Development of minority shareholders concept in law «about joint stock companies» of Kazakhstan
Table of contents: The Kazakh-American Free University Academic Journal №1 - 2010
Author: Bashirov Mansur, Kazakh-American Free University, Kazakhstan
The law «About Economic Partnerships and
Joint Stock Companies» of July 21, 1991 was the first separate law of
Kazakhstan about joint stock companies. Although this law with only 77 articles
was very brief it established foundation on which later laws were developed. Defense
of shareholders was mentioned for the first time in this law.
The first codification was in the Decree of
the President «About Economic Partnerships» of May 2, 1995 № 2555 which
replaced the Law «About Economic Partnerships and Joint Stock Companies» in
companies regulation. The decree had a lot of deficiencies and soon a new Law
«About Joint Stock Companies» in 1998 was adopted. This law for the first time
included regulations about defense of shareholder’s rights as one of the most
important in law. However, topic of this work is not all issues of joint stock
companies regulation, only minority shareholders will be considered.
Defense of rights of minority shareholders
is one of the important problems in legislation about joint stock companies as
it is an important term for investment. Investors invest in developing
countries if their rights and capitals are protected. Legal protection of
minority shareholders is an important issue to get foreign direct investment.
A famous scholar Shram notes that as
management control, defense of minority shareholders from major shareholders
decisions made with abuses is one the main legal issues in corporate law. On
this issue in the US and Europe there are different methods of regulation. In
the USA the government tries to solve this problem with special emphasis on stock
markets and provided minority shareholder with an opportunity in specific
circumstances (danger of sale of company, limitation of rights or
reorganization) to sell shares to the owner / major shareholder or the company
On the contrary, lawyers in Europe are less
inclined to provide shareholders with an opportunity to leave the company, and
by this action to deprive the company of a capital. In European concept there
is a point that a joint stock company should not defend only its interests. If a
holder of majority shares violates this obligation that causes responsibility
to the company and it can demand compensation for damage. In addition, special
rules for defense of rights of minority shareholders were developed like
special requirement of majority of votes during voting, obligatory voting in
different groups of shareholders, detailed regulation of procedure of
challenging of decisions of general meeting .
It has been long debated among European
lawyers which of these concepts is better. At present time in common European
doctrine there is a compromise in accordance to which both ways of regulation
can exist simultaneously .
The law «About joint stock companies» of
1998 demonstrates movement from European model to more US model in relation to
these principles, although it is still debatable which model is better.
Taking into account problems of defense
from redistribution of property in the Law «About joint stock companies» of
1998 new measures of defense were developed like major transaction approval and
obligation of publication. The new issue here was that the law establishes
legal consequences in case of violation. This law prescribed that in case rules
about major transactions and «conflict of interest» are violated concluded
transactions shall be recognized invalid. It is interesting to mention that
different from Russian law issue of knowledge of partner in transaction about
violation if internal regulation was considered. But for coming of invalidity
of transaction as legal consequence detailed description of circumstances of
case is required, when there is a major transaction and when there appears a
«conflict of interest». Lawmakers in 1998 tried to solve this problem by
detailed definitions .
Alongside with conceptual changes the Law
of 1998 strengthened rights of minority shareholders. Shareholders who own
minimum 5 % of shares got special authorities and special rights – preemptive
right for share purchase and right to demand extraordinary inspection of
financial reporting. In addition, process of organizing general meeting was
regulated in detail and also election of members of board of director’s
cumulative voting became obligatory.
Soon 1998’s Law’s deficiencies became
clear, many important issues were missed. In 2001 a lot of changes and
amendments were proposed, and in 2002 they became open for public discussion. During
debates and discussions it became clear that editorial changes will not be
enough and there is a need for a new law which will better define legal status
and activities of a joint stock company, rights and duties of shareholders
(especially minority shareholders) and other important issues. Initially the
purpose of amendments was to improve the 1998 Law «About Joint Stock Companies»
and as a result of numerous proposals there appeared a new law.
On May 13, 2003 the effective Law «About
Joint Stock Companies» was adopted and the old law of 1998 was cancelled.
As in 1998 law the rights of shareholders
are listed in article 14. In addition to existing rights the new law added a
right of separate shareholder: right to propose candidates for election to
board of directors, in case of qualified participation to propose conduct of
audit for own expenses, and also a right to propose additional issues to agenda
of general meeting. It should also be mentioned that in the new law only major
shareholders rights were differentiated.
