On July 23, 2018 changes came into effect to the normative decree of the Supreme Court of the Republic of Kazakhstan dated July 10, 2008 No. 2 "On certain matters of application of legislation on limited and additional liability partnerships" (Decree).
One of the key points covered by the amendments is the question of the effect the state re-registration of a partnership with the justice authorities has on the buyer's title to the interests in the charter capital of a partnership.
It follows from section 6 Article 42 of Kazakhstan's Civil Code that a partnership must be re-registered if a composition of participants changes. Because "re-registration of the partnership" is not the same as "registration of the transaction to acquire interests," there had been no direct connection between the state re-registration of the partnership and the accrual by the buyer of its rights to the interests.
That premise had its confirmation in the previous version of section 6 of the Decree, where re-registration with the justice authorities gave rise to a right to dispose of the interests (which in effect used to mean that such elements of title as the right to possess and the right to use interests could accrue earlier at a moment determinable in the sale and purchase agreement – and usually parties would agree such moment to be when the sale and purchase agreement is executed).
In its amended version, section 6 of the Decree states that a buyer acquires title to the interests only from the moment of re-registration of the partnership. It means that before re-registration the buyer is unable to acquire any of the elements of title to interests, including those which it could have acquired previously.
In transactions where completion takes place soon after the sale
and purchase agreement is executed the buyer may ask the seller to
procure the adoption of a general meeting's resolution to
re-register the partnership at the same time the sale and purchase
agreement is signed. However, in transactions where there is a
large time gap between execution of the sale and purchase agreement
and completion (for instance, time needed to obtain state
approvals) procuring the adoption of a general meeting's
resolution to re-register the partnership (which is valid only for
one month from the date of its adoption) beforehand will be
impossible. From the buyer's perspective it means that
additional risks arise mitigation of which requires additional
contractual means of protection.
The amendment in question may affect transactions in the following ways:
- Buyer's control over
re-registration. The resolution on re-registration used to
be adopted by a buyer as the new participant. Thus, the buyer had
control over the re-registration of the partnership. The amendments
in effect mean that the seller must adopt the resolution on
re-registration – thereby the buyer loses control over the
re-registration and becomes dependent on the seller taking active
steps to adopt such a resolution.
A normative decree of the Supreme Court «contains the clarification on the matters of court practice». On that basis there could be a theoretical argument that the new approach of the Decree with respect to the moment when the buyer acquires title to interest (given that the basis of such approach lies in provisions of the Law "On partnerships with limited and additional liability" that were in existence and in force previously) has a retrospective effect. This may jeopardize the legal accuracy and legality of all prior transactions where the resolution on re-registration was adopted with the participation of the buyer as the new participant of the partnership.
- Use of option agreements. Practice sees that option agreements are in use (documented as irrevocable offer of a seller and acceptance of a buyer) whereby either buyer has an option to buy or seller has an option to sell an interest in a partnership. If previously for the buyer in order to become a participant it was enough to execute an acceptance of the offer (and the adoption of a resolution to re-register was also under the buyer's control), now the acceptance alone would not create buyer's title, and furthermore, the seller keeps control over re-registration. This, in effect, significantly limits the attractiveness of an option as a civil law instrument.
- Other participants' influence on the transaction. Previously, if other participants voted against re-registration of the partnership, the buyer had a right to compel them through court to vote for re-registration, since the buyer could have become a participant from the moment when the sale and purchase agreement is executed (i.e. the buyer enjoyed legal protection for the rights already accrued). It is unclear whether a buyer would now have the ability to compel other participants to vote for the re-registration of the partnership, given that the buyer does not acquire a participant's rights until the re-registration has been completed. The Decree is silent on the point. Therefore, other participants may, in effect, have received the ability to block the buyer from becoming a participant through voting against re-registration of the partnership (even in a situation when the foundation documents neither restrict the sale to third parties in principle nor require other participants' consent for such sale).
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