeting, raise certain issues and hear explanations.

Setting of equitable price is impossible, because in reality there is no stock exchange in Georgia. Applying to court in relation to the equitable price is also ineffective, because often the amount of the stocks is so negligible and the court fee so high that it is not reasonable for the minority stockholder to submit a case. In the case of application to the court the situation does not change, because court basis its judgment on the audit report.

The art. 53³ of the law on entrepreneurship violates the art.14 of the Constitution. A minority stockholder solely due to his small ownership is placed on unequal footing with a majority stockholder. Therefore, this is an instance of giving advantage on the ground of property.

7. The representative of the Claimant on the N402 constitutional claim – I. Xorbaladze and Z. Marakvelidze emphasized that recognizing of and guaranteeing the property by art. 21(1) of the Constitution, at the same time means its inviolability unless there is a pressing social need. At the same time, art. 21 (1) shall not be considered separately from art.21 (2) and art.21 (3). The paragraphs 2 and 3 establish exceptional cases when restriction and expropriation may take place.

From civil law perspective, the right to property includes three components and comprises possession, enjoyment and disposal. A minority stockholder does not have choice to maintain stocks or sell them according to his views. He losses all three components of the right to property and therefore there is no property present. Private persons do not have right to expropriate property, but only state, which has exclusive authority to make enforceable decision in the name of social interest or necessity.

Necessary social need may involve protection of individual’s life, fight with crime, building of roads and so forth. There is no perceivable social necessity for deprivation by force of stocks of minority stockholder by majority stockholder. It is in the majority stockholder’s interest to have 100% of the stocks of the company. Apart from this, the subject who can define what is necessary social need is the state and not private individual, who can only have opinion in this respect, but not a right to establish social need.

The principle of proportionality is violated. In order a quasi joint stock company to be transformed into effective limited liability company, which will attract more investments, it is not necessary that compulsory sale of stocks took place. The purchase of stocks could have happened through market. The liquidation of quasi joint stock companies and its base, formation of new companies was also possible.

8. The representative of the public defender on the N405 constitutional claim – G. Mshvenieradze thinks, that the disputed norms is in conflict with art.21(1) of the Constitution. In the judgment of N2/31-5 dated March 25, 1997 the Constitutional Court stated that, although the word “restriction” is not used in the art.21 (1) of the Constitution, but the words “right to inheritance and property is recognised and guaranteed” means that restriction of the right to property is impermissible. However restriction is allowed in the cases provided by the art.21 (2). There is no expropriation of property envisaged by the disputed norm, but instead there is a restriction of one of the components of the right – disposal. The Constitution states that there is a right and not an obligation to sell. In this case there is not a control on the enjoyment of property provided by the art. 1(2) of the first Protocol of the European Convention on Human Rights, but restriction on disposal of a property. The witnesses also have indicated to restriction of the right to property.

In the case of a restriction on the right to property the social need and social interest should be clearly present. What constitutes pressing social need should be assessed by the Court in the examination of specific issues.

The restriction established by the disputed norm is legitimate to the extent to which the state is constitutionally allowed to restrict the right to property. However restriction is not the only means for accomplishing the aim, which appears also from the testimony of the witness K. Bendukidze. The stockholder possessing 95% of the stocks of the company has a right and means to liquidate Joint Stock Company and create another type of business subject. The restriction was not necessary fro achievement of the aim. The purpose of a joint stock company is to attract free capital investments. Forcing out of minority stockholders is not necessary for strengthening a company and development of state’s economy.

From the Respondents’ perspective, a joint stock company as a legal-organizational form is unacceptable, which is not correct. The assertion, that minority stockholders impede successful functioning of a joint stock company and development of economy through artificial fuss, negative PR, court proceedings is unfounded. During the case proceedings no example was proposed from the Georgian reality and restriction of a right on the basis of unfounded probability is deprived of any ground and reasonableness. As to what concerns the aim that the nonfunctioning joint stock companies should be transformed into proper legal organizational form, that will fasten attraction of investments and will contribute to the development of economy, its accomplishment was possible through other means.

Therefore, restriction of the right to property occurred through violation of art. 21 (2) and as a result, at the same time the right to property recognized by art.21(1) is violated.

9. The representative of the Parliament of Georgia Batar Chanskeliani thinks that the claim of the Claimants should not be upheld because it is unfounded.

It is indicated in the Preamble of the Constitution, that it is based on the fundamental principles of 1921 Constitution. Therefore, it is reasonable to analyze art.114 of the Constitution of 21^st of February, 1921, pursuant to which “forceful deprivation of property or restriction of private initiative is permissible only for state or cultural necessity in accordance with the rule established in the separate law. Expropriated property shall be compensated, except otherwise provided for in the law”. The 1921 Constitution considers that the only legal means binding legislature in restriction of right to property is the principle of financial compensation for expropriation. This is also the main principle of art. 21 of the current Constitution. If we assess the art. 53³ of the Law on Entrepreneurs with respect to this right, then the right of the minority stockholder to receive equitable price disperses all doubts regarding the violation of his rights.

The disputed norm does not provide neither for restriction nor for deprivation of property. This is state’s legal and acceptable measure, which is directed towards protection of a right of certain stockholders and is conditioned by the interests of these stockholders and generally of public interests.

In the case-law of the European Court of Human Rights and of the Commission the broad interpretation of the concept of public interests is established. The European Court of Human Rights respects vision of legislature in these issues, if it is not deprived of reasonableness. The public interest the accomplishment of which is supported by art.53³ of the Law on Entrepreneurs is not apparent in the explanatory note; however it is indicated that the adoption of the draft law will result in strengthening of joints stock company institute, attraction of investments and significant economic improvement, which is in the interests of society. The companies that were created through state property privatization are non functional, which impedes development of business processes in the country. Timely resolution of this problem is the exact purpose of the disputed norm. Minority stockholders delay development of a company. Their existence on the one hand does not allow for investments and on the other hand has a negative influence on vital processes of the company development. Although nothing is known about these from the Georgian context but the examples from foreign countries indicate that minority stockholders can impede decision making and attraction of investments through blackmail, ungrounded complaints and through negative PR.

