Where shareholders' agreement terms for the CIS joint venture stands now

A joint venture between an Asian sponsor and a CIS-based partner looks straightforward on the term sheet. It rarely stays that way past the first governance dispute. The shareholders' agreement is where the commercial understanding meets the legal architecture – and for structures with one foot in a Commonwealth offshore centre and the other in a civil-law CIS jurisdiction, the architecture matters more than most sponsors appreciate at signing.

Shareholders' agreement terms for a CIS joint venture are governed by whichever law the parties choose – most commonly Hong Kong law, English law, or the law of an offshore seat such as the BVI – but the day-two operating reality is shaped by mandatory local rules in the CIS jurisdiction where the operating entity sits. The governing-law clause and the forum-selection clause together determine whether protections negotiated at the holding level will hold when the relationship breaks down. The interaction between the two systems is where the real risk sits.

This analysis sets out the current cross-border position: what is actually at stake commercially, how the governing-law and forum interface operates across Hong Kong and the CIS, where the comparative read produces surprises, and where – in our view – the risk sits now for ventures that have not revisited their documentation since inception.

What is actually at stake commercially

The shareholders' agreement for a CIS joint venture is not a housekeeping document. It is the instrument that allocates control, defines exit, and determines what happens to value when the principals disagree. For a holding structure with an offshore entity above a CIS operating company, the agreement operates at two levels simultaneously – and those two levels are not always aligned.

At the holding level, the shareholders' agreement governs the relationship between the equity holders. It sets deadlock mechanisms, transfer restrictions, drag and tag rights, and the conditions for distributions. At the operating level, the charter documents of the local entity – the ustav (the constitutional document of a CIS limited-liability or joint-stock company, roughly equivalent to articles of association) – govern what the local directors can do, what requires shareholder consent, and how the local register is updated when ownership changes.

The commercial stakes are significant. A CIS operating company in a sector requiring regulatory approval – natural resources, financial services, infrastructure – may have a licence tied to its ownership structure. A change of control at the holding level that is perfectly valid under the offshore shareholders' agreement may trigger a licence condition or a mandatory notification at the local level. The sponsor who negotiated a clean exit right may find that the exit cannot be completed without local regulatory consent that was not contemplated at signing.

In our cross-border practice, we see this structural gap most often in ventures where the foreign sponsor engaged offshore counsel to draft the holding-level documents and assumed that local compliance would be handled operationally. The assumption is understandable. It is also the single most common source of disputes in the CIS joint-venture context.

What is at stake, then, is not just the enforceability of individual clauses. It is the coherence of the overall structure – the degree to which the protections negotiated at the holding level translate into operational reality at the local level, and the degree to which the local operating documents support rather than contradict the holding-level framework.

How does the governing-law clause actually function across the Hong Kong – CIS interface?

The governing-law clause in a CIS joint-venture shareholders' agreement performs a specific and limited function: it determines which law governs the contractual relationship between the parties to that agreement. It does not determine which law governs the charter documents of the CIS operating entity, the validity of transfers on the local register, or the mandatory corporate-law rules of the CIS jurisdiction in which the operating company is incorporated.

This distinction is well understood in theory. In practice, it is frequently collapsed. Sponsors negotiate the shareholders' agreement as if it governs the entire venture. The local operating entity is left to run on charter documents drafted at incorporation, often by local counsel working from a standard template, without reference to the protections agreed at the holding level.

Where Hong Kong law or English law governs the shareholders' agreement, the position is relatively predictable. Both systems will give effect to a well-drafted governing-law clause. A dispute between the parties to the agreement – the holding-level shareholders – will be resolved by reference to the chosen law. The courts of Hong Kong operate under the common-law system, with English as an official working language, and the doctrine of binding precedent provides a degree of certainty that the CIS civil-law systems do not always replicate.

The CIS jurisdictions – here meaning the major economies of Kazakhstan, Uzbekistan, Russia and the other post-Soviet states – are civil-law systems derived from the Soviet legal tradition, since substantially reformed and, in some cases, significantly modernised. Their corporate laws impose mandatory rules on the governance of locally incorporated entities. Those mandatory rules are not displaced by the choice of a foreign governing law in the shareholders' agreement. They operate in parallel, and they take priority for matters within their scope.

