There are many different ways to categorize and describe companies in a legal point of view; such as structures, shares and shareholders, liabilities, management systems, and dispute settlement.
The primary aim of this article is to illustrate different types of companies in the Iranian legal system based on business necessities both in domestic and international level.
The information discussed in this article can be useful for several practitioners such as 1- Lawyers who are engaged with a case involved with an Iranian company 2- businessmen and businesswomen who want to have a standpoint about Iranian companies 3- lawyers or companies engaged in a dispute with an Iranian company.
1. Legal Background
In 1932, May 13, by using the experiences of other countries, the establishment of companies were allowed in Iran’s legal system. Afterwards in 1969, March 15, another act adopted to regulate joint stock companies.
2. Types of companies
There are eight types of companies in Iran’s legal system; 1- Public Joint Stock Company 2- Private Joint Stock Company 3- Limited Liability Company 4- General Company 5- Joint Mixed Company 6- Non-joint Mixed Company 7- Relative Company 8- Cooperative Company.
1. Shareholders or Partners
- Every company needs at least two participants or shareholders. There are four exceptions to this rule: 1- Governmental Companies don’t have to follow this rule. Most of the governmental companies have only one shareholder which is the government itself. In these companies, usually the government chooses the management board; CEO and Board of Directors. These types of companies have a whole different system especially in transactions and dispute settlement which will be discussed in another article. 2- Public Joint Stock companies must have at least five members. 3- Private Joint Stock companies must have at least three members and 4- Cooperative companies must have at least 7 members. Cooperative Companies don’t have a strong role in business space in Iran. With a few differences in shares and purpose, Cooperative companies are mostly like Public Joint Stock companies so we will not discuss these types of companies unless of course, the TechRasa audiences would need it.
Rule Number One: contribution of the partners or shareholders can be in cash or non-cash such as real estate or intellectual properties. There is only one exception: Public Joint Stock Company. Here is the explanation:
- In a Public Joint Stock Company, there should be at least 5 members or shareholders. These 5 shareholders are “establishers” or Founders.
- Founders can contribute by cash or non-cash but anyone except founders who wants to contribute to this company should pay only in cash. In this regard, the definition of a Public Joint Stock Company can help. According to Article Number 4 of Commercial Code, 1969: A Public Joint Stock Company is a company in which the capital of the company will be partly acquired by selling shares to the public.
- In another word, Founders only prepare a part of capital which should be at least 20 percent of the whole capital and remaining part will be collected via selling shares.
Rule Number Two: The amount of contribution s will be represented in two different types: 1- As a number of shares in Joint Stock Companies and 2- As a percentage of contribution in other types of companies. This number or percentage determines two things: 1- Rights of members in management and 2- liabilities of members toward debts:
- Rights in Management: It is obvious that a member or a shareholder that has a significant share can have more effect in electing the directors. This topic will be discussed in another section.
- Liabilities toward debts: Companies create a safe place for business; those who involve in a company can be sure that only the company is responsible for business issues so other properties and assets are not involved in a company’s obligation. The contribution of founders or shareholders becomes the capital of the company so they don’t have any other responsibility toward the company’s debts. There are three exceptions in this rule: 1- General Companies 2- Mixed Companies and 3- Relative Companies.
- The first exception is for General Companies. A General Company also known as “General Partnership” or “Unlimited Company” is a company consisting of at least two partners. Partners in this company have an unlimited responsibility toward company’s debts. If the company’s assets are not sufficient to meet its debts, each partner is liable for the payment of all the debts of the company. Any stipulation among partners to the contrary is null and void as far as third parties are concerned.
- The second exception for Mixed Companies is similar to the first exception. There are two types of Mixed Companies: 1- Joint Mixed Company and 2- Non-Joint Mixed Company. It needs a little explanation:
- The title of this company is due to its structure: this company consists of two types of members: 1- partners and 2- shareholder. Partners in the company are like partners in General Company and shareholders are like shareholders in Joint Stock Company.
- Therefore the conclusion of the second exception is that: Partners in Joint Mixed company and Non-Joint Mixed Company have unlimited liability toward company’s debts but shareholders’ liability is limited to their share in the company.
- The third exception is about Relative Companies. Relative Companies are very rare. The number of existing Relative Companies is less than 20 which most of them are inactive in business. As the writer knows, this type of company only belongs to Iran ’s Legal System. Since there is no practical use for this company anymore we don’t need to discuss it.
4. Summary and Extra Tips
- Every company requires the contribution of two founders except for 1- Private Joint Stock Company which requires three founders. 2- Public Joint Stock Company which requires five founders.
- Founders in all types of companies can contribute in company’s capital by cash or non-cash.
- Anyone who wants to join an existing company can also pay his or her share by cash or non-cash except for Public Joint Stock Company in which, the payment has to be in cash.