The minority stockholders are forced not to lose but to sell, to transfer with equitable price their property to other private individual. The general purpose of enjoyment of a stock is to receive financial benefit, while disputed law allows for equitable compensation for their stocks. What happens is just a transformation of a property into a financial asset and not expropriation or other type of restriction of a right.

The European Court of Human Rights does not considers the norms regulating relations between the private individuals as legal norms which restrict or expropriate property, but states that such legal norms do not constitute interference of the state with the right to property.

Expropriation or restriction of property may be found if minority stockholders are burdened in a manner that is irrational and excessive. The following facts prove that this situation is not present: 1. a minority stockholder is granted equitable compensation 2. the impugned norm was adopted due to the economic situation of the country and it serves to strengthen and develop joint stock companies. 3. additional rights are granted to majority stockholders not due to violation of balance of interests but due to economic considerations. The more stocks are owned by a person, the more he invested in the company and thus such a wide sphere of activity is available to him, that he shall be entitled to acquire for an equitable price the stocks owned by the minority stockholder. Majority stockholder has a pre-emptive right to maintain membership of a joint stock company, as his rights are provided with higher degree of protection due to the public interest, compared with the rights of a minority stockholder.

According to the case-law of the European Court of Human Rights, property implies only those rights, claims and other goods, that already exists and it does not encompass the rights and goods which may emerge in the future. Therefore, article 21 of the Constitution does not guarantee rights, property and commercial profit, which will be acquired in the future.

The Constitution does not enshrine the right to be a member of a company. The only right of a minority stockholder is to be paid an equitable compensation. The procedure of “squeezing out” of minority stockholders from the company via compulsory sale of stocks is not unconstitutional as long as minority stockholders are granted adequate compensation. It is true that there is no well-developed securities market and absence of the securities market precludes determination of equitable price, though the law is aimed at the future perspectives. The problem of determination shall be dealt with case by case, but if the price is determined improperly, there are available due judicial remedies for protection.

As to conformity of the impugned norm with article 14 of the Constitution, the equality principle is not violated on the ground of property. The sale of stocks is carried out pursuant to the precise procedure, prescribed by law, which totally excludes the violation of equality balance.

10. The witness, State Minister of Georgia for Economic Reforms, Mr. K. Bendukidze noted, that the impugned norm is adopted in all developed countries. Moreover, there is the Directive of the European Union, which is implemented in the new member states; also in Georgia, there was a substantial necessity to introduce this type of regulation.

Minority stockholder cannot participate in management of a joint stock company. He limits a majority stockholder to develop the company. Minority stockholders present very little part of the public, number of which probably amounts to several ten thousands. Often it is extremely hard to identify them. In many cases, the stocks serve as symbol of the link of minority stockholder to their company, it is not perceived as a financial instrument and they are unwilling to sell it. They are financial, not strategies investors, who aim at transforming investments into money.

There is a possibility, to substitute stocks with other assets in the process of reorganization, liquidation, etc. A minority stockholder may find outcomes of liquidation very similar to those of compulsory sale of stocks. When the compulsory sale of stocks is carried out, they are granted right to transform their investments into money. Results are positive for minority stockholders, as otherwise they would lose their stocks, the stocks would be acquired for unfair price or to pay off the debt.

From the legal perspective, rights of minority stockholders are restricted, though actually there is no such a restriction. Joint stock companies would identify alternative ways to get rid of minority stockholders, which would entail results analogous to compulsory sale of stocks. Restriction is carried out in the manner prescribed by law, it emanates from the nature of joint stock companies and it is in line with international practice. The relationship set forth in the impugned norm is not expropriation, as in this case one type of financial asset is substituted with another.

There exists public necessity for adoption of the impugned norm. The majority of the joint stock companies in Georgia were created through privatization, not on the ground of free will. This type of joint stock companies cannot fully realize their potential, cannot attract capital from foreign markets and are close to bankruptcy. Their stocks are not being quoted at the securities market. There is a public necessity, that the quasi joint stock companies be transformed into limited liability companies, which would be in line with their actual status, factual activities and management. In contrast to limited liability companies, joint stock companies have additional obligations under the legislation on securities markets. This is not fatal, though it is still significant burden for a small enterprise. When the quasi joint stock companies are liquidated, the market will be free in order to create joint stock companies based on free will. Development of this enterprise will cause progress of economy and formation of new jobs. The witness posed the question, whether the stockholders owning 5 % of the stocks of joint stock companies are able to hinder the companies in enhancement of their capital and he answered, that they have no such a possibility.

The institute of compulsory sale of stocks brought about actual positive change – large and authoritative investors entered in number of joint stock companies. If the minority stockholders are present, investors have no possibility to invest capital on one hand, and on the other hand, the minority stockholders often initiate different litigations, which is an additional risk. To avoid this risk is very positive.

The compulsory sale of stocks is balanced by compulsory tender bidding, which is binding for majority stockholder and after acquisition of more that 50% of stocks oblige him to offer other stockholders to buy their stocks for the price, for which he bought his stocks. This institute doubles the expenses carried by majority stockholder.

The perfect mechanism for determination of equitable price is non-existent. Any evaluation is subjective, not impartial process. The witness could not recall any case, when a minority stockholder applied a court for determination of a equitable price. Therefore, it could be assumed, that equitable price was determined in the compulsory sales that were carried out so far. If a particular stockholder finds the price for his stocks to be unfair, he can apply to a court. Despite this, to refine and continue elaborating on the mechanism for determination of equitable price is feasible.

