English version of draft law on investment is released

After Chalco’s proposed bid of SouthGobi, the Mongolian government moved quickly to prepare a law that gave authorities a say in deals of this kind. This week a draft of the law was released and was unofficially translated into English.


Draft

LAW OF MONGOLIA

… 2012 Ulaanbaatar

ON REGULATION OF FOREIGN INVESTMENT IN BUSINESS ENTITIES OF
STRATEGIC IMPORTANCE

CHAPTER ONE
GENERAL PROVISIONS

Article 1. Purpose of the Law

1.1.The purpose of this law is to regulate relations concerning investment to
business entities operating in sectors of strategic importance by foreign investors, other
related parties of common interest with them, and third parties, and to regulate relations
related to granting of licenses to them.

Article 2. Legislation on foreign investment to business entities of strategic
importance

2.1.Legislation on foreign investment to business entities of strategic importance
shall consist of the Constitution1, Law on Foreign Investment 2, Law on National

Security 3, this Law, and other legislative acts adopted pursuant to these laws.

2.2 . If an international treaty to which Mongolia is a party is inconsistent with this

L aw, then the provisions of the internation al treaty shall prevail

Article 3. Scope of the Law

3.1.Entities controlled by foreign Governments, international organizations,
entities controlled by international organizations shall obtain permission from the
Government of Mongolia upon making investments to Mongolia.

3.2.Foreign investor, related entity with common interest and third parties shall
obtain permission from the Government of Mongolia when concluding transactions
referred to in Article 7 of this Law to own shares of companies operating in one of the
sectors or activities of strategic importance or to own shares of companies with market
value over 100.0 billion togrogs.

3.3.This Law shall not concern foreign investments made within the framework of
international treaties and conventions to which Mongolia is a party, and as part of
military technical cooperation.

1The Constitution of Mongolia – published in “ State Bulletin” No.1, 1992.
2Law on Foreign Investment – published in “ State Bulletin” No. 4,5 , 1993.
3Law on National Security – published in “ State Bulletin” No..3, 2002.
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3.4.Foreign investor, other related party with common interest and third party are
prohibited to conclude transactions breaching Article 4.1.1. of this Law.

3.5. If transaction made outside the territory of Mongolia contain features
indicated in Article 3.1- 3.2 of this Law, this Law shall apply.

3.6. This Law shall apply to foreign investor, related entity with common interest,
and third party that seek acquiring shares of companies referred to in Article 4.1.1
directly and indirectly.

3.7. The share of Mongolian party of entities of strategic importance shall be no
less than 51percent.

Article 4. Definition of terms

4.1. Terms used in this Law shall be understood in the following meaning:

4.1.1.“ entity of strategic importance” / hereinafter “ strategic entity”/ means
business entity operating in sector or activity referred to in Article 5 of this Law or
company with market value over 100.0 billion togrogs;

4.1.2.“ acquire indirectly” means to acquire rights to dispose shares
through foreign investor, related entity with common interest and third party;

4.1.3.“ invalidate management decision” means possibility for foreign
investor, related entity with common interest and through third party to invalidate the
management decision ought to be approved by the majority in accordance with laws,
bylaw of the entity or contract;

4.1.4.“ foreign investor” means entity referred to in Article 3.2 of the Law on
Foreign Investment, excluding entities referred to in Article 3.1 of this Law;

4.1.5.“ related entity with common interest” means entity referred to in
Article 99.1. of the Company Law;

4.1.6.“ third party” means legal person or individual who has continued ties
with foreign investor and related entity with common interest and not registered in
Mongolia.

4.1.7.“ market value” means the closing value of the given day of company
referred to in Article 4.1.1. of this Law, registered at specific stock exchange for specific
period of time;

4.1.8.“ Mongolian party” means citizen of Mongolia, national business
entity, Government of Mongolia, entities controlled by it.
4.1.9.“ national business entity” means entities founded by citizen or legal
person of Mongolia and owned 100 percent by citizen and legal peг son of Mongolia.

CHAPTER TWO
SECTOR, ACTIVITY, BUSINESS ENTITY OF STRATEGIC IMPORTANCE,
MAKING TRANSACTIONS

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Article 5.Sector, activity, business entity of strategic importance

5.1.Sectors of strategic importance refers to minerals, food, agriculture, power
supply, road, transportation, information and communication sectors, which are
strategically important for meeting basic needs of the population, maintaining economic
independence and normal functioning, generating national revenue, and ensuring
national security.

5.2.The following activities refer to activities of strategic importance:

5.2.1.production and distribution of industrial explosive materials;
5.2.2.activities related to maintaining flight security;
5.2.3.TB and radio activity broadcasting for more than half of the
population;
5.2.4.communications services throughout the territory of Mongolia;
5.2.5.activities for guaranteeing safety, quality and supply of food;
5.2.6.oil related activities;
5.2.7.power supply activities;
5.2.8.road and transportation activities;
5.2.9.activities of using water sources of urban settlements;
5.2.10.activities which may cause substantial negative impact both directly
and indirectly on eco system, natural resources other than minerals, and biodiversity of
Mongolia and the given local area;
5.2.11.immovable property market;
5.2.12.extraction of radio active natural resources;
5.2.13.preparation and processing of livestock skins, hides, wool, and
cashmere;
5.2.14.use, production, distribution of chemical toxic substances;
5.2.15.use of recombinant technology and substances that cause
infectious diseases in biotechnology production;

5.2.16.activity which may directly or indirectly affect the market and price
of key export items of mining, including gold, copper, coal, iron ore, and rare earth
elements

5.3.Business entities with market value over 100.0 billion togrogs shall be entity
of strategic importance.

