||PART I - General
The Joint Stock company is defined by the law as a company whose capital is
divided into shares and the liability of whose shareholders is limited to the
par value of their shares. As mentioned in the Foreword, the Joint Stock
company may be either a public company (Sherkat Sahami Am) or a private company
(Sherkat Sahami Khass). The main difference between the two is that the public
company may offer its shares and debt securities to the public while the
private company may not. See Annex A for additional differences between the
public and private companies.
1.2. Other Forms of Business Association
In addition to the Joint stock company, the Iranian Commercial Code provides
for the following types of business association:
(a) Limited liability company (Sherkat ba Masouliyat Mahdoud)
(b) General partnership (Sherkat Tazamoni)
(c) Limited partnership (Sherkat Mokhtalet Gheyr Sahami)
(d) Mixed joint stock partnership (Sherkat Mokhtalet Sahami)
(e) Proportional liability partnership (Sherkat Nesbi)
(f) Production and consumption cooperative (Sherkat Ta'avoni Towlid va Masraf)
Of the mentioned listed companies, the limited liability company and the joint
stock partnership provide for a limitation of shareholders' liability to the
value of their shares. In the case of the mixed joint stock partnership, the
law provides for both shareholders and unlimited liability partners. The
principal difference between the joint stock and the limited liability company
is that with the latter, the capital may not be divided into shares and the
participants may not transfer their interests therein without the approval of a
majority of the participants representing three-fourth (3/4) of the company
1.3. General Features
The shareholders of a joint stock company participate in the ownership, profit
and losses, and distribution of assets in liquidation, in proportion to the
shares held. As indicated above, the liability of each shareholder is limited
to the par value of his shares and in the absence of fraud or other deceptive
practices, there should be no recourse to shareholders for the liabilities of
the company. The company has a separate juridical
personality by the law and can sue or be sued in its own name. The shareholders
possess the usual shareholder rights including, in general, the right to attend
shareholders meetings, receive financial reports, elect and replace the board
of directors, and vote on major decisions of the company.
1.4. Number of Shareholders
The law specifies that a joint stock company must have a minimum of three
1.5. Nationality of Shareholders
There are no legal restrictions with respect to the nationality of persons who
may form joint stock companies. As a matter of policy, however, the Iranian
Government generally requires Iranian shareholder participation in fields of
activity deemed important to the nation's development programs.
A Joint Stock company may issue both ordinary and preferred. shares in either
bearer or registered form. While the law does not specifically state what
privileges may be accorded to preferred shares, it is understood that
priorities as to dividends and distribution of assets in liquidation, and
multiple voting powers will be honored under the law. The principal differences
between registered and bearer shares relate to the manner of transfer and tax
implications. See Section 2.6. below.
Management of a joint stock company is made the responsibility of board of
directors which must be elected by cumulative voting of the shareholders at
least once every two years. See Pan IV below for additional information
concerning the board of directors.
1.8. Dissolution and Liquidation
General provisions governing the dissolution and liquidation of a joint stock
company are provided in the law and companies are authorized to specify in
their Articles of Association any particular provisions they may desire so long
as they are not inconsistent with the law. Since the provisions of the law on
this subject are general in nature, it is advisable, when drafting Articles of
Association, to include procedures for dissolution and liquidation.
||PART II- CAPITAL
2.1. Share Capital
A minimum capital, at time of formation, of Rls. 1,000,000 is required for the
private company, and of Rls. 5,000,000 for the public company. Payment for
shares may be either in cash or in kind. If payment is made in kind, the value
of the property involved must be appraised by an official appraiser of the
Ministry of Justice. In the case of payments in cash, only 35% need be paid in
at the time of formation and the remainder within five years upon the call of
the board of directors or shareholders. In the case of payments in kind, the
full amount of the property must be transferred to the company at the time of
formation. The share capital may be increased at any time by a two-third (2/3)
vote taken at an extraordinary general meeting. Decrease in the capital may
also be effected at any time by a two-third (2/3) vote taken at an
extraordinary general meeting and there is a legal requirement for the
reduction of capital whenever half of the company's capital is lost.