Within the period when article 53³ of the Law on Entrepreneurs was suspended by the Constitutional Court until the final judgement on the issue, several joint stock companies could not conduct the compulsory sale of stocks, though there was no information proving deterioration of their situation.

In general, the corporate law is organized in the manner, that the more stocks guarantee the more rights and higher degree for their protection. This characterises organizational-legal form of joint stock company and excludes incompatibility of the impugned norm with article 14 of the Constitution.

11. The witness, the chief advisor of the Minister of Georgia on Issues of Economic Reforms, Ms. K. Kokrashvili asserting the necessity of adoption of impugned norm, mentioned that the number of real joint stock companies is very low. Mostly the joint stock companies resulted from privatization. The impugned norm will transform these companies into real limited liability companies. Otherwise this would be impossible, as there is provision in the Law on Entrepreneurs, that if the number of partners is more than 50, unless it is a cooperative, the company shall be legally organized as joint stock company. The impugned norm presented an attempt to give legal framework to the actualities of Georgia and it was seen as the best way to achieve that goal. It also helped to bring the Georgian legislation in line with legal norms of the European Union.

Minority stockholders cannot impede decision-making of the majority stockholders. They mainly present small investors, than partners in the company and practically, they do not receive dividends. Therefore, compulsory sale of stocks constitutes a fair solution.

Law on Entrepreneurs, article 53³ qualitatively changes financial assets. It is possible that minority stockholder will invest in different enterprise the sum he receives. There is no any social need for the incorporation of the impugned norm, though it is necessary for refining and harmonization of corporate relationships. It will also be conducive to the developments of economy and securities market.

12. The specialist, Director of the School of Law of University of Social Sciences, Mr. L. Izoria noted, that article 21 of the Constitution protects right of every person to property. It is irrelevant from the constitutional standpoint whether the property is rentable or not. This right shall be seen as the legal remedy for property owner to file a constitutional complaint with the Constitutional Court if the state unlawfully interferes with his possessions. The significance of the constitutional right of property, as the directly applicable law, which bounds the state, is revealed herewith.

Article 21 of the Constitution does not enshrine absolute, substantive and unrestricted property. To ask, whether this norm protects against interference by the legislator is illogical, as interference shall be firstly understood as determination of substance. The term “restriction” shall not be understood as negative category, which denotes interference of the state with the right of property. It is positive possibility, under which a legislator determines the substance of property on a given object of property if there is public need thereto. The legislator undertakes this not only in the field of public law, but also in sphere of private law relationships. Restriction gains negative character and article 21.1 is violated when the Constitutional Court finds that the legislator do not give due consideration to the interests of the owner, while determining the substance of the property according to the public interests. This can be ascertained via principle of proportionality.

Pressing social need shall not mean merely state interest. In the present case the public interest, nature of the joint stock companies are debated and therefore possession of stocks has different social function, which is determined by the nature of the company itself, not by public interest.

Article 21.3 of the Constitution brings to the forefront value of the property, its proprietary aspect. It has no connection with determination of the substance and scope of property. This norm determines the terms of expropriation of property for social need and guarantees due compensation for an owner. In case of expropriation the state plays decisive role. It is only state which carries out expropriation of property and there shall be public interest. However there are cases in practice, which do not formally, fit the notion of expropriation, but they are equated to expropriation.

II.

1. 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, though the fact that norms regulating this procedure shall be compatible with the Constitution of the country and its norms and principles has never been disputed. Particular attention shall be paid to the content of the norm regulating compulsory sale of stocks, legal construction adopted by the legislator and set forth in article 53³ of the Law on Entrepreneurs. It is noteworthy that distinction shall be drawn between a legal institute and its depiction in law, which may be comply or not with the Constitution. In determination of constitutionality of the impugned norm, the Constitutional Court shall be circumscribed with constitutional-legal assessment of the current rule for compulsory sale of stocks.

2. It was mentioned above, that article 53³ of the Law on Entrepreneurs is based to certain extent on the foreign experience. In law-making process sharing experience of the developed countries and international organizations is welcome, though it shall not be an end in itself. Several circumstances shall be considered when sharing the experience. First, the Georgian option of the incorporated institute shall fit the constitutional-legal realm of Georgia. The essence of the institute and its place in the national legislation shall be thoroughly researched when incorporation takes place. Formal resemblance does not imply substantial resemblance. Moreover, situation and perspectives of the field of law in which new legal institute is to be incorporated shall be analyzed and likely outcomes shall be foreseen. It is noteworthy that development of the corporate law, like other branches of law is an evolutionary process, taking place against the background of economic situation and prospects of progress in a given state. It is particularly hard to effectively suit a legal model approved in one situation to the different circumstances. Hence, to assert that any given norm, which appeared successful in one state, will be necessarily successful in another legal, economic, social and political realm is highly flawed.

3. The constitutionality of the impugned norm, article 53³ of the Law on Entrepreneurs is challenged in respect with article 21 and article 14 of the Constitution. However, the claimants paid special attention to the compatibility of the impugned norm with article 21 of the Constitution, which enshrines right to property. In the community which declared as its main goal in the very preamble of the Constitution establishing of economic freedom and democratic, rule of law, social state, the legal policy implemented by the state and decisions made by the legislator shall fit in the framework of these principles. Violation of this framework and ignoring fundamental human rights and freedoms, particularly right to property excludes development of free market economy, guaranteeing dignified existence for the community in the whole and its members; it also excludes political, economic and social stability. Strength of a democratic, rule of law and social state is contingent on the very respect and protection of right to property.

