Development of Business Law in Mongolia: Current

Development of Business Law in
Mongolia: Current Problems*
Dr. Batbold Amarsanaa
(Assistant Professor of Law, School of Law, National University of Mongolia)
52
《蒙藏季刊》
Abstract
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After almost 50 years of non-private property regime, general public, business people,
lawyers, including judges, attorneys, prosecutors, scholars, policy makers and government
bureaucrats faced and are facing substantial lack of understanding about modern business law.
After mass privatization of its state property that made half of Mongolian population shareholder,
legal reform in its all the fields especially business related laws have started. With substantial
difficulty understanding modern regulation on businesses, Mongolia is tackling to build its
business law.
This paper will introduce and examine development of business law in Mongolia in relation
to privatization held from early 1990`s and a legal reform Mongolia is trying to carry out. In
order to illustrate a current state of business law in Mongolia, this paper takes into consideration
corporate and securities laws, its basic features and problems facing. Finally, summary of
discussion is made.
Key Words: development of business law, Mongolia, corporate law, securities law,
privatization, legal reform, current problems
* The original text of this paper was presented at Pan-Pacific Business Law Conference Legal Frameworks for Sustainable
Development and Trade Relationships in the Asia-Pacific, September 29 - 30, 2006, UBC Faculty of Law, British Columbia,
Canada titled “Is Mongolia Ready to Embrace a Completely New Economic Environment? Examining the Gap between
Developed and Developing Countries”. Relevant changes and modifications as to date is made.
Introduction
In 1966, Mongolia was considered to be a “developed” nation according to the US
Department of Commerce Guidelines for Business Corporations. 1 This classification,
however, was arguably due to political reasons, as Mongolia was considered a close ally
to communist block countries, especially the USSR.2
At present, Mongolia is trying to tackle tasks such as the concentration of its
population in small area of its territory 3 and environmental issues4, as well as political5
and economic difficulties; there is an increasing desire to become an economically
developed nation. 6 Unfortunately, after almost 50 years of a non-private property
regime, legal system itself have difficulty adopting new regulations of business and
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general public, business people, lawyers, including judges, attorneys, prosecutors,
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scholars, policy makers and government bureaucrats are faced with a substantial lack of
understanding about modern business law and its application.
This brief introductory paper will first examine Mongolia’s process of transformation
into a market economy, including issues such as privatization, legal reform in Mongolia.
Further, various aspects of corporate and securities law as an example will be examined
to show the development and present state of the business related laws in Mongolia.
Finally, summary implications from the perspective of development of business law as a
country in transition from centrally planned economy to market economy will be made.
Due to the fact that the topic of this paper touches a wide range of issues, the
1　Voluntary guidelines for controlling U.S. investment abroad and 1967 balance of payments program, 6 I.L.M. 102, 109.
2　The Treaty of Friendship, Cooperation and Mutual Assistance between the USSR and the Mongolian People's Republic,
January 15, 1966, 5 I.L.M. 341. See Tsedendamba Batbayar, Mongolian-Russian Relations in the Past Decade, Asian Surv.,
Vol. XLIII, No. 6, November/December 2003, pp.951-970.
3　See Migration to cities increasing in Mongolia BBC Monitoring Asia Pacific – Political Supplied by BBC Worldwide
Monitoring July 15, 2004.
4　The most well known environmental problem outside of Mongolia is dust arising from the Gobi desert, which is situated in
the southern part of the country. The dust has reached as far as west coast of the USA, Japan, and China.
5　See Tom Ginsburg & Gombosuren. Ganzorig When Courts and Politics Collide: Mongolia’s Constitutional Crisis, 14 Colum.
J. Asian L. 309 (2001).
6　Although Mongolia had many problems to tackle against, a foreign scholar who lived in Mongolia wrote that there is
“general confidence among international donors in Mongolia’s ability to deal with the economic and other problems
confronting it.” See Sheldon R. Severinghaus Mongolia in 1998 and 1999: Past, Present, and Future at the New
Millennium, Asian Survey Vol. XL, No. 1, January/February 2000, p. 135.
implications that will be considered are general in nature. In order to achieve the
purpose of this paper, taking into account the lack of understanding and information
about business law regulations in Mongolia abroad, much of this paper will be devoted
to describing basic features and recent development of business law in Mongolia.
I. Privatization and Reform in the Area of Business Law in Mongolia and Public
Perception of Business Law
1. Privatization overview
The policy to establish a market economy, which gives legitimization to the existence
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of business law in Mongolia, began with a policy of privatization.7 An Associated Press
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article in 1990, commenting on Mongolia’s economy, stated that,
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“The economy centers around herding and developing natural resources such as copper,
molybdenum and timber. […] The economy is centrally planned and major industries are statesubsidized. Mongolia receives substantial aid and investment from the Soviet Union.”8
As the USSR collapsed in the late 1980s and early 90s, Mongolia lost its outside
economic support and “the country had little choice other than to pursue major
structural economic reform” 9 at that time. Advocates of liberal economic policies
frequently mentioned that major economic reform should move in the direction of a
market economy and accept private property and private businesses. In this respect,
privatization was intended to be “the “sole” means of changing ownership relations and
management”.10
In order to hold privatization, the law designed a mechanism of distributing
vouchers, which conferred the right to exchange to securities in the former state
7　Omch Huvichlaliin tuhai Huuli [Law on Privatization] (MNG).
8　Mongolian Facts and Figures, The Associated Press July 28, 1990, Saturday, AM cycle.
9　Christopher M. Finch, Mongolia in 2001: Political Consolidation and Continued Economic Reform, Asian Surv., Vol. XLII,
No. 1, Jan.-Feb. 2002, at 44.