Although only 35% of the company's capital need be paid in at the time of
formation, 100% of the capital must be subscribed. Notwithstanding the 100%
subscription requirement, a procedure has been developed in practice for
"authorized but unissued stock", enabling the use of such desirable
arrangements as employee stock purchase plans. In general, the procedure
involves the holding of an extraordinary general meeting at which the
shareholders approve to implement the increase in such amounts and at such
times as the board may determine.
2.3. Par Value
A Par Value, or nominal Value, is required to be assigned to the shares of a
joint stock company. For the public company, the law prescribes a maximum par
value of 10,000 per share. There is no minimum or maximum par value fixed for
the shares of a private joint stock company. There is a requirement applicable
to both the public and private companies that all shares must be of equal par
value and this requirement is apparently applicable to both ordinary and
preferred shares. Where both ordinary and preferred shares are issued, all
apparently must have the same par value. There is also a related requirement
that all calls of the unpaid portion of shares must be made without any
discrimination. If provision for the issue of fractional shares is made, the
par value of each fraction must also be equal.
2.4. Share Certificates
Specific requirements as to the form and content of share certificates are
provided in the law. They must be uniform, printed, and bear a serial number,
and be signed by at least two authorized persons. Each certificate must contain
the following information:
(1) Name and style of the company and number under which it is registered at
the Companies Registration Office.
(2) Registered share capital and paid-up portion
(3) Type of Shares.
(4) Par value of the shares and paid-up portion both in words and figures.
(5) Number of shares represented by the certificate.
2.5. Provisional Share Certificates
The law provides that when share certificates have not been issued, the company
must issue provisional certificates to the shareholders indicating the number
of shares and the amount paid up. The law also provides that until the full par
value is paid on bearer shares, the issuance of bearer certificates is
prohibited; however, registered certificates may be issued to the subscribers
of such shares before the full par value has been paid and in this case the
provisions of law regarding the transfer of registered shares will be
applicable to such shares.
2.6. Transfer of Shares
Bearer shares may be transferred by physical delivery while the transfer of
registered shares is not complete until the transfer is recorded in the share
register of the company. At least, in the case of registered shares,
restrictions on transfer may be written into the Articles of Association.
A legal reserve to be funded by transfer of 5% of the net profit of a joint
stock company each year until the fund reaches ten percent (10%) of capital is
required. Net profit is defined as income derived during the year less the
expenses, depreciation and any transfers to reserves (other than the Legal
Reserve of five percent (5%) of net profit).
Dividends must be authorized by the shareholders at a general meeting and may
be made only out of "distributed profit' which is defined as the net profit
earned during the year less (i) losses incurred during preceding years, (ii)
other optional reserves, plus distributed profit of the preceding years not
2.9. Preemptive Rights
Shareholders have the preemptive right to subscribe to new shares. This right
may be rescinded, however, by a two third (2/3) vote taken at an extraordinary
||PART III - FORMATION
3.1. Articles of Association
The constitutional document of a joint stock company is called the Articles of
Association which is roughly equivalent to a combination of the charter and
by-laws of a corporation formed in other countries. The subscribing
shareholders, or founders must approve the Articles of Association and affix
their signatures thereto before the company formation may be registered. See
Annex B for a checklist of matters- to be covered in the Articles of
3.2 Payment of Subscriptions
Subscriptions in the required amount must be paid in to a bank account opened
in the name of the company before the company may be formed. A receipt of the
bank is required as one of the documents to be filed with the Companies
Registration Office when the company is registered.
3.3 Founders Meeting
A meeting of the subscribing shareholders, or founders is required by law for
the public company but not for the private company. Even with the private
company, however, it is advisable to hold such a meeting as the simplest means
for accomplishing all of the actions required in connection with the company
formation. All of the founding shareholders must :
(a) Approve and sign the Articles of Association
(b) )Confirm the required subscriptions and payments thereon have been made
(c) Elect directors and inspectors
(d)Receive acceptances of directors and inspectors
(e) Designate a general circulation newspaper for publication of the
company's legal notices.