4. Discussing the compatibility of the impugned norm with article 21 of the Constitution, the Constitutional Court shall construe article 21 in order to ascertain whether there was interference in the good enshrined in this article, what type of interference it is, whether it complies with the requirements of the Constitution and fits in the constitutional-legal framework. In determining constitutionality of article 53³ of the Law on Entrepreneurs article 21 of the Constitution, its requirements and the constitutional-legal significance attached to the property will serve as legal yardstick for the Constitutional Court. As for the substance and scope of the property, as it is determined by the legislator, it is object of the assessment by the Constitutional Court, not an yardstick to be used for an assessment.

5. Prior to discussion of the compatibility of the impugned norm with article 21 of the Constitution the conceptual issue shall be ascertained – whether it is possible to assess constitutionality of article 53³ of the Law on Entrepreneurs in respect with article 114 of the Constitution of the Republic of Georgia of 1921, which addressed the issues of expropriation and restriction of private enterprises. The preamble of the Constitution states, that citizens of Georgia bear in mind “the basic principles of the Constitution of Georgia of 1921” in proclaiming the Constitution of Georgia. First we shall analyze what is the context of mentioning the basic principles of the Constitution of Republic of Georgia of 1921 in the preamble of the Constitution. Prior to these words, the preamble mentions that along with the basic principles of the Constitution of 1921, the Georgian citizens bear in mind “centuries-old traditions of the Statehood of the Georgian Nation”. This provision entirely is expression of commitment to the traditions of national statehood, base of which was set up by the Constitution of the Republic of Georgia of 1921. The preamble of the Constitution refers to the basic principles, not the particular norms, their construction, etc. From that standpoint the difference between the Constitution of Georgia of 1995 and one of 1921 is essential and evident from any perspective. Moreover, we shall regard the fact, that the Constitution of the Republic of Georgia of 1921 was drafted according to the situation in the beginning of the twentieth century, its contemporary political-legal approaches and concepts, whereas field of human rights and freedoms is dynamic, increasing the degree of their protection and reinforcement. The present day understanding of right to property, the guarantees for its protection significantly differ from the situation in the beginning of the twentieth century. However, it shall be noted that article 114, first sentence of the Constitution of the Republic of Georgia of 1921 expressly refers to “state and cultural need” as a term for compulsory deprivation of the property or restriction of enterprise and merely due compensation is not sufficient for expropriation. Hence the approach based on article 114 of the Constitution of Republic of Georgia of 1921, asserting that the legislator is bound merely with the principle of the due financial compensation in determination of the restriction on the right to property is not correct. It conflicts with the requirements of article 21.2 of the Constitution and transforms the right to property into declarative, easily violated and empty institute, as provides for possibility to restrict right to property without any legitimate aim and social need thereto.

6. Right to property is very important fundamental right. Moreover, property is the institute, which renders economic foundation of the state. Protection of property is not common in the totalitarian states and it is vitally important in the social, democratic and rule of law states to guarantee constitutional-legal entrenchment of the institute of property on one hand, and to provide the owner, as the subject with remedies for its protection and guarantees for its promotion and security. This is the goal of article 21.1 of the Constitution, which recognizes and guarantees right to property. This does not mean merely provision of the owner with remedies for its protection; it means that the property shall be protected from the interference, which does not fit the framework of paragraphs 2 and 3. Therefore, a norm which violates article 21.2 and 21.3 and does not comply with the constitutional-legal standards of expropriation or restriction of property, will simultaneously conflict with paragraph 1 of this article.

7. The obligation of the state to guarantee right to property requires that appropriate legal order, including private legal order is created. The legislator is bound by the norms and principles of the Constitution in regulating of the private law relationships just as much as in adopting the norms of public law. Therefore, the opinion asserting that norms regulating the private law relationships, including article 53³ of the Law on Entrepreneurs do not fall within the scope of article 21 of the Constitution and thus that it is impossible to determine whether the impugned norm is constitutional or not, is erroneous. Such an approach would take the significant part of the legal norms out of the sphere of constitutional control and would create favourable terms for arbitrariness in this sphere.

8. It shall also be considered that right to property is not absolute, unrestricted right. Property has great social significance. The owner is part of the community and he is entitled not merely to receive certain goods from it, but he is also obliged to use his property for the goal of well-being of the community. An owner shall realize that beyond his own interests, he lives in the realm of other interests, from which he is not isolated and where reasonable balance of interests shall be stricken. The legislator is authorized against this background and in accordance with constitutional-legal norms and principles to adopt norms, which determine the substance and scope of property. Property is the right that shall be defined by the legislator. The greater the social significance of an object of property due to its nature and qualities, the greater the importance of the definition of this right by the legislator.

9. In order to assess the constitutionality of article 53³ of the Law on Entrepreneurs, it is necessary to ascertain whether a stock presents “property” for the purposes of article 21 of the Constitution. According to the definition of the Law on Entrepreneurs, a stock is financial instrument, which proves obligations of joint stock companies towards the partner (stockholder) and rights of stockholder in the company.” stocks have rather specific legal nature. On one hand, stock indicates to the membership of a joint stock company and the component of participation in its management. In this respect, proportionally to his participation in a joint stock company, a stockholder is entitled to vote, to receive information, to control, to challenge the decisions of general meeting and other rights prescribed by the Law on Entrepreneurs. On the other hand a stock is a document denoting owner’s stock in the property of a joint stock company and proving one’s right to that stock. It is “shared financial document” according to the definition of the Law on Securities Market. Ownership of stocks may be materialized in case of disposing of stocks, also in case of liquidation of a company, as it entitles the owner to receive the part of the property of a liquidated joint stock company proportional to his stocks. Therefore stock is not presumably receivable, virtual income, even in case when it comes to the dividends. It is document proving legally reinforced property rights and position of a stockholder, which is protected good under article 21 of the Constitution.

