Matter note: shareholders' agreement terms CIS

A shareholders' agreement for a joint venture with a CIS (Commonwealth of Independent States — the group of former Soviet republics, including Kazakhstan, Uzbekistan, Azerbaijan and others) counterparty involves a structural question that rarely surfaces in standard term sheets: whose law governs the document, and where does the dispute clause actually point when the relationship breaks down? Those two choices, more than any commercial term, determine whether the agreement is enforceable when it matters.

This note describes an anonymised matter handled through our corporate-counsel desk. The identifying facts have been removed. The legal sequence, the turning point and the lesson are real.

The situation and the constraint

The matter arrived in late autumn. A mid-market group with its principal holding entity in Hong Kong had agreed in principle to enter a joint venture with an industrial counterparty incorporated in a Central Asian CIS jurisdiction. The commercial terms were largely settled: equity split, board composition, dividend distribution, reserved matters. A term sheet had been signed.

What had not been settled – and what the counterparty's local advisers had drafted around without resolving – was the governing law and the dispute mechanism. The counterparty's first draft used the law of the local jurisdiction and named a local arbitration body. That was a natural position from the counterparty's vantage point. It was not an acceptable one from the Hong Kong group's.

The constraint was structural. The joint venture company was to be incorporated in the CIS jurisdiction, operating assets would sit there, and the majority of employees and revenues would be local. A purely offshore governing law with no connection to the seat of operations was unlikely to be respected by local courts in the event of a dispute over the operating entity. At the same time, a purely local governing law gave the Hong Kong group no neutral ground and no reliable enforcement path against its own equity interest.

That tension – between the operational reality of a locally incorporated entity and the Hong Kong group's need for a neutral and enforceable legal position – defined the entire matter.

The issue and the route chosen

The core issue was forum and governing law: not because the parties expected to dispute, but because the answer would shape every other term. Reserved matters, transfer restrictions, deadlock provisions and exit mechanisms are paper rights if the governing instrument cannot be enforced against a counterparty who has home-court advantage.

We reviewed the position under several candidate governing laws. English law, as a mature common-law system with well-developed shareholders' agreement jurisprudence, was the first candidate. Hong Kong law was the second – familiar to our client and similarly well-developed. A neutral third-jurisdiction civil-law system offered by the counterparty was the third.

The route chosen was English law as the governing law of the shareholders' agreement, with arbitration as the dispute mechanism seated in a neutral common-law jurisdiction. This combination served three purposes. First, English law is widely recognised across CIS jurisdictions as a sophisticated, commercially understood governing law for cross-border commercial contracts; it carries practical credibility that a purely domestic system may not. Second, an arbitral award from a New York Convention (the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards) member state is enforceable in substantially all CIS jurisdictions, which are Convention members. Third, separating the governing law from the seat of the operating company preserved the parties' ability to enforce the agreement outside the local court system altogether.

The shareholders' agreement itself was structured to operate on two levels. The first level governed the relationship between the shareholders directly – equity rights, information, reserved matters, pre-emption, tag and drag. The second level addressed the operating company through the constitutional documents – the articles of association or equivalent local instrument – which were drafted under local law by counsel admitted in the relevant CIS jurisdiction.

That two-level architecture is the standard solution to the constraint described above. The shareholders' agreement sits above the company; it is governed by the parties' chosen law. The company's constitution is a local document and does not need to carry the enforcement weight. When the two conflict, the shareholders' agreement controls the parties; the local constitution controls the company as a matter of local corporate law.

For a comparative view of how this architecture is applied in a different jurisdiction context, our guide on shareholders' agreement terms for the Singapore joint venture sets out the analogous approach in a common-law offshore seat.

The sequence and the turning point

The sequence ran as follows. We received the counterparty's draft and the existing term sheet. We produced a marked-up position paper addressed to the governing-law and dispute clauses first, before engaging on the commercial terms. That sequencing was deliberate: the commercial terms would be interpreted by reference to the governing law, and negotiating them in a legal vacuum would create ambiguity later.

