ICLG

The International Comparative Legal Guide to:

Private Equity 2017

3rd Edition

A practical cross-border insight into private equity

Published by Global Legal Group, with contributions from:

Aab-Evensen & Co Matheson

Advokatfirman Trngren Magnell McMillan LLP
Ali Budiardjo, Nugroho, Reksodiputro Memminger LLP
Allen & Gledhill LLP Morais Leito, Galvo Teles, Soares da Silva
Angola Capital Partners & Associados
Ashurst Hong Kong Pinheiro Neto Advogados
Atanaskovic Hartnell Samvd: Partners
Br & Karrer Ltd. Schindler Attorneys
Borenius Attorneys Ltd Schulte Roth & Zabel LLP
British Private Equity & Venture Capital Association Skadden, Arps, Slate, Meagher & Flom LLP
Cox Hallett Wilkinson Limited Tomashevskaya & Partners
Dentons Triay & Triay
Fried, Frank, Harris, Shriver & Jacobson LLP Udo Udoma & Belo-Osagie
GTs Advocates LLP VdA Vieira de Almeida
Houthoff Buruma Webber Wentzel
Lloreda Camacho & Co. Zhong Lun Law Firm
The International Comparative Legal Guide to: Private Equity 2017

General Chapters:
1 Whats in Store for PE in 2017, Trends and Practices Sandro de Bernardini & Stephen Sims,
Skadden, Arps, Slate, Meagher & Flom LLP 1

Contributing Editors
Lorenzo Corte & Lutz
Zimmer, Skadden, Arps,
Slate, Meagher & Flom LLP
Sales Director
Florjan Osmani
2 Private Equity Transactions in the UK: the Essential Differences from the U.S. Market
Nicholas Plant, Dentons 3
3 Reallocating Risk: An Introduction to Warranty and Indemnity Insurance in UK Private Equity
Transactions Dan Oates & Hannah Luqmani, Fried, Frank, Harris, Shriver & Jacobson LLP 6
4 International Standard Setting Bodies and the Global Regulatory Agenda Michael Johnson,
British Private Equity & Venture Capital Association (BVCA) 12

Account Director
Oliver Smith Country Question and Answer Chapters:
Sales Support Manager
Paul Mochalski 5 Angola VdA Vieira de Almeida and Angola Capital Partners:
Hugo Moredo Santos & Rui Madeira 18
Sub Editor
Oliver Chang 6 Australia Atanaskovic Hartnell: Lawson Jepps & Jon Skene 25
Senior Editors
7 Austria Schindler Attorneys: Florian Philipp Cvak & Clemens Philipp Schindler 34
Suzie Levy, Rachel Williams
Chief Operating Officer 8 Bermuda Cox Hallett Wilkinson Limited: Natalie Neto 43
Dror Levy
9 Brazil Pinheiro Neto Advogados: Eduardo H. Paoliello Jr. 49
Group Consulting Editor
Alan Falach 10 Canada McMillan LLP: Michael P. Whitcombe & Brett Stewart 56
Publisher
Rory Smith
11 China Zhong Lun Law Firm: Lefan Gong & David Xu (Xu Shiduo) 63

Published by 12 Colombia Lloreda Camacho & Co.: Santiago Gutirrez & Juan Sebastin Peredo 72
Global Legal Group Ltd.
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Tel: +44 20 7367 0720
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Email: info@glgroup.co.uk
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GLG Cover Design 17 India Samvd: Partners: Vineetha M.G. & Ashwini Vittalachar 105
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18 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Freddy Karyadi & Anastasia Irawati 115
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19 Ireland Matheson: anna Mellett & Aidan Fahy 122
Printed by
Ashford Colour Press Ltd 20 Mongolia GTs Advocates LLP: Zoljargal Dashnyam & Enkhsaruul Jargalsaikhan 130
May 2017
21 Netherlands Houthoff Buruma: Alexander J. Kaarls & Vivian A. L. van de Haterd 138
Copyright 2017 22 Nigeria Udo Udoma & Belo-Osagie: Folake Elias-Adebowale & Christine Sijuwade 147
Global Legal Group Ltd.
All rights reserved 23 Norway Aab-Evensen & Co: Ole Kristian Aab-Evensen & Harald Blaauw 154
No photocopying
24 Portugal Morais Leito, Galvo Teles, Soares da Silva & Associados:
ISBN 978-1-911367-54-3 Ricardo Andrade Amaro & Pedro Capito Barbosa 174
ISSN 2058-1823
25 Russia Tomashevskaya & Partners: Zhanna Tomashevskaya & Roman Nikolaev 181
Strategic Partners
26 Singapore Allen & Gledhill LLP: Christian Chin & Lee Kee Yeng 191

27 South Africa Webber Wentzel: Nicole Paige & Andrew Westwood 198

28 Sweden Advokatfirman Trngren Magnell: Anett Lilliehk & Sten Hedbck 207

29 Switzerland Br & Karrer Ltd.: Dr. Christoph Neeracher & Dr. Luca Jagmetti 215

30 United Kingdom Skadden, Arps, Slate, Meagher & Flom LLP: Lorenzo Corte &
Sandro de Bernardini 223

31 USA Schulte Roth & Zabel LLP: Peter Jonathan Halasz & Richard A. Presutti 232

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer
This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice.
Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication.
This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified
professional when dealing with specific situations.