Article 6.Transactions which require permission

6.1.Transactions which require permission in accordance with this Law
/hereinafter referred to “ transaction”/ include those which will:
6.1.1.provide right to acquire one third or more shares of the strategic
company directly or indirectly;
6.1.2.provide right to carry out the executive management of strategic
entity unilaterally or to appoint the majority of the management team, or to appoint the
majority of the board of directors without any preconditions;
6.1.3.provide right to veto management decision of strategic business
entity;
6.1.4.provide right to exercise management role, determine decision of
strategic entity, and exercise business operational activities ;
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6.1.5.may create buyer or supplier monopoly at international and
Mongolian commodities markets;
6.1.6.may affect directly and indirectly the market and price of key export
items of mining of Mongolia, including gold, copper, coal, iron ore, and rare earth
elements.

6.2.Entity referred to in Article 3.1, 3.2 of this Law shall submit request for
permission to relevant authority within 30 days of the transaction referred to in Article
6.1 of this Law.

CHAPTER THREE
REVIEW OF REQUESTS AND DECISION MAKING BY STATE ORGANIZATION

Article 7.Request for permission

7.1. Entity referred to in Article 3.1, 3.2 of this Law planning to make the
transaction referred to in Article 6 of this Law /hereinafter referred to “ applicant”/ shall
submit its request to state organization in charge of foreign investment in accordance
with the Article 7.2 of this Law.

7.2.Request shall have the following documents attached to it:
7.2.1.application for permission;
7.2.2.document showing state registration in accordance with laws of
respective country;
7.2.3.applicant’s personal ID ;
7.2.4.document showing that entity is foreign entity without the status of
legal person???? тухайн хууль дагуу мэдүүлэгч –
хуулийн э тгээдийн эрхгүй гадаадын байгууллагын байгуулагдсаныг нотлох баримт
бичиг;
7.2.5.document showing establishment of the applicant-legal person;
7.2.6.draft contract describing the content of the transaction;
7.2.7.document containing information applicant’s in
years preceding the request ;
7.2.8.document showing information on the related entity with common
interest with the applicant, its composition and cooperation between participating parties
; 7.2.9.document containing information on entities that belong to the applicant or
entities that control the applicant;
7.2.10.documents on shares;
7.2.11.draft business plan.
7.3.Applicant shall submit certified copies of the documents listed in Article 7.2 of
this Law to the state organization in charge of foreign investment.

Article 8.Decision making on request

8.1.State organization in charge of foreign investment shall receive requests that
meet the following criteria:
8.1.1.any activity or nature of investment do not contradict the national
security concept of Mongolia;
8.1.2.applicant meets conditions to abide by legislations of Mongolia and
established business codes;
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8.1.3.the investment does not contain elements of restraining competition
in specific sector and creating monopoly ;
8.1.4.the investment does not provide substantial effect on national budget
revenue and other policy activities of Mongolia;
8.1.5.the investment does not provide substantial effect on activities of
national investors and business entrepreneurs of Mongolia .

8.2.State organization in charge of foreign investment shall carry out the following
actions within 14 days of receipt of request:
8.2.1.check completeness of request and demand missing documents if
incomplete, and if complete, register request;
8.2.2.return request to the applicant without further action if the applicant
did not meet the requirement indicated in Article 8.2.1 of this Law within 30 days.
8.3.State organization in charge of foreign investment shall submit its proposal to
the Government on feasibility of accepting the request within 3 months.
8.4.The Government shall make a decision to grant or not the requested
permission within 45 days of receiving the proposal with relevant supporting documents
from the state organization in charge of foreign investment referred to in Article 8.3 of
this Law.
8.5.State organization in charge of foreign investment shall notify the applicant
within 15 days of receiving the decision referred to in Article 8.4 of this Law.
8.6.Detailed procedure for reviewing request and making decision on it shall be
approved by the Government in accordance with this Law.
Article 9.Informing about transactions that took place
9.1.Foreign investor, related entity with common interest and third party shall
notify the state organization in charge of foreign investment within 30 days of its direct
and indirect acquisition ranging from five percent to the percentage referred to in Article
6.1.1 of this Law of a strategic company in accordance with the procedure adopted by
the Government of Mongolia.
9.2.Within 180 days of entering info force of this Law, entity referred to Article
3.1, 3.2 of this Law shall provide information to the state organization in charge of
foreign investment on its ownership from five percent and more of shares of strategic
company that was held prior to this Law became effective.

CHAPTER FOUR
MISCELLANUOUS
Article 10.Legal effect
10.1.Transactions that breach requirements set forth by this Law and Article 6
shall be invalid.
10.2.Relevant authority shall discontinue activities of the strategic entity that
breached this Law or invalidate its license.

Article 11.Entering info force

11.1.This Law shall enter into force on the day of approval.

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