The “Golden share” concept in Kazakhstan
Table of contents: The Kazakh-American Free University Academic Journal №1 - 2010
Author: Bashirov Mansur, Kazakh-American Free University, Kazakhstan
The Law of the Republic of Kazakhstan “About Joint Stock Companies” of 13 May 2003 (article 13, clause 5) introduced the
concept of a “golden share” into the current legislation about joint stock
“The foundation meeting (decision of the
sole founder) or general meeting of shareholders may introduce one ‘golden
share’ which does not participate in the formation of the authorized capital
and receipt of dividends. The holder of a “golden share” shall have the right
to veto decisions of the general meeting of shareholders, board of directors
and executive body on issues defined by the company's charter. The right of
imposition of veto certified with the “golden share” shall not be subject to
In Kazakhstan the “golden share” appeared
for the first time in article 22, clause 4 of the Law “About Joint Stock
Companies” of 1998 in the same wording.
After entry of the law to force it became
clear that it had many defects and problems. In connection with the fact that
“golden share” concept was adopted from European countries’ legislation it is
necessary to study European experience on this issue and how concept developed
In 1970-1980’s in many countries in
important sectors of economy like transportation, public utilities, natural
resources, energy, financial services state owned companies dominated. In a
number of countries governments initiated privatization programs for different
reasons. Unregulated sale of such enterprises in important industries to
private sector raised the possibility of failing of these enterprises to
foreign ownership and control, thereby threatening existing national control
over vital economic interests. As a result, privatizations of publicly owned
companies often involved restrictions on foreign ownership. To demonstrate
different scales of control we will review the examples provided by French and UK privatization programs in 1980’s.
In the United Kingdom government retained
control over certain matters in privatized companies by way of the so called
“golden share”. By this device, the government has one special right redeemable
preference share held by itself or its nominee in the privatized company. The
company’s articles of association specified that certain issues are deemed to
be a variation of rights of the special share and can only be effective with
the written consent of the special shareholder .
In certain strategically important
companies the “golden share” was used specifically to restrict foreign
ownership. These restrictions raised objections from the European Commission on
the grounds that they could be used as a means of discriminating against the
participation of nationals from other EC Member States in the capital of
British companies, contrary to the article 221 (now article 294) of Treaty of
In France, after the widespread
nationalizations in the early 1980’s, the government of Jaques Chirac
introduced a major program of privatization in 1986. As a part of that policy,
the control over foreign participation in privatized companies was placed in
In accordance with articles 9 and 10 of Law
№ 86-912 of 6 August 1986, no individual or corporation could acquire more than
5 per cent of the shares transferred at the time of sale of the shares by the
state, and the sum total of the shares sold directly or indirectly by the state
to foreign individuals or corporations, or to those under foreign control,
should not exceed 20 per cent of the capital of enterprise.
Article 10 of Law № 86-912 continued by
laying down the legal regime for a creation of state “golden share” in newly
privatized companies. This governed foreign shareholding in privatized
companies after the initial sale of shares by the state. For each company
subject to the Privatization Law of 1986 the Minister of Economy, after
consultation with privatization Commission, would determine by decree whether
the protection of national interests , “requires that a common share held or
acquired by the Government be transformed into a extraordinary share bearing
rights defined in this present article” .
The principal right attached to the
extraordinary share was that of permitting holdings by one or several
individuals or corporations acting in concert to exceed 10 per cent of the
capital. The extraordinary share could be converted back to a common share at
any time by decree of Minister of Economy. It expired by operation of law after
five years. The extraordinary share was less powerful than the British “golden
share” given its limited duration and the absence of powers to block disposals
of assets. Furthermore, it was not used as often .
Other EC Member countries also adopted
their own versions of “golden shares” or imposed limits on foreign ownership in
privatized industries. These laws were subjected by the European Court of
Justice (ECJ) in a series of major cases involving Portugal (EC Commission v.
