January 8, 2020
In this memorandum we will consider types (legal forms) of commercial corporations and several procedures related to their entrepreneurial activities (issue of shares, valuation of participatory interest, etc.), particularities of the establishment and liquidation. In Uzbek Law those commercial legal entities are named as commercial organizations and so hereinafter we will use this term in respect of commercial corporations (legal entities).
According to Uzbek law a commercial organization is a legal entity whose main purpose is to make a profit. Basically, these organizations can carry out any activities not prohibited by law, but they are required to obtain a licence for certain type of entrepreneurial activities. Charter and Foundation Agreement (the latter depending on the number of founders and the legal form of the legal entity) are the Constituent Documents of the commercial organizations.
The legal status of commercial organizations and the procedures associated with their establishment, management, implementation of economic activities, distribution of profits (payment of dividends) and liquidation are regulated by the following laws and regulations:
- Civil Code of the Republic of Uzbekistan;
- Law No. 223-I of 26.04.1996 on Joint-Stock Companies and Protection of Shareholders’ Rights (New Edition);
- Law No. 295-XII of 06.14.1991 on Cooperation;
- Law No. 308-II of 06.12.2001 on Business Partnerships;
- Law No. 310-II of 06.12.2001 on Limited and Additional Liability Companies;
- Law No. 558-II of 11.12.2003 on Private Enterprise;
- Law No. 602-I of 30.04.1998 on Farming (New Edition);
- Law No. 69-II of 25.05.2000 on Guarantees of Entrepreneurial Activity (New Edition);
- Law No. ZRU-327 of 26.04.2012 on the Family Enterprise;
- Resolution of the Cabinet of Ministers No. 215 of 16.10.2006 on Measures to Ensure Effective Management of Enterprises with a State Share in the Authorized Capital and Proper Accounting of State Property;
- Resolution of the Cabinet of Ministers No. 66 of 9.02.2017 on Measures to Implement the Resolution of the President No. PP-2646 of 28.10.2016 On Improving the System of State Registration and Registration of Business Entities;
- Resolution of the Cabinet of Ministers № 704 of 21.08.2019 on Approval of Provisions on the Voluntary Liquidation and Termination of Activity of Business Entities and Exclusion from the State Register of Persons not Engaged in Financial and Economic Activity;
- Resolution of the Cabinet of Ministers No. 398 of 12.10.1995 on the Approval of the Regulations on Holdings;
- Decree of the President No. UP-5739 of 06.07.2019 on Measures to Simplify the Procedure for the Liquidation of Business Entities;
- Rules for the Issue of Securities and State Registration of Issues of Equity Securities, registered by the Ministry of Justice dated August 30, 2009 No. 2000.
Commercial organizations can be established in the form of Partnerships (Full, Limited Partnership) and Companies (Joint-stock and Limited Liability Companies), a Production Cooperative, a Unitary Enterprise, and in any other form prescribed by law (such as a Family Enterprise, Private Enterprise, Farm Holding, etc.). The most common form of commercial organizations in economic sectors (except for agriculture) are:
1) Joint-stock Companies;
2) Limited Liability Companies;
3) Private Enterprise; and
4) State Unitary Enterprise.
The remaining legal forms are mostly with unlimited liability and industry (target) specific; therefore less common.
A Joint-stock Company is a company whose charter capital is divided into a certain number of shares. The share is a registered security without a fixed validity period, certifying the right of its owner (1) to receive part of the joint-stock company’s profit in the form of dividends, (2) to participate in the management of the joint-stock company and (3) to the part of the property remaining after the liquidation of the company.
Only the JSC can issue shares (save for bearer shares) and other corporate securities. Charter capital of JSC cannot be formed from shares only. Shares and other corporate securities of JSC are issued in non-documentary form .
Shareholders (legal entities or individuals) may possess two types of shares – ordinary and preferred. The Charter of JSC determines the types of shares, the procedure of public offering and payment of dividends. The nominal value of shares should be expressed in the national currency of the Republic of Uzbekistan and cannot be more than 5,000 Soums (approximately $0.50 USD).
For more information on the governing bodies of JSCs, read the Incorporation of Legal Entity in Uzbekistan (clauses 2.2.4-2.2.6)
The State can be a founder, shareholder (participant) of commercial organizations. In strategic sectors of the economy, the State retains its presence through shareholding in JSC. Under Uzbek legislation, such strategically important JSCs have the status of “Economic Management Bodies”. Most of these Economic Management Bodies in the form of JSC were the Ministries or State Enterprises in the past. According to the legislation, Economic Management Bodies are economic associations created in the following main organizational and legal forms:
- JSCs (including State-owned) which carry out the economic management of their subsidiaries through holding of shares in them;
- Associations of Legal Entities which have certain common management functions delegated by its members without holding of shares of the latters..