10　Rolf Knieper, Judicial Co-operation, Universality and Context, GTZ, 22 (2004).
enterprises, to all people born before a designated date.11
Thanks to speedy and effective measures of privatization, it privatized “40% of
state-owned enterprises, and 100% of the retail trade and service industry” 12 by the
middle of 1992. At that time, 1100 economic units 13 working in the private sector in
the first half of 1992 produced goods … equal only to 4.8% of all industrial output. 14
As a result a half of Mongolia’s population became shareholders, 15 while policy of
privatization of state property, which is still taking place presently, is intended to create
capitalists. 16 With the change in the ownership structure of the economy, Mongolia
needed to make reform on legal system so that law supports its economic reform.
2. Legal Reform in Mongolia: problems
statutes enacted from legislators. Probably the most striking feature of Mongolia’s
present legal system is that it is under major reform not only in economic related fields
but in all aspects of society. With the purpose of facilitating economic freedom by
establishing a legal system that accepts private property, the new Constitution of 1992
was enacted in order to provide a legal basis for private business.18 Currently, there are
more than 460 valid statutes enacted by Parliament19 based on the principles of the 1992
11　Privatization in Mongolia during 1990’s held in two different scales which are small-scale enterprise privatization
and big scale enterprise privatization, regulated Chapter 3 and Chapter 4 of Law on Privatization (1991), respectively.
Most big scale enterprises were organized in the form of joint stock companies and automatically listed at the
Mongolian Stock Exchange.
12　Tsedendambyn Batbayar, Mongolia in 1992: Back to One-Party Rule, Asian Surv., Vol. XXXIII, No. 1, Jan. 1993, at 63.
13　Economic unit meant at that time business organizations such as companies and partnerships.
14　Tsedendambyn Batbayar, Mongolia in 1992: Back to One-Party Rule, Asian Survey Vol. XXXIII, No. 1, Jan. 1993, at
63.
15　See Laurance J Brahm & Eduardo L Puzon, Jr., Mongolian Privatization, Asia Business Law Review, No. 21 Jul. 1998, at
28.
16　See id.
17　See Sodovsuren Narangerel, Legal system of Mongolia, 43-48 (2004).
18　Art. 5.1 of the Constitution of Mongolia which mentions that “Mongolia shall have an economy based on different
forms of property which takes into account universal trends of world economic development and national specifics.”
19　See Undsen Huuliin odriig tohiolduulan UIH-n darga D. Dembereliin radio, televizeer helsen ug. [Speech of D. Demberel,
Chairman of State Great Hural on the occasion of anniversary of Constitution day on television and radio] at http://
www.montsame.mn/index.php?option=com_news&task=news_detail&tab=200901&ne=674# visited on Jan. 14, 2009.
特載
Since Mongolia is a civil law country, 17 the main source of law in Mongolia is
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Constitution. It has been said that most of the legal framework required to support a
democratic society and a market economy have been promulgated. Recently in the end of
2007, Ministry of Justice and Home Affairs of Mongolia evaluated results of legal reform
program up until 2007 and to evaluate further actions.
Due to its new economic structure and regulation, many multilateral and
development agencies involved helping to draft legislation and institution building. 20
The problem of having a large number of legal assistance projects in Mongolia, even
if they have “lived together peacefully” by dividing the fields of laws for which
they have responsibility over, is that competition among them to introduce the most
recent standards is that the legal system of Mongolia has become “too consistent with
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international standards”, 21 especially in the field of business law. This again raised
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a problem of consistency between individual laws in terminology and sometimes
conceptual level since many of those sponsored bills came from various different
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countries.
Besides this problem of methodology of conducting legal assistance programs, there
are other problems in this area that are important from business law perspective. The
new Civil Code of the Mongolia was adopted after the transition to the market economy
and was promulgated by Parliament in 1994. Eight years later, a new Civil Code,
different in its major principles was adopted by Parliament, which shows instability that
is negatively affect businesses. 22 Since many statutes amended and revised, or newly
adopted in short span of time, there are of course difficulty of understanding, applying
and interpreting these statutes by general public, business people, lawyers, including
judges, attorneys, prosecutors, scholars, policy makers and government bureaucrats. In
20　For instance, USAID is mainly focusing on judiciary and criminal law, while JICA on institutional support of bar
and mediation, GTZ concentrated on drafting of civil code, legal training and re-training of prosecutors, WB on legal
education, administrative court institutional support and establishment of National Legal Center, ADB on various
drafting of laws such as Law on Insurance etc., UNDP on human rights master plan and establishment Human Rights
Commission, Soros Foundation on drafting of Company Law etc., Asia Foundation on combating corruption and human
trafficking, Hanns Seidel Foundation on reform of legal and administrative field, and AusAID on training of lawyers.
21　Japanese lawyer who worked in Mongolia on legal assistance project told to author.
22　Frequent change of regulation by making amendments, revisions to and adoptions of new statutes in particular fields
of law can be found in other former communist bloc countries. See Rolf Knieper, Judicial Co-operation, Universality
and Context, GTZ, 48-52 (2004).
the following part, we will discuss perception of public regarding law, surely mainly
business law as a test of the privatization policy and legal reform which discussed in
previous sections.