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 Chapter 20

Mongolia Zoljargal Dashnyam

GTs Advocates LLP Enkhsaruul Jargalsaikhan

considered as an inhibiting factor for the development of PE

1 Overview
investments in Mongolia.

1.1 What are the most common types of private equity

transactions in your jurisdiction? What is the current
2 Structuring Matters
state of the market for these transactions? Have
you seen any changes in the types of private equity
transactions being implemented in the last two to 2.1 What are the most common acquisition structures
three years? adopted for private equity transactions in your
jurisdiction? Have new structures increasingly
developed (e.g. minority investments)?
The current democratic Constitution was adopted in 1992,
transitioning Mongolia from a socialist country into a democratic
The acquisition structure for PE transactions is usually relatively
nation with a market economy. Since the right of private ownership
straightforward in Mongolia. The most commonly used transaction
was first recognised and secured by the Constitution in 1992, most
structure is PE sponsors establishing a holding company which
of the laws that govern private transactions adopted thereafter were
acquires or subscribes shares and/or other convertible instruments
based on the new constitutional ideologies. Accordingly, private
in the portfolio companies. In some cases, PE sponsors establish
equity (PE) is a relatively new concept in Mongolia. In May 2013,
a holding company for the purpose of holding shares in only one
the Revised Securities Market Law was enacted and introduced
particular portfolio company or one investment sector. The holding
certain regulations in relation to investment fund activities. Further
company must not necessarily be incorporated under the laws of
in October 2013, the Investment Fund Law which provides the legal
Mongolia, although that is a possible option. A large number of
framework for the establishment and operation of investment funds
holding companies tend to be offshore entities for various reasons,
in Mongolia, including PE funds (private investment funds), was
including a favourable tax purpose. Furthermore, we have also
enacted by Parliament.
witnessed that a minority investment strategy has been increasingly
We believe that the growth capital, mezzanine investments, as well adopted for PE transactions in recent times.
as leveraged buyouts account for the most common types of PE
transactions that are carried out in Mongolia. Mining, banking and
2.2 What are the main drivers for these acquisition
financial services and real estate are the main sectors that attract PE
structures?
investments in particular. However, due to the economic downturn
in recent years associated with the fall of global commodity prices,
the current state of the PE market in Mongolia has been relatively Tax consideration is, in our view, the key driver to determine the
inactive for the past two to three years and therefore no significant acquisition structure, e.g. using an offshore holding entity or
changes have been observed. onshore entity, etc.
Further, we believe there are a number of factors that affect the
growing popularity of minority investment. For example, under the
1.2 What are the most significant factors or developments
Land Law, companies with foreign investment (25% or more of the
encouraging or inhibiting private equity transactions
in your jurisdiction? total issued shares of which are held by foreign investor(s)) can only
have a land use right which cannot be pledged to a third party, as it
is the most limited type of land right. Many PE sponsors decide to
Mongolia is a country with rich natural resources and great
limit their shareholding up to 24% in order to prevent the portfolio
potential for growth. We view that this growth potential coupled
company from being considered as having foreign investment.
with business owners need for additional investment encourage
PE transactions in Mongolia. Furthermore, the enactment of the
Investment Fund Law in 2013, which clarifies the regulatory issues 2.3 How is the equity commonly structured in private
in relation to activities of investment funds, certainly promotes PE equity transactions in your jurisdiction (including
investments and the establishment of domestic PE funds. institutional, management and carried interests)?

However, business owners and management teams still tend to

lack sufficient knowledge and experience in PE transactions due In a typical transaction structure, institutional PE investors subscribe
to the scarce previous practice. This knowledge-gap is sometimes for shares in the holding company which acquires or further
subscribes for shares in the portfolio company or companies. The

