Tag Archives: Company Law

Liability of a Mongolian Company for Non-Compliance

We have looked at the requirement for a Mongolian company to have an internal control body and discussed a little about the forms such body may take. Our readers may be interested to note that while having such body is mandatory for a Mongolian company under law, there isn’t actually any penalty for a company that does not establish an internal control process.

What this means is that while there is no penalty for not having the review body, the Company will be considered liable under Mongolian law for any compliance violation or audit irregularity caused by the actions of the company’s officers or staff, which result in legal penalties or civil damages. By making the company responsible to maintain the internal control and compliance committee, the law makes the company responsible for any failure of compliance. Such liability will be in effect even where the non-compliance was accidental or was caused by the unapproved actions of a single staff member. The theory is that these things would not happen if the company had established and followed an appropriate internal control process.

Mongolian companies should therefore take the legal requirement to establish a Internal Control and Audit Committee seriously. The internal control system will allow company management to better ensure proper operations of the company and identify and stop potentially non-compliant behavior before it results in a larger problem, potentially carrying legal penalty. Since the law makes the company liable for non-compliance in any case, it makes sense for the company to establish internal procedures to reduce this risk.

Compliance Options for Your Mongolian Company

We talked yesterday about the Internal Control or Auditing Committee every Mongolian company should have. The Committee should operate by a set of rules, which the company approves and implements for itself. Government regulations stipulate that each, “Entity or organization must have its own internal control and auditing procedure in compliance with this regulation and consistence with its activities.”

To comply with this rule, the company must establish the Internal Control or Audit Committee, or for larger companies a complete department devoted to compliance may be used. Smaller companies have the option to appoint a single company officer to be responsible for compliance. This individual office, committee or department will have responsibly to conduct internal compliance reviews and audits.

Internal Control and Audit Requirements for Your Mongolian Company

All types of legal entities, regardless of ownership or organization details, are required to comply with state inspection requirements. Each company is required to establish an Internal Control or Auditing Committee comprised of company officials responsible for monitoring internal company operations and compliance. Whether the company is locally owned or foreign invested, or operating in mining sector, industrial manufacturing or providing a service, the company must establish an internal audit committee.

The Internal Control and Audit Committee is responsible for internal compliance issues for the company, to ensure the company meets all of its obligations as set out elsewhere in Mongolian law. The Committee is broadly responsible for compliance as regards meeting environmental impact and conservation obligations; ensuring quality of products or services provided by the company; monitoring working conditions and workplace safety and health; ensuring the company meets all obligations regarding property registration, utilization, storage and finally, the committee is responsible to ensure accurate accounting of financial records.

If you are unsure if your Mongolian company’s internal compliance and control procedures meet requires of the law, contact your Mongolian legal counsel for a consultation.

Basics of Initial public offering (IPO) in Mongolia

In recent years several Mongolian private companies have gone public, or conducted an initial public offering (IPO), very successfully. This shows that interest and knowledge about IPO is growing both among companies (businesses) and public (investors).

As you may know, an IPO is when a private company or corporation raises investment capital by offering its stock (shares) to the public for the first time. Initial public offerings are often issued by growing companies seeking capital to expand, but they can also be done by large privately-owned companies or corporations looking to become publicly traded. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders) and professional investors. The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. The Law on Securities Market requires that to conduct an IPO the issuer must offer its stock to at least 50 and more investors.

In an initial public offering, the issuer, or company raising capital, procures the assistance of an underwriting firm (underwriter), to help determine the offering price, amount (number) of shares and timeframe for the market offering. When a company initiates the IPO process, a very specific set of events occurs. The chosen underwriter facilitates all of those steps. Primarily, an external IPO team is formed, consisting of an underwriter, law firm, audit company, appraiser company, and other experts if required. The external IPO team compiles information and documentation regarding the company (issuer), including financial performance and financial statements, expected future operations, corporate governance and corporate documents, and prepares IPO prospectus, legal opinion, audit report, asset valuation report and other necessary documents respectively that are to be filed to Financial Regulatory Commission of Mongolia (FRC). After the company files its prospectus and other necessary documents with the FRC, it sets a date for the offering.