3. Public Perception of Businesses and events influenced on it
“One case concerned the Ibex Group Partnership in which the company gained a 99-year
contract for exclusive access to “mineral resources and other key economic sectors of Mongolia.” 23
The second involved the Molam Corporation Joint Venture in which the government gave
exclusive rights for 40 years to a company for the development of a wireless telephone system,
including free use of Mongolia’s broadcast space.24
These two cases took place in 1995, just 5 years after the transition to a market
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economy. Although the two contracts were declared void after that, these cases reveals
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immaturity of regulating businesses in Mongolia and a lack of knowledge about doing
business in the modern world.
Some years later, in February 2000 a survey conducted examining the business
community’s evaluation of the existing legal system.25 Findings of this survey suggested
that the biggest challenge, according to business people that participated survey, to
the legal system is corruption and due to this corruption problem, the legal system is
constraining economic development rather than promoting growth. However, from the
result of separate question in the same survey, it became clear that the legal knowledge of
business people was very low, sometimes wrong regarding the legal system they operate.
Looking at findings of the survey that big businesses were more aware of the regulation
than small and medium businesses, the result suggested that their lack of understanding
might have contributed to corruption. On the other hand, due to major legal reform on
business regulation, huge change of regulatory environment might have contributed as
well to the lack of understanding sometimes misunderstanding of business regulation.
The most recent and striking case to illustrate the present state of business law
23　Mongol Messenger, February 10, March 17, 1995.
24　Mongol Messenger, February 10, March 17, 1995.Sheldon R. Severinghaus, Mongolia in 1995: Gearing up for the
1996 Elections, Asian Survey Vol. XXXVI, No. 1, Jan. 1996, at 96.
25　Sant Maral foundation, Business Community Perception of Legal Environment, February 2000, Ulaanbaatar.
and perception in Mongolia is related to a case of Ivanhoe Mines Ltd. The company is
incorporated in Canada, and after transferring mineral rights from BHP on “discovery
of a major copper and gold deposit in the south Gobi” 26 , the company established
a subsidiary in Mongolia. Since mining sector became “a major contributor to the
Mongolian economy, accounting for about 17 percent of GDP, 65 percent of industrial
value added, and 58 percent of export earnings” 27 and the fact that gold and copper
reserves controlled by Ivanhoe Mines in the southern part of Mongolia, the biggest
discovery in recent years, led to number of demonstrations sometimes making
extremist claims such as demanding them to give up the operation right without any
compensation, the demand that no one would accept in the modern business world.
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Political parties were very much interested in this project and many politicians
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expressed his ideas sometimes publicizing their misleading assumptions regarding way
of sharing profit. Even the former Cabinet Minister in charge of the mining industry
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expressed his unhappiness on the matter 28 , though some conditions were of course
unfavorable for Mongolia.
Business community was also very interested on this project. With strong signal
from Mongolian Stock Exchange, the Ivanhoe mines considered the possibility of being
listed on the Mongolian Stock Exchange,29 in addition to the New York Stock Exchange,
the Toronto Stock Exchange, and the NASDAQ. 30 The rationale of this idea behind
was a company exploring minerals in Mongolia should be listed in Mongolia so that
Mongolians could buy its stock and profit from the operation, which is generally false
assumption and misunderstanding.
As a result, number of events happened due to increasing attention to the mining
26　Christopher M. Finch, Mongolia in 2001: Political Consolidation and Continued Economic Reform, Asian Survey Vol.
XLII, No. 1, January/February 2002, p. 42.
27　Mongolia: A Review of Environmental and Social Impacts in the Mining Sector, May 2006, World Bank Discussion
paper, p.1, at http://siteresources.worldbank.org/intmongolia/resources/mongolia-mining.pdf visited on Aug. 3, 2006.
28　Interview with Minister of Industry and Trade, Mr. Jargalsaikhan by Udriin sonin [Daily newspaper] www.
mongolnews.mn visited on March 22, 2006.
29　Revised taxation and minerals laws in Mongolia set the stage for conclusion of an Investment Contract for Ivanhoe's
Oyu Tolgoi Project, News Release by Ivanhoe Mines Ltd. July 10, 2006 available at http://www.ivanhoe-mines.com/s/
NewsReleases.asp visited on Jul. 10, 2006.
30　See also Ivanhoe Mines to Dual List on NASDAQ; First Company to Dual List in 2006, Monday, January 30, 2006 at
www.nasdaq.com/newsroom visited on Feb. 22, 2006.
sector and its influence on the economy. Mining and relevant business regulation was
subject to debate number of times attracting whole society attention while many new
projects, with domestic business participation in mining sector has started.
After major privatization and reform on the legal system, 77.4 per cent of Mongolia’s
GDP is produced from private businesses by 2005 31 and increasing today, which is a
positive evidence of economic effect of the new Constitution. Thanks to society-wide
discussion on the business as a whole, privatization and legal reform, public perception
and knowledge on businesses and business law have changed substantially regarding
principles of modern business and its regulation. On the other hand, knowledge of
business people regarding conducting business in global market is increasing very much,
thanks to involvement into those mining and other projects, a positive sign of adaptation
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into market driven economic structure. In the next part of this paper, we will introduce
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and discuss corporate and securities laws in order to make inquiry on development of
business law in Mongolia in some detail.
