Kazakhstan: The International Comparative Legal Guide To: Corporate Governance 2016

1 SETTING THE SCENE – SOURCES AND OVERVIEW

1.1 What are the main corporate entities to be discussed?

1.1.1 Types of corporate entities in Kazakhstan

Under Kazakh law, all legal entities fall into two categories, depending on whether or not the acquisition of profit is the main purpose of their activity: commercial organisations; and noncommercial (non-profit) organisations.

Commercial organisations can exist in the following forms: government enterprise (gosudarstvennoe predpriyatie); economic partnerships (hozyaistvennoe tovarishchestvo); joint stock company (aktsionernoe obshestvo); and production cooperative (proizvodstvennyi kooperativ) (see article 34.2 of the Civil Code). Economic partnerships (hozyaistvennoe tovarishchestvo) include the following legal forms: limited liability partnership (tovarishchestvo s ogranichennoi otvetstvennost'u); additional liability partnership (tovarishchestvo s dopolnitelnoi otvetstvennost'u); full partnership (polnoe tovarishchestvo); and kommandit partnership (kommanditnoe tovarishcestvo).

Non-commercial (non-profit) organisations can exist in the following forms: institution (uchrezhdenie); public association (obshestvennoe ob'edinenie); fund (fond); joint stock company (aktsionernoe obshestvo); consumer cooperative (potrebitel'skiy kooperativ); religious association (religioznoe ob'edinenie); and other forms provided by legislative acts (article 34.3 of the Civil Code dated 27 December 1994 (the "Civil Code")).

In this chapter, we shall concentrate on two types of commercial organisations that are most frequently used for business in Kazakhstan due to the convenient governance structure and liability limitation which is normally sought by shareholders (participants): limited liability partnership (tovarishchestvo s ogranichennoi otvetstvennost'u) ("LLP"); and joint stock company (aktsionernoe obshestvo) ("JSC").

1.1.2 LLPs and JSCs

The Civil Code sets out the principal rules applicable to both the LLP and JSC. More specific rules are contained in the law of the Republic of Kazakhstan dated 22 April 1998 No 220-I "On Partnerships with Limited and Additional Liability" (the "LLP Law") and the Law of the Republic of Kazakhstan dated 13 May 2003 No 415-II "On Joint Stock Companies" (the "JSC Law"). There exists other legislation which addresses particular aspects of LLPs and JSCs.

JSCs and LLPs are both considered legal entities. Normally, these are commercial (as opposed to non-commercial/non-profit) organisations, although a JSC may be a formed as a non-commercial organisation. Generally, JSCs and LLPs may be engaged in any businesses not prohibited by law; some activities are subject to licensing.

The capital of an LLP is divided into participatory interests. A share is a security issued by a JSC. It represents the right: (i) to participate in the management of the JSC; (ii) to receive dividends; (iii) to receive part of the property of the JSC upon its liquidation; and (iv) other rights according to the JSC Law and other legislative acts.

Shares can be authorised and placed. Authorised shares are shares whose issuance has been registered with the competent authority in accordance with the Kazakhstan securities legislation. Placed shares are shares of the JSC that have been paid out by the shareholders and investors on the primary securities market.

A voting share is a placed common share and preferred share to which the voting right has been granted by the JSC Law. Voting shares do not include shares bought out by the JSC and shares held in the nominal holding by an entity, information on which is not available in the system of the central depositary.

A common share provides the rights indicated above to its holder. A preferred share provides the pre-emptive (before common shares holders) right to receive dividends in the pre-defined guaranteed amount set out by the JSC charter and the part of property upon the JSC liquidation. The volume of the preferred shares should not exceed 25% of the total amount of authorised shares. The amount of dividends on preferred shares cannot be lower than the amount of dividends paid on common shares for the same period. Moreover, dividends on common shares are not paid until dividends on preferred shares are paid in full. It is prohibited to pay dividends on preferred shares using other JSC securities. A preferred share does not provide the right to participate in JSC management, except for the following cases:

  • in cases where the general meeting of shareholders (the "GMS") considers an issue that can limit the preferred shareholder's rights. Such an issue is considered as approved if no less than ⅔ of the total number of placed (except for bought out) preferred shares have voted for the respective limitation of rights;
  • in cases where the GMS considers an issue relating to reorganisation or liquidation of the JSC; and
  • in cases where the dividend on the preferred share has not been fully paid out during the three months following the due date.