Going public can be a great way to raise money, increase your company’s profile. However, there are number pros and cons in going public. So, when considering conducting an IPO, one must do all proper researches, calculations and analysis. In doing so we advise to seek professional advice and services from FRC listed underwriters, law firms, audit companies and appraiser companies.

Our law firm is FRC listed. Here at LehmanLaw we have FRC certified lawyers, who will provide you with qualified legal assistance.

Changes to Customs Tax and VAT Exemptions

During Parliament’s regular session on May 10, a final review of amendments to the Value-Added Tax Law and Customs Tax Exemptions Law were conducted and approved with a majority vote from Parliament members in attendance.

According to the amendments, all imported wood construction materials except oriented strand board (OSB), standardized pre-fabricated wood building structures, and logs will be exempt from customs duty. Other imported wood products, except those related to forestry and horticulture, will be exempt from value-added tax until 2022.

The Amendments to Value-Added Tax Law and Customs Tax Exemptions Law will be effective from January 1, 2018.

Investing in a Mongolia Company: Common vs Preferred Shares

In general, purpose of investment is for one to gain profits and raise capital by acquiring certain assets, such as real estate, shares, bonds and so on, which are projected to rise in value. However, the significance of investment, particularly foreign investment is that it lets the investor not only raise its own capital, but it also becomes a tool for economic growth in Mongolia or any country. In this article we will take a look at a shareholder’s practical options as regards ownership of shares in a Mongolia company.

As provided in the Law of Mongolia on Securities Markets, a share evidences the investment of a shareholder in a company, gives its holder the right to vote at shareholders meetings, to receive dividends and to receive a proportionate share of proceeds from the sale of the company’s assets remaining following its liquidation. Shares are classified into common or preferred shares. There are several differences between the two, with each having it’s own pros and cons.

Most companies issue common shares, and similarly most investors acquire common shares. Common shares may benefit shareholders through appreciation and through dividends. Common shares also come with voting rights, giving shareholders more control over the business. In addition, common shares come with pre-emptive rights, ensuring that existing shareholders have a right to buy new shares and maintain their original percentage of ownership when the company issues new shares. A Common shareholder is entitled to following:

  1. Receive dividends: depending on company’s profitability and board of directors’ decision whether to distribute the profit, shareholder is entitled to receive dividends. Dividends may be paid in cash, as well as in form of assets and/or securities.
  2. Be involved in the management of the company by voting: shareholder is entitled to participate in shareholders meetings and vote regarding all issues proposed at such meetings. One common share comes with one voting right.
  3. Shareholder is entitled to receive and obtain all and any information regarding the company’s activities at any time.
  4. Receive a share of proceeds from the sale of the company`s remaining assets following liquidation of the company: following liquidation of the company and payment of all debts to creditors, shareholder is entitled to receive a share of proceeds (if any) from the sale of the company’s remaining assets.

In contrast, preferred shares in Mongolia, as in other countries, take priority over common shares, when dividends are distributed, as well as when the company is liquidated and pays its lenders, preferred shareholders receive payment before common shareholders. However, preferred shares typically do not offer voting rights in the company and have set payment criteria, a dividend that is paid out regularly. Usually preferred shares are issued when privatizing a state property or if a private company wants to attract additional funding (investment) without changing company’s control package. Preferred shareholder is entitled to following:

  1. Receive dividends before common shareholders: dividends are paid out to preferred shareholders before common share dividends are issued.
  2. Receive dividends regularly: while for common shareholder dividends are paid out only if company is profitable and board of directors decides to distribute profit, for preferred shareholder dividends are paid out regularly regardless of circumstances. Even if the company was not profitable and could not pay dividends, the payment is accumulated, and two-year dividend should be paid the following year.
  3. Receive a share of proceeds from the sale of the company`s remaining assets following liquidation of the company first: if the company is liquidating, shareholder is entitled to be paid from company assets first (before common shareholders).
  4. If provided in company charter, preferred shares may be converted into common shares.

Preferred shares are an optimal alternative for risk-averse equity investors. Preferred shares are typically less volatile than common shares and offer investors a steadier flow of dividends. Also, preferred shares are usually callable; the issuer of shares can redeem them at any time, providing investors with more options than common shares.