The practical consequence is that a shareholders' agreement governed by Hong Kong law and providing for HKIAC arbitration may be perfectly valid and enforceable between the parties at the holding level, while simultaneously failing to deliver the intended protections at the operating level because the local mandatory rules produce a different outcome.

To be concrete: a pre-emption right in the shareholders' agreement may be enforceable as a matter of contract between the parties. But if the ustav of the CIS operating company does not reflect an equivalent pre-emption right, a transfer of shares in the local entity that breaches the contractual pre-emption right may still be registered on the local corporate register. The aggrieved party is left with a damages claim – not a nullified transfer.

The forum clause and the enforcement architecture

The forum clause in a CIS joint-venture shareholders' agreement is, in many respects, the more consequential provision. A governing-law clause determines the rules. The forum clause determines who applies them and where the award or judgment can be enforced.

For CIS joint ventures structured through a Hong Kong or offshore holding entity, the standard practice has been to provide for arbitration – most commonly under the HKIAC Administered Arbitration Rules, with Hong Kong as the seat, or under the rules of another international arbitral institution. The 2024 HKIAC Administered Arbitration Rules, which came into effect on 1 June 2024, are the current instrument. Hong Kong is the default seat absent party agreement, and the Arbitration Ordinance (Cap. 609) – modelled on the UNCITRAL Model Law – governs the arbitral process.

The choice of HKIAC arbitration in Hong Kong provides genuine advantages for a CIS joint venture. Hong Kong's arbitral awards are enforceable in over 170 contracting states to the New York Convention. The major CIS jurisdictions are New York Convention contracting states. Enforcement of an HKIAC award against a party with assets in Kazakhstan, Uzbekistan or other CIS states is, in principle, available through the local courts' recognition and enforcement procedure.

In practice, enforcement in the CIS is not a formality. The local courts apply the New York Convention, but they also apply local procedural rules and public-policy exceptions. The public-policy exception has been interpreted broadly in some CIS jurisdictions. An award on a matter touching on regulated activities, natural resources, or state-adjacent counterparties may face greater scrutiny. This is not a reason to avoid HKIAC arbitration. It is a reason to structure the claim, the evidence, and the enforcement strategy with the local enforcement environment in mind from the outset – not as an afterthought.

Where the CIS counterparty is itself a state entity or a state-owned enterprise, the question of sovereign immunity is also live. The PRC Foreign States Immunity Law came into force on 1 January 2024 as a reference point for regional immunity practice; the CIS jurisdictions maintain their own immunity rules, which vary. A shareholders' agreement with a state or quasi-state CIS partner requires specific immunity-waiver language, and the scope of that waiver must be consistent with what the local mandatory law permits.

The interaction between the forum clause and the Mainland–Hong Kong judicial assistance regime is less direct for CIS joint ventures, but it is relevant where the structure involves a Mainland Chinese entity as a co-investor or co-sponsor alongside CIS and offshore parties. The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645), in force since 29 January 2024, facilitates recognition and enforcement of effective Mainland judgments in Hong Kong. For a mixed Mainland–CIS structure, the enforcement architecture must account for both the Mainland–HK channel and the New York Convention channel.

The sequence of enforcement steps matters. Counsel on our desk regularly see situations where an award creditor has obtained an HKIAC award but has not mapped the enforcement route to the jurisdiction where the assets actually sit. The award is the beginning of the process, not the end.

Comparative read: what Hong Kong law offers that CIS law does not, and vice versa

The choice of Hong Kong law to govern a CIS joint-venture shareholders' agreement is not arbitrary. It reflects a set of comparative advantages that are worth making explicit – and some limitations that are equally worth understanding.

Hong Kong law offers a well-developed body of commercial contract law, derived from English common law and extensively tested in the courts and in arbitration. For the key provisions of a shareholders' agreement – deadlock mechanisms, put and call options, drag-along and tag-along rights, representations and warranties – Hong Kong law provides a predictable and relatively sophisticated analytical framework. The common-law doctrine of contractual interpretation, the rules on implied terms, and the principles governing equitable remedies (including specific performance and injunctions) give the counterparty a set of tools that civil-law systems do not always replicate with the same precision.

