At the end of June, the Law "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Improving the Business Climate" was adopted. While the draft law was being discussed, it was proposed to introduce into law a definition of a "deadlock" situation, as well as options to resolve it.
In a broad sense, deadlock is a state of inaction caused by opposition or lack of compromise in resolving issues between meeting participants or shareholders. During the draft law discussion, it was proposed to define a deadlock as a situation that occurs when the participants of the private company fail to achieve a decision or have equal votes on key matters specified in paragraph 2 of Article 43 of the Law "On Limited and Additional Liability Partnerships" (Law on LLP and ALP). However, some parts of these amendments are ambiguous.
First, what is meant by the key matters? Because, in fact, all the issues discussed by the company’s general meeting can be considered as key matters.
Secondly, for unknown reasons, all issues related to the approval of internal rules, the procedure for their adoption and other documents regulating the internal activities of the company (partnership) as well as decisions on additional contributions to the property of the partnership; approval of the procedure and terms for providing thepartnership’s members and new shareholders with information about the company’s activities were excluded from the list of key matters. Does this mean that all other issues under the general meeting competence are key matters?
Thirdly, the draft law determined that a deadlock is a situation that arises in the case when the participants of the partnership do not have the opportunity to make a decision due to the insufficiency (equal number) of their votes following the voting results. Again, does that "equal number" indicate that deadlocks are only situations when participants have an equal number of votes?
In practice, such a deadlock does not necessarily arise only if the number of votes of the participants is equal (for example, when each party has 50%), it can also arise when one of the parties has a larger number of votes, but to resolve the question, 100% of votes are needed. For example, if the parties own shares and vote in a ratio of 70% to 30%, to resolve a certain issue, either a unanimous decision or ¾ of votes (75%) is required.
But even these definitions are not included in the final version of the law.
The original version provided for several types of resolution of a deadlock situation:
1) In accordance with the procedure determined by the charter of the partnership. In other words, participants have the right to determine the procedure for arrangement by their own;
2) If there is no such procedure, the party for which the major partner votes (in terms of share's size) has a casting vote;
3) In a situation when all partners have equal shares, they can do an auction. The participant who offered the highest price receives an indefinite voting right to get out of a deadlock situation on a specific issue, and that money is distributed among other participants in proportion to their shares.
However, the latest version of the law, which was adopted in June 2020, does not specify any certain ways of problem resolving.It just provides participants with the right to determine such a procedure in the charter of the company. In practice, such provisions have already been widely used in the drafting of these charters.
In other words, we have the same outcome that we had before – the resolution of deadlock situations is in the hand of the company’s participants. However, the optionality of the rule means that in many cases participants will not provide for the procedure for resolving deadlocks. Therefore, the main goal of the law to "protect minority investors" has not been fully achieved and such deadlocks might be a source of future disputes that should be decided in the courts.
We believe if the law would define the resolution for such situations in the charters as an obligation of the company’s participants, not just a right, it would make significant changes in the corporate culture in Kazakhstan.