The counterparty accepted the principle of English law relatively quickly. This is not unusual. CIS-based industrial and commercial groups with cross-border financing experience are generally comfortable with English law as the governing law of inter-party agreements; they encounter it in loan documentation, offtake contracts and equipment supply arrangements. The counterparty's own financing arrangements with international lenders almost certainly used English law already.

The dispute clause was harder. The counterparty resisted arbitration seated outside the CIS jurisdiction, initially proposing a local institutional centre. We assessed that centre against the standard criteria: independence of the institution, quality of available arbitrators with international commercial experience, and – critically – the enforceability of its awards in Hong Kong and in third countries through the New York Convention. On the last point, the position was less clear than for the major established seats. That uncertainty was the turning point.

We presented that analysis to both principals. The counterparty's principals – not their local legal team – understood the commercial risk: an award that could not be enforced in Hong Kong or in any European jurisdiction was worth less to the Hong Kong group as a counterparty assurance. Both parties had an interest in a mechanism that worked in both directions. The parties agreed on a well-established international arbitration seat with an institutional set of rules. The specific institution was selected after considering rules, costs and likely arbitrator availability for a matter with a Central Asian element.

With the governing-law and dispute clauses settled, the remaining commercial terms moved quickly. Reserved matters were agreed by reference to the standard English-law market approach, adapted for the local regulatory requirements that the locally admitted counsel had identified. The deadlock mechanism – a buy-sell or shotgun clause (a mechanism requiring one party to name a price at which either side may buy or sell) – was included with a carve-out for deadlocks arising from a breach of local regulatory requirements, where the remedy runs through the local court in the first instance.

Execution was coordinated between our desk and the locally admitted team on the constitutional documents. The signing process used electronic execution under English law, consistent with market practice for cross-border commercial agreements where a physical signing ceremony is not required.

Our corporate counsel practice routinely manages this kind of cross-desk coordination on CIS and Greater China facing joint ventures.

Day-two operating reality: what the agreement actually had to do

The governing-law and forum clause is settled at signing. Day two begins immediately. A shareholders' agreement that is legally sound at execution can still fail operationally if it does not account for the day-to-day governance of a company operating in a CIS jurisdiction under local corporate law.

Three points required specific attention in this matter. First, the reserved matters list had to be calibrated against what the local law actually allowed a board to do without a shareholder vote. If the local corporate law requires a general meeting for a matter that the shareholders' agreement reserves to a board decision, the two instruments are in conflict. That conflict does not resolve in favour of the shareholders' agreement at the operating level; it resolves through local corporate law, which may require additional steps. The solution here was to run the reserved matters list past locally admitted counsel and adjust accordingly.

Second, the information rights were drafted to require the delivery of financial information in both the local statutory format and in an international accounting standard format. CIS jurisdictions generally maintain their own accounting standards. A Hong Kong holding company managing group consolidation needs information in a form it can use. That dual-format obligation was a negotiated point; the counterparty accepted it with a reasonable additional preparation period.

Third, the transfer restrictions – specifically the pre-emption and drag-along provisions – had to be reflected in the local constitutional documents to bind the company, not merely the shareholders inter se. Local counsel confirmed the mechanism for achieving this under local corporate law. Without that step, a transferee of shares could argue that the pre-emption right is a contractual obligation between the shareholders only and does not restrict the company from registering a transfer.

None of these points is unique to the CIS. They arise in any two-level shareholders' agreement structure where the company sits in a different jurisdiction from the governing law of the inter-party agreement. What the CIS context adds is the need for locally admitted counsel with specific knowledge of the relevant jurisdiction's corporate law – not generic post-Soviet law, but the specific jurisdiction where the operating company is incorporated. The CIS is not a single legal system; Kazakhstan, Uzbekistan, Azerbaijan and Georgia, for instance, have materially different corporate law regimes.