Such Economic Management Bodies in the form of JSC have tasks and functions as follows:
- defining a strategy of the sustainable development of the sector of economy;
- conducting of marketing research, assistance in the production of new types of competitive products (work, services) and their promotion in world markets;
- assistance in the modernization and technological re-equipment of enterprises, the wide attraction of foreign investment for these purposes;
- the provision of information services to its subsidiaries;
- training of personnel in its respective sector of economy.
Economic Management Bodies in the form of JSC have the characteristic features as follows:
- fall under the methods of state natural monopolies regulation, in accordance with the Law No. 398-I of 04.24.1997 on Natural Monopolies;
- carry out the delegated administrative powers;
- issue licenses and permits in accordance with Law No. ZRU-341 of 12.2012 on Licensing Procedures in the field of Entrepreneurial Activity and RMC No. 225 of 15.08.2013;
- consider applications (appeals) of individuals and legal entities, according to Law No. ZRU-378 of 03.12.2014 on Appeals of Individuals and Legal Entities;
- are authorized persons for the implementation of investment projects on the part of the Republic of Uzbekistan in accordance with international treaties of the Republic of Uzbekistan ;
- may be included in a structural unit of the Cabinet of Ministers of the Republic of Uzbekistan;
- can act as an executive and responsible body for the implementation of state programs in their sector of economy;
- can receive Sovereign Guarantee of the Republic of Uzbekistan.
The Existence of such a quasi-public sector and the combination of state regulatory and economic functions by these economic management bodies lead to excessive regulation of economic sectors. Therefore, in order to further reduce the administrative impact on economic sectors and expand market management mechanisms, the Government adopted the Concept of Administrative Reform of the Republic of Uzbekistan, which indicated the further reduction of such bodies as a priority reform objective (UP-5185 dated July 8, 2017).
The Holding is a JSC , whose assets include controlling stakes in other companies. The controlling stake (units, shares) means the possession of the right to give binding directives to its subsidiaries. The subsidiaries of the Holding is the company in which the Holding has more than 20 % of shares.
A limited liability company is a commercial organization founded by one or more persons and the charter capital of which is divided into participatory interests (shares) in the amount determined by the constituent documents of the Company.
The size of the participatory interest of a participant in the charter capital of the company is determined as a percentage or fraction. The size of the participatory interest of the participant must correspond to the ratio of the nominal value of that participatory interest and the charter capital. The actual value of that participatory interest corresponds to the part of the value of the company’s net assets which is proportional to the size of its participatory interest. The participatory interest in the charter capital is not a security and so it is not quoted in capital markets.
Prior to amendments to the legislation in 2007, LLCs could issue bonds in an amount not exceeding the amount of its charter capital. At the moment, only JSCs issues such securities.
For more information about the management bodies of the LLC, read the Incorporation of Legal Entity in Uzbekistan (paragraph 2.1.3).
In accordance with the Analytical Bulletin on The Demography of Enterprises (January-October 2018) out of 260,800 of operating commercial organizations as of November 1, 2018, LLCs amounted to 166,000 units. Based on this fact, it is evident that LLC is the most common form of commercial organization in Uzbekistan.
Such popularity is due to the following reasons:
- The LLC is liable for its obligations to creditors with all of its property;
- Participants of the Company are not liable for the obligations of the Company;
- The Company is not liable for the obligations of its participants;
- the Participants bear the risk of losses associated with the activities of the company within the value of their contributions;
- When the participants leave the company, it does not entail the termination of the company;
- Only in the event of bankruptcy of the company due to the fault of the participant, such a person may be held subsidiary liable for his obligations if the property of the company is insufficient.
- A contribution to the charter capital can be money, securities, other things, property rights or other alienable rights having a monetary value.
- Participants are to make their contributions to the charter capital within a year and from the moment of registration of the company.
- The monetary valuation of non-monetary contributions to the charter capital made by the participants is approved by unanimous decision of the general meeting of the company’s participants. The legislation did not establish cases of attracting independent appraisers to assess non-property contributions.
A Private Enterprise is a commercial organization created and managed by the owner – a single individual. The Private Enterprise owns separate property, acquires and exercises property and personal non-property rights on its own behalf, bears obligations, can be a claimant and defendant in court.
The Private Enterprise is liable for its obligations with all of its property. The owner of a Private Enterprise, in accordance with the law, bears subsidiary liability with his property for the obligations of a Private Enterprise in case of insufficient property of the latter.