3.4 First Meeting of the Board of Directors
Before a joint stock company may begin doing business, the Board of Directors
must hold. a meeting to:
(a) Elect a Chairman and a Vice Chairman
(b) Appoint the Managing Director and specify his duties
(c) Approve the form of share certificates and designate the company officers
to sign them
(d) Designate the officers authorized to sign on behallf of the company
In addition, it is advisable in the first meeting of the Board of Directors to
designate the bank or banks to serve as depository of the company funds.
In forming a private company the following documents are required to be filed
with the Companies Registration Office:
(a) Draft Articles of Association signed by all shareholders
(b) Statement that the shares have been subscribed together with a bank
certification that the required amounts have been paid in
(c) A document signed by all shareholders evidencing the election of directors
(d) Signed acceptances of the directors and inspectors
(e) Statement designating the general circulation newspaper in which the legal
notices of the company will be published
(f) A declaration (on a form furnished by the Companies Registration Office).
A public company is formed when its Articles of Association has been approved
by the shareholders at a founders (or statutory) meeting and filed with the
Companies Registration Office together with a minute showing the election of
directors and inspectors and their signed acceptances of their positions. The
public company's promoters, who must subscribe to at least 20% of the company's
capital, begin the process of formation by submitting to the Companies
Registration Office in Tehran draft Articles, a draft prospectus and a
declaration which must state:
(a) Name of the company
(b) Identity and domicile of promoters
(c) Objectives of the company
(d) Capitalization, including separate identification of stock paid in kind and
(e) Number of registered and bearer shares together with their par value and
the number of preferred shares together with a description of the rights of
(f) Contributions, cash and kind, of the promoters
(g) Principal office, and
When the Companies Registration Office is satisfied with the information
furnished by the promoters, it will permit publication of the prospectus which
must include information and instructions regarding how and where interested
investors may subscribe for shares of the company's stock. When the total
capital of the company has been subscribed and at least 35% has been paid in,
the promoters are required to allot the shares to the subscribing shareholders
and then call the founders (or statutory) meeting. At this meeting the
subscribing shareholders are to review the Articles of Association, elect the
first directors and inspectors and designate a newspaper for publication of the
company's legal notices. Upon approval of the Articles by the subscribing
shareholders, they must be submitted to the Companies Registration Office
together with the minute of the meeting.
A notice of the company formation is required to be published both in the
Official Gazette and the general circulation newspaper designated by the
founding shareholders. Publication of this notice is paid for by company and
usually contains the following information:
(1) Name and style
(3) Location of the head office
(4) Duration and date of formation
(6) Share capital, par value of shares and type of shares
(7) Paid-up portion of the share capital and number of bank receipt or receipts
evidencing the payments.
(8) Identity of founders and number of shares held by them
(9) Names of first board members and managing director
(10) Managing director's authorities
(11) Persons authorized to sign on behalf of the company
(12) General circulation newspaper in which legal notices will be published
(13) Names of the first statutory inspector and alternate inspector.
(14) Manner of liquidation
3.7. Commencement of Legal Existence
Although the registration and publication requirements must be met to complete
the formation process, the legal existence of the company commences on the date
the directors and inspectors accept their positions in writing.
The following charges and fees will be incurred in connection with the
formation of the Company:
(a) Registration fee based on the capitalization of the company payable to the
Companies Registration Office.
(b) Charges for publication in the Official Gazette of the notice of
registration payable to the Official Gazette at current rates.
(c) Charges for publication in a general circulation newspaper at current
(d) Stamp taxes on share certificates.
3.9. Liability of Promoters
The law provides that the promoters of the company are jointly liable for all
acts and functions which they perform in connection with formation of the
||PART IV- BOARD OF DIRECTORS
Although the law prescribes that a public joint stock company must have a
minimum of five directors, there is no minimum prescribed for private joint
stock companies. However, since the board of a private company, as well as of a
public company, is required to elect a Chairman and a Vice Chairman, and a
board is required by law, the board of a private company must consist of at
least two directors.
