Compulsory buyout of a stake in a limited liability company in Kazakhstan

14.02.2025

In Kazakhstan, the institution of limited liability partnerships (LLPs) continues to be an important form of business organization, which provides participants with flexibility in management and responsibility. However, despite the advantages associated with limited liability and the possibility of collective business, in some cases situations arise when one of the participants of the LLP commits actions that are contrary to the goals of the LLP and, moreover, cause damage LLP. In these cases, the compulsory buyout of a share is an important tool for bringing to responsibility, as well as maintaining the operability of the LLP. 

Compulsory redemption of an interest is a kind of exclusion of a participant from the LLP due to non-fulfillment of its obligations, which caused significant damage to the LLP or other participants.

Referring to the current legislation of the Republic of Kazakhstan, in accordance with Article 82 of the Civil Code of the Republic of Kazakhstan, if a member of a limited liability company violates its obligations to LLP established by legislative acts or constituent documents, the LLP, in accordance with the decision of the general meeting, has the right to demand in court the compulsory redemption of the share of such participant in the manner established by the Law of the Republic of Kazakhstan "On Limited and Additional Partnerships responsibility."

In accordance with the Law "On Limited and Additional Liability Partnerships", in the event of causing significant damage, the LLP, in addition to the claim for damages, has the right to raise the issue of compulsory buyout by the LLP of the share of the guilty participant. The Supreme Court in its Regulatory Resolution No2 of July 10, 2008 identified two entities that may suffer damage: the LLP and its participants.

Significant damage caused to the LLP or its participants should be understood as such damage, the elimination of the consequences of which for the LLP or its participants becomes difficult or impossible. 

For a more accurate understanding of the concept of "significant damage" and taking into account the contractual nature of corporate relations, it is advisable to refer to the terminology "material breach of contract" provided for by the Civil Code. A breach of the terms of the contract by one of the parties is considered material if it leads to such consequences for the other party that it loses a significant part of what it counted on when concluding it.

Damage caused by one LLP participant to another may manifest itself, for example, in the form of dismissal from a managerial position in the LLP, or the establishment of an inflated salary to the majority shareholder holding the position of director. 

It is also possible to take as an example a situation where a participant, joining an LLP, expected stable dividend payments, but loses these expectations due to the actions of another participant (majority shareholder), who votes against the payment of dividends at meetings for a long time, despite the possibility of making payments without prejudice to the LLP - this can be regarded as causing significant damage.

Damage caused by one participant of an LLP may manifest itself in the following: unlawful withdrawal of assets, performance of activities competing with the LLP; systematic evasion without valid reasons from participation in the general meeting of participants, depriving the general meeting of participants of the opportunity to make decisions significant for the LLP. 

At the same time, a participant who causes significant damage to other participants of the LLP may not cause damage to the LLP itself, but causing significant damage to the LLP always has a negative impact on the other participants. 
 

The process of compulsory redemption of a share in LLP

1. Violation detection: When one of the participants of the LLP violates its obligations or conditions established by law or statutory documents, this becomes the basis for the compulsory redemption of the share.
    
2. Decision of the general meeting: The general meeting of LLP participants meets to discuss the situation. At this meeting, a decision is made on the need to forcibly buy out the share of the violating participant. Such a decision requires a qualified majority of three-fourths of the votes of the LLP participants present and represented at the meeting, unless the LLP's charter requires a greater number of votes or unanimity for their adoption. A participant whose share is forcibly redeemed does not participate in the voting and the number of votes owned by him is not taken into account in the calculation.
    
3. Court proceedings: After the decision is made at the general meeting, the LLP files a lawsuit with the court demanding a compulsory buyout of the share. The claim indicates the reasons and provides evidence of the violation. Litigation is an important stage, as it is the court that makes the final decision on compulsory buyout.
    
4. Valuation of the share: To determine the market value of the share that needs to be purchased, the court may appoint an independent appraiser. The assessment is carried out taking into account the current financial condition of the LLP and the participant's share in the authorized capital.
    
5. A court decision: The court considers the evidence presented and makes a decision. In case of recognition of violations on the part of the participant, the court satisfies the claim and obliges him to sell his share. The court decision concerns only the obligation to buy out the share, and not its value.
    
6. Redemption of shares: After the court decision is made, the LLP or the remaining participants buy out the share of the violating participant at the market value established by the appraiser. Funds for redemption are transferred to the participant whose share was repurchased.

The process of compulsory redemption of a stake in an LLP in the Republic of Kazakhstan is a complex and multi-component process that requires compliance with all legal procedures and the availability of evidence. Participants should be prepared for lengthy litigation and evaluation procedures.

Author: Alibek Slan

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