For a comparison of how analogous supply and operational contracting issues arise with a Mainland China counterparty, see our guide on supply or manufacturing contracts with a Mainland China party.

The qualitative outcome and the transferable lesson

The shareholders' agreement was executed. The joint venture company was incorporated under local law. The constitutional documents were aligned with the shareholders' agreement to the extent local law permitted. The matter closed on schedule.

The transferable lesson is not about the CIS specifically. It is about the sequence of decisions in any cross-border joint venture where the operating entity sits in a jurisdiction with a different legal tradition from the Hong Kong holding group's home forum.

Governing law and dispute resolution are not administrative points to be resolved in the final drafting round. They are the load-bearing clauses of the agreement. Every commercial term – the reserved matters, the deadlock mechanism, the exit provisions – is interpreted by reference to the governing law and enforced through the dispute mechanism. Getting those clauses right before engaging on the commercial terms is not conservatism. It is the correct sequence.

The second lesson is about the two-level architecture. A shareholders' agreement governed by English law and seated for arbitration in a neutral centre does not, by itself, solve the problem of a company incorporated under local law. The constitutional documents must track the shareholders' agreement on the points that matter: transfer restrictions, reserved matters, the board composition. That tracking requires locally admitted counsel in the operating jurisdiction. It also requires the transaction to budget enough time for that coordination.

A mid-market deal done quickly, on a compressed timeline, with only the inter-party agreement and no attention to the constitutional documents, is a deal that has created rights on paper and transferred the risk of enforcing them to a future dispute. That is the most common error our desk sees on inbound CIS matters – not the governing-law choice itself, but the gap between the shareholders' agreement and the company's local constitution.

The contextual bridge for any group approaching a similar matter: the standard position described above applies where the operating entity and the shareholders' agreement are in different legal systems. Your matter turns on the specific jurisdiction of incorporation, the local corporate law applicable to the operating entity, and the alignment between the two levels of documentation. That is where the outcome is determined.

For a structured read on your cross-border joint venture position and the governing-law and forum options, write to us at info@lockhartyip.com.

Related practices

Corporate Counsel – cross-border entity structuring, JV documentation and governance
Disputes & Arbitration – cross-border enforcement and international arbitration strategy

Frequently asked questions

How long does drafting shareholders' agreement terms for a CIS joint venture usually take?

The timeline varies with the complexity of the commercial terms and the coordination required with locally admitted counsel in the CIS jurisdiction. In our cross-border practice, the governing-law and dispute clauses are agreed first – often within a few negotiation rounds – and the commercial terms follow. Constitutional document alignment adds time and depends on the responsiveness of local counsel and the relevant registry. Parties should plan for a realistic window and avoid compressing the local-law coordination step.

Which jurisdiction's law applies to shareholders' agreement terms for a CIS joint venture?

The governing law of a shareholders' agreement is a matter of party choice in most jurisdictions, and the parties may select any system with a genuine connection to the transaction or the parties. For CIS joint ventures with a Hong Kong group, English law is a common choice: it is widely recognised in CIS commercial practice, has well-developed shareholders' agreement jurisprudence, and supports international arbitration enforcement. The operating company's constitution is a separate document governed by the local corporate law of the CIS jurisdiction of incorporation.

What is the first step in shareholders' agreement terms for a CIS joint venture?

The first step is agreeing the governing law and the dispute mechanism – before engaging on the commercial terms. Every reserved matter, deadlock provision and exit clause is interpreted by reference to the governing law and enforced through the dispute mechanism. Resolving those foundational points early avoids the ambiguity that arises when commercial terms are drafted in a legal vacuum. In parallel, locally admitted counsel in the relevant CIS jurisdiction should be engaged to assess what the local corporate law permits and requires at the constitutional document level.

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

Matter note: shareholders' agreement terms for the CIS joint venture