In this Article its authors claim that the notion of a corporate law does not represent a purely new concept for Kazakhstani legal system and they highlight main stages which modern corporate legislation in Kazakhstan underwent through the Soviettime period until today. Their view con cerning the essence of so called corporate relations and their nature as primarily privatelaw relations is offered. The authors also make their pro posals in connection with the most urgent aspects where current corporate legislation of the Republic of Kazakhstan calls for improvement and further development. Special attention is paid to the idea of an enterprenearial code for Kazakhstan (which the authors do not agree with) and importance of drafting Principles of Civil Legislation for the EAEC for development of Kazakhstani corporate law.
The notion of corporate law is a kind of novelty to Kazakhstan law that arose after the proclamation of independence of the Republic with the transition from a planned economy to an open market.
During the Soviet-time period, including so called “epoch of the developed socialism,” the use of corporate forms and structures for economic activities was limited by law (including the Civil Code of the RSFSR of 1922 and the Civil Code of the Kazakh SSR of 1963). In any case, in that period regulation of forms of economic activity was based on concepts which were quite remote from correct understanding the legal nature of a private corporation. It did not correspond to the content of corporate law typical for the law of those states which recognize private property to the means of production, ensure protection of the private ownership and possibilities of its use for the purpose of private entrepreneurship.
With the beginning of the revision “at the sunset of the USSR” of the state ideology on economic development and the national economy’s governance the restoration of Civil Law started based on the principles now enshrined in the Civil Code of the Republic of Kazakhstan. The Fundamentals of Civil Legislation of the USSR and union republics adopted on May 31, 1991 (the “Fundamentals of Civil Law”) provided for the establishment of economic partnerships and companies as organizational forms for business activity on the basis of consolidation of the property of their members, as well as for the establishment of non-commercial organizations based on membership.
Starting from 2001 certain measures focused on creation of modern systems for corporate governance and risk management (first - in the banking sector) became carried out based on relevant methodological recommendations, and later - instructions of the National Bank of Kazakhstan. Later, in 2005, existing Law “On Joint Stock Companies” (as amended) (the “Company Law”) was added with the exclusive competence of the general meeting of shareholders to approve (at the discretion of a JSC) a code of corporate governance.
According to the subsequent changes introduced to the Company Law in 2007 adoption of such codes of corporate governance has become mandatory for public joint-stock companies.
At the same time in 2007 the Company Law was also amended with provisions regulating status of a corporate secretary of a jointstock company. Currently, all joint-stock companies, including national holdings and companies, have corporate secretaries and, often, their own staff.
In accordance with the Law dated July 05, 2008 the concept of corporate disputes has been introduced to Kazakhstan’s legislation, which had been extended to all disputes involving most types of commercial and some forms of non-profit organizations concerning their establishment, operation, management, reorganization and liquidation.
In addition to the General Part of the Civil Code of the Republic of Kazakhstan dated December 27, 1994 and the Company Law there are separate laws regulating status of general and limited partnerships, partnerships with limited and extra liability, production cooperatives, and forms of non-profit organizations.
On the basis of these and other laws there is a large number of by-laws aimed at the development of corporate relations now produced to legislation of Kazakhstan.
Thus, we can note the development and expansion of legislative regulation of corporate relations.
However, currently in Kazakhstan in legal and academic communities, as well as in the business environment and at the governmental level there is no clear understanding of what is the area of corporate relationships to be regulated by law. In addition, there are no generally accepted notion of a corporation and content of corporate law worked out yet. Such uncertainty leads to imperfection of corporate legislation of Kazakhstan and produces perceptible obstacles to its improvement and modernization.
Atthesametime, thereisnodoubtthathistorically (until the state became to use actively corporate forms for the state business activity) corporate relationships existed and were regulated solely by private law and its institution of legal entities. The very concept of a corporation is the concept of the civil law institution of a legal entity and the larger institution of persons (which is historically the one of the central institutions of civil law).
And we think that at current stage corporate relationships in their nature are civil-law relations, and, namely, they shall be attributed to property relations. They emerge in connection with establishment and operation of private corporations set up based on consolidation of cash and/or in- kind contributions (and sometimes - also efforts) by their members and operate primarily as a source of property income for those members. And attempts to allocate any “organizational” or other (non- proprietary) relations within the structure / content of corporate relations do not seem particularly promising.
