Authors: Symbat Akhatbek (Associate), Daniil Litosh (Junior Associate)
Website: https://unicaselaw.com/blog/aifc-corporate-governance-for-private-companies
Astana International Financial Center (AIFC) is an innovative financial hub that plays an important role in the development of the economy of Kazakhstan and was created for the purpose of attraction of international investments and projects. Due to its specific status and unique opportunities, the AIFC is an inviting place to locate a business, carry out financial transactions and implement investment projects.
Despite the functioning of the center since 2018 and a significant number of registered companies, center participants continue to come up with questions related to the specifics of corporate governance. Thus, this article is focused on highlighting and describing a number of aspects and features of corporate governance of private companies (as the most common company form in the AIFC).
The Concept of a Private Company
According to AIFC legislation, a private company is an organisation that has at least one shareholder and is not engaged in the public offer of its securities.[1] However, it is worth noting that a shareholder of a private company is liable to the amount (if any) that remains unpaid on the Shares held by the shareholder.[2] Also, a distinctive feature of a private company is the absence of a requirement for a minimum share capital of the company.[3]
Thus, it is possible to conclude that a private company is an analogue of a limited liability partnership under the legislation of the Republic of Kazakhstan due to the limited liability of participants (shareholders), the absence of possibility of public sale of participation interests (shares) of the company and the presence of opportunity to commence activities with zero share capital.
A private company has the following corporate governing bodies:
- Shareholder (meeting of shareholders);
- Director (board of directors);
- Other bodies provided for by the company’s articles of association.
Shareholders of a Private Company and their Powers
A shareholder is a person who has established a company or acquired its share(s) and has been duly registered in the Company’s Register of Shareholders.[4] Shares provide the opportunity to give the right to vote at a meeting of the company, through which the company is managed.[5]
The AIFC Companies Regulations do not directly contain an exhaustive list of functions falling within the exclusive competence of the sole shareholder or meeting of shareholders of a private company.
However, only the sole shareholder (general meeting of shareholders) has the right
- by issuing a Special Resolution to:
- Change the name of the company (unless otherwise provided by the articles of association);[6]
- Adopt the new version of the articles of association (unless otherwise provided by the articles of association);[7]
- Change or terminate the rights associated with a class of shares of the Company;[8]
- Change the form of the company from private to public;[9]
- Make a decision on the company’s purchase of its shares if it is an off-market purchase and the Company is not a Wholly-Owned Subsidiary;[10]
- Approve the planned merger;[11]
- Transfer incorporation of company from the AIFC to another jurisdiction;[12] and
- Conduct other actions provided for by the articles of association and Regulations.
As Special Resolution is issued by shareholders (participants) representing at least 75% of the total number of shareholders with voting rights present at the meeting.[13]
- by issuing an Ordinary Resolution to:
- Alter share capital;[14]
- Allow the company to hold its purchased shares as treasury shares;[15]
- Elect or remove directors of the company;[16]
- Appoint a company auditor and change his salary;[17]
- Make a decision on the company’s purchase of its shares if it is a market purchase or the Company is a Wholly-Owned Subsidiary;[18]
- Determine the class of shares issued by the company, as well as the powers and obligations of their holders;[19]
- Pay dividends;[20]
- Authorize shareholder(s) to inspect accounting records; [21]фnd
- Perform other actions provided for by the articles of association and/or Regulations.
An Ordinary Resolution is made by a simple majority of votes of shareholders (participants) with voting rights present at the meeting.[22]
Therefore, we can conclude that the holders of the company’s shares are given the right to vote at the general meeting of shareholders, where decisions of both private and general nature are made. Thus, the general meeting of shareholders takes part in the management of a private company by making the most key decisions. However, how does the overall strategic management of the company take place?
Directors of a Private Company and Their Functions
A private company must have at least one director.[23]
Competence of the Director or Board of Directors
The Director of the Company is obliged to:
(a) act in accordance with the Constituent Documents; And
(b) exercise the powers of a director only for the purposes for which those powers were provided.
Also, the director is obliged to adhere to the following principles when making decisions:
- Act within powers;[24]
- Promote success of company;[25]
- To exercise independent judgement;[26]
- Exercise reasonable care, skill and diligence;[27]
- Avoid conflicts of interest;[28]
- Not to accept benefits from third parties;[29]
- Declare interest in the proposed transaction or agreement;[30]
According to the standard articles of association of a private company, the business of the Company must be managed by directors or another individual appointed by the shareholders or directors and bearing the title of Chief Executive Officer. Thus, if in a private company the shareholders elect more than 1 director, these directors form the board of directors (hereinafter referred to as the “BoD”).
A director may be appointed from among the shareholders and be an individual over 18 years of age.
A Director must have the widest possible authority to act in all circumstances on behalf of the Company, for corporate purposes and subject to the powers expressly granted by law. The Director represents the Company in its relations with third parties.
Therefore, taking into account that the AIFC legislation does not contain mandatory rules on the competence of the board of directors and also that the standard articles of association are not mandatory, it is possible to conclude that the competence of the board of directors is directly determined by the articles of association of the company. Moreover, according to established practice, the BoD is responsible for all issues of ensuring the company’s activities, with the exception of issues relating to the exclusive competence of the general meeting of shareholders, determined by the company’s articles of association, which is adopted and amended by decision of the general meeting of shareholders.
The procedure for appointing members of the board of directors, the required quorum and the number of votes for their appointment.
