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.

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 1^st 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.

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.

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.

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.

The Company Code of Mongolia allows the companies to decide on the organization and management of the BoD upon the approval of their Company Charter, and unless otherwise provided in a company’ s charter, the chairperson of the Board of Directors shall convene and preside at its meetings and supervise the preparation and retention of minutes of such meeting.  

Moreover, the same Company code does not provide any explicit procedure on the convocation of the BoD’s meeting, in other words does not specify what type of communication / eg tele- and/or online conference/ shall be used for the such meetings. This ‘open’ regulation might be of interest to the foreign investors or businessman who live and work abroad and have company operations in Mongolia.

The subjects to be discussed at the BoD meeting and the Shareholder’s meeting also differ The Article 76 of the Company Code of Mongolia provides the list of subjects, which belong to the full authority of the Board of Directors, including but not limited to the ones listed below:

• The holding of regular and special shareholders meetings;
• Election and modification of the company’s executive body and determining its authority;
• Selection of the company’s auditor and establishment of the terms of the contract to be concluded with such auditor;
• Conclusion of the company’ s annual report of business operations and financial statements.

Such subject matters stated above shall be decided at the BoD meetings, and the Shareholders Meeting shall make a decision regarding the decision and/or conclusion made by the BoD.  In other words, the Shareholders meeting shall approve the decisions made by the BoD.  In particular, the Authority of the Shareholders’ Meeting includes:

• Consideration and approval of reports prepared by the Board of Directors with respect to the company’ s annual operations and financial statements;
• Other proposals submitted to the meeting by the decision of the Board of Directors and others. For such reasons, the companies shall know the different legal provision concerning these two authorities in order to avoid any adverse legal consequences that might occur.