At the core of these discussions about nature and content of corporate relations there is a debate as to what constitutes a corporation from the standpoint of civil law. From my point of view it seems to be the most appropriate defining the corporation in such a way as to reflect a form and legal significance of transfer of property to the corporation by its founders (in exchange for them to acquire membership or corporate rights in the corporation), as well as the nature of the rights of the members of the corporation in respect of the corporations assets (but not in respect to the corporation itself).
Such understanding allows to clearly determining peculiarities of legal regulation of various forms of business organizations based on membership. A well-defined distinction of legal characteristics allows to separate corporations from legal forms of state economic activity, as well as it forms conditions necessary for the proper regulation of organizational structure of corporations and their corporate governance, for the establishment of the full-fledged legal status of directors, managers and members of corporations and for the effective regulation of many other important aspects of corporate law.
It should be noted that the allocation corporate organization is not a theoretical innovation, and legal classification of legal entities to corporate and unitary organization is based on the traditional theory of civil law.
Currently it appears to be that it is the most correct to view the corporate law as a branch of legislation aimed at regulating the status and activities of private corporations established in the form of companies and economic partnerships in all their diversity of types, as well as in form of the production cooperative.
Such understanding of corporate law allows allocating in Kazakhstani legislation on non- governmental commercial legal entities (mainly in the law on joint-stock companies), a number of notable features compared to the current corporate law of developed West European and other countries. Often, these features emphasize imperfection of the Kazakhstan legislation which is in need of a significant modernization. In particular, it seems appropriate to reform our law, at least, on those aspects as set out below.
First. Establishment of a reasonable balance in repelling state and private interests in acts of corporate law. Throughout the entire period since 1991to date the legislation of Kazakhstan on commercial organizations developed primarily on the basis and within the framework of the Civil Code. However, one can note the emergence of highly visible elements of a comprehensive (complex) regulation of the establishment and operation of private business organizations, resulting in many aspects of this regulation include the use of imperative norms and methods inherent in the administrative and criminal law.
This is particularly obvious in the regulation of such traditional forms of business corporations as JSC and LLP (LLC). In principle, such a development is normal in the context of global trends and legislative development, and in comparison with the best examples of corporate law of developed countries. As good examples we can specify the French Commercial Code and the German Law on Joint Stock Companies, which include in their content provisions of Criminal Law.
However, in Kazakhstan’s law the tendency is that in general the State is trying to lay in the structure of the legislation opportunities to apply its coercive power in many aspects of functioning of large corporations. For example, there are provisions limiting participants of corporate relations in their freedom to create a corporation and to form its capital, to determine the structure of the corporation, to determine personal composition of corporate bodies of the corporation, and even allowing to practice forced hardships of membership in the corporation. I.e. based on setting legal rules there are mechanisms of administrative enforcement and limitations established in the field of legal relations which has been traditionally regulated solely by private law. The need for well-balanced regulation of the sphere of corporate relations is obvious.
Second. Introduction of the classification of business corporations by dividing them onto economic companies and partnerships. The very first law on corporations (the Law of the Kazakh SSR of 21.06.1991. “On Business Partnerships and joint- stock companies”) already did not fit the concept of the Fundamentals of Civil Law (Art. 19) in terms of separating business companies and partnerships. It considered all their varieties as types of partnerships. Only later, by the Law of July 10, 1998 joint-stock companies were removed from the classification of partnerships. Therefore, at present business entities are not consistently separated, and within the same category of economic partnerships there are general and limited partnership as well as partnerships / companies with limited or and additional liability.
At the same time, there is crucial difference between business companies and economic partnerships. [In the case of an economic partnership there is the constitutive factual and legal relatedness between the partnership and its founders (and through a partnership itself – between the founders themselves) through joint activity (efforts) of the founders. But there is no such criterion in case of business companies, in result of which there is the possibility of succession to the business entities.] This difference causes the essential specifics of the organizational structure of different types of corporations, differences in distribution of managerial authorities and responsibility for the activity of the companies and partnerships, as well as peculiarities of their reorganization and termination of their activities. All such specifics and peculiarities need detailed regulation in law.
Next observation relates to regulation of organizational (corporate governance) structure of Kazakhstani corporations and mainly of such as joint-stock companies. Among important focuses of modern corporate law there are: (i) to regulate status of shareholders and status of the corporation separately, and (ii) to ensure that managing a corporation represent responsibility of its directors (boards of directors) elected by shareholders. In most jurisdictions, this principles observed in the legislation. Among the CIS countries one can also see a tendency to modernize the regulation of these aspects within the process of development of corporate law in Russia.
