Major and Interested-Party Transactions under Uzbek Corporate Law

Why these rules matter

Uzbek corporate law, like many civil law systems, protects companies and their owners against two risks: that management will dispose of a substantial part of the business without the owners' consent, and that insiders will use their position to conclude transactions on terms favourable to themselves. The tools used for this are the rules on major transactions and on transactions in which there is an interest (in joint-stock companies — transactions with affiliated persons).

The relevant provisions are contained in the Law «On Limited Liability and Additional Liability Companies» (the LLC Law) and the Law «On Joint-Stock Companies and Protection of Shareholders' Rights» (the JSC Law), read together with the Civil Code. For foreign investors, these rules are relevant in two roles: as owners who want to keep control over their Uzbek subsidiary, and as counterparties who need assurance that a deal with an Uzbek company will stand.

Major transactions

A major transaction is, in essence, a transaction or a series of interrelated transactions involving the acquisition or disposal (or the possibility of disposal) of property whose value exceeds a threshold set by law as a percentage of the company's assets, usually measured by reference to the latest financial statements. The concept covers not only sales and purchases, but also loans, guarantees, pledges and other arrangements that may lead to the disposal of property.

Transactions concluded in the ordinary course of business are, as a general rule, treated differently, and the charter may set additional categories of transactions that require approval or lower thresholds. In practice, the charter is therefore as important as the statute: two companies of the same form can have quite different approval regimes.

Determining whether a deal is major is not always straightforward. The value of the property may differ depending on whether book value or the transaction price is used, and a series of smaller deals may be aggregated if they are interrelated. Where there is genuine doubt, the safer course is to treat the transaction as major and obtain approval.

Approval in an LLC

In an LLC, the decision on a major transaction is taken by the general meeting of participants or, where the law and the charter allow, by the supervisory board. The charter can extend or narrow the list of matters reserved to the participants within the limits of the law. Single-member LLCs approve major transactions by a written decision of the sole participant.

Approval in a JSC

In a JSC, the approving body depends on the value of the transaction relative to the company's assets. Transactions within a lower band are approved by the supervisory board, which must act unanimously; if unanimity is not achieved, the matter may be referred to the general meeting of shareholders. Transactions above a higher threshold fall within the exclusive competence of the general meeting and require a qualified majority. Public disclosure obligations also apply to JSCs that have concluded significant transactions.

Interested-party and affiliated-person transactions

A transaction involves an interest where a person connected with the company — such as a member of the executive body, a member of the supervisory board, or a participant or shareholder holding a significant stake, together with their affiliates — is a party to it, a beneficiary, an intermediary or a representative, or holds a controlling or managing position in the counterparty.

The underlying principle is the same for both company forms: such a transaction must be approved by persons who are not themselves interested. In an LLC, approval is given by the general meeting, and interested participants do not vote. In a JSC, transactions with affiliated persons are approved by the supervisory board or the general meeting, again without the votes of interested persons. Interested persons are obliged to inform the company of their interest, and the company should maintain an up-to-date list of its affiliated persons.

Group companies require particular care. Intra-group loans, guarantees, cost-sharing and service agreements between a subsidiary and its parent or sister companies often qualify as interested-party transactions and must be approved even when they are routine for the group.

Consequences of non-compliance

A major or interested-party transaction concluded in breach of the approval requirements is voidable. It may be declared invalid by a court at the claim of the company or of its participant or shareholder. The outcome depends on the circumstances of the case, including the nature of the breach and the evidence presented. Claims must be brought within the applicable limitation period.

Invalidation is not the only risk. Directors and board members who caused the company losses by concluding a transaction without approval may be held liable to the company. For counterparties, a successful claim can mean the unwinding of a sale, the loss of security under a pledge or guarantee, or lengthy litigation with uncertain recovery.

Practical recommendations

For companies and their owners:

• review the charter to make sure the thresholds and approval procedures match how the business actually operates;
• maintain a register of affiliated persons and require directors and board members to disclose their interests;
• build approval steps into internal policies for procurement, financing and intra-group arrangements;
• record approvals in properly executed minutes or decisions, and keep them with the transaction file.

For counterparties and lenders:

• request the counterparty's current charter and latest financial statements to assess whether a transaction is major;
• obtain copies of the approving resolution and evidence of the signatory's authority;
• include representations and warranties on corporate approvals and indemnities for breach;
• for financing and security packages, make delivery of corporate approvals a condition precedent.

These steps cost little at the signing stage and significantly reduce the risk of a dispute later. LEXGLOBAL advises shareholders, boards and counterparties on corporate approvals, transaction structuring and related disputes in Uzbekistan.