The principle of formal equality of
shareholders was written more clearly than in the old law. Now this principle
could be challenged only on basis of law, not on the basis of charter as it was
before. The principle of equality of shareholders has an important function as
it allows shareholder to defend against actions of joint stock companies in
court, referring to shareholder was treated differently in comparison to other
shareholders. Deviations from this principle are allowed only in definite,
prescribed by law situations.
A preemptive right for announced shares of
minority shareholder is written in article 16 of the effective Law “About Joint
Stock Companies”. Partially this right was indicated in the Decree «About
Economic Partnerships» of 1995 (now cancelled), in article 83 of the Civil Code
and in article 3 (4) of Law About Joint Stock Companies» of 1998 (now
cancelled), but without details which soon led to interpretation problems. Now
this right is written more clearly including procedure and mechanism how this
right should be exercised.
Voting procedures also changed in
accordance with the old law. The limit of making decision by qualified majority
was raised from two thirds to three quarters of voting shares. Now qualified
majority is needed not only for making decision to change the charter and for
reorganization, but also for decision to change the amount of quantity of
announced shares . As legislation develops changes of July 8, 2005 added
approval of corporate governance code (as well changes and amendments) to
issues which shall be approved by qualified majority.
By a numerous detailed improvements rights
of shareholders on general meeting of shareholders were strengthened. Among
other issues prescriptions about calling extraordinary general meeting were
specified. As a place of general meeting now it is clearly states «locality
where executive body located», notification for general meeting shall be by
publication in mass media, and procedure of amendments to agenda by proposal of
shareholder regulated more precisely.
Improvement of defense of shareholder is in
the center of 1998 law (cancelled), as well as of the current law. In a new
version these rights are indicated in articles 14, 27, 74 of acting Law «About
Joint Stock Companies» are arguably of high standard. It seems that problem of defense
of rights of shareholder is also about efficient realization in practice.
For example, the right of shareholder to
get information is interesting. The current law does not include any regulation
which happens if a company violates obligation to provide information. As a
possible decision regulator can be given special authorities to satisfy this
requirement –for example to fine in case the company will violate its
Another reason of insufficient realization
of shareholders rights is expenses distribution. Shareholders right to require
conduct of audit by joint stock company is a good example. Because shareholders
act in joint stock company’s interests there should be an opportunity to make
the company cover expenses on the basis of court or regulator decision.
Similar problem appears in judicial claims
by shareholders to benefit the company in liability cases. There is an
interesting regulation in article 53 of the Law of Georgia «About Economic
Enterprises» where in case of abuse the court is given an opportunity to make
plaintiff cover expenses for company’s damage.
Right of shareholder in specific
circumstances to require share purchase from the company also could be the
basis for disputes. It is important here that contrary to the old law a
shareholder can demand purchase of shares if the shareholder voted against
conclusion of major transaction on general meeting. In accordance with the old
law it was enough if a shareholder did not participate in voting. The
improvement made it clear, this regulation makes this right more efficient. Different
opinions, especially about price of purchased shares are the remaining part of
debates. One of the solutions is to entrust this issue to a special court or
arbitration tribunal under the securities regulation body. In addition, some
conflicts could be solved by prescribing obligatory audit inspection in major
cases, especially during reorganization.
Moreover, changes in legislation about
joint stock companies introduced a new norm. Purchase of announced shares by a
joint stock company based on demand of a shareholder shall be realized in
accordance with methods of definition of cost of shares during redemption,
approved by general meeting of shareholders. Undoubtedly, these methods will
make it easier for shareholders in purchase of their shares by the company. However,
this norm does not oblige joint stock companies to accept these methods, and
the majority of joint stock companies did not approve these methods on general
The preemptive right of shareholders for
share purchase in case of issue of shares has great importance. A new
regulation of this issue seems to be right but it misses that different
situations possible, for example admission of strategic investor to company. In
this situation the preemptive right could be used to damage company’s
interests. European law in this issue advises that in these situations general
meeting should possess the right to make decisions in specific circumstances
about exclusion of preemptive right . These specific circumstances include
in particular requirement of qualified majority and also obligation of
management to substantiate its decision.
The right of shareholders to challenge
management decisions in court is one of the most efficient shareholder defense
measures. However, this issue is not sufficiently covered by law and in
practice existing regulation could be interpreted differently.