For private-equity and institutional sponsors, Hong Kong law also offers familiarity. The major institutional investors in CIS ventures – including Asian development-finance institutions, regional funds, and cross-border sponsors – are accustomed to Hong Kong or English law documentation. Due diligence, legal opinions, and closing conditions are all calibrated to that framework.

The CIS jurisdictions, by contrast, offer their own set of features that should not be dismissed. Kazakhstan, in particular, has developed a sophisticated international financial centre – the Astana International Financial Centre (AIFC), which operates under an English common-law framework within Kazakhstan, with its own court system and arbitration centre. The AIFC regime is designed precisely to offer a common-law interface for ventures operating in the Kazakh market. For ventures with a significant Kazakh component, the AIFC framework is a genuine alternative to full offshore structuring, and it merits serious analysis.

Uzbekistan has undergone substantial commercial law reform over the past several years, with new joint-stock company and limited-liability company legislation, improved investor-protection mechanisms, and a more coherent approach to foreign investment. The direction of travel is positive. The day-two operating reality in Uzbekistan is materially different from what it was a decade ago, and structures that were designed for a more restrictive environment may benefit from review.

The practical read is this: Hong Kong law at the holding level remains the standard for reasons of predictability, enforceability, and investor familiarity. But the holding-level choice of law must be complemented by a rigorous review of the local operating documents in the relevant CIS jurisdiction, and the two levels must be made coherent. The structural work is not complete when the shareholders' agreement is signed.

The governing-law clause in context: what foreign counsel frequently miss

A recurring observation in our cross-border practice is that foreign counsel – including counsel from common-law systems outside Hong Kong – approach CIS joint-venture documentation with a set of assumptions that do not always survive contact with the local corporate law.

The first assumption is that the shareholders' agreement governs the venture. It governs the contractual relationship between the parties. The venture itself – the CIS operating entity – is governed by its local incorporation law and its charter documents. These are related but distinct things.

The second assumption is that the deadlock mechanism in the shareholders' agreement will operate as written. In a two-party joint venture with equal shareholding, deadlock is a genuine operational risk. The shareholders' agreement may provide for an escalation procedure, a casting vote, or a Russian-roulette mechanism. But if the ustav of the operating company does not contain a parallel mechanism, the deadlock at the operating level may not be resolvable without court intervention under local law – regardless of what the holding-level agreement provides.

The third assumption is that the transfer restrictions in the shareholders' agreement are self-executing. They are not. A transfer restriction that is contractually binding on the parties may not prevent a transfer being registered on the local corporate register if the transfer complies with the formal requirements of local law. The remedy for breach is damages – which may be inadequate if the concern is preventing a competitor from acquiring a stake in the operating entity.

A micro-scenario illustrates the point. A European sponsor held a 49% interest in a CIS manufacturing venture through a BVI holding entity. The shareholders' agreement, governed by English law with LCIA arbitration, contained a right of first refusal over the CIS partner's 51% interest. When the CIS partner sought to transfer its interest to a third party, the sponsor invoked the right of first refusal. The CIS partner accepted service of the notice and then completed the transfer on the local register before the contractual response period had expired, taking the position that the local corporate law did not recognise the contractual right of first refusal as a bar to registration. The sponsor obtained an arbitral award for breach of contract. Enforcement against the CIS partner's assets – which had been substantially restructured by the time the award was issued – took considerably longer and produced a materially different commercial outcome than the one the right-of-first-refusal clause was intended to deliver.

The lesson is not that contractual transfer restrictions are useless. It is that they must be backed by parallel protections at the local level – in the ustav – and, where possible, by structural mechanisms (such as share pledges, holdco-level restrictions, or regulatory conditions) that operate independently of the contractual right.

A second micro-scenario, from a different angle. A Hong Kong-based sponsor entered a joint venture in Central Asia in the resources sector through a Cayman Islands holding entity, with the shareholders' agreement governed by Hong Kong law and HKIAC arbitration as the forum. The venture required a regulatory licence at the local level. The licence conditions included a requirement to notify the local regulator of any change in the indirect beneficial ownership of the licensee. The shareholders' agreement contained a drag-along right exercisable by the majority. When the majority sought to exercise the drag-along to facilitate a sale to a new investor, the sale triggered the notification condition. The local regulator's review period was not accounted for in the drag-along timetable. The transaction completed several months later than planned, with cost and structuring implications that were not anticipated at the time the drag-along mechanism was drafted.