But the corporate governance structure as it is regulated by Kazakhstan’s law is also different from the models used in developed jurisdictions.
In particular, from Soviet time we know two models of the organizational structure of companies:
(i) the three-tier structure of the bodies, and (ii) the two-tier structure of the organs. In connection with this all jurisdictions can be divided into three categories depending on which model is regulated by a national legislation, and whether it allows founders and/or shareholders of a company to choose one of these two proposed systems. More modern sources of corporate law also point to two options of structures for corporate governance providing for use of a single-body model (monistic system of governance) or creation of a two-tier structure (dualistic system of governance). The difference between these two classifications is that one of them considers the general meeting as the body of a company, and the other separates shareholders as beneficiaries of the company’s business, from one hand, and the company’s organs, from the other hand.
Using either of these options (dualistic or monistic systems of management of a company) is equally proven in legislation and regulatory activities of authorized government agencies of different countries, as well as in the market practice. At the same time, the modern approach is to regulate this matter in accordance with the so-called “Optional” model, where a joint-stock company (its shareholders) is entitled to choose its own structure of corporate governance out of two such models regulated by law. This is the way adopted by French new Commercial Code and is proposed by unified European law. A similar approach is proposed for the CIS countries new (2010) Model Law on Joint Stock Companies.
The model of corporate governance regulated by Kazakhstani law, although it “gravitates” to the monistic model, is quite unique. In particular, the following bodies of the company are identified as its organs: a general meeting of shareholders, as the supreme governing body, the board of directors formed by the general meeting as the company’s management body, and a collective or sole executive body.
The Company Law incorrectly regulates the status of the board of directors. Its managerial authorities (as the management body of a JSC) are significantly limited. Formation and functioning of an executive body in the JSC is imperatively prescribed. And the existence of the executive body is not only limits the powers of the board to manage the JSC, but also forms the basis for declined responsibility, depersonalization and erosion of responsibilities for the conduct of affairs and property of a company.
The Company Law also provides for the creation of other bodies of a JSC, but does not indicate what kind of bodies they can be. Clearly, however, that the law should not provide for existence of any other organs in a joint-stock company, because in the context of how the Civil Code defines the legal status of organs of a legal entity, no organs other than the board of directors can be created in a JSC.
Such regulation exists in Kazakhstan for several years, and it serves as the legal basis to set up and operate hundreds and thousands of corporations. But hold of such situation limits prospects to promote advanced corporate culture, to ensure responsible management of corporations and reduction of grounds for corporate disputes. Therefore, in view of the aforementioned, it seems necessary to improve regulation of the corporate governance structure in JSCs in order to elevate efficiency of companies’ management at responsibility of their directors and professional managers, to prevent any chance for abuse of the rights of shareholders and management powers of directors and managers, as well as to effectively avoid negative impact on activity of each separate company and destabilization of the situation on the market as a result of corporate conflicts.
Existing rules of Kazakhstan’s legislation on liability of directors and officers of joint-stock companies and limited liability partnerships (companies) also need a significant improvement.
This view is based on the idea that provisions on liability of directors for the proper management of a corporation is set as the central institution of modern corporate law. The purpose of this institution is to ensure stable and legitimate activities of corporations as well as to preserve stability and reliability of the economic environment. The key points in this case are: (i) the need to distinguish liability of a company and liability of its directors, and (ii) to regulate grounds (causes) for liability of the company’s officers.
One can note the development of Kazakhstan’s corporate law in the direction of convergence with international standards in regulating these aspects and would refer to introduction of amendments to the Company Law in 2011 to enhance the accountability of officers of joint-stock companies. But the said amendments are not perfect in the context of the above mentioned standards. Incompleteness and inconsistency of some of its provisions, excessive rigidity in establishing grounds for property liability of companies’ officers discouraging their managerial activity are obvious.
At the same time, in view of the amendments regulating the liability of directors and managers of Kazakhstani corporations can become more consistent and systematic in future when these rules become improved. However, it seems more expedient to perceive to the most extent ideas and the provisions of the Model Law on Joint Stock Companies. As another good examples of effective regulation of these issues the French Commercial Code, German Law on Joint-Stock Companies, Swiss Law of Obligations, as well as model legislation for the CIS “On protection of investors in the securities market” can be mentioned.