Portugal (C-367/98) 2002), France (EC Commission v. France (C- 483/99), 2002, 2
CMLR 1249), Belgium (EC Commission v. Belgium (C- 503/992) 2002, CMLR 1265), UK
(EC Commission v. United Kingdom (C- 98/01) 2003, 2 CMLR 598), Spain (EC
Commission v. Spain (C- 463/00) 2003, 2 CMLR 557), Italy (EC Commission v.
Italy (C- 174/04) judgment 2 June 2005) .
In these cases European Commission stated
that “golden share” and other similar statute based powers violated articles 43
and 56 of the EC Treaty, which protects free movement of capital by
discriminating against investors from other Member States. Such restrictions
can only be justified in cases where the vital public policy, public security,
or public health considerations are applied. In none of the cases did the
Commission see indicated considerations existing. The ECJ ruled in favor of the
Commission in all but the case against Belgium. From these decisions the
following approach can be discerned. Direct investment in the form of
participation in an undertaking by means of a shareholding, or by the
acquisition of securities in capital markets, constitutes capital movement
within the EC Treaty countries. As accepted by the Commission, the retention of
a certain degree of influence over privatized undertakings is justifiable where
these are involved in the provision of services in public interests or
However, such restrictions can only be
taken in accordance with the reasons set down in Article 58 (1) (b) of the EC
Treaty, which permits measures “to prevent infringements of national law and
regulations, in particular in the field of taxation and the prudential supervision
of financial institutions, or to lay down procedures for the declaration of
capital movements for purposes of administrative or statistical information, or
to take measures which are justified on grounds of public policy or public
security” . In very limited cases restrictions can also be taken by
overriding requirements of the general interest. Restrictions have to apply
equally to all persons and companies pursuing an activity in the territory of
the host Member State. They are subject to a test of suitability in relation to
the securing of the objective in question, and should not go beyond what is
necessary in order to attain it so as to accord with the principle of
In addition, any restriction has to conform
to essential requirements of precision and clarity, and should be subject to
duty to state reasons and an opportunity for judicial review .
These principles do not prohibit “golden
shares” directly but establish strict limits on their use. Most of the new East
European EC Member States are now in process or already abolished or limited
“golden shares” in accordance with these legal requirements.
Taking into account the fact that in rare
cases new Member States governments use “golden share” further cases can be
expected if measures to restrict “golden shares” will not provide positive
In addition, now there is a new tendency in
Europe about “golden shares” connected with sovereign investment funds. The
main aspect here is investor’s structure of ownership and purposes of
investment. Earlier all investments in European companies from abroad were
private and private investors wanted to maximize their profits. In the
beginning of the 21st century new investment institutions emerged – sovereign
investment funds, which in essence were state owned. Their purposes is not
always getting profit as it is in case with private investors, but frequently
getting access and sometimes control over host country’s natural resources,
technologies, know how, etc. Thereby purchase by sovereign investment fund of a
large company in an important sector of economy will practically mean control
over this sector not by private investor, but indirectly by foreign government.
For example, EU Trade Commissioner Peter
Mandelson suggested that so-called “golden shares” could be used to protect
strategically important European companies against foreign takeovers. Mandelson
told business daily Hundelsblatt - "Europe's interest in maintaining
control over important and politically sensitive key industries could be
achieved via the instrument of the “golden share”, "We must find ways for
the EU to maintain control over key industries on the one hand, but still
remain attractive for foreign investors, including state-owned funds" .
The reason of EU Trade Commissioner’s
speech was purchase of UAE’s Dubai International Capital of 3, 12% share of
European airspace and defense holding EADS. Analysts also note that Russian
bank VTB already owns 5% of EADS shares. Before that French President Nikola
Sarkozy and German Chancellor Angela Merkel discussed how to defend EADS from
foreign takeover and mechanism of “golden share” was considered as one of the
There is growing unease in Europe about the
growing clout of state-financed investment funds from Russia, China and the Gulf states in European industries. Some German, French and other politicians
and experts concerned that these state-financed investment funds could try to
get important technologies from companies they invest to.