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GTs Advocates LLP
holding company usually also provides, with shareholder loans or
subscriptions, preference shares of the portfolio company. Except
in the leveraged buyout scenario, the initial shareholder(s), i.e. the
business owners, are usually required to retain their equity interest in
the portfolio company, as success of the business significantly relies
from their presence. Management equity is usually implemented
through an employee stock option plan rather than through direct
shareholding from the outset.
The particulars of the carried interest arrangement vary on a case-
by-case basis. However, as for PE funds established under the
Investment Fund Law of Mongolia, annual carried interest must not
exceed 30% of the total profit generated by the PE fund in that year.
2.4 What are the main drivers for these equity structures?
This equity structure, in our opinion, typically relates to the
investment industry and the size of the portfolio company. As
mentioned above, PE transactions usually take place as a growth
investment where the shareholders of the portfolio companies are
looking for an additional equity investment, but are not interested in
leaving the company. From the private investors perspective, these
initial shareholders are considered as key personnel of the company,
as they are usually responsible for maintaining the necessary licences
and ensure compliance with the local regulatory requirements.
2.5 In relation to management equity, what are the typical
vesting and compulsory acquisition provisions?
Compulsory acquisition by a PE fund/holding company is always
addressed in the relevant documentation and typically tied to the
termination of employment of the key managers. In our observation,
a typical vesting period tends to be around five years.
2.6 If a private equity investor is taking a minority position,
are there different structuring considerations?
We believe that the transaction structure does not differ much in
relation to PE investors taking a minority position. However, there
are certain regulatory concerns of which PE investors should be
aware. For example, if PE investors are interested in taking a minority
position in a joint stock company, they are usually advised to hold less
than a controlling block (one-third of the total issued shares) of the
portfolio company in order to prevent the mandatory bid requirement
under the Company Law and the Securities Market Law.
Moreover, as provided under the Banking Law, if an investor intends
to acquire independently or together, with its affiliated person, 5%
or more shares of a Mongolian bank, and thereby becoming an
influential shareholder of the bank, such bank must obtain approval
from the Bank of Mongolia, the central bank of Mongolia, prior to
the transfer or issuance of shares. Furthermore, the Banking Law
prohibits an influential shareholder with a voting right of one bank
from being a shareholder with a voting right of another bank.
In addition, under the Investment Law, a foreign state-owned legal
entity (50% or more of its shares are owned directly or indirectly by
a foreign state) that seeks to obtain 33% or more of the total shares
of a Mongolian legal entity operating in certain strategic sectors, i.e.
mining, banking and finance or media and telecommunication, is
required to obtain approval from the National Development Agency
(the NDA), a relevant government agency in charge of investment
affairs. Accordingly, PE funds that are further invested by foreign
states, e.g. sovereign wealth funds intending to invest in strategic
sectors in Mongolia, must obtain the abovementioned approval from
the NDA.
ICLG TO: PRIVATE EQUITY 2017
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Mongolia
3 Governance Matters
3.1 What are the typical governance arrangements
for private equity portfolio companies? Are such
arrangements required to be made publicly available
in your jurisdiction?
Mongolia
PE sponsors, initial shareholders and management (if applicable)
enter into a shareholders agreement which regulates the internal
relations with regards to the governance of the portfolio company.
The shareholders agreement clarifies, among other things, the
undertakings of each shareholder, e.g. PE sponsors and the initial
shareholders, and the special rights reserved to PE investors,
restrictions on the transfer of shares, as well as the principles to
appoint the management of the company. Many issues agreed under
the shareholders agreement can be incorporated into the charter of
the company and thereby ensured by the companys constitutional
document. The charter, as well as the shareholders agreement (if
there are two or more shareholders in the company) must be registered
with the Legal Entity Registration Office of the General Authority of
State Registration (the LERO). However, these documents are not
required to be made publicly available under Mongolian laws.
Furthermore, certain governance issues of joint stock companies
are regulated by the Company Law and the Mongolian Corporate
Governance Codex, which are mandatorily applicable for
companies that are listed with first category status on the Mongolian
Stock Exchange (the MSE). For example, joint stock companies
must have a board of directors comprising of nine or more directors
and one-third of them must be independent directors. The board
of directors have extensive authority under the Company Law,
including determining the business lines of the company, issuing
shares within authorised amounts, appointing and resigning the
executive director and auditor, etc.
3.2 Do private equity investors and/or their director
nominees typically enjoy significant veto rights over
major corporate actions (such as acquisitions and
disposals, litigation, indebtedness, changing the
nature of the business, business plans and strategy,
etc.)? If a private equity investor takes a minority
position, what veto rights would they typically enjoy?
Under the Company Law, major corporate actions are reserved to the
shareholders. Therefore, if PE investors already hold a majority stake
in the portfolio company, they have the power to shape decisions on
a range of major issues, including corporate reorganisation, change
of business, change of corporate form, issuance of new shares,
exchange of debt into equity, restructuring and liquidation, etc.
However, the following issues must be resolved by the overwhelming
majority of shareholders attending the shareholders meeting, unless
a higher percentage is set by the charter:
Amendments to the companys charter and approval of the
amended and revised charter.
Corporate reorganisation.
Debt to equity swap and issuance of additional shares.
Change of the corporate form of the company.
Liquidation of the company and appointment of the
liquidation committee.
Split or merge of shares.
PE investors in a minority position, which is not protected by the
overwhelming majority requirement, usually enable their veto rights
by requiring a unanimous or significantly higher threshold of votes in
relation to certain issues over which they wish to have veto rights over.
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 GTs Advocates LLP
The veto rights of the directors representing the PE investors can also be
implemented through a unanimous or significantly higher requirement
of votes. Under the Company Law, the board of directors attending
the board meeting must resolve a matter by its overwhelming majority,
