June 2024 – In private companies limited by shares, the most popular form of company established in the Astana International Financial Center ("AIFC") shareholders range...

Kazakhstan Corporate/Commercial Law

June 2024 – In private companies limited by shares, the most popular form of company established in the Astana International Financial Center ("AIFC") shareholders range from those with majority ownership stakes (i.e. greater than 50%) to those with smaller holdings. The latter, known as minority shareholders, often face challenges due to their limited ability to influence business decisions. Our expertise lies in safeguarding the rights of minority shareholders, offering advice on protection strategies and negotiation tactics to ensure fair outcomes in disputes involving misconduct by directors or controlling shareholders.

After five years of closely monitoring the AIFC legislation and practicing corporate law within the AIFC, we believe that its corporate law offers stronger legal protections for minority shareholders compared to the general legislation in Kazakhstan. This note is aimed to be a useful guide – it is not comprehensive and should not be regarded as legal advice.

Basic minority shareholder rights

The AIFC Companies Regulations grant all shareholders certain fundamental rights. However, the protections and rights specifically available to minority shareholders are limited and do not address many common scenarios that occur within companies.

A frequent issue for minority shareholders in private companies arises when the directors are majority shareholders or appointed by them. In these cases, minority shareholders have little influence over decision-making and limited access to financial information, allowing majority shareholders to manipulate circumstances to their advantage.

Enhancing minority shareholder rights can be achieved through the company's articles or a shareholders' agreement. There are no restrictions on how much these rights can be expanded beyond what is provided by the AIFC Companies Regulations. It is essential to understand the necessary rights and negotiate accordingly.

From our experience, the most common problems we are asked to address include:

• Reviewing shareholders' agreements to strengthen the rights and protections of minority shareholders;
• Resolving disputes involving minority shareholders; and
• Preventing the abuse of power by directors and controlling shareholders.

Rights with standard articles and under the AIFC Companies Regulations

If a company uses the standard articles provided at incorporation and no amendments have been made, shareholder rights will generally be restricted to the basic rights outlined below:

Shareholding of 5% or more

• Able to require the company to call a general meeting.

Shareholding of 10%

• Able to call a poll vote at a general meeting.
• Able to require an audit.

Shareholding of 75%

• Able to pass a special resolution.

Shareholding greater than 90%

• Able to consent to short notice of a general meeting.
• Able to squeeze out minority shareholders where a takeover offer has been made.
• Right of a bidder acquiring 90% of the shares to buy out minority shareholders .

Protecting rights of minority shareholders

The powers outlined in the AIFC Companies Regulations can be enhanced to safeguard the interests of shareholders through amendments to the articles and/or by way of a shareholders agreement.

Key considerations to strengthen shareholder protection encompass:

• Information rights – A critical provision for minority shareholders is the ability to access financial records and management accounts. This right is not automatically granted under the AIFC Companies Regulations but can be established in the articles or a shareholders' agreement.
• Power of veto – Through amendments to the articles or shareholders' agreement, minority shareholders can be granted veto powers. This authority enables them to block actions they don't agree with.
• Share dilution – While AIFC Companies Regulations grant shareholders the right to subscribe for shares in any new issue, this right may be disregarded in the articles or shareholders' agreement of certain companies. When investing, minority shareholders should scrutinize dilution risks and incorporate protective measures accordingly.
• Drag along rights – Absence of drag-along rights could trap minority shareholders with their shares in a company undergoing a change in ownership (and, thus, an uncertain future direction) when a majority shareholder sells their holding. These rights compel the buyer to acquire minority shares on the same terms as the majority, ensuring a guaranteed exit and liquidity. In such scenarios, minority shareholders receive the same price per share as the majority shareholder when the company is sold.
• Dispute resolution mechanisms – When investing, minority shareholders should consider their potential exit strategy and establish protocols for share disposal. This may include a dispute resolution clause in the shareholders agreement that can help swiftly and effectively address shareholder issues.
• Share valuation on exit – AIFC Companies Regulations do not stipulate the valuation method for shares in private share sales. For instance, determining whether the value should reflect the limited influence of a minority shareholding or be based on a comprehensive company valuation requires negotiation in the absence of a formal agreement. Therefore, it is advisable to establish a method for determining the share price upon exit in the shareholders' agreement.

Final remarks

The protection of minority shareholders within companies is a critical aspect of corporate governance that requires careful consideration and proactive measures. While statutory rights provide a baseline level of protection, they may not always suffice to safeguard minority interests effectively. Therefore, it is essential for minority shareholders to actively engage in the establishment of comprehensive safeguards through provisions in the articles of association and shareholder agreements.

With its robust regulatory framework, the AIFC offers a flexible platform for investors to establish and enforce agreements tailored to their specific needs and circumstances. This flexibility empowers investors to navigate complex corporate environments with confidence, knowing that their rights and interests are legally upheld within a framework designed to foster trust and facilitate business growth. In essence, the AIFC laws serve as a cornerstone for promoting investor confidence and ensuring a fair and equitable playing field for all stakeholders involved in the dynamic landscape of corporate governance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.