Basics of Shareholder Meetings



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When operating a Mongolian company, it is important to understand the key between two types of Shareholder Meeting. The most common type of Shareholder Meeting is a “Regular Shareholder Meeting, and is required to be held each year to take care of standard operational business of the company.

The second type is a “Special Shareholder Meeting” which is not mandatory each year, but is called only upon special need to address unique or urgent situations.

Here, we will take a closer look at what you need to know about Regular Shareholder’s Meetings for Mongolian companies. In future blog posts, we will take a deeper dive into the specifics of Special Shareholder Meetings.

When should a regular shareholders meeting be convened

Provision 59.4 of the Company Law states “The regular shareholders meeting shall be called by the Board of Directors (in the absence of executive body) and held within four (4) months following the end of each fiscal year of a company.”

A fiscal year is a period the organizations estimate their financial statements and do tax settlements. Countries consider a fiscal year as a period of twelve months, but it does not necessarily overlap with the calendar year. Therefore, the financial year varies between countries. As per Mongolia, the fiscal year commences from January 1st of the year and ends by December 31 of the same year.  Therefore, within 4 months following the end of the fiscal year, it obliges the regular shareholder meeting to be convened within April of the year.

The Regular shareholders meeting convened within April of every year by the Board Of Director’s /Executive management, in the absence of Board of Directors/ resolution.

The meeting shall be held at least 40 days after the issuance of the Board of Directors or Executive management decision to convene the shareholders’ meeting. If the company charter defined the meeting to take place in 45 or 50 days, the same shall adhere. In case the company charter does not specify a certain period, it shall adhere 40 days, regulated by law.

In connection with legal requirements, the authorized person is the Board of Directors, and if the Board of Directors absent the executive management is obliged to convene the shareholders meeting, in terms of timeline, it’s obliged to conduct the shareholders meeting within April of every year.

What is the consequence of not convening the shareholders meeting

 In case the shareholder’s meeting was not convened within April, the Board of Directors authority expires in entirety, except the right to convene the shareholder’s meeting. From the date, the Board of Directors authority expires the Board of Directors is incapable of issuing any decision and if it issued any decision the contracts and deals it executed shall be invalidated.

Who shall resolve to convene a shareholders meeting

Board of Directors

Executive management (in the absence of Board of Directors)

Mandatory agenda for a shareholders meeting

The mandatory agenda for the shareholder meeting is to review and approve the Board of Directors conclusion on the operational report and the financial statement of the company. The company should responsible the costs associated with the shareholder’s meeting pursuant to the Company law.

RESALE PRICE CONTROL UNDER THE LAW



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Recently, one of our client had been seeking our advice on Mongolian competition law, particularly on the resale price maintenance issue. As the client’s expectation is that Mongolia may have a similar restriction against resale price control/management as same as other jurisdictions like in US, South Korea and Hong Kong. Meanwhile providing legal analysis to our client’s inquiry, we have decided to provide the post in concern with background of the law on competition of Mongolia.        

        In Mongolia, Law on Prohibiting Unfair Competition was initially enacted in 1993, then it was amended in 2000, after ten years this law was renewed as the Law on Competition which is recent effective legislation in Mongolia. The current effective competition law is consisted of five chapters and 27 Articles.

        The purpose of the Competition law shall be to regulate relations regarding creation of conditions for fair competition in the market for entities conducting business activities, identification and implementation of legal and organizational basis for prohibition, restriction and prevention of any activities dominating in market and impeding competition.

In Mongolia, there are various restrictions apply for the business entities depending on their scope of supplying the particular goods in the market pursuant to the Law on Competition.

        In concern with the resale price maintenance issue, the business entity in natural monopoly and dominant position is strictly prohibited to determine the price and territory of resale of the particular products.  

        In addition, it is also prohibited to demand from customers additional conditions for sale, to sell products at differentiated prices and to refuse to sale products without any legal ground. This shall not apply to price change of products which included transportation actual cost depended on regional location and bonuses given by manufacturers or suppliers to whole and retail sellers.

If the business entity in legitimate monopoly and dominant position conduct the above mentioned dominate activities prohibited by the Law on Competition, the state inspector shall compensate the damages caused by illegal activities and fine a four percent of the sales revenue of previous year.

Permissions and Decisions in Context of a Major Transaction



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We have reviewed the basics of a “Major Decision” under Mongolia law in our previous post. Permission to enter into a major transaction must first be obtained from the Board of Directors. If there is no Board of Directors, it shall be presented to the shareholders meeting and a decision shall be made.

