How to approach shareholders' agreement terms for the CIS joint venture

A joint venture reaching across the CIS (the Commonwealth of Independent States, the grouping of post-Soviet republics including Russia, Kazakhstan, Uzbekistan, Azerbaijan and their neighbours) and Hong Kong does not fail on the business logic. It fails on the document. Specifically, it fails on the shareholders' agreement: the governing-law clause that turns out to be unenforceable, the deadlock mechanism that nobody can trigger, the exit provision that assumes a functioning local court. The commercial relationship is solid on day one. By day two hundred and fifty, the structural gaps are visible.

Shareholders' agreement terms for a CIS joint venture require a Hong Kong holding layer, a governing law chosen for international enforceability, a forum clause directing disputes to a neutral arbitral seat, and operating provisions calibrated to the actual regulatory and enforcement environment of the relevant CIS jurisdiction. The Companies Ordinance (Cap. 622) and the Arbitration Ordinance (Cap. 609) together provide the Hong Kong side of that architecture. The CIS-side terms must account for local corporate-law constraints, currency controls and the practical reach of the courts or arbitral bodies in the relevant state.

This guide sets out the practical sequence for in-house counsel and principals approaching this negotiation. It covers the decision points, the gate at each step, the structural mistakes that appear consistently in our cross-border practice, and a checklist before signature.

What decision does the reader actually face at the start?

The first question is not which clause to use. It is where the joint venture sits in the structure and which law governs the entity that holds the parties' rights. That choice determines everything downstream.

A CIS–Hong Kong joint venture typically takes one of three structural forms. First, the parties incorporate directly in the CIS jurisdiction and sign a shareholders' agreement governed by local law. Second, they hold through an offshore entity – a BVI or Cayman holding company – and the shareholders' agreement governs that offshore vehicle. Third, they use a Hong Kong company as the holding layer, with the shareholders' agreement governed by Hong Kong law and disputes referred to Hong Kong-seated arbitration. The third model is the one we most consistently recommend for cross-border joint ventures with a CIS element, for reasons this guide develops. The first model is the most commonly used and the most consistently problematic.

The decision is not purely legal. It is commercial. Where will the operating assets sit? Where will revenues be collected? Which party needs enforcement comfort, and in which jurisdiction? The answers to those questions drive the structural choice, and the structural choice drives the governing-law and forum selection. Get the structure wrong, and no amount of careful drafting in the shareholders' agreement corrects it.

Our desk sees this most acutely in joint ventures where a Hong Kong or international partner has contracted directly into a CIS-law entity. The local partner understands the local system. The international partner does not, and the document reflects that asymmetry.

Step 1: Choose the holding layer before drafting begins

Before any term sheet is agreed, the parties must resolve the structural question. This is the gate for everything that follows.

A Hong Kong holding company offers a common-law jurisdiction, a well-tested corporate statute in the Companies Ordinance (Cap. 622), access to the HKIAC arbitration seat for dispute resolution, and a holding position above the CIS operating entity. The shareholders' agreement governs the Hong Kong company. The relationship between that company and its CIS-incorporated subsidiary is then managed through a separate set of operating documents – articles, a distribution policy, a management agreement – each governed by the relevant local law.

This separation matters practically. The parties' rights against each other – the pre-emption mechanism, the drag-and-tag provisions, the deadlock resolution, the put and call options – are all enforced in Hong Kong or at arbitration, under Hong Kong law. The operating subsidiary functions under its local corporate statute, which the parties cannot contract around. Keeping those two layers distinct avoids the common error of embedding Hong Kong-style structural terms into a CIS corporate document that has no mechanism to give them effect.

Where a BVI or Cayman vehicle sits between the Hong Kong company and the CIS entity – as is common in larger transactions – the economic-substance regime (the requirement in those offshore jurisdictions to maintain genuine economic activity) must be planned for early. That is a separate piece of structuring, but it affects the holding-layer choice and should not be left to the tax adviser after the shareholders' agreement is signed.

Gate check: Do all parties agree on the entity that the shareholders' agreement will govern? Is that entity incorporated and in good standing? If not, no drafting should proceed.

Step 2: Agree the governing law and forum clause

This is the most contested and most consequential clause in any cross-border joint venture agreement. It is also the clause where international partners most often accept a position they should not.