unless a higher percentage is set in the charter or the Company Law.
For example, under the Company Law, material transactions must be
resolved by a unanimous decision of the board of directors; hence,
Mongolia
protecting the minority shareholders position.
3.3 Are there any limitations on the effectiveness of veto
arrangements: (i) at the shareholder level; and (ii)
at the director nominee level? If so, how are these
typically addressed?
At the shareholder level, since the Company Law provides that the
issues listed above must be resolved by the overwhelming majority
of the shareholders attending the respective shareholders meeting,
any contractual arrangement setting a lower voting requirement
(limiting the minority shareholders voting power) could be found
to be ineffective. The same is true for the directors, as the Company
Law mandatorily requires at least an overwhelming majority vote
to resolve a matter, unless a higher requirement is set in the charter.
3.4 Are there any duties owed by a private equity investor
to minority shareholders such as management
shareholders (or vice versa)? If so, how are these
typically addressed?
Neither PE sponsors nor management shareholders have duties
owed towards each other, unless such is voluntarily agreed under
the shareholders agreement. However, the Company Law provides
certain regulations intended to protect the interest of the minority
shareholders. In accordance with Article 86.2 of the Company Law,
a holder of 1% or more shares of a limited liability company can
sue the shareholder owning 20% or more shares independently or
together with its affiliated persons in relation to indemnification of
losses and damages incurred by such shareholder to the company.
Furthermore, the Company Law also allows minority shareholders
to require the company to repurchase their shares if they either
voted against or refused to vote on certain matters, including
corporate reorganisation, approval of material transactions, and any
amendment to the charter limiting the shareholders rights. The
minority shareholders can also require the company to repurchase
their shares if 75% or more of the shares of the company have been
acquired by a single shareholder or its affiliated persons.
3.5 Are there any limitations or restrictions on the
contents or enforceability of shareholder agreements
(including (i) governing law and jurisdiction, and (ii)
non-compete and non-solicit provisions)?
The Company Law does not contain any limitations or restrictions
with regards to the contents or enforceability of shareholders
agreements. However, in general, a shareholders agreement must
be in compliance with the Civil Code in terms of its content and
form. In respect of its content, the shareholders agreement must
not contravene laws and publicly recognised moral standards.
Non-compete and non-solicit provisions should be respected by
Mongolian courts unless they are contrary to laws and publicly
recognised moral standards, although such provisions are not
common in PE transactions. Furthermore, it is allowed by the
Civil Code for the parties to the shareholders agreement to freely
determine the governing law and jurisdiction.
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Mongolia
3.6 Are there any legal restrictions or other requirements
that a private equity investor should be aware of
in appointing its nominees to boards of portfolio
companies? What are the key potential risks and
liabilities for (i) directors nominated by private equity
investors to portfolio company boards, and (ii) private
equity investors that nominate directors to boards
of portfolio companies under corporate law and also
more generally under other applicable laws (see
section 10 below)?
There are no legal restrictions in appointing the regular directors
of the portfolio companys board. The only requirement is that the
board members must complete training on corporate governance and
obtain a certificate. However, it is recommended by the Corporate
Governance Codex to appoint directors that are specialised in auditing
or accounting, finance, law and the investment field. Furthermore,
as mentioned above, at least one-third of the board members in a
joint stock company must be independent directors. The Company
Law and Mongolian Corporate Governance Codex provide certain
requirements regarding the independent directors, including, inter alia:
not holding more than 5% of the shares in the company, either
independently or together with his/her affiliated persons;
not holding a senior position in the company or the group in
which the company is a participant;
not holding a public office other than public services;
having no business relations with the company;
having no affiliation to a member of the board or executive
management team or internal auditor; and
not a relative of a shareholder or shareholders affiliated person.
In accordance with Article 84.1 of the Company Law, directors of
the board are considered as authorised persons of the company.
Accordingly, they must act for the best interest of the company
within the legal framework. As provided under the Company Law,
the directors of the board, as authorised persons, must reimburse
the company with their own assets in the case that their actions and
breach of obligations caused losses to the company. Moreover, in
the following cases, the authorised persons, including the board
directors, are held liable to the company, as well as its shareholders
and the creditors:
if they used the companys name for his or her private interest;
if they wilfully provided the shareholders or the creditors
with false information; and/or
if they breached his or her obligation to inform the
shareholders and creditors on matters of the company.
As for the PE investors liability, under the Company Law, a
shareholder owning 20% or more shares of a limited liability
company must assume the same liabilities as an authorised person
of the company. Therefore, if PE investors hold 20% or more
shares in the portfolio company with limited liability, they can
be held liable for their wrongful actions that caused losses to the
company. However, it is usually unlikely to hold PE investors and
shareholders liable in relation to their nomination of board directors.
3.7 How do directors nominated by private equity
investors deal with actual and potential conflicts of
interest arising from (i) their relationship with the
party nominating them, and (ii) positions as directors
of other portfolio companies?
As provided under Article 84.4.3 of the Company Law, directors of
the board, as being authorised persons, must act in the best interest
of the company. Accordingly, a potential conflict of interest can
arise for a director between the best interest of the company and that
ICLG TO: PRIVATE EQUITY 2017
GTs Advocates LLP
of the shareholder that appointed such director. The Company Law
provides that directors of the board must avoid a conflict of interest
and report the conflict of interest situation if it has arisen. Therefore,
the directors of the board can handle such situation by notifying the
other directors and by obtaining approval from them, if possible,
thereby preventing or mitigating the risk or liability that may arise
from acting in conflict of interest.
4 Transaction Terms: General
4.1 What are the major issues impacting the timetable for
transactions in your jurisdiction, including competition
and other regulatory approval requirements,
disclosure obligations and financing issues?