II. Main features and problems of corporate and securities laws
In this part, corporate law and securities law will be considered as an example
of development of business law in Mongolia and problems facing. These branches of
laws are chosen for discussion due to the reason that it shows, rather clearly, problems
facing business law in Mongolia. For the purpose of this paper, recent developments,
relevant facts, and some problems in these areas will be discussed in brief, in addition
to introducing the notable features of these laws for the readers. Detailed regulation of
corporate law on one hand, while general and institutional aspect of securities law on the
other hand will be discussed showing the degree of advancement of detailed regulation,
degree of maturity of institutions that support and carry out legal mandate and problems
facing.
1. Corporate Law
(1) Historical Development
31　National Statistical Office of Mongolia, Mongolian statistical yearbook 2005, p. 117 (2006), also available at http://
www.nso.mn <electronic publications, statistical yearbook> visited on Nov. 2, 2008.
Mongolia has had three different statutes governing business organizations in its
modern history. In the early stage of its transformation to a market economy, Mongolia
adopted the Law on Business Entities of 1991, which was the first statute to accept
private forms of doing business. This Law said to be adopted textbook examples of
European laws, using the Hungarian experience as the basis for its drafting.32
The significance of this Law was that it introduced “modern corporate forms and
limited liability to Mongolia for the first time.”33 Although it introduced many important
concepts, the Law had been criticized on the basis that it was enacted “with perceptions
derived from socialism.”34 This criticism, from my perspective, is based on Article 4 of
the Law on Business Entities, which specified that government financial authority had
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monitoring rights on the financial activities of all business entities in Mongolia which
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were equal to state’s supervisory function during the former state driven economy.
Moreover, the corporate governance structure stipulated by the Law was not clear and at
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times even contradicting after 1993 amendment to the Law.
The failure that ultimately undermined the Law on Business Entities of 1991 was the
fact that it did not sufficiently limit executive directors` influence over the company35 and
it did not properly regulate the functions of the board of directors and the supervisory
board.
The second statute which regulated business organizations, the Law on Partnerships
and Companies of 1995, was considered to be a better example of regulating business
organizations. After 4 years of transition to market economy, the Law on Partnerships
and Companies was enacted in 1995, around the time that the secondary stock market
began operating. The Mongolian privatization program was implemented very fast and
around 80% of the all enterprises were privatized by the end of 1992, measured both in
32　J. Anderson, G. Korsun, and P. Murrell, Ownership, Exit, and Voice after Mass Privatization: Evidence from Mongolia, 18,
Jan. 1998, IRIS, University of Maryland at College Park. Also available at http://www.iris.umd.edu.
33　See id.
34　See id.
35　It seems that the legislators was not aware of or ignored the classic agency problem which raised by Adolf A. Berle
and Gardiner C. Means. There were thousands of shareholders mainly composed of its employees and director who was
continuously worked from former regime. At that time, there weren’t controlling shareholder which can influence
decision making of director who weren’t shareholder of a company. See general explanation of agency problem Adolf
A. Berle and Gardiner C. Means The Modern Corporation & Private Property with a new introduction by Murray L.
Weidenbaum and Mark Jensen, 1991.
terms of the number of enterprises and in terms of the amount of capital stock. 36 The
Law on Partnerships and Companies was based, some experts said, “... on a variety
of European and North American models...”, 37 and compared to the previous Law on
Business Entities, it had more detailed and comprehensive provisions. However, this
statute did not appropriately deal such important matters as protection of minority
shareholders rights.
The current Company Law was enacted in 1999 with the help of foreign advisors.38
Compared to the previous statutes, the current law is inarguably more comprehensive
with an exception of fiduciary duty issue. However, some commentators believed that
there is a substantial danger that the Law will end up as a law on the books rather than a
working law.39 We will briefly discuss, hereinafter, some important features of corporate
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law in Mongolia and take governance structure under the statute and problem of
特載
minority shareholders as a focus of further discussion.
(2) Governance Structure of a Joint Stock Company
Joint stock companies under the Company Law of Mongolia have following
governance organs: a board of directors, a supervisory board,40 and an auditor.
1) The Board of Directors, its members, powers and obligation
Perhaps the most important power of the board of directors, which consists of at
least nine members, is to hold, determine the agenda of, and “other matters with respect
to the holding of such [shareholders’] meeting”,41 and selecting and establishing contracts
with auditors of the company. 42 According to the Company Law of 1999, the board of
36　G. Korsun and P. Murrell, Ownership and Governance on the morning after: The initial results of privatization in Mongolia,
2, 1994, IRIS Working paper No.95, University of Maryland at College Park. Also available at http://www.iris.umd.edu.
37　Developing Mongolia’s Legal Framework: A Needs Analysis, at 8, ADB (1995). Also available at www.adb.org.
38　See endnote at Laurance J Brahm and Eduardo L Puzon, Jr Mongolian Privatization, Asia Business Law Review No 21
July 1998 p. 29 saying Naga Group Limited is advising the Mongolian Prime Minister`s Office on the drafting of a
new Company Law of Mongolia. However, the recent interview Prof. Black of University of Texas at Austin, the USA,
together with Prof. Kraakman with Harvard Law School, A. Tarassova, they worked on the draft of this Law. See
Transcript of interview by Batbold Amarsanaa with Bernard S. Black on March 14, 2008 at University of Texas at
Austin (file with author).
39　Chas Cadwell, Mongolian Company Law, Center for Institutional Reform and the Informal Sector (IRIS), University of
Maryland at College Park (2002), at http://www.iris.umd.edu/adass/proj/mongolia.asp visited on Jun. 20, 2002.
