A client approached us recently with a request to perform due diligence into a Mongolian company recently purchased by the client. The client, a foreign company, said they had some problems with their old local agent (not a lawyer) and wanted a local lawyer to verify the legal status and ownership of the company, as well as a property owned by the company.
Our Mongolian lawyers perform due diligence on local and foreign companies on a regular basis. We proceeded to work through the due diligence checklist, confirming the company’s status with the various local government agencies, and confirming ownership of the property. We found that the current foreign shareholder of the company had formerly been a minority shareholder with a Mongolian national being the majority shareholder of the company. The foreign shareholder had purchased the Mongolian nationals shares earlier in the year. Nothing surprising here.
When our lawyers took a look at the property held by the company we were surprised. The company held Land Possession Rights” (LPR), which by law may only be held by a Mongolian national, or a company with Mongolian ownership. As a company invested by a foreign national the client’s company was not allowed to hold LPR. By law it could only hold Land Use Rights (LUR). For both LPR and LUR the ultimate owner of the land is the state. The property rights held by LUR holder are more limited than those accorded to a holder of LPR.
We informed the client of the situation, and speculated that the LPR were purchased by the company at an earlier time before the foreign shareholder had purchased the shares of the Mongolian national. Subsequently, the relevant government bureaus were not informed of the share transfer or the change in the status of the company.
We advised the client to report the situation to the local government as quickly as possible. Legal penalties in such a situation are not clear, and it is typically far better to be open and honest about such compliance issues, rather than continue to cover up an illegal situation.
All of this may have been avoided if a Mongolian Attorney would have been consulted first.