Next, especially in comparison to Russian
Law, there is an interesting point that Russian Law better regulates rights of
shareholders to make propositions to agenda as well as the right of shareholder
to learn the list of shareholders who can participate in general meeting .
Both these regulations of Russian Law
«About Joint Stock Companies» of December 25, 1995 conform to analogous
European countries legislation. In this particular case Kazakh lawmakers could
accept this Russian experience taking into account own legislation.
Cumulative voting obligatory prescribed in
Kazakhstan and Russia is another important issue. Efficiency of this procedure
is in direct relation to quantity of members of board of directors. Therefore
indicated in article 54 (5) of the Law «About Joint Stock Companies» the
minimum quantity could be insufficient. On the other hand, in East European
countries, for example in Poland, simpler procedures were chosen. According to
article 385 of the Law of Poland «About Trade Companies» shareholders whose
part in general amount of votes corresponds to correlation of one mandate to
general amount of mandates of Supervisory Council, could elect representatives
to themselves .
It should be added that obligatory
cumulative vote procedure is widely criticized, especially in the US. It is
considered that votes count is a complex procedure and mistakes could be made. This
frequently leads to situation when directors are responsible not to all
shareholders but only responsible in relation to defined groups of shareholders
and sometimes minority shareholders interests are abused.
The Law «About Joint Stock Companies» in
initial release of May 13, 2003 was an important step in improvement of rights
and duties of shareholders. However soon it became clear that legal status,
rights, duties of shareholders are not protected fully and adequately and some
changes were needed.
Very important changes in legislation of
Kazakhstan are made according to the Law «About changes and amendments to
legislative acts of the Republic of Kazakhstan on issue of defense of rights of
minority shareholders» of February 19, 2007. Thus defense of rights of minority
shareholders was recognized as a separate challenge in legislation about joint
stock companies which deserved separate changes.
As this work focuses on minority
shareholder defense, the main conceptual change of this legislative act was an
introduction of definition of minority shareholder, which was done for the
first time in Kazakhstani legislation.
In accordance with a new definition of
minority shareholder in article 1, clause 17 of the Law a minority shareholder
is a shareholder who has less than 10% of voting shares of a joint stock
company. This change of legislation is very valuable for the defense of
minority shareholders as it was for the first time written in legislation and
was a basis for other improvements.
With the purpose of defense of rights of
shareholders other changes and amendments were introduced in the Law «About
Joint Stock Companies».
One of the important issues is an
introduction of definition and concept of a «public company». Before changes,
in the initial version of the Law «About Joint Stock Companies» there was a
definition of «people’s joint stock company». The definition itself was a part
of the Soviet tradition and meant that a joint stock company of that size has a
lot of shareholders. In addition also due to this fact in mid 1990’s some
companies gave part of their shares to its employees. According to the law
«people’s joint stock company» is a company, which charter capital is not less
than 1 000 000 times the size of the monthly assessment index established by
the law in a corresponding year where a number of shareholders is five hundred
or more. There were no special requirements on transparency, openness etc.
It should be noted that the concept of a
public company is established in accordance with international standards and
defend investors much better than the previous concept of people’s joint stock
company that just established a status of a large joint stock company and did
not have any special features. The concept of a public company finally
strengthens minority shareholders rights.
In compliance with a new concept, a public
company shall conform to some important criteria, in particular publicity. Publicity
of the company by its definition comes from the fact that shares are proposed
to an unlimited number of investors on securities market. Also, to increase the
number of shareholders it is established that not less than 30% of common
amount of purchased ordinary shares of the company shall be owned by
shareholders, every of whom owns no more than 5% of ordinary shares from common
amount of purchased ordinary shares of the company.
It is also established that a competent
state body establishes requirements on the amount of trade of ordinary shares
and that shares shall be in the list of stock market that works on the
territory of the Republic of Kazakhstan for inclusion and staying in which
internal documents of stock exchange establishes special (listing) requirements
to securities and their issuers or securities are included in the list of a
special trade center of the regional financial center of Almaty».
In addition, based on clause 2 article 4-1
of the Law «About Joint Stock Companies» the charter of a public company shall
stipulate presence of:
1) code of corporate governance;
2) position of corporate secretary;
3) corporate web site;
4) prohibition of «golden share».