- Body appointing directors, their number and procedure
The initial directors of the company must be elected by the founders. Subsequent directors must be elected by shareholders by Ordinary Resolution or as otherwise provided by the articles of association for a term determined by the shareholders.[31]
The number of directors must be established by the company’s articles of association.[32]
If a General Meeting proposes to appoint 2 or more persons as directors, the appointments must be made by separate resolution in respect of each person unless the shareholders unanimously agree otherwise at the meeting.[33]
It is worth noting that the standard articles of association of a private company regulate that the company must have at least 1 director (mandatory for private companies) [34], while directors can be appointed by ordinary resolution of the general meeting of shareholders or by decision of the board of directors.[35] However, additional directors may be appointed by shareholders or directors if the total number of directors does not exceed any maximum number of directors prescribed by the company regulations or articles of association. Additionally, the directors may temporarily appoint additional directors, and this appointment must be confirmed by an ordinary resolution of the general meeting of shareholders.[36]
Thus, as a general rule, directors are elected by the company’s shareholders by ordinary resolution unless otherwise provided by the company’s articles of association. It is worth noting that the standard articles of association are not mandatory, which indicates the freedom of shareholders to determine the number of directors, the procedure for their election and the body responsible for their appointment.[37]
- Required quorum and number of votes
Except for a company with a single shareholder, the quorum at any general company meeting is 2 shareholders present in person or represented by proxy. When voting by show of hands, each shareholder present in person at the meeting has 1 vote, and when voting by poll, each shareholder has 1 vote for each share owned by the Shareholder.[38]
Therefore, the quorum for the meeting at which the appointment of members of the board of directors will be made is 2 shareholders, with the exception of a company with 1 shareholder. At the same time, the procedure for electing members of the Board of Directors (by show of hands or by poll) is determined by the articles of association.
Position of the Secretary and His Competence
The secretary, according to established practice, is the person who ensures the company’s compliance with legislative and statutory requirements. At the same time, the directors of the company are responsible for determining the list of powers and appointing a secretary.
A public company must have 1 secretary, while a private company may not have a secretary.[39]
Also, if a private company does not have a secretary,
- anything authorised or required to be given or sent to, or served on, the Company by being given or sent to, or served on, its secretary may be given or sent to, or served on, the Company itself and anything addressed to the Secretary is taken to be addressed to the Company; and
- anything else required or authorised to be done by the Secretary may be done by a director or a Person authorised generally or specifically in that behalf by the Directors.[40]
Thus, the establishment of a private company is one of the attractive methods of doing business in the AIFC due to the limited liability of shareholders, the absence of requirements for share capital and the ability of the shareholder to adopt and amend the articles of association in wording, defining the competence of the board of directors or the chief executive officer.
The Unicase team specializes not only in providing legal advice on the law of the Republic of Kazakhstan and other Central Asian countries but is also an expert in AIFC law, providing clients with appropriate business structuring depending on their goals and priorities. Thus, Unicase provides clients with a wide range of services, which includes registration of a private company in the AIFC, as well as answering to questions on AIFC corporate law.
***
Unicase is a leading Central Asian law firm operating locally and internationally, with a strong presence in Kazakhstan, as well as in Uzbekistan, Kyrgyz Republic, Tajikistan, and Turkmenistan. Unicase has one of the strongest Expert Teams, well known for regulatory and law drafting capabilities, who, alongside a strong transactional background and expertise, have allowed the firm to win major development projects and continue to be the first-choice advisers for legislation development issues.
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[1] Paragraph 1 of Article 36 of the AIFC Companies Regulations No. 2 dated December 20, 2017; Paragraph 1 of Article 50 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[2] Paragraph 1 of Article 35 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[3] Paragraph 2 of Article 43 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[4] Paragraph 1 of Article 41 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[5] Subparagraph (a) of paragraph 1 of Article 42 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[6] Paragraph 1 of Article 22 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[7]Paragraph 1 of Article 19 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[8]Article 33 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[9]Subparagraph (a) of paragraph 1 of Article 40 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[10]Subparagraph (a) of paragraph 2 of Article 61 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[11]Paragraph (ii) of subparagraph (b) of paragraph 6 of Article 115 of AIFC Companies Regulations No. 2 dated December 20, 2017; Article 116, paragraph 1 of AIFC Companies Regulations No. 2 dated December 20, 2017.
[12]Paragraph 1 of Article 156 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[13]Paragraph 3 of Article 100 of the AIFC Companies Regulations No. 2 dated December 20, 2017
[14]Paragraph 1 of Article 44 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[15] Paragraph 1 of article 62 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[16] Article 75 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[17] Article 136 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[18]Subparagraph (b) of paragraph 2 of Article 61 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[19] Paragraph 7.1 of the AIFC Companies Rules No. GR0004 dated December 29, 2017.
[20]Paragraph 27.1 of the AIFC Companies Rules No. GR0004 dated December 29, 2017.
[21]Paragraph 28 of the AIFC Companies Rules No. GR0004 dated December 29, 2017.
[22]Article 4 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[24] Article 77 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[25] Article 78 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[26] Article 79 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[27] Article 80 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[28] Article 81 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[29] Article 82 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[30] Article 83 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[31]Paragraph 1 of Article 75 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[32]Paragraph 4 of Article 75 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[33]Paragraph 5 of Article 75 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[34]Paragraph 1 of Article 74 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[35]Paragraph 21.1 of the Standard articles of association for a private company (Appendix 5 to the AIFC Companies Rules No. GR0004 dated December 29, 2017.
[36]Paragraph 21.2 of the Standard articles of association for a private company (Appendix 5 to the AIFC Companies Rules No. GR0004 dated December 29, 2017.
[37]Paragraph 2.2.2 of the AIFC Companies Rules No. GR0004 dated December 29, 2017.
[38]Article 98 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[39] Paragraph 3 of Article 89 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
[40] Paragraph 4 of Article 89 of the AIFC Companies Regulations No. 2 dated December 20, 2017.
