Category Archives: Corporate Commercial

Avoid Risks in Foreign-Mongolian Cooperation Agreements



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Our Mongolian Lawyers regularly assist foreign investors in various forms of joint ventures and business cooperation with Mongolian partners. These partnerships are sometimes necessary to allow a foreign investor to participate where Mongolia law restrictions direct foreign ownership. For example, Mongolian law has certain restrictions on entities with foreign investment owning and using land. One client the firm has worked with, a European party engaged in property development entered into one such arrangement with a Mongolian partner for the development of land located in a special restricted zone of Ulaanbaatar.

The European side, and the Mongolian side entered into a “Cooperation Agreement” which described a cooperative business arrangement in which the European party contributed funding, while the Mongolian party contributed access to the land targeted for development. This type of cooperation, is common in Mongolia between foreign investors and Mongolian property owners, and has been upheld by Mongolian courts.

However, when entering into such an arrangement, a foreign investor should be aware of risks.  A few years into the partnership, relations broke down between the Mongolian party and the foreign investor resulting in extensive litigation over the validity of the Cooperation Agreement and ownership of the land.

Foreign participants in this kind of Cooperation Agreement should engage independent Mongolian legal counsel to review the agreement for compliance with Mongolian law, and to ensure the foreign party is protected. The agreement should be clear about the nature of the cooperation, and the contributions of each party. It is important specify that legal ownership of the land remains with the Mongolian party. To eliminate confusion, there are certain key phrases which should be avoided when describing the foreign investor’s relationship to the land. If the language of the Agreement is ambiguous the Mongolian side may latter attempt to challenge the validity of the Agreement alleging violation of Mongolian law.

Customs Processing and Temporary Warehousing



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Our Mongolian lawyers often work with foreign clients and local trading companies involved in import of product into Mongolia. Products entering Mongolia often require short term storage as the products are inspected by Customs. Importers are able to utilize temporary warehousing solutions for these goods for the duration the products are under Customs control yet not yet cleared.

Temporary Customs warehousing may be open for the public, or limited access. Goods are typically placed in temporary storage upon decision by Customs that the goods be stored pending the Customs inspection process. Goods seized by Customs or detained on suspicions of violations of import regulations are also stored in the temporary warehouse.

When goods are placed in temporary storage, a copy of the manifest and other documentation relating to the shipment is kept on file. In normal circumstances storage in temporary warehouses is permitted for a period of up to 2 months from the date of entry. Customs has the option to extent this period for an additional month. For perishable or hazardous goods, storage may be for 2 weeks, with a possible one week extension.

Storage of petroleum products is permitted in a limited access facility operated a licensed fuel importer. Third parties and those not having the necessary import license will not be permitted to store products in such facility.

A party with product in temporary storage may not transfer title to a third party until customs inspection and clearance is completed.

Seizure of Infringing Product by Mongolia Customs



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We have written previously about the legal mechanisms for registration of intellectual property rights in the Mongolia Customs database for preventing the intellectual property infringement in Mongolia. In this post we will go more in-depth regarding processes for seizure and detention of suspected counterfeit products by Customs at import or export, which has proven to be effective to fight against the infringement of intellectual property rights in the country.

In general, a holder of intellectual property rights is able to submit an application to Mongolia Customs authorities to take measures to prevent infringing & counterfeit goods from entering into Mongolia when there is evidence known or suspected illegal or counterfeit products are in transit through Customs. An application must contain information about the IP holder, the relevant intellectual property itself; and detailed information about the products requested to be seized.

Upon identifying target goods transiting Customs, authorities may require a cash deposit by the IP rights holder equal to the total value of the seized products (or MNT 1,500,000 if the total value is not possible to determine in advance). Alternatively, the IP rights holder may provide a bank guarantee to cover the deposit value.

This deposit serve as guarantee that the applicant will not cause any undue harm to the exporter or importer of the goods, and if any damage is caused due to false information, the deposit will be used to pay for damages.

The Customs authority will make a decision within 30 working days after receiving the application in accordance with the relevant laws and regulations. If the relevant customs authority decides to detain goods related to intellectual property rights pursuant to an application, it shall notify the Intellectual Property Office and the applicant.

New Intellectual Property Law



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Mongolia has enacted several laws in order to implementing the policies to protect and promote intellectual property, namely Law on Patent, Law on Copyright and Related Rights, Law on Trademarks and Geographical Indications, Law on Innovation and Law on Technology Transfer.