4.2. Election and Removal
Directors must be elected from among the shareholders at least once every two
years. It is mandatory that the election be by cumulative voting and that it
takes place at an ordinary general meeting. Any one or more of the directors
are subject to removal by the shareholders. Directors are also eligible for
re-election. Legal entities may be elected as directors.
4.3. Duration of Office
The term of office for directors must be fixed in the Articles of Association
but may not be for more than two years. However, if the term expires before
successor directors are elected, the existing directors continue to be
responsible for the affairs and management of the company until the new
directors are elected.
4.4. Security Shares
Directors are required to possess the number of shares specified by the
Articles of Association and this may not be less than the number required for
voting at general meetings. Each director must place the required number of
shares in the custody of the company for the duration of his term of office to
serve as security against losses which may result to the company through
violations by the directors of their duties. These shares must be registered
shares. The law provides that failure to comply with the requirements will
result in the offending director being considered to have resigned from his
The law specifically provides the board with all necessary authorities for the
management of the company within the limits of the company's objectives as
stated in the Articles of Association. However, the board may not exercise any
power which have been expressly reserved to the shareholders acting in general
meetings, and limitations on the board's authority which will be valid as
between the directors and shareholders, but not in respect of third parties,
may be written into the Articles of
Directors are not only subject to the ordinary rules of fair play in respect of
the company, its shareholders, and third parties dealing with the company, and
thus liable for any violations of these rules, but they are also, individually
and jointly, subject to criminal prosecution for specified acts and omissions.
The board is expected to act in meeting at which a quorum of a majority of the
directors is present. The manner of calling board meetings including any notice
requirement should be specified in the Articles of Association. In any event,
the law provides the board chairman and any group of directors constituting
one-third (l /3) of the board with authority to call meetings. Resolutions will
be adopted when passed by the favorable votes of a majority of the directors
present at the meeting, unless a higher vote requirement is specified in the
Articles of Association.
Minutes for each meeting must be kept and signed by a majority of the directors
who attended the meeting. The minutes must show the names of the directors who
attended and who were absent, a summary of the deliberations and actions taken,
and the date of the meeting.
4.8. Actions without Meeting
Actions of the board are valid without a meeting if approved in writing by all
of the directors.
Although there is no specific authority in the 1969 amendments to the
Commercial Code for director's proxies, such have been recognized in practice.
The Code, prior to the amendments provided for proxies with the caveat that the
director remained responsible for his proxy's acts.
4.10. Alternate Directors
Alternate directors are authorized but are not mandatory.
4.11. Managing Director
The law requires that at least one person be appointed by the board as the
managing director to manage the daily operations of the company. This person
may or may not be a member of the board but he may not also hold the position
of chairman of the board unless the shareholders meet
and approve the arrangement by a three-fourth (3/4) vote. The scope of the
managing director's authority should be specified by the board at the time of
his appointment and he is then considered to be the company's legal
representative with authority to sign on behalf of the company.
Directors as such may not be paid by the company except reasonable fees for
attending meetings, and a "bonus" voted by the shareholders out of company
profits. For the private company this bonus is limited to 10% of dividends and
for the public company, to 5% of dividends. Directors may serve as officers or
employees of the company, however, and be compensated in such capacities.
4.13. Doing Business with the Company
A director.(and the managing director) may not enter into an enforceable
business transaction with the company unless the transaction is approved by the
board without the interested director participating in the vote, and the matter
is reported both to the company inspectors and the shareholders. Even where
this is done, if losses result to the company from the transaction, the
directors who approved may be held liable. The law specifically provides that
loans and guarantees by the company to directors are void except where the
director is a legal entity.