The transaction timeline is greatly affected by the applicable
regulatory approval requirements. If PE investors take a certain stake
in a company in regulated sectors, such as banking and insurance,
etc., they are required to obtain approval from the competent authority
prior to the acquisition. In addition, a PE fund that is funded by at
least 50% by a foreign state (or a sovereign wealth fund) which
intends to acquire 33% or more of a company in strategic sectors,
requires approval from the NDA; as described in question 2.6
above. Furthermore, approval from the competition authority may
be required if PE sponsors i) have previously acquired at least a 20%
stake or controlling rights of a company that is recognised as having a
dominant position in a given market, and ii) intends to acquire 20%
or more of another company that produces or sells the same goods.
These approval procedures can take up to two months varying from
case to case and thereby prolong the overall transaction timetable.
Moreover, in case PE investment is effected through an issuance
of new shares by the portfolio company, capital increase must be
first reflected in its financial statement and must be verified by the
relevant finance authority. Lastly, the acquisition of shares by PE
sponsors and/or the capital increase of the portfolio company must
be registered with the LERO in a timely manner.
As for the disclosure requirement, if PE investors acquire a
controlling stake (one-third of the total issued shares) of a joint stock
company independently or together with their affiliated persons,
they must disclose such acquisition and the list of their affiliated
persons to the Financial Regulatory Commission (the FRC)
within 10 days. However, this disclosure obligation usually does
not have an impact on the overall transaction timetable as it takes
place after the transaction closing.
4.2 Have there been any discernible trends in transaction
terms over recent years?
As we noted above, the overall PE market has slowed down in
recent times, due to the economic downturn coupled with certain
other political and legal factors. Accordingly, there have not been
any discernible trends with respect to the transaction terms in the
past few years.
5 Transaction Terms: Public Acquisitions
5.1 What particular features and/or challenges apply to
private equity investors involved in public-to-private
transactions (and their financing) and how are these
commonly dealt with?
In order to implement a public-to-private transaction, PE investors
first need to acquire a sufficient stake of the target company. As
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Mongolia
required by the Company Law, a decision to change the legal form
of a company (e.g. from public to private) must be resolved by an
overwhelming majority of the shareholders attending the respective
shareholders meeting. Therefore, acquiring such a high level of
stake is certainly a challenge for PE investors, especially if the shares
of the target company are widely dispersed among a large number
of minority shareholders. Furthermore, we have known a few cases
Mongolia
where it was hardly achievable to locate the minority shareholders
of certain public companies that were privatised recently after the
democratic revolution of 1990 and to ensure their right to participate
and vote in the shareholders meeting. Accordingly, this can be a
challenge for PE investors targeting such public companies with
diffused ownership.
Compliance of regulatory matters during the share acquisition
of a public company can be another challenge. The Securities
Market Law, the Company Law and the Regulation on Tender
Offer and Acquisition of Shares (the Acquisition Regulation)
provide rules concerning the acquisition of shares in public
companies. In accordance with the Company Law, the acquisition
of a controlling block of shares of a public company by an investor
either independently or together with its affiliated persons must
be conducted through a public tender offer in accordance with the
Securities Market Law and the Acquisition Regulation. The FRC
oversees the compliance issue throughout the acquisition process.
The Acquisition Regulation provides detailed requirements
for making a tender offer, such as pricing and inclusion of bank
guarantee, etc.
Once PE sponsors acquire a controlling block of shares, they
must make a mandatory tender offer to the shareholders within 60
days after such acquisition to purchase the remaining shares. The
Securities Market Law and the Acquisition Regulation impose
certain requirements on the pricing and other procedural issues of
the mandatory tender offer process. It could be a challenge for PE
investors to arrange the necessary financing for such mandatory
tender offer.
5.2 Are break-up fees available in your jurisdiction in
relation to public acquisitions? If not, what other
arrangements are available, e.g. to cover aborted deal
costs? If so, are such arrangements frequently agreed
and what is the general range of such break-up fees?
Break-up fees are available in principle, although it is not regulated.
Under a general principle of contractual freedom, negotiating
parties of a public acquisition transaction can enter into a letter of
intent or similar agreement under which they agree to pay a break-
up fee or reverse break-up fee. In the absence of such contractual
arrangement in advance, the Civil Code and the securities-related
laws may not allow the acquirer to claim for indemnification of
costs, unless the parties could not reach an agreement due to a
neglectful action of the seller. The range of such break-up fees
varies on a case-by-case basis.
6 Transaction Terms: Private Acquisitions
6.1 What consideration structures are typically preferred
by private equity investors (i) on the sell-side, and (ii)
on the buy-side, in your jurisdiction?
In the context of public acquisitions, consideration is usually
structured using an escrow account, regardless if the PE investors
are on the sell-side or buy-side. Since the acquisition of shares is
effected through a registration of the share transfer at LERO; after
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 GTs Advocates LLP
signing the acquisition agreement, the buyer intends to defer the
payment until the completion of the registration process, whereas
the seller wishes to receive the consideration sooner than that.
Therefore, the use of an escrow account has been the most preferred
solution which both parties can settle with.
Mongolia
6.2 What is the typical package of warranties/indemnities
offered by a private equity seller and its management
team to a buyer?
Since warranties and indemnities are concepts not well-established
and recognised under the Civil Code, these are not typical in
Mongolian law-governed agreements. As for agreements governed
by laws other than Mongolian laws, PE investors usually provide a
limited range of warranties covering its capacity, authority, the legal
title of shares and the inexistence of any pledge or liens or other
property rights of a third party over the shares. In some cases, the
management of the portfolio company provides a set of warranties
in respect of good standing of the company.
6.3 What is the typical scope of other covenants,
undertakings and indemnities provided by a private
equity seller and its management team to a buyer?
The typical package of covenants and undertakings of a PE seller
and the management team is rather limited and would include
ensuring a normal operation of business until the completion date.