There has been criticism that these laws mainly regulated the protection of intellectual property by the state, but they did not establish a framework for protection of intellectual property in an economic context allowing for the full range of business profit. For instance, intellectual property is protected by patent and trademark pursuant to relevant laws, but the ability of the rights holder to benefit from the intellectual property, by pledging and selling intellectual property rights to legal entities, assigning them to a third party is harmed due to weak economic value.

Therefore, Law on Intellectual Property was newly approved on January 23, 2020, with the aim of increasing the economic value of intellectual property in Mongolia. This law will come into force on December 1, 2020.

The law is expected to clarify the legal rights and authorities of government agencies at various levels in connection with active intellectual property protection and enforcement, including expanding on the rights and duties of Intellectual Property inspectors in charge of investigating alleged infringement.  

At the same time, the law provides greater detail as to role and responsibility of intellectual property agents and brokers which assist IP owners in registering and protecting their IP in Mongolia.

The new law will also expand on the economic rights of Intellectual Property owners, including evaluation and assessment of IP rights, and the extent of state support for economic uses of IP.

Finally, the law aims to reform structure and function of the national Intellectual Property registry, as well as the dispute resolution system for IP related disputes.

With the entry into force of this law, it is expected that it will be easier to put intellectual property into economic circulation; and the intellectual property valuation and mediation will be more reliable; and the activities of the intellectual property organization will be more stable and normal.

M&A for Company in Dominant Market Position



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The legal entity in dominant position shall be obliged to file a request to the Authority of Fair Competition and Consumer Protection in case of reorganization by acquiring or merging with other legal entity or by purchasing more than 20 percent of the common shares or more than 15 percent of the preferred shares of a competing company selling or serving similar products, or by merging with a related party.

The Government of Mongolia approved the Resolution No. 118, “Procedure for reorganization of a dominant legal entity through merger or acquisition with other legal entities, and conclusion on the purchase of competitor’s shares” in 2012.

In accordance with this regulation, the Authority of Fair Competition and Consumer Protection shall review the applications and related materials submitted by legal entities and monitor whether competition, mergers and acquisitions result would be the restriction of competition in the market.

The Authority of Fair Competition and Consumer Protection shall review or approve the application within 30 days upon the receipt of the application. This period may be extended by up to 30 days and additional information may be requested to the applicant if necessary.

If the Authority for Fair Competition and Consumer Protection considers that there are conditions to restrict competition upon the reviewing the application, the refusal on reorganization of the dominant legal entity by acquiring or merging with other legal entities will be issued in accordance with above-mentioned procedure.

This refusal by the Authority for Fair Competition and Consumer Protection is a ground for not registering the legal entity reorganized through merger or acquisition, and for not registering the charter of the legal entities that sells or buys the shares.

If it is proved that the benefits to the national economy outweigh the disadvantages to competition in the market, the dominant legal entity will be allowed to register the reorganization by acquiring or merging with other legal entities.

Can Immovable Property be Pledged Twice?



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A owner of immovable property (usually real estate or buildings) is entitled to dually promise collateral to others as a pledge on satisfaction of debt. Previously, double collateral was not allowed, if it was prohibited by the agreement between parties. The Constitutional Court made a resolution #11 to repeal this regulation in 2015. Therefore, it is now possible to dual pledge the collateral several times.

When concluding a contract with a subsequent pledgee, the pledgor is obliged to inform the pledgee that the pledge item has already been pledged. If not informed, pledgor should liable for the damage that a subsequent pledgee suffers. A subsequent pledgee has the right to terminate the pledge agreement and may demand compensation for damages. As a best practice, it is recommended to describe the initial pledge within the pledge documentation for a subsequent pledge.

If the previous pledge agreement states terms and conditions of a subsequent pledge agreement, such terms and conditions must be included in a later pledge agreement. If these terms and conditions are not reflected in the next pledge agreement and the previous pledgee submits a claim to the court to invalidate the subsequent pledge agreement, the court will likely consider the later pledge agreement as invalid regardless of whether the secondary pledgee knew or did not know about the original pledge. If the original pledgee and the secondary pledgee are the same, this regulation will not apply.

A dual pledge must be registered at the Mongolian State Registration Office. All subsequent pledges of such property shall be recorded along with the original pledge.

In case collateral is somehow pledged by several persons, a pledgee’s demand will be satisfied via the collateral in the order registered with the State Registration Office. In other words, in satisfying the pledgee’s demand, the pledge item shall be secured in the order registered in the state registry.

If a previous pledgee did not enjoy a preemptive right to demand the secured obligation, first priority right over the collateral will be transferred to next pledgee. A Pledgee shall be obliged to notify other pledgees prior to demanding to satisfaction of a secured obligation from such property. The reason for notifying to other pledgee is, if any of pledgees demanded to satisfy secured obligation from the collateral, other pledgees may demand simultaneous satisfaction although previous and next security period is not due. If other pledgees approve, each secured demand shall be satisfied in order of its performance date.