10. Taking into account claims in the constitutional complaints, constitutionality of article 53³ of the Law on Entrepreneurs shall be checked against the standards of expropriation of property, as well as restriction of property. It is logical to conduct a discourse according to the gravity of interference in the property. Firstly it shall be ascertained whether the relationship regulated by the impugned norm is “expropriation” or not for the purposes of article 21.3 of the Constitution. Only afterwards it will be possible to ascertain whether it meets very strict formal and material, legal requirements of the Constitution for the expropriation. Analysis of the case-law of the European Court of Human Rights, as well as Constitutional Courts of foreign states and Constitutional Court of Georgia and of the opinion of the specialist presented at the hearing, indicates that the institute of expropriation prescribed in article 21.3 is characterized by explicit formal features. This notion does not encompass every case, when a person is deprived of his property against his will. Expropriation means deprivation of property, terms and procedure of which is prescribed by the Law of Georgia on the Rule of Expropriation for Pressing Social Need. The Constitutional Court noted in its judgment No. 2/155 of April 1, 2003, “It shall be considered that the rule relating to expropriation is applicable to the cases, when it is implemented by the subjects (state authorities) with special authorization and for achieving of public goals... The case when the property is taken away in the contractual relationship cannot be considered as expropriation.” Article 21.3 accords special significance to the proprietary component of the ownership. The relationship of expropriation is characterized by direct or indirect participation of the state in a given process of deprivation; the state does not circumscribe itself with mere determination of the legal regime for deprivation of property. In case of compulsory sale of stocks, the state, the legislative branch determined the legal regime, though it is not participant of the relationship. The state may hold more than 95 % of stock, though in this case it is a stockholder, which does not differ from other majority stockholders. In case of compulsory sale of stocks practically coercion of minority stockholders to contracting occurs. It is transaction, providing for transfer of stocks of minority stockholder to the ownership of majority stockholder on one hand, and paying a equitable price for the stocks by the majority stockholder to the minority stockholder, on the other hand. Despite that fact that will of the minority stockholder is ignored, it still shall not be equated with the state act of diametrically different legal nature, which authorizes for expropriation and legalizes the deprivation. In case of expropriation, the relationships between the owner and government are essentially public law relationships, whereas relationships between the stockholders fall in the sphere of private law. Expropriation may be implemented exclusively due to the pressing social need or urgent need and for achievement of public goals. Therefore, despite the fact that a minority stockholder loses ownership on the stocks, relationships regulated in article 53³ of the Law on Entrepreneurs may not be considered as expropriation and its constitutionality cannot be checked against article 21.3 of the Constitution.

11. As the relationship regulated in article 53³ of the Law on Entrepreneurs shall not be considered as expropriation of property, relation of the impugned norm with article 21.2 shall be established. First, it shall be ascertained whether there is “restriction of right to property” for the purposes of article 21.2. The Court agrees with the specialist’s opinion that “restriction” shall be understood as containing positive component. If we construe the word “restriction” literally, article 21.2 of the Constitution will serve as the norm protecting solely against negative interference with the right and binding the state. In the present case it is vitally important to understand properly purpose of article 21.2. This very norm empowers the state to define the substance and scope of property according to social nature of property. “Restriction” shall be construed as determination of the legislative framework by the state. Otherwise, wide range of relationships would fall beyond the scope of article 21.2, which would not fit the term “restriction” if understood literally. In cases encompassed by article 21.2, in contrast to expropriation of property, the state determines the legal regime, but it does not necessarily take direct or indirect part in any given relationship. Therefore, article 53³ of the Law on Entrepreneurs, as a norm determining the substance and scope of the right of a minority stockholder to the stocks and regulating the relevant legal relationships, is subject to review of constitutionality under article 21.2 of the Constitution.

12. In evaluation of the constitutionality of the impugned norm in respect of article 21.2 it shall be ascertained whether formal requirements of the Constitution are observed. Under article 21.2, the restriction may be carried out in cases and in the manner prescribed by law. The case of compulsory sale of stocks, when transfer of more than 95% of voting stocks of a joint stock company in the possession of a single stockholder gives him right to acquire stocks of other stockholders, is established by article 53³. The same article regulates the manner of compulsory sale of their stocks of the minority stockholders to the majority stockholder. Therefore the impugned norm meets the formal criteria under article 21.2 of the Constitution.

13. As article 53³ of the Law on Entrepreneurs constitutes a restriction for the purposes of article 21.2 of the Constitution, it shall be ascertained whether the compulsory sale of stocks is caused by the “pressing social need”. This will be impossible without ascertaining the essence of “pressing social need”. The approach taken by the European Court of Human Rights in this respect is quite liberal. In the case of James v. The United Kingdom, the European Court of Human Rights pointed out that the compulsory transfer of property from one individual to another may constitute a legitimate means for promoting the public interest. The notion of “public interest” is extensive and concept of margin of appreciation shall be applied here. The scope of discretion granted to the legislative branch in determination of the social-economical policy shall be quite extensive. However, the approach taken by legislative branch is flawed, if the approach lacks reasonable ground.

14. “Pressing social need” is not a static notion which is universally suitable to each society. It is changed in time and space according to the social, economic and political context. Thus, what may be considered to be pressing social need in one society may not be considered as such in another. Moreover, what presents a pressing social need at certain moment may not be considered as such in the future and vice versa, a given aim which is not considered to be pressing social need, may acquire that importance in the future. In determining “pressing social need”, the object of right to property, its nature and social importance shall be taken into account. From this perspective, the circumstances which create pressing social need in respect of one object of property, may not present such a need in respect of another.

