In the Republic of Uzbekistan, investors and entrepreneurs mostly prefer to structure their activities through joint-stock companies (JSCs) and limited liability companies (LLCs). Recent statistics indicate a sustainable landscape with 324,469 registered LLCs and 662 JSCs operating throughout the country. It is worth noting that a significant proportion of JSCs – especially in sectors such as banking, insurance and industrial production – operate under state ownership.

Legal Scope

As previously highlighted, the primary avenues for conducting business operations within the Republic of Uzbekistan are through the organisational structures of LLCs and JSCs. There is a comprehensive set of legal instruments covering the governance and oversight of these entities:

• The Law of the Republic of Uzbekistan dated 06 December 2001, No 310-II, titled “On Limited and Additional Liability Companies”, delineating the legal framework governing the formation and functioning of such entities.
• The Law of the Republic of Uzbekistan dated 06 May 2014, No ZRU-370, titled “On the Protection of Joint-Stock Companies and the Rights of Shareholders”, which serves as the regulatory cornerstone safeguarding the interests of JSCs and their shareholders.
• The Civil Code of Uzbekistan, a fundamental legal document that encapsulates a wide spectrum of legal provisions relevant to business activities, contractual relationships, and civil obligations.

Registration and Establishment Procedure

The registration procedures for both an LLC and a JSC are facilitated through the Single Portal of Interactive Public Services. This digital platform enables seamless submission of essential documentation, such as company charters, meeting minutes, and pertinent records, in accordance with the legislative framework of the Republic of Uzbekistan. This process adheres to the guidelines outlined in the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No 66 dated 09 February 2017, which delineates the protocol for the state registration of business entities.

Shareholders

Shareholders in LLCs and JSCs can be both legal and natural persons. In the case an LLC, the number of shareholders may vary from 1 to 50, and their voting rights correspond to their ownership of shares.

In an LLC shareholders must inform their colleagues of their intention to sell shares. Other shareholders have the preferential right to acquire this share in the authorised fund of the company. If they are rejected, the selling shareholder may explore external sales options. In this process, priority is given to internal communication and fair decision-making within the LLC structure.

Conversely, JSCs are characterised by a potentially larger shareholder base, which is not limited to a specific number but should not fall below 50. Within the AB, the distinction between public and private entities is enshrined in their respective charters. It is noteworthy that in public JSCs, shareholders retain the freedom to trade their shares without requiring the consent of other shareholders.

In contrast, before a shareholder in a private JSC can initiate the sale of its shares, it is obliged to officially notify the other shareholders. These shareholders are given the opportunity to express their interest in the proposed shares. If other shareholders refuse to purchase these shares, the selling shareholder may engage in third-party sales.

Authorised Capital

In adherence to the Law of the Republic of Uzbekistan “On Limited and Additional Liability Companies”, the stipulation for minimum authorised capital for LLCs is absent unless specified by their licence. However, LLCs engaging with foreign enterprises require a minimum authorised capital of USD35,000. Shareholders of an LLC possess voting rights proportionate to their ownership share in the authorised capital.

Concerning JSCs, the authorised capital aligns with the nominal value of issued ordinary shares. JSCs are authorised to issue preferred shares, constituting up to 25% of the total issued shares. Preferred shareholders exercise voting rights in general meetings, while ordinary shareholders without voting rights are only eligible to participate. To safeguard their interests, ordinary shareholders can establish a minority shareholders committee, which oversees significant transactions, addresses petitions, and appeals to regulatory bodies. Operating through majority decisions, this committee ensures company integrity and protects the rights of minority shareholders.

The contribution to the authorised capital of a company, as determined by participants, can encompass not only monetary assets but also property, intellectual property, industrial technology, among other things, as per established protocols or the shareholder agreement.

General Meetings of Shareholders

LLCs

The Law of the Republic of Uzbekistan “On Limited and Additional Liability Companies” (the “LLC Law”) establishes a hierarchical framework for corporate governance. The supreme authority rests with the general meeting of shareholders, while the option of a supervisory board may be introduced through the charter. Operational management is overseen by the sole or collective executive body, accountable to the general meeting and potentially the supervisory board as per charter provisions.

The LLC Law delineates the authority of the general meeting of company participants, encompassing vital decisions outlined in the charter, such as defining core activities, modifying authorised capital, amending constituent documents, tenure of executive bodies, audit commission elections, supervisory board appointments (if applicable), annual report approval, net profit allocation, regulatory document sanctioning, audit-related determinations, legal entity establishment, restructuring or liquidation, and other stipulated matters. Exclusive powers of the general meeting cannot be delegated to the supervisory board, except as explicitly allowed by the LLC Law or designated to the company’s executive body.