The interaction between the holding-level agreement and the local regulatory environment is a structural point, not a drafting point. It requires coordinated advice at both levels.

Where the risk sits now: our analytical read

The question of where the risk sits now for CIS joint ventures documented under Hong Kong or English law is not a single answer. It is a function of three variables: the vintage of the documentation, the current state of the local operating documents, and the degree to which the regulatory environment in the relevant CIS jurisdiction has changed since the venture was established.

Documentation vintage matters. A shareholders' agreement drafted before the most recent round of CIS corporate law reforms – in Kazakhstan, Uzbekistan, and others – may contain provisions that were adequate at the time but are no longer consistent with the current mandatory rules at the operating level. Pre-emption rights, consent thresholds, and director-appointment mechanisms are the most commonly affected provisions.

The local operating documents are the second variable. In our cross-border practice, we regularly encounter situations where the holding-level shareholders' agreement has been carefully maintained and amended over time, but the ustav of the CIS operating entity has not been updated since incorporation. The divergence between the two levels has grown silently. The first moment at which the divergence becomes visible is usually a governance dispute or a contemplated transaction.

The regulatory environment is the third variable. Several CIS jurisdictions have implemented or are implementing beneficial-ownership disclosure requirements, foreign-investment screening mechanisms, and sector-specific licence conditions that interact with the transfer provisions of the shareholders' agreement. A venture that was structured before these requirements came into effect needs to be reviewed against the current regime. The review is not a theoretical exercise. The consequences of a non-compliant transfer – revocation of a licence, regulatory fine, or enforced restructuring – are operational.

The risk, in our view, is concentrated in three areas. First, the gap between the contractual transfer restrictions and the local-register reality – addressed above. Second, the deadlock and governance provisions, which may not function as intended if the local operating documents do not mirror the holding-level framework. Third, the enforcement route for an HKIAC award into the relevant CIS jurisdiction, which requires advance mapping rather than post-award analysis.

The objection sometimes raised is that HKIAC arbitration and Hong Kong governing law provide sufficient protection through the award-enforcement mechanism of the New York Convention. That position overstates the certainty of New York Convention enforcement in the CIS context. Enforcement is available in principle. The practical outcome depends on the local courts, the nature of the award, and the location and nature of the assets against which enforcement is sought. The mechanism is a real and valuable tool. It is not a guarantee.

For ventures with a documented shareholders' agreement that has not been reviewed against the current local operating documents and the current regulatory environment, the appropriate step is a structured review at both levels. The review should be framed around the provisions that matter most in a breakdown scenario: transfer restrictions, deadlock mechanisms, exit rights, and the licence and regulatory conditions that interact with each.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. To discuss how the governing-law and forum analysis applies to your cross-border position, contact us at info@lockhartyip.com.

How does this interact with holding-structure and tax considerations?

A CIS joint venture structured through a Hong Kong or offshore holdco sits at the intersection of corporate counsel work and holding-structure analysis. The shareholders' agreement governs the equity relationship. The holding structure governs where the value is housed and how it is treated for tax purposes.

The interaction is direct. The exit provisions in the shareholders' agreement – the drag-along, the put option, the pre-emption rights – determine the form of the exit. The form of the exit determines whether the gain is realised at the holdco level or at the operating-company level, and in which jurisdiction. That determination interacts with the foreign-sourced income exemption (FSIE) regime in Hong Kong – the rules under which foreign-sourced dividends, interest, intellectual-property income, and disposal gains are either exempt or subject to profits tax, depending on whether economic-substance conditions are met.

For a Hong Kong holding entity above a CIS operating company, the FSIE regime has been in force since 1 January 2023 (as subsequently amended). The substance conditions for Hong Kong holdcos are a live issue for any venture considering a sale or restructuring. A disposal gain realised at the Hong Kong holdco level may be subject to profits tax if the relevant substance conditions are not met. The FSIE analysis should be part of the pre-transaction review, not a post-transaction discovery.

For larger multinational groups with consolidated revenue above EUR 750 million, the Hong Kong minimum top-up tax and the income-inclusion rule under Pillar Two apply for fiscal years beginning on or after 1 January 2025. CIS ventures that form part of a larger group need to account for the Pillar Two position at the holding-entity level.

