B. Bailikhuu, SPC Advisor, USAID or BPI Project

1. The Mongolian Law on Companies
and Corporate Governance
B. Bailikhuu
SPC advisor

2. Changes in corporate governance
1. 1992 – 1997 – executive management
2. Large shareholders formed as a result of opening
secondary markets in 1996
3. Minority shareholders’ and of companies’ rights
violated
4. There were articles and provisions requiring certain
technical clarifications, revisions and changes
5. There was a necessity to protect investors
according to basic international standards
(corporate governance)
6. Almost no provisions imposing liabilities existed
2

3. Structure of the law
• Old law – 14 chapters, 98 articles, 58 pages
• New law – 14 chapters, 100 articles, 73 pages
• About 400 amendments
3

4. Matters for regulation
1. Establishing a company
2. Registration
3. Forms and types of a company and their specifics
4. Shareholders and their rights and duties
5. Issuing shares and other securities
6. Management, structure and organization of a company
7. Supervisory system
8. Important regulations of activities
1. Assets and finances
2. Disclosure of activities
3. Important agreements and deals
9. Reorganization
10. Liquidation
4

5. Scope
• All types of companies operating on the territory of
Mongolia
• Specific regulation of banks, financial institutions and
state owned enterprises
– Representation of the state
– Fulfillment of specific requirements
• Mandatory reserve
• Satisfaction of other requirements
5

6. Company and its specifics
• Company’s capital in divided into certain number of
shares
– Shares are the certificates of ownership in the
company
– But shares do not guarantee the right of a separate
ownership of specific company assets
• Owns specific assets
• The main objective is to obtain parts of profits
• Legal entity
6

7. Forms and types of a company
• Joint stock companies -
– Open joint stock companies – shares are registered at a
securities trading institution and traded openly and freely
– Closed joint stock companies – shares are registered at a
securities trading institution and traded on a closed basis
outside of a securities trading institution
• Limited liability companies
• – share rights are regulated by the law and charter
• Closed issue of securities
7

8. Specifics of joint stock companies
• Unless the law provides otherwise, shareholders can
freely
• Register at a registrar if shares transferred outside
• Issue shares on an open or closed basis unless the
charter provides otherwise
• Shareholder purchasing the privately held shares may
freely sell them
• Shareholders may enter into agreements with each other
8

9. Limited liability companies
• No more than fifty founders
• Private issue of securities
• Procedure to obtain in a first priority and its
implementation
9

10. Affiliate and subsidiary companies
• 20-50%
• More than 50%
• Independent legal entity
• Producing consolidated and separate statements
• Joint or sole liability regarding debt matters (law and
agreement)
• Continuous structure
• Owning shares of a parent company
• Participating by the rights of owned shares
• Consortiums, adjoining companies, consortium member
companies
10

11. Branches and representative offices
• Definition and activities
• Right to establish them
• Appointment
• Liability
11

12. Types of activities
• All activities not prohibited by the law
• Restriction by the charter
• Licenses
• Start and end of activities
12

13. Liabilities
• Liability limited by the size of assets
• Joint liabilities of the company and
shareholders
• Full liability
13

14. Establishment
• New establishment, reorganization
• Founders
• Decisions and agreement of founders
• The founding meeting of the company shall include the
following items:
– Charter of the company;
– Declared and issued shares, price for founders to purchase
them;
– the procedures to elect board directors and setting their
compensation where it is decided to have a board of directors;
– The procedure to compensate the expenses of establishing a
company;
– The period for completing the investment in the company
• Registration period 14

15. Registration
• Name
• Form
• Charter
• Address
• Logo
• Trademark
• Registration number
15

16. Charter
• The main document of foundation
• Mandatory items in a company charter:
– the full and brief name of the company, distinctive acronym
briefly defining its form;
– the number, type and face value of the company’s declared and
issued shares and the amount of the invested assets;
– the number of board directors where it is decided to have a
board of directors;
– the powers of the meeting of shareholders and board of
directors;
– the type of company activities;
– other items required by the law to be in the charter.
• Approval, registration and effectiveness
16

17. Reorganization
• By the decision from the meeting of shareholders
– merger,
– acquisition
– division,
– separation,
– modification
• The court may issue a decision of division and separation.
• The decision should be made available to the creditors
and other stakeholders within fifteen days and the joint
stock company shall inform the Financial Regulatory
Commission within three days.
• Bankruptcy – absence of shareholders, nationalization
17