15. The essence of pressing social need is determined by the legislator in a given case. To act in accordance with a pressing social need does not mean that it shall be carried out in order to avoid certain and inevitable negative consequences. The legislator may act for a pressing social need driven by a goal of achieving positive results for a society or its part. Moreover, it is not necessary, that the legislator indicates in the norm for which pressing social need it is adopted. Presence of pressing social need may be identified through analysis and construction of a norm. Pressing social need is not established by individual, applying the norm, but it is considered that in the given case, there is pressing social need identified as such by the legislator. The fact whether the judgement of the legislator in respect of pressing social need is proper and compatible with the Constitution will be identified by the Constitutional Court.

16. The term “pressing social need” is also used in article 21.3 of the Constitution in respect of purpose of expropriation of property. In the context of expropriation of property, pressing social need undergoes strict and precise construction. This is evident from the exhaustive list given in the Law on Rule of Expropriation for Pressing Social Need. In the context of 21.2 the essence of pressing social need shall be constructed extensively taking into account the social nature of property. If the pressing social need in article 21.2 is not construed extensively and freely, than the legal norms regulating the private relationships will acquire the degree of rigidity characteristic for norms regulating public law relationships. In this sphere the legislator has wider discretion, than in sphere of regulation of public law relationships. However, this does not mean that the legislator is given unfettered discretion and it can act outside constitutional framework. The position of the legislator shall be balanced, certain, precise, shall not provide for possibility of arbitrariness and abuse of the norm.

17. The compulsory sale of the stocks of minority stockholder to the majority stockholder cannot be considered as social need and legitimate aim, as it presents a “restriction.” Such a construction would be incompatible with article 21.2 of the Constitution, which considers a restriction to be means for achieving an aim, not an aim itself. It is task for the Constitutional Court to ascertain whether there is a legitimate aim, pursued by the legislator and then to assess whether compulsory sale, as a means is proportional to the aim.

18. Formation of joint stock companies in Georgia, as well as in other countries with socialist system of economy, was characterized with peculiarities. The significant part of joint stock companies was created via privatization. However it is discussible to allege that the joint stock companies in Georgia were created without free will and artificially. Law of the Republic of Georgia dated August 9, 1991 on Privatization of the Enterprises of the Republic of Georgia required foundation of partnerships in order the employees of an enterprise to become its buyers and acquire legal preferences. The privatization of state enterprises by its employees was an intentional activity and this procedure implied expression of free will of the employees. The partnerships were not founded automatically, without the will of employees. On April 14, 19994, the Cabinet of the Republic of Georgia adopted the Resolution No. 287 on Introducing the System of Privatization Cards, which granted to each citizen of the Republic of Georgia at the moment of September 1, 1993 right to acquire one privatization card. The card granted possibility to acquire the free title on the equal part of the state-owned, to-be-privatized property.

Pursuant to the statute on Privatization Cards approved by the abovementioned Resolution, the privatization cards were used as mechanism for transferring the state-owned enterprises, their divisions, possessions, the stocks and shares of joint stock companies and partnerships free of charge to the ownership of the citizens of the Republic of Georgia. The privatization cards were accepted as payment. Citizens were free to spend their own voucher or use it to acquire the stocks of a joint stock company. Under these conditions, which excluded factually transfer of stocks to a person without his will thereto, were formed majority of joint stock companies.

19. To take uniform approach to joint stock companies, that they shall be transformed into limited liability companies is not accurate. The organizational-legal form, which would be effective for an enterprise shall be selected case by case. Absence of efficient and considered administration, instead of organizational-legal form is to blame in the failure of certain joint stock companies. When the limited liability company organizational-legal form is more appropriate for an enterprise, there is special procedure for these cases prescribed in the Law on Entrepreneurs. If the procedure is flawed and possibilities of transformation are restricted, the legislator is empowered to amend the law with due regard to the constitutional-legal framework. Besides, it is noteworthy, that historically joint stock companies, as organizational-legal form, are oriented on attraction of capital. To allege, on one hand, that joint stock companies shall be necessarily transformed into limited liability companies, which are less attractive, less flexible and accessible and to state at the same time that this would contribute to attraction of investments are contradictory.

20. The Law on Securities Market does not stipulate a general requirement towards the enterprises legally organized as joint stock companies. The joint stock company will be considered to be accountable enterprise only if the financial instruments issued by it, in this case, stocks, as shared financial instruments, are quoted or allowed for trade on a stock exchange. However, even if the joint stock company is an accountable company, the obligation to present to the commission, to publish or to provide the registered owners annual, semi-annual and current reports serves interests of investors at the securities market, ensures transparency and other legitimate aims and do not corroborate flaws of the joint stock company as a organizational-legal form and does not unnecessarily or excessively burden the company.

21. The activities of joint stock company is related to expenses, part of which may be assigned to the minority stockholders. However, this is not burden sufficiently grave or excessive for joint stock companies, particularly in case of normal management, to cause in each case necessity of squeezing out the minority stockholders from a joint stock company. No one case was presented before the court in the course of litigation corroborating that expenses of a joint stock company were caused by destructive actions of the minority stockholders. Person participating in the purposive association based on the contract together with many other people, shall recognize beforehand, that such an association cannot serve merely to generate economic gain, that there will be some financial losses, and he will be compelled to regard the interests of partners.

22. There is a presumption that a person exercising his rights will act in good faith, though possibility of misuse of rights in practice may not be excluded. Application to court may result in imposing different restrictions on the joint stock companies, which would delay its activities, for example delay or wreck of favourable transaction, etc. It shall also be noted, that in market economy, when the flexible and swift actions and operative decision making is necessary to be competitive, the time aspect gains decisive importance and litigation will affect the joint stock company even from the perspective of losing time. Despite this fact, squeeze out of minority stockholders may not be justified by the statement that they exercise their legal rights, including right to apply to court. The impediment for unconscious minority stockholder is regulations in the civil legislation related to the abuse of rights, tangible possibility of incurring the court expenses. The legislator can also reasonably optimize the relevant norms of the Law on Entrepreneurs, which would be much easier means for pursuing the aim, than squeezing out the minority stockholders from a society.

