July 9, 2021
LLC Management organs in Uzbekistan
The management bodies of a limited liability company (LLC) in different countries have their own specifics. The following are the features of foreign models and the Uzbek model of LLC.
In an American corporation, the general meeting of shareholders is endowed with much less powers than the German meeting of shareholders. Since the countries of the common law system are characterized by a merger of management and control functions, the board of directors is fully responsible for the activities of the corporation and manages the corporation (the term “supervisory board”, existing in Russian and Uzbek legislation, is not applicable to it). The Board of Directors is a collegial executive management body of the corporation, to which another executive body reports. And above these bodies is the general meeting of shareholders. The American model is actually two-tier. At this time, the board of directors is a strong body.
The German model of the control system is a three-link one. Between the shareholders ‘ meeting and the executive body, there is a supervisory board with a control function in relation to the management board (executive body). This is due to the separation of management and control institutions in the joint-stock laws of the countries of the Romano-German legal family. The German model has a weak board of directors.
The Russian model is four-tier or three-tier, it includes a general meeting, an optional supervisory board, a collegial management board and a sole executive body. With the introduction of the supervisory board, control over the management Board and the sole executive body is strengthened. This is done in order to give more flexibility to participants.
The Uzbek model of management bodies in an LLC can be dual-level or tri-level.
Dual-level management organs:
(1) the supreme organ – the shareholders’ level (meeting of multiple shareholders or sole founder);
(2) the executive (individual or collective);
Tri-level management organs:
(1) the supreme organ – the shareholders’ level (meeting or sole founder);
(2) the intermediary organ – the supervisory board (optional); and
(3) the executive (individual or collective);
The executive organ is an organ performing functions of the CEO – true management organ performing daily managerial operations of the company. This organ is mandatory.
It can be individual or collective.
When the executive organ is individual it is a sole director who performs all executive functions and no other organ performs daily executive management. This system does not exclude that there could be a separate supervisory organ as a superior organ above the sole director or manager. The director then is subordinate to the supervisory organ.
Although it is not rare when foundation documents allocate powers between the members of the collective executive organ and even appoint one of the members of the collective executive organ as a general director with separate powers enabling him/her to act independently. However, the latter would not be correct, as the collective executive organ implies collective decision-making. One, all or few of the members of the collective executive organ shall be vested with the powers to act on behalf of and represent the Company before third parties and shall hold the power of Company’s signatory, including in bank transactions. An individual performing functions of the executive organ solely or collectively must be an employee of the Company. It is implied that if they are foreign residents they shall obtain a work permit and at least periodically stay in Uzbekistan to perform their daily work duties.
When a company’s executive organ is a collective organ, it could be called the “management”, the “directorate” or “board of directors” or otherwise. When the executive organ is collective it shall make all decisions by voting. Although it is not rare when foundation documents allocate powers between the members of the collective executive organ and even appoint one of the members of the collective executive organ as a general director with separate powers enabling him/her to act independently. However, the latter would not be correct, as the collective executive organ implies collective decision-making. One, all or few of the members of the collective executive organ shall be vested with the powers to act on behalf of and represent the Company before third parties and shall hold the power of Company’s signatory, including in bank transactions. An individual performing functions of the executive organ solely or collectively must be an employee of the Company. It is implied that if they are foreign residents they shall obtain the work permit and at least periodically stay in Uzbekistan to perform their daily work duties.
The executive director has the following responsibilities:
- acts without a power of attorney on behalf of the company, including representing its interests and making transactions (signing agreements);
- issues power of attorney for representation on behalf of the company;
- enters into and terminates employment contracts with employees of the company, applies incentives to them and imposes disciplinary penalties on them;
- exercises other powers that are not assigned by Uzbek legislation and the company’s Charter to the competence of the General meeting of the company’s participants and the Supervisory Board of the company.
The supervisory organ is an intermediary organ and is not mandatory.
It does not perform daily transactions and executive management of the company, but carries out certain managerial functions of higher level, such as determining certain programs, policies, categories of transactions (size- or direction-wise), makes appointments of executive organ, internal auditing organ, grants approvals, permissions, etc. All such functions are closer to the powers of the general shareholders meeting. In fact, the supervisory board acts under the powers delegated to it by the general shareholders meeting. Members of the supervisory organ are not employees of the Company, but may receive remuneration for their services. Members of the supervisory organ never hold powers of the executive organ and do not represent the Company before third parties and shall not hold the power of Company’s signatory, including in bank transactions. If members of the supervisory board are foreign residents they do not need to have any work permit.
Please also note that there a limitation for the simultaneous combination of membership in executive organs and supervisory boards: members of the executive organ of your Uzbekistan company or its subsidiaries or any Uzbekistan company’s employee are prohibited from becoming a member in the supervisory board of the same Uzbekistan company (should such a board of directors established in it). The original text of the Law on Limited Liability Companies (LLC Law) is as follows:
<< The sole executive body and members of the collegial executive body of the company, the governing bodies of its subsidiary and dependent commercial entities, the head of a unitary enterprise created by the company, and persons working under an employment agreement (contract) in the same subsidiary, dependent commercial entity and unitary enterprise cannot be members of the supervisory board of the company.>>
The limitation apply mostly to Uzbekistan jurisdiction and shall be read as follows:
<< members of the executive organ of Uzbekistan Company or any other employees of the Uzbekistan company, cannot be members of the Uzbekistan company’s supervisory board.>>
The supervisory board is a collective management body of the company. All decisions are made by voting. The charter of the entity shall stipulate formation of the supervisory board and its powers. It is important to note that the supervisory board does not have the rights of a sole Executive body (Director). In particular, the supervisory board is not entitled:
- To act without a power of attorney on behalf of the company, including representing its interests and making transactions (signing agreements);
- To issue power of attorney for representation on behalf of the company;
- To enter into and terminate employment contracts with employees of the company, to apply incentives to them and impose disciplinary penalties on them;
- To exercise other powers that are not assigned by Law and the company’s charter to the competence of the general meeting of the company’s participants.