18. • Total assets
• Invested assets – specified in the charter
• Equity
• Equity > invested assets
• No minimum limit for assets during foundation
• If Equity < than invested assets The board of directors modifies the invested assets,
recapitalizes or liquidates the company by announcing the meeting of shareholders
within ten days
• The executive management should inform the creditors within thirty days.
• Shareholders and creditors may complain to the court where there is no such
decision
• As for joint stock companies, the Financial Regulatory Commission shall file to the
court for liquidation.
Assets
18

19. Company shares
• A security certifying the right to invest in the company, vote on
its basis, obtain dividend and receive proceeds from the
income after the sale of assets in case of a company
liquidation
– Common and preferred shares
– Declared shares
– Issued shares
– Issued shares shall be registered in the company accounting
statements according to each type
– Declared shares >= issued + convertible shares
– Repurchased shares
– Golden shares
• The company shall issue common shares on a mandatory
basis.
• The shares shall not be issued at a value than the face value.
19

20. Rights of a shareholder
1. Participating and voting in the meetings of shareholders
2. Receiving dividends
3. Receiving proceeds from the remaining assets after liquidation
4. Exercising rights purchase of shares
5. The holder of one or more percent of shares has the right to submit to the court the request for requiring
the authorized officials of the company compensate the damages caused to the company.
6. The holders of preferred shares shall exercise these rights:
1. Receiving dividends in a first priority
2. Providing opinions on matters specified in the decision of issue
3. Receive proceeds from remaining assets after the liquidation of the company
7. The shareholder to demand the repurchase by the company
1. Having a dissenting vote or avoiding to vote where the reorganization through merger or consolidation and amendments to
the charter negatively affect the interests of the shareholder
2. One entity owns more than seventy-five percent of common shares
• There is no limit to the number of common shares that a shareholder may own.
• Common shares may not be converted into preferred shares of the company or other securities
• This law may restrict the right of common shareholders to vote on certain issues at the meetings of
shareholders
20

21. Registration of shareholders
• The company should maintain the registry of shareholders
• The company has a duty to organize the work of storing the securities
where they have been physically issued.
• The company may on a contractual basis delegate this duty to a
securities depository organization.
• The registry should include the following items:
– The surname, name and address of the shareholder,
– The type, amount of securities and number of transferred securities
– The surname and name of the persons transferring and receiving the transfer
• The shareholder has the duty to inform the registry entity about every
change or modification
• The registration provides the right of owning the securities
• The registry entity has the duty to confirm the right of a shareholder to
own securities by providing a copy of the registration where it is
demanded
• The copy does not pertain to the securities.
• A document (certificate) may be given proving the right of a
shareholder 21

22. Purchase of securities
• Purchase of its own shares by the company
– BOD , 25%, initial value, invested assets >
equity
• Merging and dividing the shares
• Controlling amount of shares, its obtainment and
activities after the obtainment
22

23. Dividends
• Within fifty days from the end of the financial year by the board of directors
• In the decision :
– amount,
– the day of producing the list with name of shareholders eligible to receive the dividends
– the day of distributing the dividends
• Right to receive dividends
• Informing the meeting of shareholders
• The company shall pay penalty where the dividends are not timely distributed and the executive
directors shall be liable for the damages to the company
• The dividends of shareholders who have not received them shall be stored in the accounting
documents with the names of such shareholders and the company has the duty to provide them
on the first demand of the shareholder.
• Joint stock companies shall deliver the dividen distribution report to FRC within fifteen days since
the end of the distribution.
• The board of directors shall report the dividend distribution to the meeting of shareholders on a
mandatory basis.
• Where the shares are transferred between the day of producing the list of shareholders eligible for
dividends and the day of dividen distribution, the right of receiving the dividends shall remain with
old shareholders unless the agreement specifies otherwise
23

24. Requirements for dividend distribution
• The company shall distribute dividends for common
shares:
– The company must remain solvent after the dividend distribution;
– The amount of the company’s equity must be higher than the
sum of the minimum amount specified by the Law on
Companies, dividends unpaid for preferred shares and value of
liquidation;
– The company must have repurchased back the securities where
it has such duty.
– The company shall not distribute dividends for the repurchased
shares
• Where the company’s equity decreased by more than
twenty-five percent after the dividend distribution, the
company shall in a written form inform the creditors
about its remainder equity within fifteen business days
since the dividend distribution 24