It is especially important to separate property and criminal liability of directors for the managing corporations, and to allocate correctly grounds for liability of each of these types. It is also essential to set the principle that a company’s directors remain responsible for proper management of the company and liable also when they delegate all or some of their powers to the company’s managers.
It is also advisable to separate property liability of a company to its third-party creditors and liability of the company’s officers to the company itself. And the entitlement to represent the company in these cases must be differentiated depending on whether it is involved to account a director or a manager.
Appropriate amendments should be based on the general principle of the legislation on legal entities and especially corporate law, which set forth that a legal entity is managed only by its organs under their responsibility. Consistent application of this principle will form in Kazakhstan category of professional corporate managers (managers of commercial enterprises). It is aimed to promote good corporate culture, including ensuring safety of private enterprise and responsible keeping the business affairs.
Correct understanding of the concept of a “corporation” will also help to find right solution regarding suitable organizational forms for business activities, as well as to separate business corporations, from one side, and non-profit organizations based on membership, from the other side. In this case it is important to avoid allowing use of the same form for both commercial and non-commercial organizations. This observation applies, in particular, to the fact that in Kazakhstani Civil Code and the Company Law there provisions on the admissibility of non-profit organizations in the form of joint-stock company still exist. Despite the fact that such is permitted under the laws of a number of jurisdictions (for example, Switzerland, USA), the most modern and appropriate is to follow the principle that, for instance, “joint-stock organizations are commercial organizations by virtue of their form regardless of the subject matter of their activity” (see Art. L.210-1 of the Commercial Code of France).
Withrespecttotheissueofsuitableorganizational forms of business corporations, it should be noted that, in accordance with the principle of numerus clausus Kazakhstan legislation correctly contains an exhaustive (closed) list of legal forms of business corporations and types of economic partnerships. Some of them have proved they are demanded for the purposes of business, others were unpopular.
Particularly, in Kazakhstan (as in Russia) there JSC, general partnership, limited partnership, LLP (LLC), partnership with additional liability and production cooperative are regulated as forms for non-governmental commercial entities. But, in connection with adoption of a concept of public and non-public companies in Russia and the preparation of appropriate amendments to the Russian Civil Code, there were statements published that since 1995 “there are totally unused forms, such as a general partnership, additional liability partnerships, and some other” and therefore they are to be excluded from the Civil Code”.
However, in those circumstances, when proposed innovations have not been supported by an adequate theoretical study (as in the case with the introduction of the concepts of a public company to Russian Civil Code) it is impractical to refuse traditional and historically existing legal structures, concepts and forms.
there will be also no harm to recall the fact that in the laws of Germany and France, in addition to the above forms, there forms of equity limited partnerships, limited partnerships by shares and simplified joint stock company, as well as European associations are also regulated and they are not considered obsolete or unused in economic environment. In this regard, on the contrary, it is advisable to consider the preservation and possible expansion of organizational forms allowed for use by business corporations as it is evidenced by foreign corporate law.
A similar proposal concerns improving the legal regulation of reorganization of commercial entities. There significant gaps remain which in practice create obstacles to effective economic activities of companies and business partnerships during the process of their reorganization. In addition to improving the legislative regulation in this field it would also be advisable to carry out its modernization of law in terms of expanding opportunities for the use of additional forms of reorganization, with the application of which many of the gaps can also be eliminated.
In particular, in the Kazakhstan legislation there is exhaustive (and therefore restrictive) list of allowed form of reorganization of legal entities. Traditionally it includes regulated by law companies’ merger, separation, split, takeover and change of organizational form (preobrazovanie). At the same time, some international lawyers reasonably believe that there is no real reason for the prohibition of other possible forms of reorganization. Even during the period of Soviet law B.B.Cherepakhin claimed that “the cases listed above do not exhaust all possible types of reorganization of legal entities that are important in the study of the legal succession.” With this in mind, the Model Law on JSC, in addition to those forms of reorganization of legal entities which are already regulated in the Kazakhstani Civil Code and the Company Law, proposes to regulate also others forms [such as, for example, separation with simultaneous merger (takeover) and split with simultaneous merger (takeover)]. All forms of companies’ reorganization are regulated the Model Law on JSC in much more detail than in the Company Law. Again, such detailed regulation is conditioned by the needs of balanced protection of interests of a company, its shareholders, investors, as well as safety of financial markets and the public interests. The Commentary to the Model law on JSC in detail explains the features and feasibility of each of these forms.