40　There are different translation for this organ of governance such as supervisory board and inspection commission.
41　Kompaniin tuhai Huuli [Company Law] (MNG) art. 76.1.13.
42　See id. art. 76.1.10.
directors is the governing body of the company between shareholders’ meetings.43
The term of the board of directors expires on the date of the next regular
shareholders’ meeting. Since a company should hold regular shareholders’ meeting once
a year 44, the term of a member of the board of directors is considered to be one year,
the mechanism that can make directors accountable for shareholders. However, due to
the regulation that directors could only be removed by dismissing whole board, and
considering cost of convening extraordinary shareholders` meeting, the likelihood of a
director to be removed between ordinary shareholders meetings is very low during the
term. There is no regulation in the law if such kind of cases like unable to carry out its
power for instance due to illness, death or other reasons by a director.
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Moreover, monitoring function of directors and board of directors, the most
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important function of board of directors and its members, is not expressly stated in the
law. However, from the text of the statute that says executive organ is accountable to
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board of directors,45 provisions in the statute giving power to elect, remove, limit power
of executive organ to the board46 and other powers referred to the board, we can assume
that board of directors have monitoring function over executive organ of the company.
Recently adopted Corporate Governance Code of Financial Regulatory Commission, the
oversight organ of financial market which discussed later part of this paper, suggests
establishing audit, remuneration and nomination committees within board of directors
structure. There is danger of overlap on monitoring function between supervisory
board and audit committee of the board, the unnecessary burden on governance of the
companies. The law determined the role of independent directors in very limited way47
while the law does not impose monitoring function to individual director.
There is no established and applied fiduciary duty concept in Mongolia, which
generally classified into duty of care and duty of loyalty, while some elements of this
duty stated in the law. 48 At present, there is no business judgment rule available in
43　See id. art. 75.1.
44　Company Law art. 60.3
45　See id. art. 80.8.
46　See id art. 76.1.8 and art. 80.
47　See id. art. 89.2.
48　See id. art. 81.2.
Mongolia, the necessary issue to pay attention in the future. In the case that director
breaches his/her duty, liability is stated in the law.49
2) Supervisory board
Compared to an auditor, which will be discussed later, the Supervisory board of a
company is more of an internal organ. A joint stock company must have a Supervisory
board that the number of members, procedures for election, term of office, and rights
and obligations of members are specified in company’s charter. 50 The power of the
Supervisory board of a company is, according to Article 92.2 of the statute:
- To monitor compliance of the company’s management with the provisions of
the company’s charter and the implementation of resolutions adopted at shareholders’
meetings;
review of the activities of the company’s management and financial statements for the
preceding year;
- To review specified financial activities of the company at the demand of
shareholders; and,
- To perform other duties as provided in the Company Law and in the company’s
charter.51
All members of the Supervisory board are elected by the shareholders at the
shareholders’ meeting, and the members of the Supervisory board cannot simultaneously
be a governing person of the company because of the self-control issue outlined in
Articles 63.1, 92.4, and 92.5 of the same statute.
Although Supervisory board and its members are given important power to monitor
executive organ, supervisory board and its members does not liable for their inaction
which means they does not become liable when they did not monitor management.
This gap is very serious in terms of governance since supervisory board is responsible
for submitting report with respect to financial statement and annual report. Today this
49　Company Law id. art.81.3, 81.4, 81.5 and art. 82.
50　See id. art. 92.1.
51　The phrase “such other duties as provided in the Company Law” means: a) power to call a regular shareholders’
meeting if the board of directors fails to convene or hold it (art. 60.3); b) make a demand to call a special shareholders’
meeting to the board of directors (art. 62.1, and 62.2, 92.6).
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- To submit to each regular shareholders’ meeting a report with respect to its
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internal organ is widely perceived as unimportant in Mongolia due to its status within
governance and its ineffectiveness.
3) Auditor
Under the Company Law, joint stock companies in Mongolia must recruit an
auditor(s). The contract between an auditor and the board of directors specifies all other
matters such as the rights, duties, and obligations of the auditor and the amount of the
auditor’s compensation other than that provided for in the Company Law and the Law
on Auditing o 1997.
The main function of the auditor is to review and certify company’s financial
statements and to audit, in full or in part, the company’s financial and economic
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activities 52 by conducting regular or special audits. 53 According to Articles 76.1.10 and
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91.2, the board of directors selects an auditor and approves a contract to be concluded
with an auditor. Briefly an auditor has four functions provided by the Company Law54:
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- To give advice on the market value of property, intellectual property, and
company’s shares according to Article 56.4. Here, an auditor acts on request of the board
of directors;
- To give recommendations to the board of directors on book value of the
company’s assets to reflect inflation;55
- To report to the shareholders meeting;56 and,
- To review and certify financial statements prepared by the board of directors.57
To make auditor accessible to the company’s documents and to ensure the quality
of audit, any person who has a conflict-of-interest must report to the company auditor
information specified 58 and a governing person in the company must deliver any
documents pertaining to the company’s financial and economic activities at the demand
52　Company Law art. 91.1.
53　See id. art. 91.2.
54　There is also Law on Auditing (1997) that regulates conduct of accounting auditors.
55　Company Law art. 84.3.
56　See id. art. 66.4.2, 66.4.3, 91.4 and 91.7.
57　See id. art. 94.4.
58　See id. art. 88.1.
of the company’s auditor.59
There is a problem of self-control in that the auditor who is appointed by the board
of directors checks the activities of the company that are the board of directors’ activities,
even though the auditor has a very independent position according to Law on Audit.60
This problem of self-control can be especially identified in companies with concentrated
ownership, the typical character of listed companies in Mongolian.