The scope of indemnities provided by PE sellers are limited to the
warranties, covenants and undertakings given by them.
6.4 Is warranty and indemnity insurance used to bridge
the gap where only limited warranties are given by
the private equity seller and is it common for this
to be offered by private equity sellers as part of the
sales process? If so, what are the typical (i) excesses
/ policy limits, and (ii) carve-outs / exclusions from
such warranty and indemnity insurance policies?
In our experience, warranty and indemnity insurance has not yet
become a common tool in PE transactions occurring in Mongolia.
6.5 What limitations will typically apply to the liability of
a private equity seller and management team under
warranties, covenants, indemnities and undertakings?
Typical methods aimed at the limitation of liabilities of the PE seller
and the management team include time and capping limits.
6.6 Do (i) private equity sellers provide security (e.g.
escrow accounts) for any warranties / liabilities, and
(ii) private equity buyers insist on any security for
warranties / liabilities (including any obtained from
the management team)?
Although it is not common for PE sellers to provide a security comfort
to the buyer in relation to its warranties and liabilities; in rare cases,
a range of security mechanisms can be used, including the use of an
escrow account, retention of a certain portion of the purchase price (in
very rare cases) and providing a guarantee from its parent entity, etc.
On the other hand, PE buyers almost always require sellers to
provide security through the abovementioned mechanisms, most
preferably an escrow account and/or retention of a certain portion
of the purchase price.
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Mongolia
6.7 How do private equity buyers typically provide
comfort as to the availability of (i) debt finance,
and (ii) equity finance? What rights of enforcement
do sellers typically obtain if commitments to, or
obtained by, an SPV are not complied with (e.g.
equity underwrite of debt funding, right to specific
performance of obligations under an equity
commitment letter, damages, etc.)?
In the context of public acquisitions, the bidders are required, under the
Acquisition Regulation, to attach into the tender offer a bank guarantee
obtained in relation to the offer, as a proof of its financial capacity
to fulfil the consideration obligation. Since the bank guarantee must
cover the whole consideration obligation of the bidder, not just debt
financing availability, PE bidders need to prove the availability of their
equity contribution to the bank, not to the shareholders.
In private acquisitions, it is not common practice to provide comfort
as to the availability of financing. However, if PE investors are
acquiring shares of companies in regulated sectors, e.g. banking and
insurance, they are required to disclose the source of their financing.
6.8 Are reverse break fees prevalent in private equity
transactions to limit private equity buyers exposure?
If so, what terms are typical?
In our experience, reverse break fees are not prevalent in PE
transactions, although it is in principle possible, as discussed in
question 5.2 above.
7 Transaction Terms: IPOs
7.1 What particular features and/or challenges should a
private equity seller be aware of in considering an IPO
exit?
We believe that market risk is the biggest challenge for PE investors
contemplating an IPO exit. The Mongolian capital market is not very
large in terms of the size and volume of transactions. Accordingly,
it might be challenging for PE investors to raise the necessary funds
that they intend to reach through an IPO exit in Mongolia.
7.2 What customary lock-ups would be imposed on
private equity sellers on an IPO exit?
As provided under the Securities Listing Rule of the MSE, the
MSE can submit its recommendation to lock up the shares held by
the holder of the controlling block of a company to the FRC. The
Securities Registration Rule provides that the FRC can resolve to
lock up the shares held by the holder of the controlling block for
a certain period of time. Accordingly, if PE investors hold more
than the controlling block of shares of the company, their shares
can be locked up for a period up to 12 months. In accordance with
the Securities Registration Rule, the lock up period can be extended
once, if the FRC finds it necessary.
7.3 Do private equity sellers generally pursue a dual-track
exit process? If so, (i) how late in the process are
private equity sellers continuing to run the dual-track,
and (ii) were more dual-track deals ultimately realised
through a sale or IPO?
It is usual for PE sellers to pursue a dual-track exit process until
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GTs Advocates LLP
i) they enter into a letter of engagement with the potential private
purchaser, or ii) the registration of the company as a public company
(but not listed). In our experience, the majority of the dual-track
deals were realised through private sales in the past.
8 Financing
8.1 Please outline the most common sources of debt
finance used to fund private equity transactions in your
jurisdiction and provide an overview of the current
state of the finance market in your jurisdiction for such
debt (particularly the market for high yield bonds).
The most common source of debt finance for PE transactions in
Mongolia is a traditional loan obtained from commercial banks.
Loans are provided by both local and foreign banks depending on
the size of the deal. Since the Mongolian debt capital market for
corporate financing is at its very initial stage of development, corporate
financing through debt securities instruments has always been a rare
case in the past. However, we have witnessed a few cases where
companies raised funds through debt instruments in foreign capital
markets. Nevertheless, in recent years, we have observed the growing
interest of companies and domestic investors to raise capital through
issuance of debt securities instruments in the domestic market.
8.2 Are there any relevant legal requirements or
restrictions impacting the nature or structure of
the debt financing (or any particular type of debt
financing) of private equity transactions?
Under Mongolian laws, there are no specific legal restrictions
or requirements that affect the structure of debt financing in PE
transactions. As discussed in question 8.1 above, debt financing
for PE transactions is mostly funded through loans received
from offshore banks. However, if acquisition financing is
provided by a Mongolian bank, such bank must comply with the
banking regulations, e.g. single borrower limit, regulatory capital
requirement, etc.
We think that the underdevelopment of the debt capital market in
Mongolia is the reason for loan financing being the primary source
of debt finance.
9 Tax Matters
9.1 What are the key tax considerations for private equity
investors and transactions in your jurisdiction? Are
off-shore structures common?
With the enactment of the Investment Fund Law in 2013, the
Corporate Income Tax Law was simultaneously amended, pursuant
to which income of the investment fund is exempted from corporate
tax, in order to encourage investment fund activity in Mongolia.
However, the sale of shares in portfolio companies by PE investors
triggers a taxable event under the Corporate Income Tax Law.
Income earned through the sale of shares by a resident taxpayer is
