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DISCLAIMER: The content of this presentation is intended only to provide a summary and general overview of the
SEFIL. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other
professional advice before acting or relying on any of the content. Your use of this presentation or the receipt of
any information from us or this presentation is not intended to create nor does it create an attorney-client
relationship between you and MahoneyLiotta. This presentation reflects the views of MahoneyLiotta and to our
knowledge and belief is factual as of the date of this presentation. No representation, express or implied, is made
as to the fairness, accuracy, completeness or correctness of information, opinions and conclusions contained in this
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be used or distributed beyond this limited audience.
Why?
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Proportional
60% Takeover
Bid29.9% Acquisition
*2 year guaranteed off-take at market price
*Infrastructure – Electricity, coal-haul highway project
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USD 250 Million pre-sold
coal to CHALCO. Market
price thereafter.
Competitors Others
The Fearful
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How? Mr. N. Enkhbold(Deputy Speaker of
the Parliament)
Ms. S. Oyun (CWG)
Mr. D. Odkhuu (DP)Mr. Kh. Narankhuu
(MPP)
Mr. R. Gonchigdorj(DP)
5 Member
Working Group
& Mr. N.
Batbayar (DP)
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Late April 2012
• First Internal Working Group Draft.
May 8-9 • Working Group Modifications.
May 10• Introduced to the Standing Committee of Parliament for its first reading.
May 10, 14, 15
• Further Modifications.
May 17• Enacted by Parliament.
June 19• Published.
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• Category I Investors – Foreign investors, their affiliated entities
or third parties who choose to “operate” in a sector of
strategic importance or conclude certain transactions listed in
the SEFIL with a business entity operating in a sector of
strategic importance.
• Category II Investors – State owned legal entities, entities with
state ownership, international organizations, their affiliated
entities or third parties who choose to “operate” in Mongolia
or “invest” into businesses, affiliated entities or third parties
carrying out any business operations in Mongolia.6
The Way it Works
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• The Catch All
Article 4.5 – Any transaction made outside the
territory of Mongolia that is relevant to the type of
transactions stipulated in Article 4.1 or 4.2 of the
SEFIL are subject to the SEFIL.
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Sectors of Strategic Importance
Resources Media & Communications Banking & Finance
Any other sectors named
by the Government of
Mongolia and approved
by Parliament
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The Regulators
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• Foreign Investment Regulations andRegistration Department of the Ministry ofEconomic Development (FIRRD),
• Government (Cabinet),
• Parliament.
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TransactionsApproving
EntityRelevant Article
Requirement
Providing the right to acquire one-third or more shares of business entity operating in sectors of strategic importance
FIRRD and Cabinet6.1.1 (subject to
4.7)Approval
Providing the right to carry out the executive management of a business entity operating in sectors of strategic importance unilaterally or to appoint the majority of the management team, or to appoint the majority of the board of directors without any preconditions
FIRRD and Cabinet 6.1.2 Approval
Providing the right to veto management decision of a business entity operating in sectors of strategic importance
FIRRD and Cabinet 6.1.3 Approval
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TransactionsApproving
EntityRelevant Article
Requirement
Providing the right to exercise management functions or determine decision of the management of business entity operating in sectors of strategic importance, and carry out its business operation
FIRRD and Cabinet 6.1.4 Approval
That may create a buyer or supplier monopoly at international and Mongolian mining raw material and commodities markets transactions
FIRRD and Cabinet 6.1.5 Approval
That may affect the market and price of mining export products of Mongolia
FIRRD and Cabinet 6.1.6 Approval
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TransactionsApproving
EntityRelevant Article
Requirement
Having consequences of diluting shareholding in business entities operating in sectors of strategic importance by entering into an agreement between others and itself, or affiliated entity or third party
FIRRD and Cabinet
6.1.7 Approval
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Shareholding Percentage
Trigger
Investment Trigger
Approving Entity Relevant Article Requirement
5% - 33.32% (less than 1/3)
None (no minimum or maximum investment)
FIRRD 8.1 Post Notice
33.33% - 49%None (no minimum
or maximum investment)
FIRRD and Cabinet4.7, 6.1, 6.1.1, 6.2,
7.1, 7.4 and 7.5Approval
> 49%investment at the time ≤ 100 billion
MNTFIRRD and Cabinet Same Approval
> 49%investment at the time > 100 billion
MNT
FIRRD, Cabinet & Parliament
Same Approval
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Criteria for Review by FIRRD and the Cabinet• whether any activity or nature of investment of the investor contradicts the national
security concept of Mongolia,
• whether the applicant meets conditions to abide by legislation of Mongolia and
established business codes,
• whether the investment contains elements of restraining competition in specific sector
and creates a monopoly;
• whether the investment causes a substantial effect on national budget revenue and other
policy activities of Mongolia;
• whether the investment causes a negative effect on the particular sector in Mongolia.
