When advising our clients in the past year we noted that due to general economic instability along with foreign exchange fluctuation shareholders of Kazakh companies seek to protect their interests in getting the net profit (dividends) which would be fair to both shareholders and a company itself. Thus, they start raising questions regarding possibility of early payment of dividends. Since statutory restrictions with respect to annual distribution of net profit apply only to limited liability partnerships (LLP), participants of this type of legal entities are especially keen on finding solutions on this matter.
In this client note, we would like to pose a few related questions, propose possible solutions along with associated risks and bring these up before a wider legal community in order to start discussions as to how legally protect both participants and LLPs in net profit distribution. We do hope that following a more profound legal analysis, these proposed options may be viable in practice in the future.
One can easily imagine material losses foreign investors face when they get net profit from LLP operations distributed as per the financial results of the year with USD dollar rate in Kazakhstan having increased more than twice as against KZT within one year. Therefore, it becomes obvious for LLP participant that it would be rather advantageous to receive net profit on a monthly or quarterly (e.g. shareholders in joint stock companies are entitled to get dividends each quarter subject to certain conditions) basis.
Based on the foregoing, LLP participants seek to consider all possible options for early payment of dividends without waiting for the LLP's year-end results and approval thereof.
The main objective of LLP in Kazakhstan is to gain profit from its operations. Pursuant to the Law of the RK on LLP, distribution of net profit is done at the ordinary general meeting dedicated to approval of the financial results of LLP for the prior year. LLP participants are entitled to adopt the following resolutions with respect to LLP's net profit:
- To fully distribute net profit among participants as per participating interests;
- To partially distribute net profit among participants;
- Not to distribute net profit and keep retained earnings on the LLP balance.
At the outset, one should raise a question as to whether the Kazakhstan laws allows LLP participants to distribute net profit absent approval of the year-end results of the partnership.
Pursuant to the Law on LLP, the above decisions on distribution of net profit can be taken only at the ordinary general meeting of shareholders of the partnership specially dedicated to approval of partnership's year-end results. This statutory requirement is imperative; accordingly, there seems to be not much room for considering options for distribution of net profit at other times, e.g. monthly or quarterly. We understand that the objective of this imperative statutory requirement is to primarily protect interests the LLP itself and its creditors, as there may be potentially a scenario where participants would obtain a large chunk of cash based on the outstanding results of the first quarter, followed by huge losses in all other three quarters, which may potentially lead LLP to bankruptcy.
Consequently, if participants are explicitly prohibited from early distribution of net profit, what other options may be considered without reference to the year-end results.
For example, could LLP participants consider advance payment of dividends? Assuming that LLP participants would comply with all the required corporate and statutory formalities, and would adopt resolution approving advance payment what would be potential risks of such option. We believe that there may be a risk of challenging the resolution of the general meeting by creditor or governmental authorities, claim for LLP damages and premeditated bankruptcy, etc.
Accordingly, this option could be viable and acceptable to LLP provided that participants guarantee to return the advance payment in case LLP has no profit based on the overall year-end results. What kind of security instrument could potentially be considered as a guarantee? Bank guarantee? Or perhaps LLP participants could set up an escrow account subject to adoption of resolution of the general meeting based on the LLP's year-end results? We believe that this option requires a more thorough analysis from general legal and corporate perspective.
Apart from advance payment, loan may also deserve consideration and and thorough analysis. Kazakhstan laws allow loans between LLP participant and an LLP. In this case, LLP provides a loan to its participant based on financial indicators, hence, this option may also be considered as a workable solution for LLP participants to keep/save the profit regardless of market volatility and currency exchange rates. Perhaps, there are other alternatives that representatives of our legal community came up with? What, in your opinion, the current laws can offer to business in our days of instable economic situation and dramatic currency exchange rate fluctuations? It would be interesting and useful to discuss other ideas/options which would be beneficial to all stakeholders involved – LLP, participants, creditors, etc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.