Setting Agenda for the Regular Shareholder Meeting



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A shareholder who has voting rights and holding the company’s common shares with 5 or more percent has entitled to submit the following 4 issues to be included on the agenda of the regular shareholders meeting to the Board of Directors or the executive body within 60 days after the end of the previous financial year. This includes:

  1. Matters falling within the authority of the shareholders meeting
  2. Proposal for nomination of candidate to the member of the Board of Directors;
  3. Proposal on the person to be nominated as a member of the Tabulation Commission

(Please note that if company charter provides number ii) and iii) matters to be discussed by the shareholders meeting)

  1. Proposal on candidate for executive management

Certain requirements and criteria must be met when submitting proposals on matters within framework of authority of shareholders meeting. Thus, the proposal should be made in writing and should include grounds for the proposal, full name of shareholders introducing/proposing the proposal, type of shares he/she owns ( such as common or preferred shares) and number of shares (number of shares owned).

When nominating candidate to the member of the Board of Directors, the tabulation commission and executive body, the full name of candidate (if a candidate is shareholder of the company, number of shares), full name of the nominating shareholder, type and number of shares and grounds for nomination.

Please note that abovementioned criteria are important factor to make decision.

The process of resolving the proposal

If there is Board of Directors, the executive management will submit the proposal to the Board of Directors within 3 working days.  The Board of Directors (in its absence, the executive body) is obliged to check whether the proposal meets the above requirements and, if so, to include it in the agenda of shareholders meeting within 15 working days after receiving the proposal. If the proposal does not meet the requirements, decision on refusal should be delivered to the shareholders who submitted the proposal within 3 working days after the decision was made.

If shareholders who is introducing the proposal (proponent) does not agree with the decision to refuse, the proponent has a right to file to the court.

What is a Natural Monopoly in Mongolian Competition Law?



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In our previous post, we looked at the legal regulation of business entity in “Dominant Position” from a competition law perspective. In today’s post we will review background and legal regulation of business entity in a “Natural Monopoly.”

The legal entity in natural monopoly defined as legitimate monopoly entrepreneurs exists when a single entity alone accounts for the total supply of particular goods to the market at the lowest minimum social cost.

A business entity in natural monopoly shall be determined in accordance with the methodology set forth in the Procedures for Identifying Business Entity in Natural Monopoly and Dominant position. If an entrepreneur is identified as natural monopoly, the Authority of Fair Competition and Consumer Protection issues a decision confirming that the business entity is a legitimate monopoly.

The Authority for Fair Competition and Consumer Protection shall regulate the activities of of naturally monopolistic business entities as follows:

  • Regulating/monitoring changes in the amount and size of products supplied to the market in connection with its capacity;
  • upon considering the actual costs, controlling and granting a permission to change of the selling price of particular products;

A business entity in natural monopoly is obliged to submit its annual financial statement, market research, survey, proposal and other required documents to the Authority of Fair Competition and Consumer Protection the within first quarter of each year.

According to such report, research and proposal comparing with sources, such as news, information, reports, research and analysis conclusions issued by the Customs Authority, Tax Authorities, the Central Statistical Office and other government agencies, the business entity shall be decided to exclude from the “Registration of a legitimate monopoly entrepreneurs”.

It is strictly prohibited to conduct the dominant activities for the business entity in natural monopoly by using their monopolies illegally, restricting the number, quantity, and price of goods sold in the market in order to block other entrepreneurs from entering into the market, restricting the fair competition and blocking consumers’ rights and interest.

What is a Dominant Position in Mongolia Competition Law



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We have already posted a brief introduction about the Competition Law of Mongolia earlier. This time, we would like to address this blog on issues related to the legal regulation of business entities in dominant position.

The legal regulation of the business entities in dominant position is currently governed by the Competition Law, the Procedure for Determining Legal Monopolies and Dominant Entrepreneurs, and the Procedure for Reorganizing a Dominant Legal Entity by Acquiring and Merging with Other Legal Entities and Concluding the Purchase of a Competitor’s Shares.

A business entity in dominant position is an entrepreneur who solo or in association with other persons in a particular product market accounts for one-third or more of the production, sales, or purchases of the product in that market. In addition, the business entity accounts for less than one-third of the production, sales or purchases of the product in the market, but the ability to block other entrepreneurs from entering the market or to push them out of the market, could be considered as business entity in dominant position based on its range of products, market geographical boundaries and market concentration.

