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New Companies Regime Introduces Improvements for Investors - International Law Office

International Law Office

Company & Commercial - Azerbaijan

New Companies Regime Introduces Improvements for Investors

July 26 2004

The most common corporate entities existing under Azerbaijani legislation - joint stock companies (open and closed), limited liability companies and full partnerships - will be familiar in many other jurisdictions. However, Azerbaijani legislation has suffered for some time from being piecemeal, and has often been scant on detail in relation to important issues. There has been a tendency in the last few years to consolidate companies legislation in the Civil Code.

There have been two significant changes to the legal regime governing companies in Azerbaijan since the beginning of 2004. Until the end of 2003, company law was variously contained in the 1996 Law on Joint Stock Companies, the 1998 Law on Limited Liability Companies, the 1999 Civil Code and the 1996 Law on State Registration of Legal Entities.

The Law on State Registration of Legal Entities and the State Registry was passed by Parliament on December 12 2003 and came into force on January 9 2004.

The law amends the existing regime in respect of:

  • operation of the State Register;

  • greater detail as to documents and their contents required for registration;

  • greater detail as to the procedures for registration and de-registration;

  • timeframes for registration; and

  • a consolidated list of documents required for registration and de-registration.

It is now possible to conduct the effective equivalent of a company search at the Ministry of Justice. On application to the ministry, copies of all documents registered in respect of a company will be sent to the applicant. Thus far, applications for documents have been dealt with within approximately two weeks, a contrast to the general 30-day time limit observed by many government entities.

Less welcome are the time limits within which the ministry must register a legal entity. These have now been extended from the previous 10 days (30 days in practice) to a potential total of 40 working days. Despite the extension of time limits, there is now pressure from the president's office for registrations to be dealt with more swiftly, which it may be hoped will assist investors in practice.

The principal effect of the changes to the Civil Code (passed by Parliament on December 23 2003 and in force from March 6 2004) is to set out clearer procedures for the formation and operation of limited liability and joint stock companies. Previous legislation had not made clear provision in a number of areas and the changes are to be seen in relation to the following:

  • company incorporation procedures for founding shareholders;

  • increases in charter capital;

  • restrictions on distributions by a company;

  • operation of the company organs (supervisory and management boards and financial revision commission); and

  • maintenance of the shareholders register.

There were a number of significant deficiencies in the previous companies legislation. For example, in the absence of a provision stating the minimum quorum requirement for general meetings of shareholders, one shareholder could in effect hold the company to ransom. The law now specifies a quorum of 60% of all shareholders for joint stock companies, reduced to 40% for a reconvened meeting and 25% for a further reconvened meeting if the 40% quorum cannot be met. The new legislation does not, however, provide for general quorum requirements for limited liability companies.

Voting majorities required to pass resolutions on specific issues at general meetings of joint stock companies are also dealt with in the Civil Code amendments. These range from a simple majority of those present at a meeting to a two-thirds majority for resolutions as to liquidation, reorganization of the company and amendments to the charter. Likewise, no provision is made for majorities required in limited liability companies, other than the previous requirement for a unanimous resolution of shareholders in respect of liquidation or reorganization. It is not clear, however, whether this unanimity must be of all shareholders or only of all those present at a general meeting.

It is a welcome boost to corporate governance that in joint stock companies with more than 20 registered shareholders, the register of shareholders must be maintained by a third party which is licensed in the securities market to maintain such registers. The register is open to the inspection of any shareholder on request (no more than once a year).

Also welcome is the provision for the establishment of an independent counting committee (members of the internal organs of the company cannot be members) for joint stock companies with more than 100 shareholders.

While the new regime has provided some much-needed clarification on important issues, further consolidation is required. For example, parts of the Law on Limited Liability Companies remain in force, although in the event of differences - as in other jurisdictions - the provisions of the later legislation prevail.

For further information on this topic please contact Benjamin Paine at Ledingham Chalmers by telephone (+994 12 936 669) or by fax (+994 12 987 132) or by email (Benjamin.Paine@LedinghamChalmers.com).

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