Interest in Transactions and Major Transactions

In the corporate law of the Republic of Uzbekistan, special attention is paid to mechanisms that prevent conflicts of interest in transactions concluded by a limited liability company (LLC). The legal regulation of interested-party and major transactions serves as an essential element in protecting the rights of company participants, ensuring transparency in management, and minimizing potential abuses by management bodies and controlling members.

1. Concept of Interest in a Transaction

According to the Law of the Republic of Uzbekistan “On Limited Liability Companies”, a transaction is considered interested if:

• a member of the supervisory board, a director (sole executive body), a member of a collegial executive body, or a participant holding jointly with affiliated persons 20% or more of the voting shares has a direct or indirect interest in the transaction;
• such persons or their close relatives (spouses, parents, children, brothers, sisters) are a party to the transaction or hold managerial positions in the organizations involved in the transaction;
• they own a significant share in the legal entity that is a party to the transaction.

Key principle: An interested-party transaction may not be concluded without the consent of the general meeting of participants.

2. Legal Regulation of Major Transactions

A transaction (or several interrelated transactions) is considered major if it involves:

• the acquisition, disposal, or potential disposal by the company of property
• whose value amounts to 50% or more of the company’s book value of assets as of the date of the decision on its conclusion.

Features:

• Major transactions may be concluded only with the consent of the general meeting of participants.
• If a major transaction is concluded without approval, it may be declared invalid upon the claim of the participants.
• The decision on a major transaction is adopted by at least two-thirds (2/3) of the votes of the participants, unless a higher threshold is provided in the charter.

3. Mechanisms for Protecting Participants’ Interests

• Disclosure obligation: Interested persons must promptly inform the general meeting of any circumstances giving rise to an interest.
• Principle of good faith and reasonableness: The director and members of management bodies must act in the interests of the company; failure to comply with approval procedures may entail their subsidiary liability.
• Judicial protection: Participants have the right to challenge transactions and decisions that infringe their rights.

4. Comparative Analysis: Interested-Party vs. Major Transactions

Criterion	Interested-Party Transaction	Major Transaction
Basis	Presence of a personal or indirect interest of management or participants	Significance of the transaction by value (≥ 50% of assets)
Decision-making body	General meeting of participants	General meeting of participants
Voting quorum	Simple majority (unless otherwise provided)	At least 2/3 of votes
Consequence of violation	Transaction may be declared invalid	Transaction may be declared invalid
Liability	Persons concealing their interest may be held liable	Director bears liability for damages caused to the company

5. Practical Significance for Corporate Governance

• These rules enhance corporate discipline and prevent abuses.
• Approval procedures for major and interested-party transactions establish an internal control system.
• The existence of legal mechanisms enables participants to safeguard their rights from improper actions by management.

Examples of Interested-Party and Major Transactions

Example	Description	Qualification	Legal Basis	Required Decision
Loan agreement with the company’s director	The director (sole executive body) receives a loan from the company	Interested-party transaction	Director is a party to the transaction, has personal interest	Approval by the general meeting
Sale of company’s building valued at 60% of its assets	Significant disposal of property	Major transaction	Value exceeds 50% of book assets	Approval by 2/3 of the general meeting
Supply agreement with a company where a participant owns 30%	Participant controls the counterparty	Interested-party transaction	Ownership ≥20% in another company	Approval by the general meeting
Purchase of equipment worth 55% of company assets	Large investment transaction	Major transaction	Exceeds 50% of assets	Approval by the general meeting
Lease of premises from the director’s brother	Counterparty related by family ties	Interested-party transaction	Close kinship with management	Approval by the general meeting
Purchase of land from a subsidiary company	Transaction between affiliated entities	Interested-party transaction	Participation in the dependent entity	Approval by the general meeting
Company guarantee for a loan to an entity where the director is a board member	Company assumes direct financial liability	Interested-party transaction	Director involved in management of the counterparty	Approval by the general meeting
Sale of equipment worth 20% of assets	Significant but below the 50% threshold	Ordinary transaction (not major)	Value < 50% of assets	Decision by the executive body
Contract with a foreign company for 70% of assets	High-risk operation	Major transaction	Exceeds 50% of assets	Approval by 2/3 of the general meeting

Conclusion

• Interested-party transactions are determined by the subjective factor (presence of personal or indirect benefit).
• Major transactions are defined by the value criterion (≥ 50% of assets).
• Some transactions may simultaneously be both interested and major (e.g., sale of real estate to a company where the director is a co-owner).

Consequences of Concluding Interested or Major Transactions Without Proper Approval

1. Legal Consequences

Type of Transaction	Consequences Without Approval
Interested-party transaction	- May be declared invalid upon claim by participants. - Invalidity entails restitution (return of all received under the transaction).
Major transaction	- May also be declared invalid upon claim by participants. - Invalidity entails restitution or compensation of value.

2. Liability of Management Bodies

The director and members of the executive body bear subsidiary liability to the company and creditors if:

• their fault in concluding the transaction without approval is proven;
• the company suffers losses or insolvency results.

Members of the supervisory board involved in the violation may also be held liable.

3. Protection of Participants’ Rights

Participants of the company have the right to:

• challenge the transaction in court;
• demand compensation for damages;
• seek financial liability for those at fault.

4. Judicial Practice (Generalized Approach)

Courts may invalidate transactions concluded in violation of procedures, even if they were economically beneficial, where participants’ rights were infringed. However, if a transaction was concluded without prior approval but in the company’s interests and was subsequently ratified, courts may uphold its validity.

5. Overall Consequences for the Company

• Financial risks: Restitution of property, payment of compensation, reduced liquidity.
• Corporate conflicts: Potential abuse by minority participants seeking invalidation.
• Reputational effects: Reduced trust from investors and partners.