23. It is necessary that the legislator regulates the corporate matters, in the manner which ensures the possibility for the joint stock companies to carry out flexible economic policy, to exercise initiatives and to develop themselves in circumstances that are already present and those that will appear in the future. From that perspective, the active subject in the joint stock company is the majority stockholder, whereas the minority stockholder is driven mostly by gaining profit. Currently, when the foreign investments are vitally important for progress of economy, there is an economic need of structuring precise legal framework to avoid possible corporate conflicts, to install effective legal mechanism for mergers, liquidations and reorganization of companies, indispensable part of which is the institute of compulsory sale of stocks. It will contribute to formation of effectively organized enterprises and development of market of securities.

24. The enterprises which are legally organized as joint stock companies are particularly important for progress of Georgian economy. They constitute the major part of enterprises functioning in the country. Attraction of investments, development of entrepreneurship, producing competitive goods, formation of new workplaces and thus enhancement of social welfare and stability depends on efficient operation of joint stock companies, and its fast and flexible restructuring opportunities. Frequently the progress of the company is not merely in interests of the relevant joint stock company, but it gains regional and state significance.

25. The liquidity and price of stocks of a joint stock company, which is subject to restructuring or particularly, to liquidation procedures, and which has its stocks quoted on the stock exchange, is reduced, and the compulsory sale of stocks of minority stockholder with due compensation is even favourable to him. However, it is noteworthy that compulsory sale of stocks is not panacea for bringing positive economic change to each enterprise. The compulsory sale of stocks constitutes a mechanism applicable mostly in mergers and restructuring of companies. From this standpoint, employing this institute in the enterprises being in statical condition enhances the risk of its being misused and negative consequences.

26. 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.

27. When the proportionality of compulsory sale of stocks is evaluated, all the components of the procedure shall be granted due consideration. From this standpoint two aspects shall be brought forward and assessed – first, whether the procedure of decision-making and enforcement of compulsory sale of stocks is compatible with the abovementioned requirements and second – whether the procedure for determination of price of stocks guarantees a fair compensation for a minority stockholder. If these two important aspects are not duly considered, even if the legitimate aim is present, the means employed will be inadequate and disproportional.

28. The Constitutional Court noted in its judgement No. 1/4/184.228, “...the state is obliged to identify the most correct and efficient way for restricting of property with public interests, which would not burden heavily only one part of the civil turnover. It would be inadmissible, to deprive one party the guarantees of property in favour of property of another party...”. The rule based on economic efficiency shall not burden only one party, otherwise, beyond legal problems, threat of market disorganization and disbalance between supply and demand will emerge. Article 53³ of the Law on Entrepreneurs does not meet these requirements. It manifestly violates the fair balance in favour of majority stockholder. In contrast to its counterparts from abroad, the impugned norm cannot demonstrate its purpose. This feature provides a majority stockholder with opportunity to acquire stocks of minority stockholder even in cases, when it is not necessary for an enterprise. Under the rule in article 53³ the minority stockholder is informed on decision of compulsory sale of stocks via publication of the decision in the press. The same announcement is send to him via insured mail. In these conditions, a minority stockholder is not merely deprived of any remedy to protect himself against abuse of economic power by the majority stockholder, but also he is not granted a possibility to gain information on reasons for compulsory sale of stocks and to express his position in this respect. The procedure, laid down in the impugned norm, is not transparent and practically keeps a minority stockholder in information vacuum and is placed in much more unfavourable position compared to the majority stockholder. In the case, when the legal system cannot ensure protection of minority stockholders and their rights and conflict of interests of majority and minority stockholders causes additional legal instability in the field of business, enhances risks and frightens off the internal and foreign investments.

29. In evaluation of the mechanism for determination of equitable price in compulsory sale of stocks, article 53² of the Law on Entrepreneurs, which regulates compulsory tender bidding, shall be considered together with article 53³. As we noted above, article 53³ refers to article 53², particularly its section 2 in respect of equitable price. There is no legal definition of “equitable price”. The indeterminate legal terms like this are common and sometimes necessary. However, when a legislator uses indeterminate legal terms, he shall consider that there will be in some cases certain objective grounds for its determination and its definition will not depend on the fantasy or will of certain category of persons. From this perspective, drafting a legal procedure for determination of equitable price which is unambiguous, certain, and does not provide for manipulations by any party shall be granted particular significance. There exists threat on both sides of the relationship - majority stockholder wants to acquire the stocks for most favourable price, whereas minority stockholder wants to get highest possible compensation for its stocks. It is true, that compulsory bidding rule strikes balance between these interests to certain extent, particularly in providing a equitable compensation for minority stockholder, though this is not the procedure, which precedes compulsory sale of stocks in each case. This rule is not applied, when the majority stockholder owned more than ½ of the voting stocks of a joint stock company for the moment of entry into force of article 53² of the Law on Entrepreneurs.

30. Law on Entrepreneurs sets forth two mechanisms for determination of equitable price- 1. determination of equitable price by an independent expert or broker company and 2. determination of equitable price pursuant to the charter of a joint stock company. The legislator determined the lowest threshold of equitable price, which shall not be less than the highest price paid by the majority stockholder for the stocks of the joint stock company within last 12 months. However this norm will apply only to cases when the stock transactions took place within the mentioned period. The lowest threshold of equitable price is vague in cases, when the stockholder who employs a compulsory sale rule has not bought any stocks of the joint stock company or no stock transactions were conducted at all within the last 12 months.