Charters or resolutions of the GMS/the sole shareholder may provide for one "golden share". A golden share does not take part in the formation of the charter capital and receipt of dividends. The owner of the golden share has a veto right with respect to decisions of the GMS, board of directors (the "BoD") and executive body set out by the charter. The veto right certified by the golden share is non-assignable.

One of the types of JSCs is the so-called public joint stock company. Under article 4-1 of the JSC Law, a JSC can be recognised as "public", provided that: (a) the common shares of the JSC have been offered for purchase to an unlimited range of investors in the non-organised and/or organised securities market (i.e. on the stock exchange); (b) no less than 30% of the total amount of the placed common shares of the JSC shall belong to shareholders, each of whom owns no more than 5% of the common shares out of the total number of the placed common shares; (c) volume of trades with common shares of the JSC shall conform to the requirements established by the National Bank of the Republic of Kazakhstan (the "NBK"); and (d) the shares of JSC shall be included to the list of stock exchanges operating in Kazakhstan (i.e. listed on Kazakhstan Stock Exchange (the "KASE")).

There are the following statutory requirements applicable to a public JSC as opposed to an "ordinary" JSC. The public JSC must have: (a) a corporate governance code (the "CGC"); (b) a corporate secretary; (c) a corporate website; (d) prohibition of "golden share"; and (e) stricter disclosure requirements as indicated in section 4.

1.1.3 The main differences between LLPs and JSCs

Charter capital. To operate an LLP and JSC, it is necessary to form a charter capital. The requirements to charter capital of an LLP and a JSC are summarised in Table 1 below.

Table 1. Charter capital of LLPs and JSCs

Issue LLP JSC
Minimum value of the charter capital. No less than 100 so-called "monthly calculation indices" (the "MCI") or approximately USD 635, save for certain exceptions (e.g. unless the LLP is a so-called "subject of small business" (see article 24.3 of the Business Code), when the charter capital shall be no less than 0 Tenge (article 23 of the LLP Law).

The MCI is a coefficient, used for the calculation of benefits and other social payments and for the application of fines, sanctions, taxes and other payments according to Kazakh legislation. One MCI for 2016 is KZT 2,121.
No less than 50,000 MCIs or approximately USD 316,000 (article 10 of the JSC Law) unless the relevant JSC is a special type of legal entity (e.g. bank, insurance company, etc.) for which a stricter requirement is contemplated.
Way of formation. Contribution by participants of different property to the LLP's charter capital. A participant gets participatory interest in an LLP pro rata to its contribution to the charter, unless it is otherwise agreed between the participants (article 23.6 of the LLP Law). This means that a different allocation of the interest may be envisaged by the participants, e.g. one participant may contribute USD 100 and the other USD 5,000, and both of them may get a 50% stake in the LLP. Placement (purchase) of shares by the shareholders/investors (article 11.1 of the JSC Law). Issue of shares is subject to state registration with the NBK. This is a relatively manageable procedure and it usually takes a month or more. Registration is also associated with certain compliance burdens (e.g. approval of the results of the placement of shares with the NBK, etc.).
Timing for the initial formation of the charter capital. No later than one year upon state registration (the minimum charter capital must be contributed prior to registration). 30 days upon registration of the JSC.
Mandatory evaluation by a licensed appraiser of nonmonetary contributions to the charter capital. For contributions exceeding 20,000 MCIs or approximately USD 126,250 (article 23.4 of the LLP Law). Always (article 21.1 of the JSC Law).

Corporate governance. There are a few issues relevant for the analysis (when comparing LLPs and JSCs from a corporate governance perspective):