Moreover, the sole executive body (director) and members of the collective executive body of the company, the management bodies of its subsidiary and dependent business entities, the head of a unitary enterprise established by the company, and persons working under an employment contract in the same subsidiary, dependent business entities and unitary enterprise may not be members of the Supervisory Board of the company.
The responsibilities of the supervisory board member are determined by the company’s charter in accordance with Uzbek legislation. The company’s charter may provide that the responsibilities of the supervisory board member of the company include:
- formation of executive bodies of companies and early termination of their powers;
- establishment of the internal audit service and appointment of its employees;
- the decision-making on large transactions in stipulated cases, on issues related to preparation, convening and holding General meeting of shareholders; and
- solution of other issues stipulated by Uzbek legislation.
Under the applicable law,
1) the servicing banks in Uzbekistan must accept payment instructions from the members of the official executive organ of company.
2) local banks are not accustomed to work in line with corporate requirements and relevant thresholds, as they work in line with their own banking regulations and business practice. The form of signature specimen card is approved by the Central Bank of Uzbekistan and registered by the Ministry of Justice and thus has the legal force of legislation (MoJ No 1948 of 27 April 2009) and it must be filled in by each company operating in Uzbekistan.
3) the banks in Uzbekistan deals with only two groups of signatories on behalf of company:
– group one comprising members of executive organ with the right of the first signature (the quantity is not limited) and
– group two including officers representing accounting and financial management with the right of the second signature.
There is no limitation for inclusion of two or more individual-officers to the group one of officers (same applied to group two signatories). But it would be hard to ensure that the servicing bank rejects payment documents (contracts etc.) if it does not contain simultaneous signatures of all officers listed in the group one. In reality, local banks consider that any of the officers listed in group one can act individually and his/her individual signature would suffice for the acceptance of the payment instruction.
The definition of “board of directors” often creates confusion, as it may refer to both
– the executive organ or
– a superior organ with supervisory powers, which does not engage in daily management, but only performs certain functions in the interim between the executive organ and the general shareholders meeting (sole founder).
For us it is important to understand which functions are planned to be assigned to the proposed “members of the board of directors” as listed in your email below:
– Variant One – purely daily transactions of the Uzbek company inclusive of all daily managerial functions performed under employment;
– Variant Two – only certain controlling or supervisory functions, such as approval of certain transactions based on their size (with certain thresholds) or category.
So, if it is implied that your designated directors are the individuals who actually shall not only approve but also implement/perform all relevant executive documentation such as agreements/contracts/banking payments instructions/acts of acceptance (which are the executive powers), then these individuals shall become employees of your Uzbekistan company. Under this arrangement, it will be implied that these directors are members of the Directorate (the executive organ) of the Uzbekistan company and shall be employed by the latter (obtain work permits) and shall be present in Uzbekistan (although, from time to time they can work for Uzbekistan company while stay abroad).
However, if it will be decided by your party that the purposes of appointment of these individuals are only to approve the substantial transactions whereas the actual execution (performance/implementation) of the same transactions will then be affected by different executive officers of Uzbekistan company (the executive powers will be performed by the Directorate), then such proposed directors can be members of the supervisory board of Uzbekistan company. Under this arrangement, the Supervisory Board only approves the transaction in line with the determined collective decision-making by the members of the Supervisory Board. This would be the first step. At the second step, the Directorate will implement/perform the approved transaction.
It is typical and simpler if the company has dual-level management, where the proposed directors could be either appointed as members of the collective executive organ and in that case they shall be employed by the company and perform certain executive powers in line with the internal allocation. Such internal allocation of powers between the members of the collective executive organ shall be reflected either in the Charter of the Company or shall be reflected in an internal corporate regulation governing operation of the collective executive organ (directorate). Such internal regulation for the directorate then shall be elaborated.
6.2. A possibility of establishing the supervisory board as a third organ of your Uzbekistan company
Alternatively, you may decide to form a third management organ – an intermediate organ superior to the current directorate, which organ shall be named as “supervisory board” and shall be composed at minimum of 3 members (the quantity of members is not limited), who will not be employees of the company and would have no need to stay in Uzbekistan, but may perform their supervisory board membership functions from distantly. They can have the powers of granting approval towards certain categories of transactions of the executive organ.
Please note that in certain foreign jurisdictions the “board of directors” could be referred to
(a) the executive organ if performs all daily activities of the company or
(b) an intermediate organ between the executive organ (individual or collective) and the general shareholders’ meeting (or individual founder).
Please also note that there a limitation for the simultaneous combination of membership in executive organ and supervisory board.