31. When the equitable price is determined by an expert or broker company the risk of violation of minority stockholders’ rights are reduced. This is ensured by obligation to draft an sale account on one hand, where circumstances backed by relevant documents, method of determination of equitable price and price of stocks are described and by setting liability of an expert or a broker company to compensate the stockholder the damages caused by their negligent or intentional incorrect evaluation. At the same time, a minority stockholder is authorized to familiarize with sale account and apply the court to determine the different price for stocks, that is the legislator provides him a legal remedy. As to any given method of determination of equitable price and fairness of the price thus determined, it shall be assessed by the evaluators and common courts case by case, it is not for the competence of the constitutional court, particularly taking into account that any precise method for calculation of price of stocks is not stated in the legislation.

32. The context is different when the procedure for determination of equitable price is regulated in the charter of a company. In this case the balance is violated to the detriment of a minority stockholder again and he has no legal remedies. Article 53³, section 3 provides for right to access to court for a minority stockholder merely in case, when an expert or broker company determined the price, though the law does not provide for a situation when the price, determined pursuant to the charter of a joint stock company is not acceptable for a minority stockholder.

33. Constitutionality of article 53³ of the Law on Entrepreneurs shall also be assessed with regard to article 14 of the Constitution, as the Claimant of the claim No. 390 alleges that a minority stockholder is placed in unequal position solely due to the fact that his proprietary status is worse than that of a majority stockholder and the latter is granted preferences on the ground of property. Thus the following shall be ascertained: whether the impugned norm provides for differential treatment, whether it is possible to consider the minority and majority stockholders being essentially analogous subjects, in case there is differential treatment, whether it is carried out on the ground of property, to what extent the differential treatment is determined by the nature of an object, whether it has objective ground and whether it is proportional.

34. The representative of the Respondent denied the violation of article 14 stating, “the transfer of stocks is carried out in the manner precisely prescribed by law, which excludes possibility of violation of equality balance.” Unfortunately, this position does not provide for thorough analysis of a situation. The issue of equitable compensation would be significant after the issue of differential treatment is ascertained and when its proportionality is being assessed. The phrase “in the manner precisely prescribed by law” means that the norm meets the requirement of principle of certainty. However, the norm’s being compatible with the certainty principle, does not per se exclude by itself violation of article 14 of the Constitution.

35. In order to evaluate constitutionality of article 53³ of the Constitution with regard to article 14 of the Constitution the legal nature of corporate relationships shall be considered. Corporate relationships, due to their nature are asymmetric relationships, particularly in capital-based companies. It is important, that the legal regime regulating these relationships is not applied to a person without his will, participation in these relationships in not compulsory, as practically these relationships are based on multilateral agreements. Entering the field of these relationships implies per se, that he accepts the terms of agreement and he realizes the specificity of relationships. Nature of corporate relationships determines differentiation of the rights, obligations and liabilities of the participants on the ground of their stock in the property of a company. This is the basic principle of a joint stock company, about which an individual is informed about prior to his entering these relationships. Hence, when we talk about participants of the relationships within the joint stock companies, differentiation of their rights and duties may not be considered as differential treatment of analogous situations and unequal approach to essentially analogous subjects. This is the relationship between stockholders, who chose this organizational-legal form at their free will, where the scope of decision making, participation in management, other powers and also relevant liabilities depend on the quantity of owned stocks of the company. The activity of a joint stock company is based on the majority principle and it is prima facie excluded to grant equal rights and duties to the stockholders with essentially different per cent of stocks and to put these subjects on equal footing. Article 14 of the Constitution does not bind the legislator to ensure the equality between the parties in these type of relationships, as it does not require universal equality without due regard of legal nature of a relationship.

36. Moreover, the essence of the term “property” shall be given due consideration. The claimant identifies the “property” with the scope of stockholding of a particular joint stock company, though the stockholding in a company is not identical to the proprietary status of a person. Individual’s property status includes many components besides the stockholding of a company and it is an extensive notion. Therefore, no ground of differential treatment is evident.

III

Pursuant to article 89, section 1, clause “f” and section 2 of the Constitution of Georgia, article 19, clause “e”, article 21, sections 2 and 8, article 23, section 1, article 25, sections 2 and 3, article 43, section 2, 4, 7 and 8, article 45 of the Organic Law of Georgia on Constitutional Court of Georgia, article 7, sections 1 and 2, article 24, section 4, article 30, article 31, article 32 and article 33 of the Law of Georgia on Constitutional Litigation,

The Constitutional Court of Georgia:

1. Upholds the constitutional claim No.405 (The Public Defender of Georgia v. the Parliament of Georgia).

2. Upholds partially the constitutional claim No. 370 (The Citizens of Georgia D. Mtvarelishvili, E. Feradze, N. Kalandadze, I. Natsvilishvili and Z. Natroshvili v. the Parliament of Georgia).

3. Dismisses the constitutional claims No. 382 (The Citizen of Georgia Z. Elashvili v. The Parliament of Georgia), No. 390 (The Citizens of Georgia S. Mashia and R. Gogia v. The Parliament of Georgia) and No. 402 (The Citizen of Georgia A. Mandzulashvili v. The Parliament of Georgia).

4. Holds that article 53³ of the Law of Georgia on Entrepreneurs is declared unconstitutional with regard to article 21.1 and 21.2 of the Constitution of Georgia.

5. Holds, that the present judgement enters into force from the moment of its public announcement at the session of the Constitutional Court;

6. Holds, that the present judgement is final and cannot be challenged or reviewed;

7. Holds, that copies of the present judgement shall be sent to the Parties, the President of Georgia, the Government of Georgia, the Supreme Court of Georgia;

8. Holds the present judgement shall be published in “Legislative Bulletin of Georgia” within 15 days.

Members of the Chamber

Besik Loladze

Otar Sichinava

Joni Khecuriani