Pursuant to the Company law “A resolution to conclude a major transaction must be adopted unanimously by the Board of Directors (in its absence, by a shareholders meeting).

What does it mean to make a decision unanimously?  For instance, lets imagine that “A” LLC has five members of board. Does this mean that all members of the board, or 5 members, will agree to a major transaction? or If 1 out of 5 members of the Board of Directors did not attend the meeting and the 4 members who attended the meeting agreed, is it considered that they make a unanimous decision?  The question is whether all board members, regardless of whether they are present at the board meeting, are willing to agree to a major transaction, or whether all members at the board meeting are in agreed to enter into the major transaction. 
In this case, according to the Company Law, the Board of Directors' meeting shall be valid if the majority of its members are present.  In addition, unless the company's charter specifically sets up a higher percentage, the board decision should be effective by an overwhelming majority of the members present at the board meeting. Therefore, as our Mongolian lawyers see it,  if the company's charter does not state that the decision of the board is valid by the vote of all members, then it is understood that a major transactions will be permitted by decision of all members present at the board meeting (assuming a quorum is met). In other words, all members present at the meeting agreed unanimously to enter into the major transaction.

Each member of the Board of Directors shall have one vote with respect to each matter considered at any meeting of the Board. The company’s charter may prohibit some board members from voting on major transactions. In this case, the decision shall be made by a majority vote of the Board members with the right to vote. Decisions of the Board of Directors must be adopted by an overwhelming majority of votes of members who participate in the meeting, unless a larger number of votes is specified in the company charter.

If the Board of Directors fail to unanimously adopt the resolution to conclude a major transaction, then the major transaction shall be discussed by a shareholders meeting where it must be approved by a majority votes of shareholders who attend the meeting.

Shareholders who voted against a resolution to conclude a major transaction have the right to demand the company that to redeem their shares.

 A company is obligated to inform the public about the major transactions and their price in their quarterly and annual reports.

What to Consider When Closing a Major Transaction?



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Mongolian Company Law has a specific definition of a “Major Transaction,” with specific issues to keep in mind to ensure compliance. A Major Transaction is any transaction with a market value exceeding (25%) of the total amount of assets of a company based on the most recent balance sheet of the company, or a transaction in which certificates with right to purchase common shares or securities convertible into common shares where the number of such common shares exceeds (25%) of the common shares issued before such transaction.

A Major Transaction typically connected to sale, purchase, disposition or pledge of a property or property rights. Care should be taken to define the market price of property and property rights (including the value of a company shares and securities). The price agreed to by a seller and buyer should be understood as market price of the property and property rights which is connected to the major transaction.       

The market value of property and property rights should be determined by the company`s Board of Directors (in its absence, the shareholders meeting), based on market principles. The conclusions of an independent evaluation organization or company may be used when determining the market price. This market price should be determined by a majority vote of the members of the Board of Directors without conflict of interest. A member of the Board of Directors is deemed that a free of conflict-of-interest who has no common interests with the participant, mediator, parties to the transaction, and will not receive any financial benefits directly or indirectly resulting from this transaction.

COVID-19 and Force Majeure



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The current quarantine measures hold by the Government of Mongolia have become increasingly difficult for the legal entities and individuals conducting business operation in Mongolia due to the Coronavirus epidemic (COVID-19), which is being declared as a pandemic by the World Health Organization.

This recent quarantine creates the risk/problem that business entities will not able to timely fulfill their contractual obligations, such as loan payments, interest and rent payments etc.

In circumstances of force majeure and hardship, the situations which are unable to fulfill their contractual obligations are considered as respectful grounds. In this case, there will be issues that contractual parties have to deal with their obligations, responsibilities and risks to be distributed under the agreement.

Therefore, we provide our clients with legal service and support that seeks to overcome this difficult time with less harm and a release from contract liability in order to the respectful ground as force majeure. The evidence which allow to release the contractual obligation is the certificate proofing the force majeure.

The Mongolian National Chamber of Commerce and Industry (“MNCCI”) has entited to certify force majeure and hardship condition in accordance with the Article 6.6 of the Law on the Chamber of Commerce and Industry of Mongolia.

Therefore, in the event of unforeseen circumstances occurring between parties during the performance and fulfillment of the contract regardless of the  control or willing of the parties, the MNCCI provides a certificate proofing the force majeure and a hardship.

The business entity shall submit the following documents for the MNCCI for the certificate:

  • request letter
  • a notarized copy of the contract (in Mongolian)
  • a notarized copy of state registration certificate / incorporation certificate of business entity
  • other documents proving the force major and hardship situation

If you would like us to assess the rights and liabilities of your personal situation, please contact us to arrange a consultation with one of our experts.