For a CIS–Hong Kong joint venture, the standard approach on our desk is to provide for Hong Kong law as the governing law of the shareholders' agreement, with disputes referred to arbitration seated in Hong Kong under the HKIAC Administered Arbitration Rules (2024 Rules, effective 1 June 2024). Hong Kong courts apply the common law to contractual interpretation. Hong Kong-seated arbitral awards are enforceable under the New York Convention in the states that are contracting parties to it. Several CIS states – including Kazakhstan, Uzbekistan and Azerbaijan – are parties to the New York Convention, which materially expands enforcement reach.

Russia presents a distinct position. Enforcement of foreign arbitral awards in Russia has become more unpredictable in recent years, and parties should take separate advice on the current enforcement environment before selecting a forum. The same applies to Belarus. In both cases, the forum clause should be chosen after, not before, a careful assessment of where the counterparty's assets actually sit and whether an award could reach them.

The CIS-law alternative – submitting to the jurisdiction of the local courts or to a domestic arbitral body – is sometimes proposed by the local partner as a condition of signing. In-house counsel should understand what that concession involves. CIS civil-law courts apply procedural and substantive rules that differ significantly from the common law. Court timelines are generally longer. Recognition and enforcement of CIS judgments outside the CIS is not straightforward. A judgment from a Kazakhstan commercial court, for instance, is not automatically recognisable in Hong Kong, while a Hong Kong-seated arbitral award is enforceable in Kazakhstan under the New York Convention. The asymmetry is significant.

Where the local partner insists on a CIS governing law for the operating-level documents, that is often acceptable and sometimes sensible. The question is whether the shareholders' agreement – governing the holding-level relationship – also submits to that law. Our consistent advice is that it should not, and that the negotiation should be on the forum and governing-law clause, not on the structural tier.

Gate check: Is the governing-law and forum clause finalised and legally effective in both the chosen seat and the relevant CIS jurisdiction? Have both parties' counsel confirmed the clause is not excluded by any mandatory local-law provision?

Step 3: Draft the operating provisions for the CIS reality

Once the governing law and forum are fixed, the body of the shareholders' agreement must be drafted to reflect the operating environment of the specific CIS jurisdiction involved. This is where generic precedents from English or Singapore joint-venture agreements cause the most damage.

Consider the following consistently problematic provisions.

Pre-emption and transfer restrictions. Most CIS corporate statutes include statutory pre-emption rights on transfer of shares in a limited-liability company. Where the shareholders' agreement imposes additional contractual pre-emption, the two sets of rights must operate consistently. If the statutory pre-emption period under the local law is, say, thirty days, and the shareholders' agreement specifies a different period, the mismatch creates uncertainty about which timeline governs. Verify the statutory position in the specific jurisdiction and calibrate the contractual provisions accordingly.

Deadlock and reserved matters. A deadlock clause that triggers a buy-sell mechanism is only as good as the ability to value the shares and close the transfer. In a CIS context, valuation methodologies are sometimes constrained by local regulatory requirements. Currency controls – particularly in Uzbekistan, Tajikistan and, in different forms, Russia – can delay or prevent the settlement of a buy-out. The deadlock mechanism should contemplate a realistic exit timeline. A provision requiring completion in thirty days of a buy-out that requires central-bank approval is not a functioning mechanism.

Dividend and distribution provisions. Many CIS jurisdictions impose withholding tax on dividends paid to foreign shareholders, subject to double-taxation treaty relief. The shareholders' agreement should not specify a fixed distribution policy without first confirming the treaty position between the CIS state and the jurisdiction of the holding company. Hong Kong has concluded double-taxation arrangements with several CIS states – the position should be verified on the specific facts. Where a withholding tax applies and no treaty relief is available, the economics of the joint venture change, and the distribution clause should reflect that.

Intellectual-property ownership. Where the joint venture will develop or use intellectual property, the ownership structure – at the holding or operating level – must be decided at the term-sheet stage, not in the shareholders' agreement drafting. Several CIS jurisdictions restrict the assignment or licensing of certain categories of IP to foreign entities. If the shareholders' agreement assumes that the Hong Kong holdco owns the IP, and local law prevents that, the document creates a promise that cannot be performed.

