The scope of authority of managers in commercial companies

Author: Dr. Hamid Bagherzadeh

Are you aware of the powers and duties of the directors under company law of Iran? What are the restrictions to the directors’ powers?

Directors play an important role in managing the companies, since they determine and implement policies. Iranian legal system has adopted two different approaches to the scope of authorities of the directors in Commercial Code and the Amendment Bill to the Act. Here, the said approaches are discussed briefly. 

  • What is the Commercial Code’s approach?

Commercial Code (1932) is the most important act in the business sector and it does not cover the stock companies. Yet, the Commercial Code needs to be updated, as it does not contain any provision for e-commerce, insurance, shipping, stock companies, co-operative companies and many other legal concepts. Considering corporate capacity and the acts beyond the sphere of the directors’ powers, the Commercial Code is applicable to the company law.

1.1. Corporate Capacity

In accordance with article 588 of the Commercial Code, “a company may have all the rights and assume all the obligations granted by law to natural persons, except rights and obligations peculiar to man by his very nature, such as rights and obligations resulting from paternity, affiliation and other similar rights or obligations”.

In doctrine, some commentators (like Dr. Kaviani and Dr. Pasban) believe that corporations have broad legal capacity. This approach has dome disadvantages, as taking this approach eventually leads to broad legal capacity of all legal persons. However, it is in contradiction with Article 44 of the Constitution of the Islamic Republic of Iran. Therefore, broad legal capacity under Article 588 of the Commercial Code can be only applied to corporates. 

Moreover, all actions that require authorization are exceptions, since the corporations are not entitled to act without obtaining approval or prior authorization. It is worth noting that based on Article 587 and Article 62 of the 5th Five Year Development Plan, registration of the company is a key factor when assessing the validity of the actions. Accordingly, it seems that a broad approach for legal capacity of the corporates is not accepted in case law and the procedure of the registration company.

1.2. Acts beyond the powers of directors (Ultra vires acts)

Article 589 alongside Article 105 of the Commercial Code determines the procedure of decision making of the legal persons. The latter only applies to limited liability companies and private stock companies are not covered by the said articles.

Accordingly, the authorities entitled to decide are only the ones who are granted the power to do so by the relevant law or Article of Association. In fact, the responsibility of the directors to the shareholders is similar to the responsibility of the agents to their principals. Thus, the agent is not entitled to  exceed the limits of the authority which the principal has explicitly given him, or the authority which is inferred by custom, usage, and circumstantial evidence based on Article 667 of the Iranian Civil Code.

Yet, this is not applicable to stock companies, as these types have their special regime and regulations. In accordance with Article 6 of the co-operative Act, the relationship of the directors and shareholders is similar to agents and principals. Any action beyond the sphere of the directors’ powers is considered invalid. This provision is in line with Article 589 of the Commercial Code and also Article 247 of the Civil Code. Obviously, such actions should be approved by the shareholders.

  • What is the Amendment Bill’s approach?

Under Article 299, the Amendment Bill to the Commercial Code  replaced the provisions of Article 21 to 94 of the Commercial Code.The bill applies to the government companies based on Article 300 of the Commercial Code. It contains no specific provision on the legal capacity of the legal persons and companies and is only applicable to the stock companies. 

With regard to the legal capacity of the stock companies, we can refer to Article 8 of the Bill which provides that it is mandatory to expressly  mention the subject matter of the company in the Article of Association. The term “expressly” is not mentioned and required under the Commercial Code. This shows that a narrow interpretation should be taken into consideration when someone is interpreting the subject matter and actions of a stock company. 

The amendment Bill contains two articles regarding the sphere of the directors’ powers. First, we can mention Art.118 of the Bill. This article provides that basically the directors have full authority to manage the company. Yet,  there are two exceptions which limit their powers. Article 118 expressly provides that: 

“Except for matters which, in accordance with the provisions of this Act fall under the exclusive jurisdiction of general meetings of the company, the directors of the company shall have all necessary authorities for the management of the company provided, however, that their resolutions and acts are intra vires. The imposition of any limitation on the powers of the directors by the articles of association or by resolutions of a general meeting are valid in respect of relations between the directors and the shareholders but are considered as null and void vis-à-vis third parties”.