  1. Public nature. A JSC is a public company, unlike an LLP. JSC corporate bodies' competencies/authorities are generally defined and cannot be allocated/shared between each other (e.g. the GMS takes decisions referred to the exclusive competence of the BoD). On the other hand, the LLP is more flexible in this respect, meaning that the general meeting of participants (the "GMP") can generally take decisions referred to the competence of other bodies.
  2. Independent director. It is not mandatory to have an independent director in an LLP, unlike the JSC.
  3. Pre-emptive right. Generally, LLP participants have a pre-emptive right to purchase the participatory interest of another participant prior to it being offered to a third party (unlike the JSC shareholders). If more than one participant would like to buy a participatory interest, then such interest may be purchased by each participant pro rata to their current holding (unless it is otherwise provided for in the constitutional documents). In the event that the participants do not intend to purchase the offered participatory interest, the LLP itself may have a pre-emptive right to buy it. Thus, before acquiring or selling a participatory interest in an LLP, a waiver of pre-emptive right must be obtained from both the participants and the LLP. JSC shareholders have a pre-emptive right in the case of placing authorised shares or other securities convertible to simple shares or selling shares that have been previously bought out by the JSC.
  4. Tag-along, drag-along, etc. It seems that the enforceability of the drag-along and tag-along provisions may be more secure in an LLP rather than in a JSC (although under both corporate forms, it is still questionable).
  5. Shareholders' Agreement (the "SHA") vs. Foundation Agreement (the "FA"). We note that an LLP has the FA, unlike the JSC (its FA ceases at the moment of registration of the issuance of the shares). The FA is considered a constitutional document (considered a commercial secret). The SHA, in turn, is not considered a constitutional document. Having the FA (together with the SHA or alone) in an LLP may add more security in terms of potential enforceability of relevant arrangements (although, of course, this is not guaranteed).
  6. Tax issues. Overall, JSCs and LLPs are similar in terms of taxation. However, the JSC may offer more flexibility, e.g. disposal of shares in a JSC (on the KASE, via open trade) is tax-exempt. In addition, dividends in an LLP can only be paid on an annual basis, unlike the JSC. However, it is fair to say that an LLP can be converted into a JSC (and vice versa).
  7. Flexibility. Generally, the LLP is considered a more flexible corporate vehicle as compared to the JSC. In our experience, LLPs are usually the preferred corporate form as joint venture vehicles because they offer more flexibility vis-à-vis corporate housekeeping, general compliance matters and maintaining the closely held nature of the business. A JSC requires substantial capitalisation, compliance with securities laws, higher disclosure and reporting standards, and a mandatory supervisory body (i.e. BoD), and are often mandated to be used by financial and public corporations (banks, insurance companies, etc.).
  8. Approval of transactions. Approval of certain transactions by JSC is subject to specific requirements, non-compliance with which can lead to the invalidation of such transactions. For example, approval of so-called "major transactions" can generally be approved by the BoD of the GMS depending on their value. Major transactions are generally transactions, or several connected transactions, that will lead or can lead to acquisition/disposal of the property with the value of 25% or more of the total balance sheet assets of the JSC. Approval of major transactions with a value of 25% to 50% of the total balance sheet assets of the JSC are referred to the exclusive competence of the BoD, and major transactions with a value of 50% or more of the total balance sheet assets of the JSC are referred to the exclusive competence of the GMS.

The interested party transaction is generally a transaction with an affiliate of the JSC. Interested party transactions shall be approved by a simple majority of BoD members who are not interested in the conclusion of such a transaction. These members are usually (but not necessarily) independent directors. If all directors are interested in the conclusion of the transaction, or if it is not possible to take a decision on the transaction due to the absence of the required number of directors' votes, the decision on such a transaction is escalated by the BoD to the GMS consideration (article 73 of the JSC Law).

The LLP Law requires that a transaction or several connected transactions that will lead or can lead to acquisition/disposal of the property with a value of 51% or more out of balance sheet assets of LLP shall be approved by the GMP.

Mandatory choice of JSCs and LLPs. In certain cases, it is mandatory to select a JSC or an LLP; sometimes, it is mandatory to select either the JSC or LLP and no other form is available. For example, banks and insurance (reinsurance companies) can be established only as JSCs, and credit partnership, can be established only as LLPs.

Decision-making process. JSCs must have at least three corporate bodies; namely, the GMS, the BoD, and executive body (e.g. management board). The LLP, on the other hand, may generally have only two corporate bodies; namely, the GMP, and the executive body. Both JSCs and LLPs may have other corporate bodies, e.g. an internal audit committee. For more details, please see section 3 below.

Acquisition of shares. The JSC Law contains special restrictions and requirements with respect to the acquisition of shares in a JSC. For example, it is necessary to notify the JSC and NBK in cases where an entity (independently or jointly with its affiliates) wishes to purchase ≥30% shares in a JSC on the secondary market. An entity that purchased (independently or jointly with its affiliates) on the secondary market ≥30% shares in a JSC must publish in the mass media an offer for other shareholders to sell their respective shares. A shareholder may accept the offer within 30 days upon publishing the offer. In such a case, the buying entity must pay for the shares within 30 days upon receipt of written acceptance from the shareholder. Failure to comply with said procedure may result in a necessity for the buying entity to sell shares exceeding 29% to non-affiliated parties.

There are some other restrictions and requirements, e.g. acquisition of certain number of shares in a bank may require obtaining a special status from the NBK, etc.

Acquisition of participatory interest in LLP may also trigger certain approvals/consents (e.g. pre-transaction approval by the antimonopoly agency).

To read this Report in full, please click here.

Originally published by Global Legal Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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