Moreover, now European Commission realizes
danger because of which “golden shares” were seriously restricted. According to
EU Trade Commissioner they violate the principle of free movement of capital
and are frequently used for national protectionism, but there are new challenges
that should be dealt with.
Peter Mandelson proposed to divide
responsibility for adoption of “golden shares” between European Commission and
EU Member States. Thereby “golden shares” will not be right of separate state,
but rather a common European concept of defense of strategically important
sectors of economy against undesirable takeover, i.e. practically common
European “golden share”.
However, some analysts warned that when
concerning about strategic companies like EADS Europe may create mechanism
which can cause misusage. Analysts note that the main part of the foreign
investments is very beneficial for EU but there appears a question who and how
will choose which companies are strategic and which are not. Local European
companies will want to defend themselves and probably most of the cases will
presume that foreign takeover is undesirable. In addition, between EU Member
States there is no common view which economic sectors have to be defended. France concerns about airspace and energy industries, Germany concerns about banks and public post.
At the same time EU Trade Commissioner
Peter Mandelson criticized US system when US authorities on foreign investment
could veto takeovers from foreigners, even deals with European investors.
It was assumed that debates in European
institutions about introduction of common European “golden share” will begin
soon, but because of the global economic crisis they were suspended.
Lawmakers in Kazakhstan adopted “golden
share” concept from European countries’ legal systems. While adopting a “golden
share” concept lawmakers apparently supposed that identical circumstances
existed in Kazakhstan. On the contrary, conditions of use of “golden shares” in
Kazakhstan and European countries were different.
First of all, “golden share” in legislation
of some European countries was adopted during the privatization era when entire
sectors of economy were transferred from state to private investors. Probably,
introduction of “golden share” to Kazakhstan legislation would be more logical
in the beginning of the 1990’s at the time when in Kazakhstan there was a large
scale privatization. At the moment of introduction of this concept to the Law
“About Joint Stock Companies” of the Republic of Kazakhstan privatization program
in all sectors of economy was completed. On the contrary, recently government
restored state ownership fully or partially in oil and gas industry and
purchased the majority of shares in some banks in fear of bankruptcy.
Secondly, in legislation of European
countries owner of “golden share” usually stands for the government. The
purpose of “golden share” were to ensure that the government retains a certain
degree of control over the company, even in case when the company had been
privatized and sold to foreign owners.
The Law of the Republic of Kazakhstan “About Joint Stock Companies” does not prescribe that the owner of “golden share”
could be only the government or agency which is delegated by the government. In
accordance with article 13, clause 5 of the above mentioned Law “golden share”
could be introduced by the foundation meeting (decision of the sole founder) or
general meeting of shareholders of any joint stock company without
clarification about private or state ownership.
Thirdly, legislation of European countries
regulates “golden share” issue in detail. In the Law of the Republic of Kazakhstan “About Joint Stock Companies” “golden share” issue is fragmentary
mentioned just a few times which demonstrates insufficient clarity of the law
in that issue. Insufficient clarification of the law and absence of subordinate
acts which can explain application of “golden share” can be the reason for
different interpretation and therefore misuse.
Introduction of “golden share” in Kazakhstan did not receive a warm welcome by scholars. A famous expert in this field
Popelyushko indicates that “introduction of “golden share” is not clear as the
law already has a definition of a major shareholder. In addition, “golden
share” was in the old law and it did not justify itself. Introduction of
“golden share” is a backward step, it can happen that the owner of “golden
share” may be a shareholder who can block work of the company” .
Another expert Lobkov said that
“significantly complicates economic activity the fact that decision of
executive body, in relation to which there is veto right has to obligatory
concur with the owner of “golden share”. We need to admit that “golden share”
stipulated in old legislation was not used in practice and it has not
perspective in development of joint stock companies movement” .