  • What can be concluded?

It is inferred from Articles 17, 118 and 135 of the amendment bill and also Article 7 of the Company  Registration that directors and their decisions are the key parts of the stock companies. Thus, the decisions are valid and credible to the third parties. Consequently, the aforementioned approach is not in line with the Commercial Code, but is adopted by the majority of the commentators, courts and judges.

Have a legal question about forming a company or the director’s scope of authorities in your company? For further information and legal advice, you can easily contact us. The experienced lawyers of Libra guide you through every step of the legal process.


Requirements for establishing a privately held joint-stock company

How much do you know about the joint stock companies? The requirements for a private joint-stock company can be categorized into some parts such as capital, governance, fees, types of shares, directors, registration and etc. Here is a brief overview of the requirements.

  • Capital

The minimum amount of capital required to establish a private joint-stock company is 1m IR (around €70).  The registered capital will also be the ceiling for investors’ liability. Thirty-five percent of the capital must be deposited in a special bank account in the company’s name before the company seeks registration. The rest will have to be paid up by shareholders after the registration process.

  •  Governance

Joint-stock companies must hold annual general meetings of shareholders and are required to have an annual audit, depending on the size of the activity. Auditing firms must be members of the Iranian Association of Certified Public Accountants (IACPA), and designated as official accountants. The Commercial Code requires all joint-stock companies to appoint one or more inspectors at the annual general meeting.

  •  Fees

There is a nominal fee for registering joint-stock companies based on the authorized capital of the company. The fee is nominal and there is also a stamp duty equal to 0.2% of the capital.

  •  Types of Shares

The Commercial Code allows for the creation of different classes of shares, such as preference shares as well as common shares. Shares may be in either registered or bearer form (even bearer shares need to be assigned to a shareholder, but can be their transfer process is easier). The shares of joint stock companies are freely transferable.

  • Directors

A joint-stock company must have a board of directors, consisting of shareholders or representatives of shareholders. At least two directors must be appointed. The board of directors is elected for a two-year period at the general meeting. The meeting also appoints the managing director of the company. Should a board member reside abroad, delegation of power to resident board members is permitted, but the Articles of Association of the company must authorize such delegation of power.

  •  Registration

The registration process for a joint-stock company can take between 2 (takes 2 weeks from submission) and 4 (could take additional 2 weeks for preparations of forms) weeks and requires the following submission to the Registrar of companies:  

  • Translation and Articles of Association of the foreign company;
  • Translation and original of declaration of registration of the foreign company;
  • Translation of notice of establishment of the foreign company in the country where the company is registered;
  • Translation and original agreement between Iranian and foreign company in relation to the establishment and registration of the new company in Iran. Although this needs to be in place, it does not need to be disclosed. (This is not ;
  • Introduction of a single representative as a member in the board of directors who will attend general meetings of the new company, only if the foreign company also wishes to be elected as director;
  • Translation and original full power of attorney with delegation rights to the representative;
  • The representative’s signature and foreign company’s stamp on the new company’s registration documents; and

The Articles of Association of the company should be divided into Persian and foreign parts. The foreign part should be signed by the foreign company’s representative and the Persian part should be signed by the Iranian partners.   The Persian part is the only operative part, and the English part is only for the benefit of the foreign shareholder.

 What is more, Iranian private joint-stock companies with foreign participation are often referred to loosely by the business community as “joint venture companies”. Companies established under the Commercial Code may also be in the form of a limited-liability company (sherkat bamassouliatemahdood), which is roughly comparable to French SARLs, German GmbHs or British private companies.

Corporate law is a complex area. If you want to establish a business or need legal consultancy, you can simply contact our high qualified lawyers. We know what you are going through!

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