(3) Minority Shareholder Issue
According to the Global Competitiveness Report 2008-2009 prepared by the World
Economic Forum, Mongolia is ranked 133 out of 134 countries in terms of protection
of minority shareholders’ interests. 61 Although the number might be too downgrading
Mongolia`s position, there are some cases that reveals the lack of protection of minority
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shareholders. Looking at already concentrated ratio of ownership and an increasing
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concentration of share ownership in Mongolia, we can say that minority shareholder
protection issue is present for some former state-owned companies. 62 According to a
survey disclosed by the head of the former Securities Exchange Commission, by the
end of 2000, slightly less than 90% of all listed companies were controlled by person(s)
who possessed 50% or more of the common shares in those companies.63 The situation
remains the same at present.
Another matter that regulators are worried about is distribution of dividend by
companies. Only 217 out of 418 listed companies at the Mongolian stock exchange
held shareholders’ meetings and only 21 of them declared dividends for their shares in
199964 while only 19 out of 390 listed companies have distributed its dividends in 2005.65
59　See id. art. 91.3.
60　Auditiin tuhai Huuli [Law on Auditing] (MNG).
61　See The Global Competitiveness Report 2008-2009, Klaus Schwab & Michael E. Porter, World Economic forum, 2008,
p.381.
62　For instance, State Department Store JSC, a listed company in the stock exchange is struggling to change its legal form
into closed company, while many small shareholders are claiming right to receive dividend and fair treatment.
63　D. Dulamsuren, Unet tsaasnii zah zeeliin tolovshil, hogjil[Maturity and development of Securities market], 2000, p. 51.
64　See id. p. 20.
65　Mongoliin Horongiin Birjid burtgeltei huvitsaat companiudiin nogdol ashig taraaltiin sudalgaa [Survey on dividend
distribution from listed companies at Mongolian Stock Exchange] http://www.mse.mn/doc/hayg.htm visited on Jun. 11,
2006.
In 2008, 37 companies have distributed its dividend a positive increase in the capital
market.66
Although Mongolia has been ranked very low in the Global Competitiveness Report
in terms of protection of minority shareholders’ interests, there is increasing an interest
to protect minority recently.67
2. Securities Law
(1) Phases of development and present situation
Securities law is a new regulatory instrument for Mongolia. The development of
securities market in Mongolia up to present can be divided into several phases. Before
66
examining these phases, it is worth to mention that a peculiarity of the securities market
《蒙藏季刊》
in Mongolia is the government took the initiative in establishing and operating the
securities market and almost all of the reforms were led by the government due to its
第十九卷　第二期
‧
relation to privatization policy of government to make state property be privatized by
the way of distributing vouchers to the population. Thus, there are expectations from the
public generally that the government should formulate policy to strengthen the market
and if the policy fails, the shareholders expects to confiscate them even if it is due to
market failure and shareholders wrongful choice of stock. The author thinks that this
psychological expectation of public and abnormal strong government involvement in the
market is not desirable.
The first phase, which covers 1991 to 1993, included initiatives such as establishing
and strengthening the first stock exchange in Mongolia, and reorganizing stateowned enterprises into joint stock companies by distributing vouchers as a means of
privatization, through which half of the population became shareholders in privatized
companies. In this phase, there were no shareholders, except state, that controlled a
majority of the common shares in a particular listed company. The first statute regulating
the securities market was enacted in September 1994, 3 years after the Stock Exchange
66　2008 ond nogdol ashig taraa huvitsaat companiud [Joint Stock Companies distributing dividends in 2008] http://www.
mse.mn visited on Jun. 11, 2009.
67　According to a conversation with a member of working group to draft a bill to amend the Company Law, the bill that was
sponsored by Ministry of Finance and Economics of Mongolia and Financial Regulatory Commission, one of the purposes
of this amendment to the statute was to protect minority shareholders (file with author).
began operating.
In the second phase, beginning in 1995, the secondary trading of securities became
possible, which gave rise to the possibility of holding a controlling block of shares
in a company. Around 1999, the government implemented a policy to concentrate
shareholdings and to establish an environment where controlling shareholders can
control the company. However, the policy supported only shareholders who control
substantial portions of stock, leaving minority shareholders` without adequate
protection. The negative effect of that policy was many of those companies with
concentrated ownership chose not to distribute dividends to minority shareholders
and annual shareholders` meetings were not regularly held68 even if these were illegal
at that time. The hallmark of the this phase was the fact that most of the companies
67
traded on the stock exchange were controlled by shareholders or entities that possessed
特載
a controlling block of shares, which as result made securities trading less attractive.69 In
other words, up to 2003, the focus was the privatization of state owned enterprises rather
than establishing an effective securities market.
From 2004 up to the present, the third phase, there have been some activities
to attract public attention to the securities market and to gain investor confidence. 70
According to the Mongolian Stock Exchange website, there are currently 201 listed
companies,71 compared to 390 listed stock companies72 by the mid 2006, and the overall
68　Here we can see the difference that dividend distributed by 94 companies in 1994 have fallen into 45 in 1997.　For
instance, in 1999, number of companies held shareholders` meeting was 217 out of 418 listed stock companies and
only 21 of them declared and distributed dividend. The value of dividend was very low that didn`t attracted the small
shareholders interest. See D. Dulamsuren, Unet tsaasnii zah zeeliin tolovshil, hogjil[Maturity and development of Securities
market], 2000, p. 20.
