Legal basis

The matter of commercial transaction between a company and its directors, including members of the board of directors and the managing director of the company whether or not the MD is a member of the board, has been regulated in Articles 129, 130 and 131 of the Legal Bill to Amend Part of the Commercial Code (1969) that is called in our legal literature the Joint Stock Companies Act (the Act). Although, the Act was legislated with a focus on elaborating and regulating various matters of joint stock companies, part of its provisions, including the aforementioned Articles 129 – 131, have been firmly recognized as applicable to all kinds of companies established under the laws of Iran.

This overview is limited to the conditions to be followed and the formalities to be taken for commercial contracts only; financial transactions have their own criteria and requirements.   

Who is subject to

According to the Act, entering by the company into any commercial contract with any of the following persons shall require taking extra formalities (“subject person”):

• any person (legal or individual) who is a member of the board of directors of the said company;
• managing director (MD / CEO) of the said company;
• any legal entity to which a member of the board of directors of the said company is a partner;
• any legal entity in which a member of the board of directors of the said company is a board member; 
• any legal entity in which a member of the board of directors of the said company is the MD / CEO; 
• any legal entity to which the managing director of the said company is a partner;
• any legal entity in which the managing director of the said company is a board member; and
• any legal entity in which the managing director of the said company is the MD /CEO.  

 

What are the conditions to be followed / formalities to be taken

If the company intends to enter into a commercial contract / transaction with a “subject person”, the following conditions / formalities must be followed / taken:

• a prior approval of the board of directors of the company is the initial requirement for entering into such a contract / transaction. The “subject person” whose engagement is the ground of government of restrictive provisions of Articles 129 – 131 of the Act, shall not be allowed to vote for such approval.
• if entering into the relevant contract / transaction is approved, the board shall be obliged to inform the company’s inspector of the case together with a report containing the details of the said contract / transaction.
• in that case, the board shall also be obliged to provide the general assembly of shareholders of the company with a report of the case that should be supported by a separate report prepared by the company’s inspector stating his / her opinion re the same.
• the general assembly of shareholders of the company should then vote in agreement or disagreement with the relevant contract / transaction. The “subject person” whose engagement is the ground of government of restrictive provisions of Articles 129 – 131 of the Act, shall not have the right to vote.
• if the relevant contract / transaction had been concluded / performed upon the “approval of the board” but the general assembly of shareholders did not agree with it, the relevant contract / transaction shall remain valid via-a-vis bona fide third parties. The interested “subject person” and the board members who approved the relevant contract / transaction, however, shall be jointly liable vis-à-vis the company to remedy any damages resulted therefrom.
• if such a commercial contract / transaction is concluded / performed without prior approval of the board of directors of the company and the general assembly of shareholders would not approve it as well, the relevant contract / transaction shall be rescindable within three years. 

Emphasizing that there are lot of details and subtleties that should be taken into consideration for any particular case and situation, the above is giving a very general understanding of the basic position of the Iranian legal system in dealing with one of the “conflict of interest” situations that could occur between a company and its directors.   

 

For more information and advice, please contact us in Tavakoli & Colleagues law firm.