The dominance of any business entity shall be determined in accordance with the procedure set forth in the Regulation for the Determination of Natural Monopolies and Dominant Entrepreneurs. If a dominant entity is identified in accordance with such regulation, the Authority of Fair Competition and Consumer Protection issue a decision confirming the dominant entity and register it in the list with “Dominant Enterpreneur Registration”.

The dominant business entity shall be ogliged to submit its audited financial statements of the previous year, market research, proposals and other necessary documents to the Authority of Fair Competition and Consumer Protection within the first quarter of each year.

Based on sources, such as the information, reports, research and analysis conclusions issued by the Customs authority, Tax authorities, the Central Statistical Office and other government organizations, plus the report, research and proposal submitted by the legal entity, Authority of Fair Competition and Consumer Protection shall make a decision excluding the business entity from the list with“Dominant Entrepreneur Registration”.

It is strictly forbidden that the business entity in dominant position use their dominance illegally in the market by restricting the number, quantity and price of goods sold in the market in order to block other entrepreneurs from entering the market, restricting competition and sabotaging consumers.

Special Shareholder Meeting in Mongolia



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In our previous post, we looked at basics of a Regular Shareholder Meeting. Today, we will take a closer look at requirements for holding a Special Shareholder Meeting.   

A Special Shareholder Meeting may be convened only in the following situations:

  • If more than 50 percent of the Board of Directors unable to work or resigned;
  • If two (2) or more independent members of the Board of Directors, or shareholders with 10 or higher percent of voting rights has issued a proposal or demand;
  • If the loss incurred by the company exceeds 30 percent of the owner’s equity at the time of the last financial report;
  • If the company debt has exceeded the owner’s equity for two (2) years in a row, and is a negative figure;
  • the Board of Directors has issued a decision;
  • the audit committee demanded to convene a special session of the shareholders meeting;
  • all other cases specified in the company charter.

Under the Company Law, (61.1.2) it states to convene the a special shareholders meeting if two (2) or more independent members of the Board of Directors, or shareholders with 10 or higher percent of voting rights (further to call “ meeting initiator ”) has issued a proposal or demand, and it closely regulates the procedure of the proposal and its resolution. This is one of the significant differences and regulations between regular and a special shareholder’s meetings.

The Company Law directs that when the above describer 2 or more independent members if the Board of Directors and shareholders with 10 or higher percent of voting rights demand to convene the a special shareholders meeting they must issue the written proposal to the Board of Directors or Executive management reflecting i) meeting initiator’s full name ii) the number of voting shares iii) reason for convening the meeting iv) agenda v) draft resolution.

The Board of Directors (in its absence, the executive body) could decide whether or not to call such a special shareholder meeting within ten (10) business days following the date that they receive the demand. The Board of Directors may decide one of the following two alternatives:

1) Resolve to convene the a special shareholders meeting according to the meeting initiator’s demand. In this case, the meeting should be convened within 45 days of receipt of a valid proposal for a meeting. The company must  bear the cost associated with the shareholders’ meeting.

2) If the voting rights of the shareholders demanding the calling of the special meeting do not reach ten percent (10%) of the company`s aggregate voting rights; or none of the issues proposed for the agenda of the special shareholders meeting are within the authority of such meeting the Board of Directors or the executive management shall refuse to the proposal and the decision shall be immediately notified to the Board of Directors member or shareholder proposed the meeting.

If the meeting initiator disagrees with the refusal, they could appeal to the court.

If within 10 days the Board of Directors (in its absence, the executive body) fails to make a decision, the demanding shareholders or an independent member of the Board of Directors may call to convene the a special shareholders meeting independently. In such a case company may bear costs associated or refuse to bear the cost.

Conclusion and Key Differences of Regular Shareholders Meeting and A Special Shareholders Meeting

The key difference between the regular and a special shareholders meeting is the regular meeting shall be convened at least 40 days after the decision was made, and the a special shareholders meeting shall be convened within 45 days after the decision was made.

With regard to the legal consequences, if the regular meeting was not convened within the April (4 months), the Board of Directors authority ruminates in entirety, except the right to convene the shareholders meeting. In case, it failed to convene the a special shareholders meeting, the meeting initiator is entitled to convene the meeting, and if the meeting initiator disagrees with the refusal from the convening the meeting, the meeting initiator may appeal to the court.

In connection with mandatory agenda, the regular meeting must be discussed and approved the Board of Directors conclusion on the operational report and the financial statement of the company. However, the a special shareholders meeting does not have a mandatory agenda item, and it may discuss any issue related to the authority of the shareholders meeting.