69　Buh huvitsaag gartaa tovloruulsen tsoohon hun nogdol ashig olgoh sonirholgui bolson [Few people who concentrated
shares did not want to distribute dividend], Udriin sonin [Daily newspaper], 25 November, 2005, www.mongolnews.mn
70　See Kompaniud unet tsaasnii zah zeel ruu hoshuurch baigaa ni tsag ueiin shaardlaga [It is unavoidable and good timing
that companies are interested in securities market] Interview with R. Sodkhuu, CEO of Stock exchange of Mongolia by
Udriin sonin [Daily newspaper] correspondent B. Bold, www.olloo.mn visited on Feb. 16, 2006. As well government
initiated some measures to gain investor confidence. See also Zuunii medee [Century News], www.zuuniimedee.mn visited
on Jul. 31, 2006.
71　List of listed companies at the Mongolian Stock Exhange, Companies-Companies information [in Mongolian] http://www.
mse.mn/doc/hayg.htm visited on Jan. 10, 2009
72　List of listed companies at the Mongolian Stock Exhange, Companies-Companies information [in Mongolian] http://www.
mse.mn/doc/hayg.htm visited on Jun. 11, 2006
value of the market is 517.1 billion tugrugs, 73 compared to 85.6 billion tugrugs 74 by
August 2006 almost six times increase of market size. There have been several initial
public offerings (IPOs) and both government and private company bond trading have
become active, which are signs that securities trading has resumed. 75 In addition,
Parliament enacted a new statute governing the securities market and Financial
Regulatory Commission showing government interest to develop securities market.
(2) Statutory Problems
For the first time in Mongolia, securities regulation was enacted in 1994 with the
promulgation of the Securities Law. 76 The law had 26 articles, which regulated and
covered all kinds of securities. 77 However, until the enactment of Law on Securities
68
Markets, which invalidated previous Securities Law of 1994, in December 2002, the
《蒙藏季刊》
Securities Law of 1994 was the only core statute with some 30 regulations adopted by
Securities Exchange Commission of Mongolia.
第十九卷　第二期
‧
Currently, the Law on Securities Markets is in effect, and it formulates the basic
framework for the securities market. Although the statute determines the basic structure
of the securities market, there are several issues that need to be addressed. First, the
Law on Securities Market focuses more on institutional issues, such as what is the
function of stock exchange and investment funds, rather than actual rules regulating
the process. This is likely an unavoidable stage for a legal system in transition.78 Second,
73　Number after securities market trading on Jan. 2, 2009. See www.mse.mn <News, Latest News, Weekly review> visited on
Jan. 10, 2009.
74　www.mse.mn <News, Latest News, Weekly review> visited on Aug. 1, 2006.
75　www.montsame.mn National News Agency, June 19, 2006, <English news, Mney, Loan & Stock Market> “According to
the Mongolian Stock Exchange report, in May of 2006,…[t]he value of shares increased 1.7 times compared to previous
month, and its share in total trade amounted to 96.6 percent. The company bonds value increased 7.1 times.” See
also Mongol Ulsiin irged ariljaanii banknii huvitsaag ezemshih erhtei bolloo [It became possible for Mongolians to own
commercial bank share.] www.olloo.mn visited on Feb. 16, 2006.
76　The act is enacted on October 13, 1994 from the Parliament of Mongolia
77　According to the definition determined in article 3.1 of Securities law of 1994, securities means a share certifying a right
to an investment in a stock company, dividends, and vote, a debenture with a maturity date of more than one year issued
by an authorized organization, a Government bonds or other instruments determined by the Securities Committee to be a
security in conformity with this law (means Securities law of 1994 auth.).
78　Prof. Knieper of Germany, who extensively engaged in legal assistance projects in post communist countries, wrote “At
the beginning we often saw regulations in the form of decrees proclaiming the right to found an enterprise. These were
more like political declarations of intent than actual regulation.” See Rolf Knieper Judicial Co-operation, Universality and
Context, GTZ, 2004, p. 48.
the current statute regulating the securities market has more detailed regulations than
its predecessor; however, there is still a lack of regulations, which is barrier to gaining
investor confidence. For instance, disclosure rules which are stipulated by the law need
to be improved. The law dedicates a very small portion of its regulations on disclosure
requirements, availability, timeliness, and adequacy of information. Thus, there is a need
to develop a regime of more comprehensive disclosure, which in turn will strengthen
securities law. It is widely accepted that a full information disclosure regime is the basis
for having effective securities regulation. Third, there is a substantial lack of regulations
regarding fraud. The law does not sufficiently address this issue, which in turn
influences to the issue of whether or not the securities market is healthy.
This issue of declarative form rather operational rules 79 is also true in the case of
69
Law on Legal Status of Financial Regulatory Commission of 2005. The law which was
特載
enacted by Parliament at the end of 2005 regulates mainly structural issue of the Agency
rather than “actual regulation”.80
Another statute that is relevant to the securities market is the Company Law of
1999 which we have discussed in previous part. The Company Law has rather detailed
regulations on securities related matters compared to its predecessors.