4.14. Competing with the Company
If any director (or the managing director) concludes transactions in
competition with the company, and the company suffers a loss of profits as a
result, the director will be liable to indemnify the company for the loss.
||PART V- SHAREHOLDERS MEETINGS
Shareholders meetings are called general meetings and the law provides for
three types. The first is the statutory or founders meeting which is mandatory
only for the public company. The second is the ordinary (annual) meeting which
must be held once a year and the third is the extraordinary meeting which is
held on call. In addition, there are two other species of meetings involving
the shareholders. One is a Special meeting' which must be called whenever the
rights of holders of preferred shares are to be altered, to enable these
shareholders to vote on the intended alteration. The other is called an
'extraordinary session of the ordinary general meeting" and may be called by
the board of directors, inspectors, or holders of 20 percent of the company's
shares whenever action is required on a matter within the competence of the
ordinary meeting at times other than when the ordinary meeting is scheduled to
5.2. Competence of Ordinary Meeting
The ordinary meeting is competent to deal with all of the affairs of the
company except those which are expressly within the competence of the statutory
and extraordinary meetings. It is expressly required to take action on the
(1) Review and approval of the balance sheet and profit and loss account and
other financial reports.
(2) Review and approval of the directors annual report
(3) Review and approval of the inspectors annual report
(4) Election of directors (if their term has expired) (5) Election of
inspector(s) and alternate inspector(s)
(6) Designation of general circulation newspaper in which the company's legal
notices will appear.
5.3. Competence of Extraordinary Meeting
The extraordinary meeting is competent to deal with any changes in the Articles
of Association or the share capital and dissolution of the company.
The law provides for management of general meetings by a directorate composed
of a chairman, a secretary, and two observers. Unless the
Articles of Association provides otherwise, the chairman will be the chairman
of the board of directors. The secretary need not be a shareholder but the
observers must be.
Written notice for general meetings must be given to the shareholders not less
than 10 days and not more than forty days before the date of the meeting and
such notice must be published in the general circulation newspaper designated
for the company's legal notices. The notice must state the agenda and the date,
hour, and place of the meeting. Waiver of these requirements is author4zed
whenever all of the shareholders attend the meeting.
The quorum requirement for both the ordinary and extraordinary meetings is more
than 50 percent of the shares entitled to vote. If an ordinary meeting fails
for lack of a quorum upon the first call, the
Written minutes of all general meetings are required to be made by the
secretary of the meeting providing a record of the deliberations and actions
taken. The minutes must be signed by the directorate and a copy thereof must be
kept at the principal office of the company.
5.8. Filing and Registration of Minutes
Whenever a general meeting takes action on any of the following matters, a copy
of the relevant resolution must be filed with the Companies Registration Office
for registration in a register (book) maintained by that office:
(1) Election of directors or inspectors
(2) Approval of the balance sheet
(3) Decrease or increase in the capital and any change in the Articles of
(4) Winding up of the company and the manner of liquidation.
5.9. Publication of Minutes
In addition to the filing and registration requirements mentioned in Section
6.12 above, notice of action taken by a general meeting (or by the board) on
the following matters is required to be published in the general
circulation newspaper designated by the shareholders and in the Official
(1) Election of directors or inspectors
(2) Decrease or increase in the capital and any change in the Articles of
(3) Winding up of the company and name and particulars of the liquidators.
(4) Name and power of the Managing Director
(5) Designation of the newspaper in which all the legal notices of the company
will be published.
A general meeting may be adjourned for a period of up to two weeks by the
directorate with the approval of the meeting. In such a case, no new notice is
required and the quorum requirement for the adjourned session will be the same
as for the original session.
5.11. Minority Shareholders Calls
Minority shareholders owning in the aggregate one-fifth (l/5) of the company's
shares are entitled to request the board and the inspectors to call a general
meeting at any time. If the board and the inspectors fail to call the requested
meeting, then the shareholders, themselves, are entitled to call the meeting.
||PART VI- MISCELANIOUS
6.1. Statutory Inspectors (Auditors)
The law requires the election, by the shareholders, of a statutory inspector
and alternate inspector once a year at the ordinary general meeting. The
election of more than one inspector and alternate inspector is optional. In
general, the function of the inspector is to serve as a watchdog over
shareholders and third parties interests and he may be prosecuted criminally
for violation of his duties. Certain categories of persons such as criminals,
the directors and their relatives, and persons doing business with the company
are disqualified from serving in this post. Among other things, the inspector
is required to submit a report of the ordinary general meeting each year.