taxed at 10% after deducting the initial acquisition price.
Off-shore structures that, in some cases, enable a favourable tax
regime due to the existence of a double tax treaty are also common
for PE investments. In particular, certain double tax treaties provide
a lower withholding tax rate on dividend or interest income for
residents of the contracting states. Currently, Mongolia has signed
a double tax treaty with about 30 countries.
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The thin capitalisation rule which limits the interest bearing
shareholder loan to three times of the equity investment made by the
shareholder should also be considered for PE investors.
9.2 What are the key tax considerations for management
teams that are selling and/or rolling-over part of their
Mongolia
investment into a new acquisition structure?
The Personal Income Tax Law of Mongolia does not provide an
exemption on income realised through the sale of shares, regardless
of whether the shares are employment shares, or acquired and sold
within a short period or reinvested as rollovers, etc. Therefore, the
management team should be aware of the tax implication of their exit
event from the outset. Income earned through the sale of shares is
taxed at 10% for individuals after deducting the initial purchase price.
9.3 What are the key tax-efficient arrangements that are
typically considered by management teams in private
equity portfolio companies (such as growth shares,
deferred / vesting arrangements, entrepreneurs
relief or employee shareholder status in the UK)?
Mongolian tax legislation does not differentiate between the normal
sale of shares and the sale of employee shares, vesting arrangement or
entrepreneurs profit, etc. Therefore, a tax-efficient structure might
be hardly available for the management team in PE transactions.
9.4 Have there been any significant changes in tax
legislation or the practices of tax authorities (including
in relation to tax rulings or clearances) impacting
private equity investors, management teams or private
equity transactions and are any anticipated?
We believe that the tax exemption on the income of investment
funds, described in question 9.1 above, is the most significant
development for encouraging PE investment in Mongolia. This
exemption certainly impacts PE investors as it decreases their
eventual tax expenses.
10 Legal and Regulatory Matters
10.1 What are the key laws and regulations affecting
private equity investors and transactions in your
jurisdiction, including those that impact private equity
transactions differently to other types of transaction?
The key laws and regulation governing PE activities in Mongolia
are as follows:
1. The Investment Funds Law of 2013.
2. The Regulation on Operation of Private Investment Funds
enacted in 2014.
3. The Securities Market Law of 2011.
4. The Company Law of 2011.
5. Investment Law of 2013.
10.2 Have there been any significant legal and/or
regulatory developments over recent years impacting
private equity investors or transactions and are any
anticipated?
As mentioned in question 1.1 above, PE investment is a relatively
new phenomenon in Mongolia. Until the enactment of the
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 GTs Advocates LLP
Investment Funds Law of 2011, there has not been any specific
legislation on the establishment and operation of investments funds.
Given the gradual development of this kind of transaction, we
believe no significant legal and regulatory developments, specifically
impacting PE transactions and investors, are expected in the next
one to two years. However, the draft proposal of the Investment
Banking Law has been submitted to Parliament recently, and we
Mongolia
view that the potential enactment of this law would contribute to
the development of PE investments in Mongolia to a certain extent.
10.3 How detailed is the legal due diligence (including
compliance) conducted by private equity investors
prior to any acquisitions (e.g. typical timeframes,
materiality, scope etc.)? Do private equity investors
engage outside counsel / professionals to conduct all
legal / compliance due diligence or is any conducted
in-house?
A comprehensive and detailed legal due diligence is usually
conducted by PE investors prior to making the final investment
decision. A typical legal due diligence report covers compliance of
the main rules and regulations relating to the business, the material
debts and financial obligations and industry specific requirements.
The requirement of such broad and extensive due diligence is in
part related to the fact that PE investors usually do not have much
knowledge as to the Mongolian business and legal environment.
PE investors usually hire local legal counsels to conduct the due
diligence process.
10.4 Has anti-bribery or anti-corruption legislation
impacted private equity investment and/or investors
approach to private equity transactions (e.g.
diligence, contractual protection, etc.)?
PE investors are increasingly concerned about compliance of the
portfolio company with anti-corruption legislations, especially
if the companys business is subject to regulatory oversight and/
or licences or with state involvement. In some cases, the sellers
representation, as to the compliance of anti-corruption-related
legislation by the target, was included in the acquisition agreements
as contractual protection.
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10.5 Are there any circumstances in which: (i) a private
equity investor may be held liable for the liabilities of
the underlying portfolio companies (including due to
breach of applicable laws by the portfolio companies);
and (ii) one portfolio company may be held liable for
the liabilities of another portfolio company?
Under the general rules of the Company Law, a company is not
liable for the liabilities of its shareholders, while its shareholders
are liable for the liabilities of the company, only to the extent of
their shares in the company. However, a shareholder of more
than 50% of a company (the parent company) can be jointly held
liable for the liabilities of its subsidiary, in case the subsidiary has
become insolvent due to the decision made by its parent company.
Furthermore, Article 9.4 of the Company Law also provides that a
person/persons that individually or jointly, with its affiliated persons
holding 10% or more shares of a company, must be liable to the
company with its own assets for losses and damages incurred to the
company due to the wrongful actions of such persons. Therefore,
the PE investors may be held liable to the portfolio company for any
loss and damage incurred due to the PE investors wrongful actions.
It is unprecedented to hold one portfolio company liable for
another portfolio company, as they are separate legal entities with
independent legal personalities.
11 Other Useful Facts
11.1 What other factors commonly give rise to concerns
for private equity investors in your jurisdiction or
should such investors otherwise be aware of in
considering an investment in your jurisdiction?
In our view, PE investors should be aware of the legal framework
for doing business in Mongolia in general, as the laws are constantly
developing. New legislations are introduced frequently and change
in law events tend to occur commonly in Mongolia. Enactment
of new legislations and amendments to the existing laws can have
both a positive and negative impact on the investment made by PE
investors.
ICLG TO: PRIVATE EQUITY 2017
GTs Advocates LLP Mongolia