Bankruptcy and Court Appointed Trustees



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A Mongolian Court shall appoint a trustee to oversee operations of a company within 5 days after a request for trusteeship from the claimants in a bankruptcy proceeding.

The trustee can be either an individual or a legal entity. The trustee can be the person with higher education in law, finance and economics who does not have financial and economic personal interests in the respondent’s activities, or the legal entity has the rights and responsibilities to provide professional consulting services in the field of law, finance and economics. According to the relevant legislation, it is prohibited to being appointed the respondent’s and claimant’s management, their members, related persons or their family members shall be as a trustee.

The trustee has the following rights and responsibilities in concerning with the bankruptcy case:

  • take under custody the assets of the respondent according to the court order;
  • safeguard the respondent’s assets and relevant documents, conduct counting;
  • if required, conduct a documentary audit of the respondent’s activities, organize such work;
  • announce and convene a meeting of claimants;
  • review contracts and transactions conducted prior to the start of a bankruptcy case, submit to the meeting of claimants’ proposals on whether to terminate, amend, or consider invalid the contracts and transactions specified in the relevant legislation;
  • open a special account and deposit the respondent’s cash;
  • conduct contracts and transactions with others on behalf of the respondent within the scope of the rights granted by the claimants’ meeting;
  • obtain from the respondent relevant data and documents;
  • submit to appropriate parties his/her assessment of the respondent;
  • evaluate the respondent’s assets;
  • hire an assistant within the limits of compensation determined by the claimants;
  • sell the respondent’s assets according to the procedures set forth in the relevant legislation;
  • other rights and responsibilities set forth in law.

The trustee shall make an assessment of the respondent’s activities within 20 days since the his/her approval by the court and submit the court, respondents and claimants the assessment, including financial and economic calculations of the respondent, conclusions; reasons and specific features of the respondent’s insolvency; the management’s activities; claimants’ groups and amount of each claim; and proposals on whether to recapitalize the respondent, or to liquidate upon consideration as insolvent; other data and documents deemed necessary.

In addition, the trustee has the significant rights and obligations in concerning with the respondent’s recapitalization, the allocation of its assets and liquidation process of the respondent.

The trustee will be personally liable for the damages caused the respondent due to illegal activities such as fraud and negligence, and the parties to the bankruptcy case have the right to assert a complaint to the court regarding the activities of the trustee and the court may change the trustee.

Getting an Apostille in Mongolia



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Often when official documents from Mongolia are to be used abroad, the intended recipient requires these documents to go through an authentication process known as an Apostille.

Apostilles authenticate the seals and signatures of officials on public documents such as birth certificates, court orders, or any other document issued by a public authority so that they can be recognized in foreign countries that are members of the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents in 1961 which is known as Hague Convention Treaty or Hague Apostille Convention.

Mongolia has been a member of the Hague Apostille Convention since joined on December 31, 2008. It helps that the documents apostilled in Mongolia will be valid in 117 Member States of the Apostille Convention without requiring any re-certification or notarization in the receiving country. However, the apostille certificate originated by Mongolia is not recognized in Austria, Belgium, Finland, Germany and Greece, and vice versa.

The document will often be certified by the foreign ministry of the Mongolia in which the document originated and an embassy or consulate. This apostille only certifies the signature, the capacity of the signer and the seal or stamp it bears. It does not certify the content of the document for which it was issued.

As for apostille, It requires that a copy of original document which originated from Mongolia shall be notarized and translated by a certified translation bureau in the language used in the receiving country. That translation of the document is also required to be notarized in Mongolia for the submission.

The following documents shall be eligible to apostille in Mongolia:

•           ID, passport, birth certificate and marriage certificate;

•           Reference letter by police and state registration office;

•           All types of education certificates or diploma;

•           Decision by the court and prosecuter; and

•           Administrative documents issued by government agencies of Mongolia.

In general, the apostille certificate is issued within 3 business days from the submission date of the documents.

If you need help to obtain your documents, please contact our firm and let us know how we can help.

Updates to Mongolia Money Laundering Law Under Review



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The Law on Fighting Money Laundering and Financing of Terrorism was first ratified by the Parliament of Mongolia on July 8, 2006. The Asia-Pacific Organization of the Financial Action Task Force on Money Laundering (FATF) has conducted a mutual evaluation of Mongolia’s anti-money laundering and financing of terrorism system in 2007 and 2017.

Mongolia was included in the FATF’s grey list of Strategically Deficient Countries in Combating Money Laundering and Terrorism Financing in October 2019. Therefore, Mongolia needs to be implemented the work plan in comply with the FATF’s recommendations.