6.2. Books of Account
Both the public and private joint stock companies are required to maintain in
the Persian language the journal, ledger, inventory and copy book of merchants.
These books serve as the basis for determining the company's tax liability and
failure to keep them strictly in accordance with the legal requirements may
result in the tax authorities making their own determination of what the
company's tax liability should be.
6.3. Company Name
The law requires that the words, "Private joint stock company (Sherkat Sahami
Khass)" appear with the name of a private company and that these words be
displayed in a conspicuous way on all letterheads, publications and notices of
the company. As a matter of practice, the Companies Registration Office
requires the use of Iranian names and will refuse to register a new company
name that is too similar to the name of a company already registered.
SOME DIFFERENCES BETWEEN PUBLIC AND PRIVATE JIONT STOCK COMPANIES
1. A private company may be formed with a minimum capital of one million Rials
(Rls. 1.000.000). The public company must start with a minimum capital of five
million Rials (Rls. 5.000.000).
2. The founding shareholders of a public company are required to subscribe at
least 20 percent of the initial capital and to pay in at least 35 percent of
the subscription. The founding members of a private company must secure
subscriptions to 100 percent of the capital and pay in a minimum of 35 percent
of the cash capital and 100 percent of the non-cash capital.
3. The board of directors of a public company must consist of a minimum of five
directors. A private company may operate with a board of two directors.
4. Directors of a private company are permitted a bonus of 10% of dividends.
Directors of a public company may be voted a bonus of only 5% of dividends.
5. When a public company is organized, a founders meeting is required at which
a number of formalities must be observed. This meeting is not required for the
founders of private companies, although it is desirable to hold such a meeting.
6. The annual financial reports of public companies must be certified by
officially recognized accountants. This requirement is not strictly applicable
to private companies.
7. The public company is limited in the maximum nominal value which it may
assign to each share of stock to Rls. 10.000. The private company is not so
8. The raising of additional capital by a public company requires the
preparation and filing of a prospectus with the Companies Registration Office.
A private company need only submit to the Companies Registration Office a
resolution and declaration when raising its capital.
CHECKLIST of Matters which in Most Cases should be Covered in the Articles of
1. Name of the company
2. Style of the company
3. Duration of the company
4. Objectives of the company expressed and defined
5. Location of the head office and branch offices, if any
6. Details of the share capital of the company specifying the amount paid in
cash and the amount paid in kind, separately
7. Number of bearer shares and of registered shares and the par value thereof
as well as the number of preferred shares, if any, particulars and the
privileges attached thereto
8. Details of the amount of the shares which is paid up 9. Those who will sign
the share certificates
10. Manner of call of the par value of shares and the period over which the
balance should be paid
11. Manner of transfer of registered shares
12. Manner of conversion of registered shares into bearer shares and Vice-Versa
13. Manner and conditions of increasing or decreasing the capital of the
14. Period and manner of calling general meetings
15. Regulations governing the quorum for general meetings and the manner of
running such meetings
16. Manner of transacting business and the number of votes required to give
validity to the actions taken by general meetings
17. Number of directors, the manner of their election, their term of office,
the manner of election of the successors of such directors who die or resign or
become incapacitated or have been removed from their office or otherwise
deprived of their office by any legal impediment
18. Details of the scope of the functions and authorities of the board of
19. Time for and the manner of calling the meetings of the board of directors
20. Regulations governing the quorum for the meetings of board of directors
21. The manner of election of chairman and vice chairman of the board and their
term of office
22. Manner of transacting business and the number of votes required to give
validity to the actions taken by the board of directors
23. Number of directors' security shares to be deposited with the company
24. Whether the company shall have one or several legal inspectors and the
manner of their election and their terms of office
25. Whether the company shall have one or several managing directors and their
terms of office
26. Date of commencement and end of the fiscal year of the company, the time
limit for preparing the balance sheet and profit and loss account and the
submission thereof to the legal inspectors and to the annual general meeting
27. Manner of voluntary winding up of the company and the proceedings for
liquidating its affairs
28. Manner of making alterations to the Articles of Association