So, if you are thinking about buying shares in a Mongolian company, be sure to look into it more closely. There might be more options than just buying common shares.

Is your Mongolia Company Compliant? Are You Sure?

Our Mongolian lawyers often work with foreign companies to establish and close down Mongolian companies and Representative Offices in Mongolia. Almost every time, when closing down one of these Mongolian companies our lawyers encounter compliance issues and tax irregularities which must be dealt with carefully. Sometimes these are intentional, other’s they are caused by local employees who just didn’t know any better.

Just this week we have encountered a similar situation in connection with the Representative Office of an international company. The below is almost exactly the email one of our Mongolian lawyers sent to this client, explaining the situation in Mongolia. Names and identifying information have of course been removed.

“Yesterday afternoon we were summoned to the tax office. The tax inspectors showed us their preliminary calculations of the amount of taxable income of the Rep Office, from which pursuant to law, taxes must be withheld. The tax inspectors specifically pointed out that the Rep. Office employees and accountant had been negligent and failed in their responsibility to duly collect and maintain financial documentation, including failing to maintain appropriate ledgers, and financial reports.

For example, one employee withdrew a large sum of money from the Rep. Office’s USD account and didn’t deposit the money into the MNT account. We can assume that she may have taken this to the office as cash on hand, however because no official ledger was kept, there is no record of the office receiving that cash and it is impossible to prove that the money was so deposited.

Because of this lack of documentation, the tax inspectors must consider the value of that transaction as the withdrawing employee’s personal income. Now, since from the perspective of the tax office those funds were paid to the employee as personal income, the Rep. Office should have withheld the standard 10% income tax, which of course did not happen. Therefore, we must now make up for the value of that 10% with a payment in taxes.

There are other examples where the Rep. Office gave donations or sponsorships to certain local events or business partners. Normally of course these payments are subject to tax. However, again, the Rep. Office did not withhold relevant taxes. There are quite a lot of such transactions, and unfortunately, most are relatively large sums.

Yesterday, we met with the tax inspectors and reviewed all financial documentation again, seeking to find documentation for those transactions the tax office as identified as suspicious. We were able to find corroborating documentation for some transactions, but not all. All of those remaining have been identified by the tax office, added up, and the value is are required to be paid to the tax office before we will be allowed to finally liquidate the Rep. Office. Because of the relatively large amount of unpaid taxes, the Rep. Office is also subject to a fine, which must also be paid prior to liquidation.

Once the inspection is finished completely, the tax office will specify the exact amount of taxable income in the official inspection decision.”

To avoid this, we recommend your Mongolia company implements a corporate compliance system, which includes oversight of accounting issues by a local accounting firm. Our firm regularly works with approved Mongolian accountants, and is able to make recommendations and provide accounting support.

Everything you Need to Know about Corporate Guarantees in Mongolia: Part II

In our most recent blog post we introduced the concept of the corporate guarantee in Mongolia, its basic function in a commercial transaction, and some unique aspects of such guarantees under Mongolian law.

Today, I wanted to briefly summarize the basic roles and responsibilities taken on by the Guarantor and as well as the Obligee.

Firstly, remember that the Obligee has a positive obligation to report to the Guarantor if and when the Obligor has failed to perform its duties. An Obligee will lose its right to claim against the Guarantor if the Obligee doesn’t properly perform this notification. The Obligee should also provide further information relating to the circumstances of the failure of Obligor as requested by the Guarantor.

As for the Guarantor, it is entitled to claim all rights and defenses as to non-payment which the original Obligor would be entitled to. The Guarantor will keep such rights and defenses even where the Obligor has taken action to relinquish or waive such rights.

If the Obligor is a natural person, in case such individual dies, the estate is primarily responsible for meeting the original obligations utilizing the funds and resources at its disposal. The Guarantor is only required to pay any amounts which cannot be covered through the estate.

The Guarantor of course has the ability to challenge a claim raised by Obligee if there are legitimate concerns.

As to potential liabilities of the Guarantor, beyond the obvious chance that the Guarantor may be made to pay in the event the Obligor doesn’t, the Guarantor may be required to pay any expenses in relation to early contract termination, or legal fees and expenses relating to any judicial proceedings required to adjudicate claims made by various parties. The guarantee contract may also specify that the Guarantor is required to pay for any damages or loss caused to the Obligee by the Obligor’s failure to meet its end of the agreement. The Guarantor will also be made to pay for any interest accrued do to the non-payment. Where Guarantors are more than one individual persons, they will each be jointly liable for the Guarantee regardless of any specific agreement between them.