Other forms of reorganization of joint-stock companies and economic partnerships are regulated by the Commercial Code of France, which allows a transformation of a joint-stock company not only into any other form of incorporated partnership, but also into a general partnership and a European company, and features of each of these types of transformation are regulated in sufficient details. In addition, it regulates partnerships’ merger through transfer of assets of one partnership not only to a newly created a partnership, but also to another existing partnership, as well as it allows split of a partnership through the transfer of its property to several new and/or existing partnerships.
Established time limits for my report do not allow to list and review all aspects of corporate legislation of Kazakhstan in place, which aspects are in need of improvement and modernization. However, I believe that mentioning of the above points would be sufficient to justify the proposal for reform of Kazakhstan law on commercial organizations.
However, the attention should be paid to the fact that in the development of Kazakhstan’s corporate law at this phase we can distinguish two different trends. The first of these trends is characterized by unsystematic and unmethodical introduction into Kazakhstani legislation of the phenomena from foreign law. Such adoption of alien concepts takes place without a full reform and modernization of the legislation on commercial legal entities to be made in accordance with our legal traditions and history. In particular, we note the introduction into Kazakhstani law of such notions like self-regulation, corporate secretary, independent directors, corporate governance codes, etc. These concepts are not conventional or organic for Kazakhstan law, and their introduction into the structure of our legislation has not been justified by an acceptable methodology and comprehensive understanding of the tasks, content and prospects of development of our corporate law. Perception of these concepts as legal terms in the Kazakhstan legislation has not produced the expected results in improving the efficiency and reliability of corporate governance, as well as the stability of the economic and social environment. On contrary, it caused significant increase of costs and expenses for Kazakhstani companies connected with the need to comply with the relevant legal requirements, and showed a number of other non-positive consequences. In this connection it is inappropriate to the further development of Kazakhstan’s corporate law in this way.
Another trend represents attempts to change the structure of Kazakhstan’s private-law legislation. And within this trend we can also observe the following two separate processes.
The first is connected with drafting of the Principles of Civil Legislation of the EvrAzEC, which involves making certain adjustments into Kazakhstan’s Civil Code. In the context of the topic of this report it is important to highlight the fact that our Russian colleagues originally proposed a special indication of corporate relations as type of relations regulated by civil law. These relations are proposed to determine as “the relations associated with participation in corporate organizations or managing them,” which in itself is not objectionable. It was also proposed to define the terms “body corporate” or “corporation” in contrast to “unitary organizations”, and to generally fix the rights and duties of members of corporations. And serious discussions emerged exactly on these proposals because there was no consensus reached with respect to right criterion distinguishing unitary and corporate organizations, the content of the concept of “corporation” and whether this notion should apply to both commercial and non-profit organizations. In addition, there was no common position developed as which powers and duties shall form the legal status of a member of the corporation.
In result of the exchange of views the last revised draft of these Principles (as of September 06, 2012) does not contain articles that caused such sharp disputes, but it naturally and reasonably retains indication of corporate relations as regulated by civil law. The decision on whether legal definitions of “corporation”, classification of corporate organizations, reglamentation the status of the participants (members) of corporations and other related aspects shall be fixed in law left to be made by legal community and the legislature of each particular jurisdiction. This approach seems correct, because it does not allow the hasty introduction into the national law of those terms and concepts that have not been approved and agreed upon at the theoretical level. In general, improvements of civil law based on principles, implying the harmonization and modernization of the national law and its development with taking into account global trends is the most correct solution.
This conclusion is particularly relevant in view of the fact that there is another process going on in Kazakhstan which, on the contrary, caused a sharp rejection of Kazakhstan jurists and our foreign colleagues. This is due to the fact that in the last few years in our country they are trying to create an entrepreneurial code. In result of such move the integrity and methodological unity of Kazakhstan’s legal system, as well as the efficiency and stability of the business environment and socio-economic relations are threatened. Regarding the topic of my report, we note that the developers of this document suggest to mechanically combining all the rules of the Kazakhstan legislation on the various forms of business entities within a single code. However, they retain all the shortcomings, gaps and errors present in current corporate legislation and do not consider and allow any of the theory and methodology of law nor international trends in the development of the private (including corporate) law.
Almost all of Kazakhstani civil law scholars stand united against the idea of the entrepreneurial code to be adopted in Kazakhstan, as well as against its draft which has already been distributed for discussion (in which have received strong support from foreign scientists).