In accordance with the Analytical Bulletin on the demography of enterprises (January-October 2018), Private Enterprises were the second most common form of doing business . The popularity of this form is due to the fact that the law did not establish a minimum size of the charter capital. the Owner has the discretion to determine the size of the indivisible charter capital and solely manage this Enterprise.
A Unitary Enterprise is a commercial organization which does not have the right of ownership to the property allocated to it by the Owner . The property of a unitary enterprise is indivisible and cannot be distributed as shares (participatory interest). Such property of a unitary enterprise belongs to it on the title of economic management, operative administration. The Unitary Enterprise is liable for its obligations with all of its property and is not liable for the obligations of the Owner of its property.
Generally, such enterprises are established by the State on the basis of state-owned property. State Enterprise is the commercial organization in the form of State Unitary Enterprise formed on the basis of state-owned property which is allocated to it on the title of the operative administration. State Enterprise exercises the right of possession, use and disposal with respect to the allocated property, within the limits established by law, in accordance with the objectives of is commercial activity, assignments of the Owner and the purpose of the allocated property. The founder of a state enterprise is the Cabinet of Ministers or state bodies authorized by it.
State Enterprise created by decisions of the President or the Cabinet of Ministers can carry out licensed activities without obtaining an appropriate license. Moreover, state unitary enterprises cannot be declared bankrupt by a court.
A Family Enterprise is a small business entity created by its participants on a voluntary basis on the basis of common property of the members of a family. The activities of a family business are founded on the personal work of its members. The general meeting of participants of the Family Enterprise is the highest governing body.
The total number of participants in a family enterprise and its employees cannot exceed the average annual number of employees of small businesses established by law. At the same time, the minimum number of participants in a family business should be at least two people.
Partnership is a commercial organization (corporate entity) with a charter fund divided into participatory interest in which participants or some of them personally conduct entrepreneurial activity on behalf of the partnership. Such partnerships may be created in the form of a full or limited partnership.
Full partners (individual entrepreneurs and commercial organizations) are the participants of the Partnership which conduct entrepreneurial activity on behalf of the partnership and bear full liability.
Contributors (fr. commanditer) are participants (legal entities and individuals) who bear the risk of losses associated with the partnership, within the amount of their participatory interest and do not take part in the entrepreneurial activities of the partnership. Therefore, a limited partnership is a partnership in which, along with full partners, there is one or more contributors (. If there are no contributors, then it is full partnership.
Partnerships have the following features:
- The full partners jointly bear subsidiary liability with their property for the obligations of the partnership and such liability cannot be limited or excluded.
- Admission of new partners is possible only with the consent of all partners.
- The partnership may cease its activity with the departure of one of the partners (Article 22).
- Each partner is entitled without a power of attorney to act on behalf of the partnership,
- Contributors can only act on the basis of a power of attorney;
- Contributors cannot dispute the actions of full partners in managing and conducting the affairs of the partnership.
- Losses of the partnership are distributed among its participants along with profit in proportion to their participatory interest in the charter capital.
A cooperative is a self-managing entity with the rights of a legal entity that possesses, uses and disposes of its property on the title of collective ownership. The main difference of the cooperatives from other forms is the simple form of membership of its participants. Land and other natural resources are provided for use to cooperatives. The cooperative’s property is fixed assets, working capital, mutual contributions, as well as other values, which are reflected in the cooperative’s independent balance sheet. Activities of production cooperative are based on personal labour participation of its members and hired workers. The cooperative has its own charter and collective governing body. At the moment, this legal form of entrepreneurial activity is not used in practice.
Farm Holding – a business entity engaged in the production of agricultural products and other activities not prohibited by law, using land provided for rent. Farm is the main subject of agricultural production in the Republic of Uzbekistan. The founder of a farm (Farmer) can only be a citizen of the Republic of Uzbekistan who has reached the age of eighteen years and has the appropriate qualifications or work experience in the agriculture.
A farm is created on agricultural lands and on reserve lands. To create a farm, its Farmer is to receive a land plot in the prescribed manner. Most issues of farm holding activities are regulated by the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 476 of 10.30.2003. For more information on the regime of lands read the Acquisition of Land Plots and Other Objects of Real Estate.
When considering the differences, below we will only compare the most common legal forms of commercial organizations, namely JSC, LLC, Partnerships, Private Enterprises and (State) Unitary Enterprises.
The main difference of the aforementioned legal forms is in the liability of their founders (participants, shareholders, members and owners). As a general rule, the commercial organization (the debtor) is obliged to compensate its creditors for losses caused by the failure to perform or improper performance of obligations.
