CORPORATE GOVERNANCE

Corporate structure is a central element of the corporate governance system which represents the system of corporate bodies and their interrelationship expressed by the distribution of powers.  

Since a limited liability partnership (LLP) and a joint stock company (JSC) are the most popular forms of business organisation in Kazakhstan, we deem it necessary to consider their corporate structure in detail.

1) Joint Stock Company (JSC)

JSC must constitute the following corporate bodies:

• supreme body – a general meeting of shareholders (or, in a JSC where all voting shares are held by one shareholder – such sole shareholder);

• management body – a board of directors; and

• executive body – a collegial body or a person who performs the executive functions at their sole discretion.

The supreme body of JSC is a general meeting of shareholders (or a sole shareholder) to be held annually within 5 months after the closure of a financial year.  Apart from the annual general meeting, a JSC may convene extraordinary general meetings of shareholders.

The relationship between shareholders and the relationship between shareholders and the JSC are regulated by a memorandum of association (until the authorized stock is registered with government authorities) and articles of association.  In Kazakhstan companies such legal instrument as a shareholders’ agreement is hardly ever applied.  Such agreements are not prohibited, although, in practice, the provisions of a shareholders’ agreement (to which foreign shareholders are accustomed to) might conflict with law.  For example, a shareholders’ agreement may not contain any clause that would limit shareholders’ rights because the law explicitly prohibits such limitation.

The board of directors is a body responsible for the management of JSC operations.  It is a corporate governance centre of a JSC.

Subject to the JSC law, a board of directors must consist of at least three members, minimum 30% of which must be independent directors.  However, the legislative requirements to independent directors are aimed, primarily, at the independence of such directors and, in fact, they do not apply to professional qualifications of independent directors.

The JSC’s board of directors must set up various committees for consideration and issuance of recommendations to the board on the most vital issues, including the following:

• strategic planning;

• human resources and remuneration;

• internal audit;

• social issues; and

• any other issues covered by internal documents of the JSC.

Please note that Kazakhstan law does not provide for the term “shadow director”.

The executive body, either collective or sole, administers the day-to-day operations of a JSC.  The executive body may resolve on any matters related to the JSC operations which are not reserved to other bodies or officers of the JSC.

2) Limited Liability Partnership (LLP)

LLP must constitute the following corporate bodies:

• supreme body – a general meeting of participants (or, in an LLP where all interests are held by one person – such sole participant); and

• executive body – a collective body or a person who performs the executive functions at their sole discretion.

LLP may also set up a supervisory board and audit committee (auditor) who are called to exercise control and supervision over the performance of the executive body; however, they are not authorised to make management decisions.

LLP may set up other bodies, although, technically, there is a risk that their decisions are recognised null and void due to certain legislative considerations.

The supreme body of LLP is a general meeting of participants (or a sole participant) to be held annually.  

The total time limit for the convocation of an extraordinary general meeting is 30 days (which can be changed if an LLP has less than 7 participants).

A general meeting of participants is the body which is responsible for the most important and strategic decisions, while it is authorised to make decisions on any matters, even those which are not on the primary list of its powers.  A general meeting may also overrule decisions of any other corporate body of LLP which relate to internal affairs of LLP.

The relationship between participants and the relationship between participants and the LLP are regulated by a memorandum of association (foundation agreement) and articles of association (charter).  In Kazakhstan companies such legal instrument as a corporate agreement is hardly ever applied.  Such agreements are not prohibited, though, in practice, the provisions of a corporate agreement might conflict with law, memorandum and articles of association.  Therefore, the provisions of such corporate agreement would be hardly enforceable or unenforceable in Kazakhstan.

The executive body administers the day-to-day operations of an LLP.  The executive body may be either collective or sole.  The executive body may resolve on any matters related to the LLP operations which are not reserved to other bodies or officers of the LLP.

Protection of Minority Shareholders/Participants

One of the key principles of corporate governance is the equitable treatment of shareholders/participants.  Nevertheless, the ability to influence JSC/LLP operations is directly proportional to the number of shares/interests held in the authorised capital thereof.

Kazakhstan law provides for a number of legal instruments to protect the rights of minority shareholders/participants:

• the right of minority shareholders/participants to make common cause with other shareholders/participants in order to adopt decisions on the agenda issues of a general meeting of shareholders/participants;

• the right of minority shareholders/participants to demand buyout of their shares/interests by the JSC/LLP on the grounds provided for by Kazakhstan law;

• the legislative provision of the requirement that any decisions of a general meeting of shareholders/participants related to the JSC/LLP operations must be adopted by the supermajority of votes or with consent of all shareholders/ participants; and

• the right of minority shareholders/participants to file a lawsuit in court seeking the prosecution of JSC/LLP officers and/or to challenge decisions of corporate bodies.

It is worth noting that LLP legislation is less demanding and scrupulous, as compared to JSC legislation, thus giving leeway to major participants of an LLP to abuse their powers through lawful mechanisms for restriction of the minority participants’ involvement in LLP management.