Tag Archives: Foreign Direct Investment

Contracts with Provincial Governors Promote Accountability



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In an interesting development, the Prime Minister of Mongolia has signed contracts with local governors, and the mayor of Ulaanbaatar, in a move which seems designed to promote accountability and strengthen rule of law in Government.

The contracts set forth the responsibilities of the local governors, and obligations to adhere to the Constitution of Mongolia, and to follow other applicable laws. Additionally, the contracts state clearly that governors are required to fully implement the governmental action program to the benefit of their respective province.

The contracts further provide that local government must be staffed with educated and appropriately skilled personnel, with relevant specializations and expertise. Under the contracts governors are responsible to ensure that provinces maintain and implement budget saving policies and make public services available to more people. Governors will be responsible for enforcing budgeting and discipline, and for enforcing anti-corruption laws.

 Governors will be responsible for ensuring that their respective provinces benefit from economic growth, and to ensure equal and well distributed development in areas such as education, culture and general health with a goal to minimize poverty and unemployment.

 Under the contract, provincial governors will be subject to punishment for failure to meet the responsibilities as outlined. Governors will be required to submit progress on contractual responsibilities in an annual report to the cabinet.

The take away here is the government’s effort to implement as system of accountability. We are hopeful that the clear guidelines and expectations of the contract will work to increase local government effectiveness. Penalties which the local governors may be subject to for failure to meet expectations are not clear, but the important thing is that each of these governors now knows their performance is being watched. Clear expectations and a little oversight will hopefully go a long way to improve provincial governance.

Accountability and dependability are key factors foreign companies look for when considering a major investment. This applies nationally and at local levels. If provincial governors are able to deliver good results in meeting their responsibilities under the new contracts, foreign investors’ confidence to do business in Mongolia will be greatly improved.

Mongolia Company Formation 101



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In Mongolia, the Law on State Registration of Legal Entities regulates the founding, reorganization, and dissolution of legal entities, as well as amendments to registered information. Per the law the following legal entities, including subsidiaries and representative office must be registered with the state registration authority:

  • partnerships;
  • companies;
  • cooperatives;
  • NGOs;
  • State or local government owned enterprises;
  • government organizations, departments and state funded enterprises (Other than intergovernmental organizations, international organizations, government special funds, committees and national councils);
  • religious organizations;
  • media organizations;
  • public legal entities;
  • foreign invested legal entities;

After a completed application and required documentation has been submitted to the state registration authority, a decision will be made within 10 business days for foreign invested legal entities as to whether the entity is approved for registration. For domestic entities only two days are required.

If the state registration authority refused to register the legal entity, they will deliver notice in written stating the ground for refusal.

The state registration authority will refuse to register a new entity or any changes to an existing entities’ information if the application documentation is found to not match legal requirements, to be incomplete, or is found to be fraudulent. If an application is refused for any of these reasons, an new application may be made correcting the errors.

Investors should understand that the law specifically prohibits undertaking activities in the name of a entity which has not yet been officially registered.

 If any key information of the entities registration is to be amended, the legal entity should inform to the state registration authority within 15 business days after execution of relevant corporate documentation. Failure to do so may incur legal penalty.

Holding a Perfected Pledge in Mongolia just got 100% Better!



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As part of the firm’s project finance practice, we do a lot of work with securities, and particularly pledges of movable and immovable property. When advising clients, we often receive pushback and incredulity when we explain Article 54.2 of the Law on Enforcement of Court Decisions which states, “A pledgee shall be responsible for other creditors’ payments.” Clients rightly ask, “what is the value of holding the pledge if after receiving the pledged assets you have to give it all away to other creditors of the pledgor?”

However, a plain reading of Article 54.2 led to the inevitable conclusion that the law was specifically making pledgees a first priority security interest in collateral responsible for payments owed by the pledgor to other creditors, even where the pledgee has not done or agreed to anything whereby it would otherwise assume any of those obligations.

Article 54.2 provided legal justification for Mongolia’s Court Decision Enforcement Agency, which is responsible for the enforcement of valid court decisions, to demand a pledgee take action to recover funds due to other creditors of a pledgor, even by going so far as to require redistribution of proceeds earned via the sale of the collateral and in some cases the pledgee’s own assets! All of this required no additional court decision or ruling against the pledgee. Naturally, once we convince a client of the meaning and implications of the law, the typical reaction would be, “Well, that’s just not fair!”

Luckily, the Mongolian Constitutional Court agrees. The court recently concluded that Article 54.2 resulted in outcomes in violation of Article 16.3 of the Constitution of Mongolia. Article 16.3 protects, “The right to fair acquisition, possession and inheritance of movable and immovable property.” The court ruled that due to violations of that provision of the constitution, enforcement of Article 54.2 shall be stopped.

This is great news for investors and foreign investment in Mongolia. In a country were major mining and infrastructure projects are financed via complex securities transactions with international banks taking pledges over local real estate and other assets, the legal regime provided for by Article 54.2 increased the risk of these international banks and made acquiring funding even more difficult that it would normally be. We consider this a step in the right direction for Mongolia and foreign investment in the country.