However, in accordance with the legislation or the terms of the obligation (contract), it is possible to impose subsidiary responsibility (liability) on another person (participant, owner of the commercial organization), which will be additional to the liability of the main debtor. For example:
- If the bankruptcy of JSC is caused by unlawful actions of the shareholder who has the right to give binding instructions to the company, this shareholder may be held subsidiary liable for the obligations of JSC;
- In the event of bankruptcy of LLC through the fault of a participant, such participant may be held subsidiary liable for the obligations of the LLC;
- The owner of a Private Enterprise bears subsidiary liability for the obligations of a Private Enterprise;
- The Founder bears subsidiary liability for the obligations of the State Enterprise;
- Participants of the Family Enterprise bear subsidiary liability for the obligations of the Family Enterprise;
- The Farmer bears subsidiary liability for the obligations of the Farm Holding.
It is also possible to limit the liability of the main debtor:
- The participants are not liable for the obligations of LLC and bear the risk of losses within the value of their contributions;
- An interested person is liable to the company in the amount of losses incurred by him to the company.
Moreover, the founders (participants) may be held jointly and severally liable, which means the creditor has the right to demand execution from all debtors (founders) jointly, and from any of them individually. Joint debtors remain obligated until the obligation is fully fulfilled:
- Shareholders who have not fully paid for the shares (participatory interest) are jointly and severally liable for the obligations of the company to the extent of the unpaid portion of the value of their shares;
- The founders of JSC are jointly and severally liable for the obligations associated with its creation, until state registration;
- The participant of LLC, which have not fully made contributions, are jointly and severally liable for its obligations to the extent of the cost of the unpaid part of the contribution of each of the participants in the company;
- The founders of the company are jointly and severally liable for obligations related to incorporation of the company and arising prior to its state registration;
- The participants in the partnership jointly and severally bear subsidiary liability with their property for the obligations of the partnership and such liability cannot be limited or eliminated.
JSC places shares of the initial issue among its founders no later than one year from the date of its state registration as a legal entity. The types of shares to be placed among the founders, the size, form and procedure for their payment, as well as the size of the charter capital are determined by the foundation agreement or the charter. The charter should also determine the types, quantity, and nominal value of shares acquired by shareholders (offered shares).
Shares can be distributed through open or closed subscription. An open subscription means the placement of shares among an unlimited number of investors using advertising, including through a public offer of shares. Closed subscription means the placement (offer) of shares among the predetermined limited number of investors without a public announcement and advertising campaign. Open subscription of shares is carried out exclusively on the stock exchange.
The Central Securities Depository (or investment intermediaries) performs the functions of accounting for the rights to dematerialised securities (shares, bonds) of a JSC in securities accounts. The Central Securities Depository is a State Enterprise.
The issue of shares consists of the following stages:
- approval of a decision on the issue of shares;
- approval of the prospectus (in case of public offering);
- state registration of the issue of shares;
- registration of the issue of shares at the Central Securities Depository;
- disclosure of information on the issue of shares;
- placement (offering) of shares;
- Informing the registration authority on the results of the issue of shares.
In case of placement of shares on the stock exchange securities market, their issue shall be deemed valid if the placement volume is not less than thirty percent of the total number of shares.
Liquidation of a legal entity entails its termination without transfer of rights and obligations in succession to other persons. Liquidation may be voluntary or, in cases specified by law, compulsory. Declaring a legal entity bankrupt also entails its liquidation.
The founders (participants) or the governing body of a legal entity make a decision on liquidation, establishing the procedure and terms for liquidation. On the basis of this decision, a liquidator (liquidation commission or an individual) is appointed.
The liquidator publishes in the media an announcement on the liquidation. The announcement shall indicate the procedure and term for the statement of claims of its creditors. The liquidator takes measures to identify creditors and receivables, and also notifies creditors in writing on the liquidation.
If the funds available at the liquidated legal entity are insufficient to satisfy the requirements of the creditors, the liquidator sells the property of the legal entity at public auction. The property of a legal entity remaining after the satisfaction of creditors’ requirements is transferred to its founders (participants).
The liquidation of a legal entity is deemed completed, and the legal entity ceased to exist after making an entry in the Unified State Register of Legal Entities.
Commercial organizations can be liquidated, if they are not engaged in financial and economic activities. At the request of the state tax service, those commercial organizations which do not engage in financial and economic activities are transferred by the registration authority (the Agency of State Service under the Ministry of Justice of Uzbekistan) the inactive regime for three years. The grounds for such transfer is (1) non-arrival of funds on the financial and economic activity in the bank account within and nine months, and (2) failure of tax reporting for nine months.
The registration authority excludes commercial organizations that are transferred to an inactive regime from the Unified State Register of Entrepreneurship Entities in case of non-restoration of activities for three years.