Zoljargal Dashnyam Enkhsaruul Jargalsaikhan

GTs Advocates LLP GTs Advocates LLP
Suite #705, Park Place Suite #705, Park Place
Sukhbaatar District, 1st khoroo Sukhbaatar District, 1st khoroo
Chinggis Avenue 24 Chinggis Avenue 24
Ulaanbaatar 14253 Ulaanbaatar 14253
Mongolia Mongolia

Mongolia
Tel: +976 7013 1020 Tel: +976 7013 1020
Email: zoljargal@gtsadvocates.mn Email: enkhsaruul@gtsadvocates.mn
URL: www.gtsadvocates.mn URL: www.gtsadvocates.mn

Zoljargal is a leading finance and capital market expert. She has
extensive experience in capital markets; corporate law, including
mergers and acquisitions; private equity; and foreign direct and indirect
investments. Zoljargals portfolio is extensive, and her experience
in cross-border finance transactions is unparalleled. The Legal 500
describes Zoljargal as highly recommended, while Chambers and
Partners Asia Pacific designates her as a leading lawyer in 2010-2017
in the clients guide to Asia Pacifics Leading Lawyers for Business.
Zoljargal has a Bachelor of Arts degree in International Law from the
School of Law of the National University of Mongolia (2001). She also
has a Masters degree in Business Administration in Finance from
Oklahoma City University, USA (2004). In addition, she has completed
various professional training courses on advanced loan documentation
and PPP concepts and contracts at reputable international legal
training institutions.
Enkhsaruul is an associate at GTs Advocates LLP. She is frequently
involved in transactions relating to banking and finance, project finance
and capital markets. Her practice also includes advising clients on
various aspects of investing in Mongolia, including regulatory and
compliance matters. She earned her Bachelors degree in law from
the School of Law, National University of Mongolia. In 2016, she
received her LL.M. in Finance from Goethe University of Frankfurt,
Germany.
Prior to joining GTs Advocates, she worked as an associate for another
commercial law firm in Mongolia where she practised corporate law,
foreign investment law, insolvency law and corporate litigation. During
her masters studies in Frankfurt, she completed an internship with the
banking and capital markets team at the Frankfurt office of Linklaters
Germany LLP.

GTs is recognised internationally and domestically as one of the leading law firms in Ulaanbaatar. What distinguishes GTs is the hard working team
of lawyers who are always on the offence for knowledge and greater experience. The firm has risen in the rankings to a Band One firm for Mongolia
focused in General Business Law in 2015, 2016 and 2017. GTs provides a full range of legal advisory services focalised in five key areas including
corporate and M&A, finance and capital markets, all stages of project finance (encompassing mining, infrastructure and energy), commerce and real
estate, and lastly, litigation and arbitration. As a law firm with wide-ranging experience with far reaching clients, GTs has cultivated a consistent and
instinctive pragmatism that is sensitive of cultural, social and legal differences.

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