As it was mentioned, in accordance with
article 13 (5) of the Law “About Joint Stock Companies” foundation meeting
(decision of the sole founder) or general meeting of shareholders may introduce
one “golden share”. The owner of that share has veto right for certain issues,
defined in charter.
However, article 12 (4) indicates that
shares of a certain class, shall provide each holder with the rights equal to
the rights of other holders of that class, unless it is otherwise specified by
this Law. Practically this article established the principle of equality of
Thus article 13 (5) went too far, making
principle of equality of shareholders written in article 12 (4) of the Law
“About Joint Stock Companies” to its opposite. Hereby unequal treatment is not
that any shareholders can have veto right but is that unequal treatment can be
possible irrespective of amount of shares of shareholder.
This provision can has practical meaning if
its usage is limited by government as shareholder as it happened in Russian
law. However Russian law has the same problem, Russian Law “About Joint Stock
Companies” has not any restrictions for “golden share” owner. Taking into
account the fact that investors consider “golden share” as a risk there is a
point in regulation of “golden share” in a maximum clear way – what
prerequisites exist when “golden shares” can be provided, what purposes they
have, if veto right can be challenged etc.
It can also be said that some experts have
another opinion. In accordance with article 36 of the Law “About joint stock
companies” “golden shares” can be introduced and annulled by simple majority,
so in practice they will not have significant meaning. Thus concerns of
investors about sudden introduction of “golden share” should not be significant
as it can be introduced only on general meeting of shareholders in public and
At last, “golden share” issue was one of
the issues in changes in the Law “About Joint Stock Companies” in accordance
with the Law “About introduction of amendments and additions to legislative
acts of the Republic of Kazakhstan on issue of defense of rights of minority
shareholders” of 19 February, 2007.
Lawmakers among other changes introduced
definition of a public company. According to article 4-1, clause 1 of the Law
“About Joint Stock Companies” a public company is a company which meets the
“1) A company shall realize allocation of
ordinary shares on unorganized and (or) organized securities market and propose
these shares to unlimited circle of investors”;
2) not less than 30% of total amount of
ordinary shares shall belong to shareholders, every of them shall own no more
than 5% of ordinary shares from the total amount;
3) the amount of trade of ordinary shares
shall correspond to requirements established by a normative legal act of an
4) shares of company shall be in category
of list of stock exchange that works in the territory of the Republic of Kazakhstan for inclusion and stay in which internal documents of stock exchange
establish special (listing) requirements to securities and their issuers or
they included in list of special trade center of regional financial center of
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”.
Thus according to the current law a
significant part of Kazakhstan’s large joint stock companies are public
companies. The law indicates that the charter of a public company shall
prohibit “golden share” and because majority of largest joint stock companies
are public companies, “golden share” shall be prohibited in these companies. By
these amendments lawmakers probably wanted to shatter the concerns of investors
about “golden share”. Finally, although “golden share” remained in the Law
“About Joint Stock Companies” lawmakers significantly restricted the scope of
1. Law of Republic of Kazakhstan “About
Joint Stock Companies” of May 13, 2003, article 13, clause 5.
2. Privatizing Public Enterprises, C.
Graham and T. Prosser Oxford, Claredon Press, 1991, p.141, 152.
3. Law of French Republic № 86-793 of 2
4. Privatizing Public Enterprises, C.
Graham and T.Prosser Oxford, Claredon Press, 1991, pp.152-153.
5. Decisions of ECJ http:// www.curia.
6. Rome Statute (Treaty Establishing
European Community), 1957.
7. EC Commission v. Belgium (C- 503/992) 2002, CMLR 1265, n.63 at paras 48-53.
9. “Law about joint stock companies is
discrepant and has back action”, Popelushko A., Kazakhstan Securities Market
Journal, 2003, № 6, p.17.
10. “New law about joint stock companies”,
Lobkov A., 2003, № 6, p.41.
Table of contents: The Kazakh-American Free University Academic Journal №1 - 2010