Emphasising the central role of the general meeting, the LLC Law underscores its governance alongside a potential supervisory board, as specified in the charter. Day-to-day management is entrusted to the sole or collegial executive body, accountable to both the general meeting and the supervisory board where applicable. The LLC Law mandates regular general meetings, providing a yearly platform for stakeholders to endorse the company’s annual outcomes, reinforcing transparency and accountability, and convened in adherence to the charter’s specified timeline – at least once a year.

The LLC Law introduces the concept of an extraordinary general meeting, convened when essential for the company’s interests or as prescribed in the charter. Led by the executive body, this gathering facilitates focused discussions and resolutions on crucial matters, governed by clear protocols for notification, agenda inclusion, and distribution of essential materials.

During an LLC’s general meeting, most decisions require approval by a minimum of two thirds of the total votes cast by company shareholders, unless the LLC Law or the company charter stipulates a higher majority.

JSCs

In a JSC, the general meeting of shareholders holds the highest authority, led by the chair of the supervisory board or an appointed member. An annual meeting is mandatory, focusing on pivotal issues such as board elections, leadership contracts, and strategy, with the possibility of additional extraordinary meetings. The supervisory board manages logistical aspects, including remote participation and technology-enabled voting, while sole shareholders of all ordinary shares can make individual decisions.

The Law of the Republic of Uzbekistan “On the Protection of Joint-Stock Companies and the Rights of Shareholders” (the “JSC Law”) outlines the protection of minority shareholders’ rights through the establishment of a committee composed of these shareholders. Chosen through the supervisory board nomination process, this committee safeguards their rights and interests. Consisting of non-supervisory board shareholders, the committee oversees significant transactions, addresses petitions, and engages in regulatory appeals. Committee decisions require a majority vote, with three quarters of its members in attendance. The committee’s chair is elected by its members and granted limited document access in accordance with regulations. While proactive, the committee refrains from intervening in company operations to maintain the company’s integrity.

The JSC Law defines the scope of authority vested in the general meeting, encompassing crucial decisions essential for corporate governance and strategic direction. Its competence includes charter and structural decisions, capital management, organisational matters, strategic planning, oversight and compliance, and decision-making authority, following the “one voting share, one vote” principle. Notable provisions include prohibiting the executive body from making decisions within the general meeting’s scope and outlining exceptions for the supervisory board in specific areas.

The JSC Law mandates an annual general meeting within parameters specified by the charter. This meeting addresses critical matters including board appointments, executive contracts, and annual report assessment. Decision-making involves ordinary shareholders exercising voting rights through majority decisions, with a simple majority (or a three-quarters majority for certain issues).

Resolutions related to state capital require the approval of shareholders representing two thirds of the voting shares, excluding state shares. The JSC Law emphasises agenda adherence, disallowing decisions on unlisted topics, and stipulates communication of outcomes to shareholders in compliance with legal regulations, with provisions for appeals. The process for proposing agenda items and nominating candidates for the general meeting of shareholders requires shareholders holding at least 1% of voting shares to submit issues and candidates.

The supervisory board evaluates these proposals and includes them in the agenda if criteria are met. A counting commission, composed of a minimum of three individuals chosen by the general meeting of shareholders, is responsible for vote tallying. The JSC Law sets a quorum requirement for general meetings, stating that a quorum is established if shareholders representing over 50% of voting shares are present, with a repeated meeting mandated if the quorum is not met.

The principle of “one voting share, one vote” governs voting at general meetings, except in cases of cumulative voting for supervisory board elections.

Distribution of Profits

JSCs

The JSC Law outlines Uzbekistan’s dividend distribution process. Dividends, derived from a company’s net profit, are disbursed to shareholders based on share type and quantity, with procedures governed by the JSC’s charter.

The JSC has the authority to determine dividend payments for issued shares within intervals of up to one year, encompassing the first quarter, six months, nine months, and the full year. This decision must be reached within three months following the conclusion of each respective period, unless otherwise stipulated by legal provisions or the company’s charter.

The general meeting of shareholders, guided by the supervisory board’s advice and financial statements, determines dividend amounts, forms, and procedures. Dividends are sourced from net profit or retained earnings, potentially including a dedicated fund for preferred shares.

Unclaimed dividends incur penalties, and shareholders can seek payment through legal means. Certain constraints on dividend payment exist, including bankruptcy signals or inadequate net assets.

The company notifies shareholders of dividend amounts, and taxation adheres to tax legislation.

LLCs

The LLC Law governs the allocation of company profits among members, with decisions regarding distribution occurring quarterly, semi-annually, or annually through the general meeting. Dividends are distributed in accordance with share proportions, and their payment timeline, as determined by the company’s charter or general meeting, is set at a maximum of sixty days following the distribution decision.