Gate check: Has each key operating provision been reviewed for compatibility with the mandatory corporate law of the relevant CIS jurisdiction? Has local counsel confirmed the position on currency controls, statutory pre-emption and dividend withholding?

How does the Hong Kong–CIS cross-border interface actually work in practice?

The cross-border interface is where the document meets reality. Understanding how it works prevents the most expensive errors.

A Hong Kong holding company above a CIS operating entity is a common structure in our cross-border practice, and it functions well when the layers are cleanly separated. The shareholders' agreement governs the Hong Kong layer. A separate set of documents – the constitutional documents of the CIS operating entity, a management agreement, a services agreement if the Hong Kong company provides management services – governs the operating layer. Each set of documents is governed by its own proper law.

The enforcement chain runs as follows. If a dispute arises between the shareholders, the arbitration clause in the shareholders' agreement is invoked. The arbitral proceedings are seated in Hong Kong. An award is issued by the HKIAC tribunal. The award creditor then enforces the award: in Hong Kong, by registration with the Court of First Instance; in the relevant CIS jurisdiction, through the local recognition-and-enforcement procedure under the New York Convention. The enforceability of that award in the CIS state depends on whether the state is a Convention party, whether any of the recognised grounds for refusal apply, and whether the counterparty has assets that can be reached.

For CIS states that are New York Convention parties, this route is generally more reliable than attempting to enforce a foreign court judgment, which would require a separate mutual-recognition treaty or an application through the local conflict-of-laws rules. The arbitral route, while not frictionless, is the stronger enforcement path. That is why the forum clause matters so much.

What happens at the operating level when the relationship sours? The holding-level shareholders' agreement cannot compel the local directors of the CIS operating entity to take a specific action if local corporate law does not permit it. A deadlock at the holding level – say, both parties voting against each other on a board resolution – does not automatically produce a resolution at the subsidiary level. The shareholders' agreement should include provisions that oblige the parties to exercise their shareholder rights in the CIS entity consistently with the agreement. But those provisions are only as good as the enforcement mechanism behind them, which loops back to the forum clause.

We regularly advise parties entering this structure that the document-signing moment is not the moment of maximum legal exposure. The maximum exposure is in the first two years of operation, when the operating entity is generating real activity, the relationship is under commercial pressure, and the weaknesses in the agreement become visible. Draft for year two, not for day one.

The sequence above describes the standard position. Your matter turns on the specific jurisdictions engaged, the identity and enforceability of the counterparty's assets, and the order of steps in both the corporate and arbitral chain – which is where the route is won or lost.

To discuss how the Hong Kong–CIS structure applies to your joint venture, contact us at info@lockhartyip.com.

What are the most common mistakes and how does the sequence avoid them?

Three errors appear with consistent frequency in CIS joint venture documents that come to us for review or salvage.

First: the governing-law clause is ineffective. Parties choose English or Hong Kong law as the governing law but incorporate the joint venture as a CIS-law entity. The CIS corporate statute then overrides the contractual choice on the matters it treats as mandatory – pre-emption, voting mechanics, liquidation priority. The shareholders' agreement provisions on those matters do not operate as intended. The fix is structural: the shareholders' agreement should govern a holding entity, not the CIS operating entity directly. The CIS operating entity's constitutional documents are then calibrated to local law.

Second: the deadlock mechanism has no exit. Buy-sell clauses drafted for English-law joint ventures assume a liquid market, a straightforward valuation, and a clean completion. In a CIS context, none of those assumptions may hold. Currency controls can prevent settlement. Valuation can be disputed through local proceedings. The buy-out may require regulatory approval that neither party has contemplated. The fix is to draft a deadlock mechanism that is realistic for the specific jurisdiction: longer timelines, regulatory approval conditions, an alternative wind-down route if the buy-out cannot close.

Third: the New York Convention is assumed but not checked. The forum clause references HKIAC arbitration. The award creditor assumes the award is enforceable in the CIS state. Nobody checked whether the state is a Convention party, whether it has a reservation limiting Convention enforcement to commercial matters, or whether local courts have a track record of applying the grounds of refusal broadly. The fix is to conduct a jurisdiction-specific enforcement analysis before the forum clause is agreed, not after a dispute arises.

