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 companies:

“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 transfer” [1].

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 Europe.

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 [2].

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 Rome.

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 legislation.

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” [3].

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 [4].

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) [5].

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 strategic services.

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” [6]. 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 proportionality.

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 [7].

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 results.

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" [8].

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 priorities.

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” [9].

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” [10].

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 shareholders.

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 transparent manner.

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 following requirements:

“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 authorized body;

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 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”.

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 its use.


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 July 1986.

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

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