Introduction and General Information
The latest changes to the local content requirements relating to the purchase of goods, works and services for public or subsoil users’ needs, as well as the general current trend to purchase products from Kazakh manufacturers, have been increasingly promoting the creation of joint ventures between Kazakh and foreign business partners. Foreign investors bring modern business technology, efficient organisation of the production process and know-how, whereas Kazakh parties contribute their experience of market operations and knowledge of the specifics of the Kazakh market and assets located in Kazakhstan.
According to foreign practice, the term “joint venture” or “JV” does not cover only a corporate body, the share capital of which is allocated between its non-affiliated founders, but also the joint activity of an unincorporated consortium. Kazakh law tends to understanding of the “joint venture” as the corporate bodies owned by different shareholders.
As a rule, each of the commercial partners in a joint venture holds a significant interest (at least 40%) and acts as an active investor. The proper regulation of mutual understanding between the parties with respect to the establishment of the entity’s goals, financing of its operations and distribution of profit, appointment of key managers, launching of new business directions, sale of investments and project exit strategy therefore become especially significant. A joint venture organisation should be flexible in satisfying the interests of all involved parties in order to ensure, in turn, the development of the company.
At first, each of the partners creating a joint venture should take into consideration the fact that decisions on the project taken by it have to now be agreed upon with the other partner. Further development of the project is possible only in the case of close cooperation with the other partner(s) and purporting to the long-term project development, but not seeking immediate profit. All partners are supposed to benefit from the joint project and the profit of one partner results in the profit of another. A thoroughly designed and transparent corporate structure of the future joint venture plays the most critical role in ensuring the effective balancing of the partners’ mutual interests.
Below we will briefly describe usual legal provisions of the joint venture.
Change of control restriction
The said provision restricts the possibility of changing the partners to a joint venture both at the level of the direct participant/shareholder of a Kazakhstani company and at the level of the holding company. Obviously, from a commercial point of view, each of the partners feels comfortable when he is confident in the other participant that he develops the project with, and whose goals are known and clear to him.
Basically, Western jurisdictions allow a restriction on transferring control over any of the JV participants to a new person to be set forth in the Shareholders’ Agreement and this agreement might require that such assignment should be agreed upon with the other partner or a buy-out of shares held by the person affected by the change in control. The transfer of control breaching provisions of the foregoing agreement shall be regarded as a default of the relevant participant and may entail, apart from a recovery of losses, the winding-up of the JV. The transfer of interests/shares in the joint venture is governed in a simpler way, as the parties may agree that such transfer may be made only to affiliates or subject to compliance with the pre-emption right of the remaining participant.
Kazakh law does not allow for a restriction on the change of control at a level above the JV partner since this factor does not depend on it and the person disposing of the shares in the holding company is not a party to the Shareholders’ Agreement/Joint Venture Agreement. In turn, restrictions as to the transfer of shares in the venture may be provided for by a Foundation Agreement (for Kazakh LLC’s) or by creating a call option for the shares of the exiting shareholder (for Kazakh JSC’s).
It is assumed that by creating a joint venture, its participants transfer the running of certain business within a relevant territory to it and therefore, they have to refuse to continue similar business for the benefit of the JV since otherwise, the creation of the JV would be economically unsound and would not generate profit. Restrictions on competing also relate to investments/holding an interest in other companies, which are competitors with the JV. Customarily, non-competitive restrictions survive the exit of the JV partner and are binding upon the affiliated persons of each partner.
Generally, Kazakh law does permit non-competitive arrangements as they contradict the current Kazakh Competition Law, except for agreements signed within the same group of persons as determined by Article 10.3 of the said Law. As to corporate bodies, the main attribute of a group of persons is holding more than 25% interest and according to this principle, most JV’s will be included in the group of persons of creating partners. Based on this, commitments undertaken by the JV founders with respect to non-competition with the JV will not be breaching Kazakh law.
The involvement of the partners, each of whom pursues his/her own goals by creating the JV, means that they will take an active part in the management of the project through their appointed or nominated managers. Usually, managerial positions are shared depending on the area of JV business that the concerned JV partner is in charge of. The partner making intangible investments in the form of know-how, technology or trademarks will be responsible for production matters, whereas the participant providing financing enjoys control over financial issues.
The said method of creating managerial bodies is a so called “sandwich structure”, which supposes that persons representing all partners will participate in the board of directors, the supervisory board or the management board of the joint venture. It is common for the number of positions to correspond with the interest held by each partner and, for example, a partner holding a 40% interest will appoint 2 out of 5 members of the management board.
Joint ventures with 2 participants usually set a “double signature” rule, according to which each material document of the company shall be signed or approved by representatives of both partners.
Specific matters of a Kazakh JV
We should also note that Kazakh law is still undeveloped in relation to regulating JV matters, which essentially hampers the successful implementation of the joint venture schemes tested by foreign practice.
Kazakh law is still not familiar with the concept of a Shareholders’ Agreement, which seems to be the “starting point” or the most crucial condition of JV creation. In the said document, the partners regulate their mutual commitments related to the creation, financing, management of and exit from the project.
The Kazakh LLC Law allows for the adaption of the said arrangements in a Foundation Agreement, although in respect of Kazakh JSC’s, this structure will not work since a Foundation Agreement of a JSC ceases to be effective upon the date of the JSC registration. The charter of a Kazakh company, regardless of its organisational form, is of a rather impersonal nature and is aimed at determining the status of the company in relations with third parties, but not to govern relations within the company between its shareholders. The foregoing “silence” of Kazakh law with respect to Shareholders’ Agreements is supported by inconsistent and arbitrary court practice as to the recognition and enforcement of such agreements.
The article was published in KazService Magazine, #1(01), 2012