25. Meeting of shareholders
• The meeting of shareholders is a supreme authority of the company
• Where a company has one shareholder, such shareholder implements the powers of the
meeting of shareholders
• Meetings of shareholders are regular and extraordinary
• The board of directors makes the decision to convene the meeting
• The decision to convene the meeting shall include the following items:
– The date of the meeting;
– Agenda of the meeting
– The day of producing the list of shareholders eligible for attending the meeting in case of a joint stock
company;
– The procedure to inform the shareholders about convening the meeting;
– The list of documents which shareholders may view during the preparation of the meeting;
– Voting with the vote sheet and content of the vote sheet;
– The last day to receive the vote sheets;
– Chairman of the meeting
– The chairman and members of the counting committee.
• The meeting of shareholders will convene in no less than forty days from the decision
• The company will publicly announce the meeting within five days from the decision 25

26. Regular meetings
• The board of directors will convene the regular meeting
within four months since the end of the financial year
• Where the regular meeting is not convened, the powers
of the board of directors terminate except that of
convening the meeting of shareholders and agreements
and deals made after that will be void
• For joint stock companies where there is no decision to
convene the regular meeting of shareholders, the
Financial Regulatory Commission shall publicly
announce that the powers of the company’s board of
directors terminate except that of convening the meeting
of shareholders 26

27. Information delivered to the shareholders at the regular meeting
1. Annual financial statements
2. The report of the audit organization regarding annual financial
statements
3. Deals with conflicts of interest made during the statement year
4. Presentation about people nominated to members of the board;
5. Related entities of the company and types and number of shares
owned by them
6. Expenses and remuneration of the board of directors and
executive management
7. Business activity report in case of a joint stock company
27

28. Extraordinary meeting
• The board of directors convenes the extraordinary
meeting in the following cases:
1. More than half of board directors are not able to work or
ceased to work
2. Two or more independent directors of the board or
shareholders owning ten or more percent of voting shares
issued the proposal
3. The losses of the company exceed more than thirty percent of
the equity at the end of the reporting period
4. The total debts of the company exceed than equity for the
second year straight and shifted into a minus zone
5. The decision of the board of directors
6. The audit committee demanded to convene the extraordinary
meeting
28

29. Some important matters of the meeting
1. Powers of the meeting
2. Effectiveness of the meeting’s decisions by each agenda
3. The meeting of shareholders will not discuss matters that are
not specified in the agenda
4. Right to participate registration date
5. In the announcement to convene the meeting:
– Name and location of the company,
– Date, time and location of the meeting,
– Registration day,
– Agenda of the meeting, drafts of decisions, procedure to view it and
other relevant documents
6. Period and venue of the meeting, possibilities of attendance
7. Counting committee and quorum of the meeting
8. Minutes and resolution of the meeting
29

30. Board
• The board of the directors is the authority of the company in the
period between the meetings of shareholders.
• Joint stock companies shall have boards of directors and limited
liability companies may provide otherwise in their charters
• The charter of the company sets the number of board directors
• Boards of directors in joint stock companies have nine members and
no less than a third of them are independent directors
• Where the meeting of shareholders fails to elect independent
directors, it is considered that the board of directors cannot
implement the powers
• The meeting of shareholders will convene within five days and
discuss again the issue of electing the directors of the board
• The members of the board and corporate secretaries must enroll in
corporate governance trainings and receive certificates
30

31. OTHER VITAL MATTERS
• BOD authority
• BOD chairman
• BOD members term of office
• BOD meeting
• Convene BOD meeting at least once a month unless
charter specifies otherwise
• Secretary
31

32. INDEPENDENT DIRECTORS
• Requirements
 May not own more than 5 percent of the company shares
 May not hold senior or influential position in the company
 May not hold any position except civil support services
 May not have any related business affairs to the company
• Independent directors additional duties
 Ensuring, BOD and Executives performance, policy and decisions made
have no conflict with the company, monitoring related law and company
charter compliance
• Monitoring, BOD and executives implementing policies and decisions not conflicting with
companies interests and whether the company operating compliance with related law,
regulations, rules and charters. Preventing from offence, if any offence revealed report to
BOD and get solved or even to announce at shareholders meeting
• Ensure company’s operations transparent and assign responsibility to executive director,
monitor compliance
• Participate in shareholders meeting, announce any main disagreements with the BOD,
answer to the shareholders questions or commenting on other matters.
• State owned enterprises independent director have additional duties:
– Suggestion on state purchase
– Monitoring efficiency of executives purchase of state goods and services .
32