(3) Institutional Development and Problems
Until the enactment of new Law on Securities Markets, the securities watchdog
in Mongolia was called the Securities Exchange Commission of Mongolia. Currently,
the agency in charge of overseeing the securities market is the Financial Regulatory
Commission, which is comprised of six commissioners appointed by the Parliament of
Mongolia. As stated in Article 3.1 of the Law on Securities Market, the Commission is an
amalgamation of three different government agencies: the former Securities Exchange
Commission founded under the Securities Law of 1994, the Division of Non-Banking
Financial Institutions of the Central Bank of Mongolia, 81 and the section in charge
of supervising insurance activities at the State Specialized (Professional) Inspection
79　See id.
80　See id.
81　See www.mongolbank.mn.
Agency 82. The Law provides that the Financial Regulatory Commission is empowered
to oversee a wide array of jurisdiction, including the activities of non-banking financial
institutions, the securities market, activities relevant to insurance, and activities of
cooperatives which offer deposits and lending and such other financial activities.83
The biggest challenge of its existence and role in the market is battered by recent
case of a major bank, listed in the Mongolian Stock Exchange that faced financial
difficulty not long after its IPO.84 Due to this question among other reasons, the President
of Bank of Mongolia, the central bank, resigned taking blame of unable to control its
commercial banks. Some market participants who bought shares of the bank are shocked
by this event and there are voice that blaming Financial Regulatory Commission for its
70
approval to be listed at stock exchange. On the other hand, one of important problems
《蒙藏季刊》
in securities law and its perception by the government is there has a “little official
recognition and appreciation of the extent, depth and implications of market failure”.85
The Mongolian Stock Exchange (MSE), which is the only stock exchange in
第十九卷　第二期
‧
Mongolia, is a fully state owned company. MSE is taking initiatives to increase awareness
of securities market and working on to expand their cooperation with other stock
exchanges such as Hong Kong Stock Exchange, Taiwanese and Korean stock exchanges.
Currently, there are 42 underwriting, broker dealer companies seated, the sharp increase
from June 2006. 86 Besides MSE, a group of business people established a project to
open another stock trading house named MOSDAQ together with NASDAQ OMX, on
amid increase of attractiveness of financial market due to surge of minerals industry in
Mongolia.87
82　See www.ssia.gov.mn.
83　Unet Tsaasnii Zah Zeeliin tuhia Huuli [Law on Securities Market] (MNG) art. 3.1.
84　See Anod Banknii TUZ-n gishuudiig shalgaj ehellee. [Members of the Board of Directors Anod Bank under investigation],
at http://www.news.mn/news/section=home/page=index#0.383093865914388 visited on Jan. 5, 2009.
85　See Richard Marshall, Frederick Nixson, & Bernard Walters Privatization and Regulation in an Asian Transitional Economy:
The case of Mongolia. Is the Elite in Denial? Centre on Regulation and Competition, Working paper series No. 66, June
2004.
86　See www.mse.mn <Mongolian Stock Exchange, Companies, Broker Dealer Company> visited on Jan. 10, 2009. For
the number of the year 2006, there were only 27 underwriting, broker, dealer companies according to www.mse.mn
<Mongolian Stock Exchange, Companies, Broker Dealer Company> visited on Jun. 25, 2006.
87　See E-Stock Exchange System To Be Introduced, Montsame news of Jun. 26, 2008 at www.montsame.mn/index.
php?option=com_news&task=news_detail&tab=200806&ne=2732 visited on Jan. 10, 2009.
Recently, parliament group that is composed of members of parliament initiated
and they are paying attention to the financial market issue due to recent problems in the
market.88 Mongolia needs to improve its securities regulation and strengthen institution
that needs to operate in the market and oversee it though “the complex institutions that
support strong securities markets can’t be built quickly.”89
III. Summary
Thanks to speedy-privatization, the economic result, not necessarily well-being
of the people and advancement of economic capacity, is positive and ownership
structure of the economy is changed and weight of private businesses in the economy
became substantially important, the result that policy makers intended to establish to
development. In order to support new economic system, legal reform was also inevitable
though reform itself challenged the system. Existence of business itself in Mongolian
society and justification of business law in some respect is still weak and partly due to
misunderstanding and lack of understanding regarding doing business in the world,
especially on hotly debated issues such as minerals.
In detailed analysis of the corporate, we have taken governance structure of joint
stock companies and its weak points, problem of protection of minority shareholders.
The present corporate law shows advancement of regulation in the field though there
are many issues pending its resolution. The securities law provides importance of
institutional development in this field, especially in the wake of market revival. The
biggest challenge for securities law and its institutions is to change both government
and public perception and to accept the fact that market sometimes fails though law and
institutions need tackle against the possible failure of market for the minimum loss.
Therefore, there are number of normative and institutional level issues in Mongolia
though as author believes Mongolia made substantial step toward establishing market
economy and legal system that can function as a positive factor to facilitate economic
structure.
88　Ediin Zasgiin Baingiin Horoo Haalttai Huraldaj ehellee [Standing Committee on Economy of the State Great Hural began
Closed Session] at http://www.news.mn/news/section=home/page=index#0.554064387513037 visited on Jan. 14, 2009.
89　Bernard S. Black, The Legal and Institutional Preconditions for Strong Securities Markets, 48 UCLA L. Rev. 847, ( 2001).
71
特載
make private businesses as a foundation of economy and private initiative as a gear to
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特載
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《蒙藏季刊》
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第十九卷　第二期
‧
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75
特載
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