The practical point is that the shareholders' agreement review should not happen in isolation from the holding-structure and tax review. A well-drafted exit mechanism that produces an adverse tax outcome is a structuring failure, not a documentation success. The two levels need to be reviewed together.

For coordinated advice on holding-structure and corporate-counsel matters, our practice works across both areas. Relevant guidance on holding structures through Hong Kong is available at our corporate counsel practice page.

If an earlier filing, structure or enforcement attempt produced an adverse or stalled result, a second read can identify the structural issue and the routes still open. Write to us at info@lockhartyip.com.

The objection handler: "the choice-of-law clause solves the problem"

The most common analytical error in CIS joint-venture documentation is the belief that a well-chosen governing-law clause – Hong Kong law, English law, New York law – resolves the cross-border risk. It does not. It resolves the choice-of-law question for the contractual relationship between the parties to the shareholders' agreement. It does not resolve the mandatory-law question for the CIS operating entity.

Civil-law systems – including all the major CIS corporate law regimes – apply a principle that the law of the place of incorporation governs the internal affairs of the company. That principle is not displaced by the choice of a foreign governing law in the shareholders' agreement. The ustav of a Kazakhstani or Uzbekistani limited-liability company is governed by the law of Kazakhstan or Uzbekistan, respectively. The shareholders' agreement governed by Hong Kong law and the ustav governed by local law coexist. Where they conflict, the local law governs for matters within its scope – which, in practice, means transfers, governance, and director authority.

The choice-of-law clause does solve a real and important problem: it gives the parties a predictable, neutral, and sophisticated legal framework for their contractual relationship. That is valuable. The error is in treating that solution as exhaustive.

The complementary steps – aligning the ustav with the holding-level protections, building structural rather than purely contractual transfer barriers, and mapping the enforcement route in advance – are the work that converts a well-drafted shareholders' agreement into a genuinely protective instrument.

Director duties and governance at the subsidiary level are a related dimension of this analysis. Relevant guidance is available in our briefing on director duties and governance for Hong Kong subsidiaries. For the data and IP dimensions of cross-border contracts, see our analysis on data confidentiality and IP clauses in cross-border contracts.

What a structured review should cover

A review of shareholders' agreement terms for a CIS joint venture at this stage of the market has a defined scope. It is not an exercise in re-negotiating the commercial terms. It is an exercise in identifying the gaps between the holding-level documentation and the operating-level reality, and closing those gaps before a dispute or transaction makes them consequential.

The review should cover, at minimum, the following areas.

• Governing-law and forum clause alignment – confirming that the chosen law is appropriate for the current stage of the venture, that the arbitral institution and seat remain the right choices, and that the immunity provisions are adequate for the counterparty type.
• Transfer restrictions and local-register protection – reviewing whether the contractual transfer restrictions are mirrored in the ustav of the CIS operating entity, and whether structural mechanisms (share pledges, holdco-level restrictions) provide independent protection.
• Deadlock and governance alignment – confirming that the deadlock and governance mechanisms in the shareholders' agreement are consistent with the consent thresholds and director-authority provisions in the ustav.
• Exit and drag-along mechanics – reviewing the exit provisions against the current regulatory environment in the relevant CIS jurisdiction, including licence conditions, beneficial-ownership disclosure requirements, and foreign-investment screening rules.
• Enforcement route mapping – identifying the jurisdiction(s) where the CIS counterparty holds assets and preparing a preliminary enforcement analysis, so that an award or judgment can be deployed without delay.
• FSIE and Pillar Two interaction – confirming that the exit mechanics produce the intended tax outcome under the current FSIE regime and, for larger groups, under Pillar Two.

The review is not a theoretical exercise. It is a practical preparation for the scenarios that actually arise: a disagreement over a distribution, a contemplated sale, a change of control at the local operating level, or a counterparty in financial difficulty. The time to identify structural gaps is before those scenarios arise, not during them.

Related practices

• Holding Structures – cross-border holding entity design and offshore centre analysis
• Disputes & Arbitration – HKIAC arbitration, award enforcement, and interim measures across Greater China and CIS jurisdictions

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Related

• Corporate Counsel
• Director Duties Governance Hong Kong Subsidiary Briefing
• Data Confidentiality Ip Clauses Cross Border Contracts Analysis

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.