33. • If necessary company can form board committees or temporary
committee
– Auditing committee
– Compensation committee
– Remuneration committee
• At least 2/3 members should be independent
• The committee will have specified duties and will report it to the BOD for
decision.
Auditing committee chairman must be independent member of
the BOD. The committee reports to the BOD following review.
– Auditing the reliability and fairness of company accounting policy, implementing
IFRS, internal auditing and risk management, financial statements and finance
and economic related information.
– Internal auditing management, employees election, compensation bonus
setting suggestion
– Elect auditing institution and suggestion on set up service fee
– Auditing and reviewing material transactions and interest party deals
33

34. NOMINATION COMMITTEE
• Duties:
– Determine qualification requirements for BOD members and
executives requirements, and to set up evaluation of education,
experience and qualifications.
– Assess whether current member as well as independent
members satisfy qualifications, education and experience
requirements
– To register all the BOD members and executives candidates and
nominate at the shareholders meeting
– Assessing members and executives performance
– Develop executives contract terms
– Review the authorized officials except BOD members
performance assessment
– Any public company BOD members prohibited to act as a BOD
member for the next 3 years after termination.
34

35. REMUNERATION COMMITTEE
Reports released from the committee to BOD :
• Approve BOD members, Executives and other
authorized officials compensation, bonus and
incentives policy and oversee its implementation
• To put limit on members, executives and officials
compensation amount and develop
compensation policy within the limit.
• Set objectives for company remuneration policy
and assess results
35

36. EXECUTIVE DIRECTORS
• Appointment
• Form
• Agreement, contract
• Reporting
• Bonus and incentives
• Responsibility
36

37. Authorized officials and some other crucial agreement
• BOD, Executive directors, CEO, CFO, Chief
accountant, general professionals, board secretary
are involved directly or indirectly in company affairs
or contract and agreements
• Depending on a company, authorized officials shall
be named in the company charter
• Other vital transactions
– Material transactions
– Agreements with conflicts of interest
37

38. Company auditing
• Public company must have an auditor.
• Auditing committee elects auditor and approves the auditing contract.
• Regular auditing fee paid by the company however for the random auditing
fee the ordered shareholder or party responsible.
• In the case of authorized officials defensibility (faulty) auditing fee will be
paid by them.
• Companies must provide auditors with financial and economical information
and documents.
• Auditors can attend shareholders meeting to give comment or interpretation.
• Parties prohibited to act as an auditor:
– Company’s related party, company’s authorized officials, their related parties,
company’s or related party’s employee and authorized officials.
– Company or related parties shareholders, property owners or property right owners.
– Other company contracted parties except auditing contract.
38

39. COMPANY ACCOUNTING AND FINANCIAL
STATEMENTS
• Beginning and end of financial year are ruled by company
charter.
• Companies must keep accounting records and develop
financial statements
• Executives are responsible for the reliability.
• Compulsory financials reports:
– Balance sheet
– Income statement
– Cash flow statement
– Owner’s equity
– Information about material transaction and conflicted agreements
during the financial period.
– Executives compensation, bonus and incentives
39

40. INFORMATION FOR SHAREHOLDERS
Information for the shareholders must include following :
– General company performance information during the financial
period, results of the developments, organizational structure and
its modifications
– Executives and authorized officials compensation, bonus and
intensive amount as well as the administrative cost information
– Other information required by company charter
– For MSE listed companies other materials required by FRC
40

41. INFORMATION DELIVERANCE
• Financial statement, performance report, name list of
related parties and their share type and owned
percentage and other information by request of
shareholders.
• Possibility of accessing or acquiring information
except prohibited information about the company
• Shareholders have the right to access registration
booklet including shareholders name, address and
owned share numbers etc.
41

42. LIABILITY
• Faulty officers fined 5-10 times of minimum wage.
• Organizations fined 15-30 time of minimum wage.
• Civil penalty+ Damage compensation
42

43. THE LAW COMPLIANCE
• Any charter amendments must be registered in State
registration office before 1st of July, 2012
• Until the amendment period charters that are not
conflicting with this law are valid.
• No fee applies for the registration
43

44. Amendments made to 11 laws
1. Article 11.1.1 is irrelevant to government organizations, state owned
enterprises or provincial owned organizations financial or performance
auditing.
2. State organizations finance and management law, article 21.4, word
‘bonus’ to be eliminated.
3. State and Rural Property Law clause 21.10 nomination of civil
administrative office for state representation
4. Civil service law 15.1.12 delete state owned enterprise and state owned
factories board member and be administrative member to be deleted
1. Civil law, NBFI, Insurance, Securities, Foreign investment, Banking
law and Company Law share contributor phrase to be changed as
shareholder
44

45. Thank you for attention