What foreign counsel often miss is that CIS joint ventures are not a homogeneous category. Kazakhstan, Uzbekistan and Azerbaijan are each distinct legal environments. What is true for a Kazakh counterparty may not be true for a Russian or Uzbek one. The shareholders' agreement must be tailored to the specific CIS jurisdiction involved, not to a generic "CIS" assumption.

For reference on how the same structural issues arise in a different cross-border context, see our guide on corporate restructuring across Hong Kong and the UAE, where the governing-law and enforcement questions take a parallel form.

A micro-scenario: the Kazakh–Hong Kong JV and the deadlock that almost wasn't

Consider a mid-market manufacturing joint venture between a European group with a Hong Kong holding entity and a Kazakh industrial partner. The shareholders' agreement was drafted on an English-law precedent, governed by Hong Kong law, and referenced HKIAC arbitration. Kazakhstan is a New York Convention party. So far, so good.

The problem arose in the deadlock provision. The buy-sell mechanism required completion within sixty days of a deadlock trigger. The parties had not verified that the transfer of the Kazakh operating entity's shares required approval from the competition regulator, which carried a statutory review period that could extend beyond sixty days. The deadlock mechanism, as drafted, could not close within its own timeline.

The matter came to us eighteen months into the joint venture, when a genuine deadlock had arisen and neither party could trigger an exit that actually functioned. The parties ultimately renegotiated the mechanism, extending the timeline and inserting a regulatory-approval condition. The negotiation was expensive and time-consuming. The fix was straightforward if it had been incorporated in the original drafting. The gate check at Step 3 – specifically, confirming the statutory transfer-approval requirement – would have caught it.

This is the year-two exposure that the shareholders' agreement must be drafted to address. It does not arise from bad faith. It arises from precedent-driven drafting that has not been adapted to the jurisdiction.

Step-by-step decision checklist before signature

The following checklist is not a substitute for legal advice. It is a structured prompt for in-house counsel before the shareholders' agreement is signed.

Structure. Is the shareholders' agreement governing a Hong Kong or offshore holding entity, or a CIS-incorporated entity directly? If the latter, has local counsel confirmed that the governing-law and forum-selection clause is effective and not overridden by mandatory local corporate law?

Governing law and forum. Is the governing law of the shareholders' agreement the law of a jurisdiction whose courts or tribunals are genuinely accessible to both parties? Is the arbitral seat in Hong Kong? Has the HKIAC arbitration clause been reviewed by counsel familiar with the HKIAC Administered Arbitration Rules in their current form?

New York Convention enforcement. Is the relevant CIS jurisdiction a party to the New York Convention? Has a jurisdiction-specific enforcement analysis been conducted? Are there reservations or local judicial practices that narrow Convention enforcement?

Operating provisions and local law. Have the pre-emption mechanics, deadlock timelines and buy-out provisions been reviewed by local counsel in the relevant CIS jurisdiction? Do they account for statutory pre-emption periods, currency controls and any regulatory approval requirements for share transfer?

Dividend and tax. Has the withholding-tax position been confirmed, including any applicable double-taxation arrangement between the CIS state and Hong Kong? Does the distribution clause in the shareholders' agreement reflect the actual post-tax economics?

IP and regulatory. Is intellectual-property ownership placed at the level that local law permits? Are there sector-specific regulatory constraints on foreign ownership that affect the structure or the operating provisions?

Day-two operating reality. Does the agreement address the mechanics of how decisions at the holding level translate into action at the CIS operating level? Are the directors of the operating entity under a contractual obligation to act consistently with the holding-level agreement, and is that obligation enforceable?

If an earlier structuring attempt or shareholders' agreement has produced a stalled or adverse result – a deadlock mechanism that cannot be triggered, a governing-law clause that is disputed, an enforcement route that has not produced recovery – a structural review can identify where the failure arose and what routes remain open.

To discuss your specific joint venture position and the cross-border enforcement options, write to info@lockhartyip.com.

For reference on how shareholders' agreement terms operate in the Mainland China joint-venture context, see our related matter note on shareholders' agreement terms in the Mainland China joint venture.

For the full scope of our corporate-counsel work across cross-border structures, see the corporate counsel practice page.

Related practices

Related practices

• Corporate Counsel – cross-border joint venture structuring and corporate governance
• Disputes & Arbitration – Hong Kong-seated arbitration and CIS enforcement of awards
• Holding Structures – Hong Kong and offshore holding layers for CIS-facing groups

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