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Key Procedural ProvisionsTransaction agreed to with business entity operating in a sector of strategic importance
≤ 30 days
Request made to FIRRD through the business entity operating in a sector of strategic importance
≤ 45 days
FIRRD submits its proposal to the Cabinet
≤ 45 days
Cabinet renders decision and provides it to FIRRD
≤ 5 days
FIRRD notifies the foreign investor of the Cabinet's decision through the business entity operating in a sector of strategic importance
[1]Articles 6.2 and 7.1, SEFIL.[2]Article 7.4, SEFIL.[3]Article 7.5, SEFIL.[4]Article 7.6, SEFIL.
Between 5% and less than one-third requires reporting within 30 days from the
acquisition of shares.
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Other Considerations• Business entities operating in sectors of strategic importance shall:
• Give priority right to Mongolian national business entities when
procuring goods, works and services based on procedures approved by
the Cabinet.
•Defined as a business incorporated by a Mongolian citizen OR a
legal entity who is a Mongolian tax payer with more than 50% of its
shares held by a Mongolian citizen or legal entity.
• Withhold taxes of a Category I Investor who has entered into a
transaction provided for in Article 6.1.1 – 6.1.7 of the SEFIL, from any
payment made to another party in relation to the transactions, and remit
them to the state budget.
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Other Considerations• Any Category I Investor who has entered into a transaction provided for
in Article 6.1.1 – 6.1.7 of the SEFIL shall:
• Pay taxes in accordance with the tax legislation of Mongolia from
any payment made to another party in relation to the transactions
and work with the business entity operating in a sector of strategic
importance (as the withholder) to remit such taxes to the State
budget.
• The SEFIL equally applies to a Category I Investor that is incorporating a
new business entity that will operate in a sector of strategic importance.
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Non-Compliance
•Transactions will be deemed to be invalid.
•Discontinuation of the activities of the business
entity operating in the sector of strategic
importance including cancellation of any licenses
(i.e. minerals and others) held by such entity.
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Many Issues & No Regulations1. Definitional Lack of Clarity.
• No definition for “operating” which could lead to broad application (suppliers,
operating companies, license holders, etc.?). Is it tied to incorporation or a catch
all? If catchall, then overregulation. If tied to incorporation, then does it apply
only after the foreign investment threshold is met according to the Foreign
Investment Law (25% foreign shareholding)? If so, is Cabinet approval required
once the 25% threshold is met?
• No definition for “resources” in Article 5.1.1 which could lead to broad
application (petroleum, wind, energy?).
• No clarity on “relevant” in Article 4.5 for regulation of offshore transactions.
• No clarity on “continuous ties” in the Article 3.1.5 definition of third party.
•No clarity on the 100 billion MNT threshold (book value, market value, etc.?)
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Many Issues & No Regulations
2. Constitutionality of effective date of May 17, 2012 in question.
3. Severity of Punishment is significantly more extreme when compared to
non-compliance penalties associated with foreign investment rules in other
countries.
4. The timing for approval is extreme. Up to 125 days for Cabinet approval.
No indication on timing for Parliamentary approval.
5. No detail for appeals process if not approved.
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Many Issues & No Regulations6. Potential for negative impact on publically listed companies or companies
preparing to list either inside or outside the territory of Mongolia. As noted, any
transaction made outside the territory of Mongolia that is relevant to the type of
transactions stipulated in Article 4.1 or 4.2 of the SEFIL are subject to the SEFIL.