The law imposes specific limitations on profit distribution, preventing decisions until full capital payment, fulfilment of real share value, or in instances of potential bankruptcy or asset devaluation. These restrictions equally apply to prior profit distribution resolutions. Notably, the LLC Law permits the establishment of a reserve fund, required to be at least 15% of the authorised capital. This fund is accumulated through annual deductions from net profit, ensuring a minimum of 5% of net profit until the charter-mandated amount is achieved. The reserve fund is designed to cover losses and facilitate share acquisition, adhering to both the company’s charter and legal obligations.

Right to the Information

LLCs’ shareholders have the right to receive information on the activities of the company and get acquainted with its accounting books and other documentation in the manner prescribed by law and the constituent documents of the company.

JSCs in Uzbekistan are required to maintain accurate accounting records and provide financial statements, ensuring accountability and transparency. The executive body holds responsibility for organising accounting, submitting reports, and sharing information. Independent audits verify financial data.

Essential documents, including the charter, property records, and decisions, must be retained. Shareholders can access these documents, with certain exceptions. Copies can be obtained upon request for a fee, maintaining confidentiality.

Affiliates must promptly inform companies of associations, with liability for delays or omissions. Companies with stock exchange listings must disclose charter details, ownership of shares, and transactions with affiliated parties.

Overall, these regulations promote transparency, accountability, and proper corporate governance in Uzbekistan’s business landscape.

Major Transactions

LLC transactions involving interested parties within a company – such as members of the supervisory board, sole or collective executives, or significant shareholders – require the consent of the general meeting of shareholders. These interested parties include those with affiliations to the transaction, either directly or through associates, and encompass ownership, positions, or involvement in relevant legal entities.

Such transactions must be disclosed, and their completion is subject to approval by the general meeting, excluding interested parties. Non-compliance may render the transaction void, and interested parties are liable for losses incurred.

The supervisory board’s role in related-party transactions is stipulated by the company’s charter, while major transactions, exceeding 25% of company property value, necessitate general meeting approval. Involvement of the supervisory board is optional for transactions between 25% and 50%. Violations can lead to the nullification of major transactions through legal action.

Within JSCs, significant transactions encompass property acquisitions or disposals, contingent upon predetermined value thresholds. Unanimous endorsement from the supervisory board is requisite for transactions ranging from 15% to 50% of net assets, with those surpassing 50% necessitating approval from the general meeting. Rigorous external audit assessment and evaluation of market value are obligatory for these transactions. Adherence to these protocols upholds transparent and well-informed deliberations in substantial corporate undertakings.

Trends

In Uzbekistan, the prevailing form of conducting business operations is through LLCs, with JSCs primarily seen in sectors such as insurance, banking, and specific economic entities that need to function as JSCs. A noteworthy trend is the preference among private entrepreneurs for establishing LLCs, attributed to the absence of minimum authorised capital requirements, streamlined registration processes, and reduced disclosure obligations.

In Uzbekistan, private entrepreneurs gravitate towards establishing LLCs due to the favourable legal landscape. LLCs offer distinct advantages, including relaxed capital requirements, streamlined registration, and reduced information disclosure obligations compared to JSCs.

The establishment of JSCs and the associated capital accumulation mechanisms offer distinct advantages over LLCs and private enterprises. It is imperative to acknowledge the latent potential for more effective capital aggregation within joint-stock structures, despite the current under-use of this avenue by entrepreneurs.

It is also crucial to acknowledge the dynamic evolution of JSCs in Uzbekistan. Before 2000, several key sectors such as manufacturing, banking, and insurance were predominantly state-owned. A substantial portion of these state-owned shares was entrusted to depository custody. Subsequent progress has paved the way for accessible opportunities, allowing interested parties to acquire shares in these JSCs through the securities market.

A noteworthy recent development is the Presidential Resolution of the Republic of Uzbekistan, dated 24 March 2023, No PP-102. This directive underscores the commitment to reducing state participation in the economy. In accordance with this resolution, a comprehensive list of 40 state-owned companies is slated for divestiture through IPOs. This measure aims to augment private sector participation and stimulate economic growth through enhanced private ownership in strategic sectors.

Uzbekistan’s business landscape is predominantly characterised by LLCs, which are favoured by private entrepreneurs due to their flexibility and ease of establishment. However, JSCs with state-owned shares continue to play a crucial role in the strategic sectors of the economy of Uzbekistan.

The recent Presidential Resolution create grounds for hope of bolstering private sector involvement and economic diversification through the forthcoming IPOs of state-owned enterprises.