Updated June 28, 2022
Company formation in Kazakhstan by two or more shareholders assumes presence of largest shareholder aka majority shareholder whose shares dominates over second, minority shareholder. As we stated in our previous legal insights and publications, most demanded form of business organizations in Kazakhstan is a Limited Liability Partnership which is registered in the form of legal entity that bears all corporate responsibility to company’s debtors and third parties. Shareholders of a LLP carries responsibility only within the limits of their shares and contributions made to authorized share capital. In this regard, Kazakstan LLP in some way is an analogy of UK Ltd’s and US LLC. More about differences and commons between UK Ltd. and US LLC please read in our next legal insight: “Kazakhstan LLP vs. UK Ltd. and US LLC”.
When it comes to shares and their physical contributions, it is allowable by Laws on “Limited and Added Liability Partnership” to contribute the authorized part of share capital through the means other than financial, i.e. intellectual property, patended business concept and ideas, equipment, providing technical solutions, which are essential and pre-requisite part of partnership’s prospect entrepreneurial activity. Of course, share contribution agreement is an important corporate document between shareholders to determine how and when contribution should be made, proceeds shall be distributed and etc. Generally, share contribution allocation is determined and approved by shareholder agreement. Shares contribution default within one year from the date of company formation in Kazakhstan shall cause shareholder withdrawal.
LLP formation in Kazakhstan by several shareholders assumes business collobaration between partners which may simply turn into hostile relations. Founding documents rebalancing each parties interests will be a key factor in defending minority shareholder’s rights. By and large, minority shareholders needs more protection to prevent abuses by majority shareholder. Adhering to standard form of founding documents is losing strategy, as a rule, ready-made or DIY documents do not take into account the interests and rights of a minority participant. All shareholders meeting decision are made on a one-share-one-vote basis.
As per requirements of Law “On Limited and Added Liability Partnerships” (hereinafter – LLP Act) shareholder’s General Meeting is a partnership’s supreme management body entitled to take a decision on any corporate matter, but often on those that coresponds to such level of decision-making competence like director replacement, acquire and disposal of corporate assets , dissolution, annual audit performance and etc. Directors or Board of directors are entitled by default to take a decision on any other corporate matter unless it attributes to general meeting’s exclusive competence. General meeting still entitled to take over any corporate matter, ratify or overrule executive management’s decision.
Getting back to vote calculation when one share entitles to one vote, decision in any case will be taken simply by majority vote giving dominance to majority shareholder. Key corporate decisions shall be taken contrary to minority shareholder interests who’s right less protected.
Such exposures can be managed by drafting founding documents (Articles of Association, Shareholders Agreement) with specific provisions protecting minority shareholders rights.
Disregarding this safeguard will imminently create prerequisites for dominance of one shareholder over other, emergence of unruly and hostile executive exercising powers in favor of majority shareholder in partnership ended up by capital outflows and pushing to insolvency.