There are notice requirements to FIRRD for changes in shareholding from 5% -
33.32%, approvals required from the Cabinet for changes in shareholding from
33.33% - 100% (where the investment at the time is equal to or less than 100 billion
MNT), and approvals required from the Parliament for any changes in shareholding
from greater than 49% - 100% (where the investment at the time is greater than
100 billion MNT). As also addressed above the timing for such approvals can last for
months. Trading occurs on both local and foreign exchanges on a daily basis where
the value of shares increase or decrease at any given time. Given the complexity of
stock markets, it will not be possible for a listed company to comply with the notice
and approvals of the SEFIL.
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Many Issues & No Regulations7. Limitations to Obtain Financing. The SEFIL controls a wide range of transactions
which impact share transfers, the ability to dilute shareholding, the ability to control
board or management decisions and the ability to control operations of a business
entity operating in a sector or strategic importance. In many cases financiers require,
and business entities want to offer, options, warrants, securities convertible into
shares, or similar rights convertible into securities. Lenders and financiers often
require share pledges as security and in some cases require a degree of control over
the management and operations of a business entity, control of the board of directors
and veto rights either directly by the financier or by the Category I Investor. Their
ability and willingness to finance may depend on tight timing based on their own
financing and market cycles that do not coincide with the timelines of the SEFIL. It may
become much harder for business entities operating in sectors of strategic importance
to obtain financing crucial to their ability to operate.
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Many Issues & No Regulations
8. Effective Lock-up of the Mongolian Party. A Mongolian joint venture shareholder in a
business entity operating in a sector of strategic importance would need to obtain
Cabinet, and in some cases Parliamentary, approval to sell all or a portion of its/their
shares of the joint venture, or be strictly limited to selling its shares only to other
Mongolian parties (at what is likely to be for much less than selling on a foreign
exchange or to a Category I Investor).
9. One Bad Apple Spoils the Bunch. It is not uncommon for a business entity to be
engaged in diverse sectors either directly (one company holding diverse assets) or
through a string of subsidiaries (a parent holding several companies with diverse
assets). Given the scope of the SEFIL, it may now be practically impossible to segregate
assets to remove a business entity from falling under the category of a business entity
operating in a sector of strategic importance.
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Many Issues & No Regulations
10. Potential for Burdensome, Discriminatory or Unrealistic Requirements to Give
Priority to Mongolian National Business Entities. Waiting on Cabinet regulations.
11. License Transfer. The SEFIL is silent on the transfer of licenses in sectors of strategic
importance. However, the licensing agencies have been in self-paralysis for months,
even unwilling to transfer licenses to entities already in the same sector of strategic
importance. Ad hoc rules continue. Companies cannot even segregate their own assets
for financing.
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Many Issues & No Regulations
12. The SEFIL does not Clearly Address Collective Foreign Investment (a collective
threshold). It is not clear what will happen if three completely independent Category I
Investors were to each acquire just less than one-third of the shares of a business entity
operating in a sector of strategic importance (i.e. 33.32% each and 99.96% total), or, along
the same lines, if two completely independent Category I Investors were to each acquire
up to 33.32%, and by doing so collectively pass either the one-third or 49% thresholds.
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Current Impact
While the SEFIL did prevent the CHALCO transaction from occurring, the overall
impact to Mongolia’s reputation and economy, foreign investment and the
integrity of the rule of law has been sharply NEGATIVE, costing both Mongolia
and foreign investors millions of USD and creating serious reputational damage to
Mongolia’s investment climate.
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Further Reading
For an impartial report on the Mongolian Investment Climate outlining the
overall investment climate and the impacts of the SEFIL, please see the US
Embassy’s 2012 Mongolia Investment Climate Statement at
http://mongolia.usembassy.gov/root/media/pdf/2010-mongolia-investment-
climate-statement.pdf
Also, please feel free to visit our website at www.mlmongolia.com
Thank You
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