Disproportionate Participation Interests in the Charter Capital of the LLP: When Technical Deficiencies Create a Problem

We live in uncertain times. Our government as never before shall be interested in attracting foreign investments. It has been widely declared about creating a favorable business climate in Kazakhstan, namely simplifying the regulation procedures, creating the automated digital system, reducing the bureaucracy, and improving the business environment. No doubt, such declarations have their positive effect, and every year we notice it while helping our clients with legal matters. However, as we can see from our practice, there are still flaws and sometimes rather serious.

We have recently advised a foreign pharmaceutical company (hereinafter – the “Investor”) on the transaction whereby the Investor was acquiring a right to become a participant of Kazakh LLP by increasing its charter capital (according to Subclause 5) of Clause 2 of Article 26 of the Law on LLP). The existing participant of LLP and the Investor agreed on their participation interests being disproportionate to their contributions to the LLP's charter capital as per Article 28 of the Law on LLP.

We faced the following problem when filing for the re-registration of the LLP: the software of the Citizens Services Center (CSC) used for registration of the applications did not allow us to register the participation interests of the participants that were disproportionate to their contributions to the charter capital of the LLP. For example, if the charter capital is 30 KZT and the new participant is entering LLP by increasing its charter capital for additional 70 KZT, the software can only register its participation interest as 70%.

In our client's case, the increase of the LLP's charter capital was made by accepting new participants into the LLP. According to the Law on LLP, if the charter capital is increased with an additional contribution by any of the participants or by the newly accepted participant, the size of such contribution is determined taking into consideration its previous contribution to the charter capital of the LLP and recalculation of the participation interests in the charter capital of all other participants. The Law provides that such a decision shall be made by the general agreement of all participants. 

Our client was a new participant to the LLP, and his contribution could not be determined taking into consideration its previous contribution. The parties signed the investment agreement and established in the foundation documents of the LLP that their participation interests are disproportionate to their contributions to the charter capital. It is worth repeating that the Law on LLP (Paragraph 1 of Clause 1 of Article 28) provides for such a possibility for the participation interests to be disproportionate to the contributions to the LLP's charter capital. However, as it was discovered, the software used by the state authorities did not allow to accommodate such will of the parties. The system at the CSC rejected all attempts to register disproportionate participation interests.

In this case, the CSC shall simply collect the documents to send them for further review to the Department of Registration of the Real Estate and Legal Entities of the Branch of the State Corporation Citizens Government (hereinafter – the “Department”). After numerous clarifications and written requests, the CSC employee had to temporarily fill in incorrect data to register the application and hand it over to the Department. Based on the information that we have received from the Department, we realized that the Department could fill in the correct data into the system but refused to do so, referring to the fact that the CSC employee should have filled in such data before. Here we experienced a well-known principle of shifting the responsibility between stakeholders while the interests of the bona fide investor were damaged.

All officials understood that the legislation allowed for disproportionate participation interests, and re-registration was possible. Nevertheless, they chose to insist on the software deficiencies putting them above the rule of law. After lengthy discussions and explanations, written requests, and phone calls to the central authorities, the Ministry of Justice, National Digital Technologies JSC, and one month after the re-registration application was filed, the state authorities finally succeeded by entering data manually.

We decided to share this experience with our audience because the technical deficiency of the CSC system remained unfixed, and our case was resolved individually by the numerous requests and explanations addressed to the higher-level authorities. As practice shows, the activities of the state authorities require revision, taking into account the plans of our government to attract more investors.

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please note that Kazakhstan is an emerging economy, and its legislation and legal system are in constant development. Should you have any questions or want to discuss matters addressed in this Client Update, please contact us.