The Working Group was set up with representatives of multilateral state organizations which is responsible to coordinate the implementation of relevant measures to exclude Mongolia from the FATF’s grey list by order No.172 of the Prime Minister of Mongolia dated December 11, 2019. The Working Group is responsible to provide the certain actions for amending the relevant legislation.

Within the framework of the FATF’s recommended mandatory work plan for Mongolia, it is necessary to ensure the coherence of laws which are an integral part of Mongolia’s responsibility system for combating money laundering and financing of terrorism, and to create conditions for a unified, non-duplicated sectoral system by taking remedial action.

Therefore, the amendments in concerning with the legislations, namely, Law on Combating Money Laundering and Financing of Terrorism, the Law on Accounting, the Criminal Code, the Law on Legal Status of the Financial Regulatory Commission and relevant bills have been developed for purpose of the eliminating duplication  and violations of the relevant legislations, as well as the abovementioned  legal and practical needs within the framework of combating money laundering and financing of terrorism.

The drafting of the amendment was based on a common international requirement, which was to strengthen Mongolia’s system for combating money laundering, financing of the terrorism and the spreading of weapons of mass destruction.

In particularly, the draft of amendments of the relevant legislation states that to determine clearly the some legal terminologies stipulated in the Law on Money Laundering and financing of terrorism, to ensure/provide the authorized person who are entitled to perform the monitoring, to create a legal environment for monitoring in purpose of the implementation of the legislation, to report electronically by the obliged person to the Financial Information Agent, to include the tighten of sanctions for crimes and offenses related to the money laundering, to intensify the investigation and to eliminate the duplication and violation between the relevant legislations.

These amendments to the above-mentioned legislation are expected to be discussed by the State Khural of Mongolia (the Parliament of Mongolia) for the adaptation.

Tax Reform for Mongolia



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As you all aware that the Parliament of Mongolia ratified the amendments to laws on taxation and related legislation during the irregular session held on 22 March 2019 in order to the submission of Government’s tax reform packages.

The new tax laws require the Cabinet, Ministry of Finance and Mongolian Tax Authority to release a number of implementing guidelines. As these regulations largely play an important role to set the tone of the taxing rules, we encourage you to monitor these developments in a timely manner.

The newly adopted tax laws, including the General Tax Law, the Corporate Income Tax, Value Added Tax and Personal Income Tax Laws and tax implementation guidelines and regulations came into force on 1 January 2020.

A number of important changes that may have a material impact on taxpayers, requires taking appropriate actions to comply with the new requirements. There are following main revisions introduced to the tax reform: new amendments include increased supervision on suspicious tax activities, tax deductions for environmentally friendly product purchases and rehabilitation expenses by companies.

Furthermore, the higher tax refunds—up to 6 million MNT-for new apartment owners if the deed is issued in 2020. Independent contractors such as artists will pay taxes from their net income, not from their income as before. Shareholders’ dividends will be taxed at 5 percent, and individuals and organizations who make less than 50 million MNT in sales income, will be taxed 1 percent of their total sales income, and small traders will be charged 1 to 50 percent of the minimum wage, depending on their sales volume.

BROADCASTING FOREIGN TV CHANNELS IN MONGOLIA



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We would like to post a blog in concerning with the foreign TV channels practice in Mongolia. Today, there are over 130 foreign TV channels broadcasting within Mongolia through the licensed TV multi-channel transmission service providers as their basic package service. One of our clients was recently seeking our assistance on clarifying whether a foreign TV channel is required to obtain any license for broadcast within Mongolia.

Under the currently effective legislation of Mongolia, there is no requirement for a foreign channel operator, or distributor to obtain licences for broadcast within Mongolia. The Communications Regulatory Commission of Mongolia (CRC), a government agency, is entitled to grant a licence to following activities in concern with broadcasting:

  • Digital terrestrial television network provider;
  • TV& radio and channel broadcasting service.
  • TV& radio multi-channel transmission service; and

However, this licensing requirement applies only to Mongolian legal entities, not to foreigners. In practice, a licensed Mongolian legal entity providing TV multi-channel transmission service, entered into an agreement with the foreign channel operator or distributor for broadcasting such foreign channel within Mongolia. TV multi-channel transmission service providers have a responsibility on the contents of foreign TV channel what shall be compatible with Mongolian laws and regulations.

Nowadays, a new legislation in related to the broadcasting is in the process of review. The draft law on broadcasting is currently under review by the parliament. According to the draft, the foreign channel would be required to be register with CRC before entering into the agreement with licensed Mongolian broadcast company.