There are many moving parts and considerations which we cannot address fully and effectively in this blog post. If you may require a corporate guarantee in Mongolia, you should seek assistance from a Mongolian lawyer.

Everything you Need to Know about Corporate Guarantees in Mongolia

One of the firm’s Mongolian lawyers was asked recently to assist a longstanding client to confirm the legality of a corporate guarantee in connection with one of this client’s commodities trading transactions. The corporate guarantee is common in varies business transactions in Mongolia.

This particular client had some questions about the corporate guarantee, based on the client’s experience using similar instruments in the UK. A corporate guarantee in Mongolia has some special features, so it is worth taking a look at what makes a Mongolian corporate guarantee unique, and what the main laws are governing this vital business tool.

Under a typical guarantee contract the Guarantor undertakes to guarantee to an Obligee to accept a specific obligation in case of the failure of the Obligor to fulfill that obligation. The Guarantor’s obligation is normally limited by the Obligor’s obligation to the Obligee under the guarantee contract, and the Guarantor will not be responsible for obligations of the Obligor relating to separate agreements concluded after the date the guarantee is issued.

The guarantee contract itself may specify future obligations that come due at a certain time in the future, or conditional obligations which only arise in the event of the occurrence of a certain defined situation.

The guarantee contract must be concluded in writing. This is a formal requirement which is stated in the law. It’s always better to specify a limit to the Guarantor’s potential liabilities in case of the failure of the Obligor to meet its own obligations.

If the guarantee contract is to be valid for a period over 5 years, or by its terms is valid for an indefinite period, Mongolian law requires the Guarantor to notify the Obligee and Obligor at least three months in advance of any termination of the guarantee contract by the Guarantor;

If the guarantee contract is terminated on any party’s initiative, the Guarantor is legally required to fulfill its obligations arising before the termination of the contract.

Our next post will review some specific obligations of the parties to the guarantee contract under Mongolian law.

Mongolia Company Liquidation: What are Requirements for Employee Termination?

There are many reasons a company or organization may decide to liquidate. Some liquidations are compulsory, in which case the process occurs as the result of a court order. Other liquidations are voluntary, in which case the people running the organization decide to cease operations. Either way there are formal steps in which you should closely follow. One of one of the key aspects of any company liquidation is termination of employment. Here is a quick guide to termination of employment in process of company liquidation in Mongolia.

When terminating employees’ contracts, the employer must perform certain steps:

  • formalize the termination of employment;
  • complete all necessary payments to employees;
  • complete the handover of work and duties by employees, if necessary provide employees with letter of reference;
  • make corresponding entries to health and social insurance books, handover books to employees.

When liquidation process is formally initiated this establishes clear legal ground by which a company or organization may lawfully lay off employees. In compliance with Labor law of Mongolia, firstly, the employer must give notice of termination of all employees due to liquidation of the company to the employees’ representatives at least 45 days prior to the employment termination date. Once employees have been notified, the employer is required to issue a formal decision of employment termination and provide it to each terminated employee. This is the formalization of termination of employment. In such decision employer must specify the grounds for termination of employment, dismissal date, time period for employees to handover work and duties and complete all outstanding payments (salary, holiday payment, health and social security payments, etc.), amount of severance pay. In the case where employees’ contracts are terminated upon liquidation of a company or organization, employer needs to pay severance pay in an amount equal to at least the employee’s average salary for one month. The amount of severance pay may be negotiated between employer and employees’ representatives prior to issuing a decision, and typically this negotiation is required in any Mongolian company liquidation.

However, just because liquidation is underway, this doesn’t suggest that all employee contracts should be terminated immediately. In fact, it is often the case and preferred that some employees are kept on to help and support the liquidation process. For example, accountants may contribute by managing the liquidation balance sheet, to ensure the payment to all creditors, assist with final tax inspections, and other proceedings. Therefore it would make sense to keep such employees to support the liquidation process instead of terminating them immediately.