The Law also establishes the order of
recognition of a company as public, withdrawal of that status, loss of that
After changes in law concept of corporate governance the
code appeared, this document now regulates relations in the process of
management of company. Now presence of a corporate governance code in the
company became obligatory that also promotes a more efficient corporate
governance of the company and a better defense of shareholders.
Novation in the law is a requirement of availability of
corporate secretary in a joint stock company. Article 1, clause 12 of the Law
«About Joint Stock Companies» now provides definition of a corporate secretary
– «employee of joint stock company who is not a member of the board of
directors or executive body, appointed by the board of directors and
accountable to the board of directors, in his work controls preparation and
conduct of meeting of shareholder and the board of directors of the company,
provides composition of material to agenda of general meeting of shareholders
and materials for meeting of board of directors, directs control to provide
access to materials».
Undoubtedly, availability of a separate official responsible
for corporate governance increased level of responsibility of employees and
will promote better defense of a shareholder.
In public companies availability of a corporate web site
became necessary in accordance with law. It is affixes some expenses for the
company but beneficial for transparency of decisions. In particular public
companies should publish on a corporate web site decisions on dividend payments
and in case 30% and more shares are purchased in corresponding order. In
addition, public companies must publish on a corporate web site the majority of
issues that affect interests of shareholders of the company.
Prohibition of «golden share» in the public company’s
charter should be another guarantee for investors \ shareholders as some of
them believe that «golden share» holder can unexpectedly use it to damage or
alter decision making and intervene with management of the company. This
prohibition confirms the principle of equality of shareholders claimed
previously in the law. Before the principle did not work as «golden share» had
priority over all other shares. Now this prohibition defends rights of major
and minority shareholders better.
Another change in the Law «About Joint Stock Company» states
that a minority shareholder can apply to registrar of the company with the
purpose of consolidation with other shareholders on making decisions indicated
in agenda of general meeting of shareholders.
To defend a shareholder from unexpected changes in agenda of
general meeting recent changes in the law establish that points for discussion
in agenda with broad understanding like «different issues», «other issues»,
«miscellaneous items» and analogous wording is prohibited. This regulation
guarantees that at general meetings of shareholders there will not be
considered issues which were unexpected and issues shareholders did not have
opportunity to prepare for discussion. This novation conforms to international
practice and undoubtedly will stop previous practice when any issue could be
added to agenda of general meeting of shareholders.
Moreover, with the purpose of informing
shareholders responsibility of officials of the company was clarified. In
particular now they bear responsibility for damage as a result of providing
misleading or knowingly wrong information and violation of order of providing
information. Previously in article 63 of the Law «About Joint Stock Companies»
only general responsibility of executive body was indicated without
All indicated changes are recognized as innovation
comparing to previous legislation. Amendments of February 19, 2007 changed
other regulations on purchase of shares, annual general meeting and committees
of the board of directors.
Considering development of minority
shareholders 2007’s changes of the Law «About Joint Stock Company» are very
important because they are specifically directed to defend minority
shareholders. This changes and amendments implemented a lot of international
corporate standards and norms to the Law «About Joint Stock» like concepts of
corporate secretary, public company, minority shareholders and definite
mechanisms of execution of these norms. As a result the current Law «About
Joint Stock Companies» meets international standards and demonstrates progress
in development of defense of rights of shareholders, corporate governance,
voting procedures, equality of shareholders and many other issues.
1. Shram H. «History and perspectives of
Kazakhstani law about joint stock companies», Kazakhstan Securities Market
Journal, 2004, № 2, p.49.
2. Communication from the Commission to the
Council and the European Parliament: Modernizing Company Law and Enhancing
Corporate Governance in the European – A Plan to Move Forward (21.05. 2003)
3. Law of Republic of Kazakhstan «About
Joint Stock Companies» of July 10, 1998 (cancelled), IS Paragraph legal
4. Law of Republic of Kazakhstan «About
Joint Stock Companies» of May 13, 2003, IS Paragraph legal database.
5. White Paper on Corporate Governance in
Russia, 2002. http://www.oecd.org/
6. EU Directive № 77 /91 of December 13,
7. Federal Law «About Joint Stock
Companies» of Russian Federation of December 26, 1995, articles 51-4 and 53.
8. Law of Poland «About Trade Enterprises»
of September 15, 2000, article 385.
Table of contents: The Kazakh-American Free University Academic Journal №1 - 2010