- In Public Joint Stock Company, founders have to prepare 20 percent of the capital. From this 20 percent, founders have to pay 35 percent (cash or non-cash) and the remaining percentage can remain as an obligation up to five years.
- In Private Joint Stock Company, founders have to prepare 35 percent of the capital (cash or non-cash) and the remaining percentage can remain as an obligation up to five years.
- In all type of companies, (except in General Companies and General members of Mixed Companies) members have limited liability toward debts. This liability is limited to shares either paid or obliged. This statement is because that in Joint Stock Companies both Private and Public, 65 percent of founder’s shares can remain as an obligation. But this remaining part has to be paid in five years. Again, this remaining part also can be paid in cash or non-cash.
- Remember, it is only for Joint Stock Companies that founder’s shares can remain as an obligation. In other companies, founders have to prepare all the capital (cash or non-cash). No part of capital can remain as an obligation.
- If the contribution is non-cash, it has to be evaluated. The member who’s shares is in non-cash will be responsible for this value.
- Members of General Companies are liable for all the company’s debt. Members who join an existing General Company are also liable for all debts. This liability cannot be limited by any agreement.
- In Mixed Companies, there are two types of members: 1- Members who have unlimited liability toward debt who are called as Partners and 2- Members who have limited liability. Unlimited liability of partners in this company cannot be limited by any agreement.
- Remember, in both General and Mixed Companies, as long as the company exists, the debts and obligations are in the company. The unlimited liability of partners is emerged only after dissolution or bankruptcy of the company.
5. Management Systems
Every company has three organs: 1- A General Assembly 2- A Board of Directors 3- A Managing Director or a Director or CEO.
- General Assembly consists of all members; partners or shareholders. Major Decisions are on the General Assembly.
- General Assembly chooses Board of Directors. And Board of Director Chooses Managing Director. Members of Board of Directors have to be a member of the company. Managing Director can be either a member or non-member.
- Decision-making process in General Assembly is based on the nature of the decision. Different decisions need a different majority. As mentioned in the previous section, there are two different Acts to regulate companies: 1- Commercial Code adopted in 1932 which governs to all companies except Joint Stock Companies and 2- Commercial Code adopted in 1969 which governs to Joint Stock Companies. In the first Act, there is only one General Assembly and only the majority of the decision making varies regarded to the importance of the matters. In second Act, there are three types of General Assemblies.
- General Assemblies and Decision Making
- In Joint Stock Companies there are three types of Assemblies: 1- Founders Assembly 2- Ordinary Assembly and 3- Extraordinary Assembly.
- Founders Assembly will elect the first Board of Directors and Inspectors and in general, is responsible for starting the company. Ordinary Assembly is an annual Assembly responsible for electing Board of Directors and revising accounts and loss and profits. Changing the Statute of the company, changing the amount of capital and dissolution of the company is under the authority of Extraordinary Assembly.
- In other types of companies, the decision will be made by the majority of shares. Changing the Statute, changing amount of capital and dissolution needs a majority both in the number of members and shares.
- Board of Directors
- The number of this Board depends on the Statute of the company which in Joint Stock Companies shouldn’t be less than three. In other companies, it shouldn’t be less than two. Decisions will be made by the majority.
- There is also another rule that can affect the decision-making process; some of the shares or shareholders can have privileges. These privileges may regard to either power for decision makings or financial privileges.
- Board of Directors chooses the Managing Director. Managing Director is representative of the company and works under the authority of Board of Directors.
6. Summary and Extra Tips
- In a company, General Assembly is an annual meeting to revise the company’s outcomes for the previous year and to determine executive plans for the next year.
- Board of Directors is responsible for day to day decisions which perform its role via Managing Director.
- Major decisions are: changing the Statute, changing the amount of capital and dissolution. These decisions need to be made via Extraordinary Assembly and with a significant majority.
- There is no prohibition to define different assemblies or different majorities for decision making.
- Decision making largely related to the number of shares. Some of the shares can have privileges.
- A practical example of privileged shares: A company wants to work in IT industry. The main instrument of the company is a Patent which belongs to one of the founders. This founder can demand more power in decision making. This founder can also ask for more profit. Also, these privileges can relate to any other issues in the company such as:
- The exclusive authority on some matters.
- Supervision on share transfers.
- Prohibiting other members from transferring their shares.
- The exclusive authority on the entrance of new member.
- Transferability of shares in Public Joint Stock Companies is a primary rule so it cannot be subject to any permission even for General Assembly and Board of Directors.
7. Practical Rules for International Trade
- There are two types of companies which are commonly used in Iran’s private sector: 1- Limited Liability Company and 2- Private Joint Stock Company.
- The amount of capital is one of the most important tools to assess reliability. Like any other country, there is a mandatory amount of capital for any company. This minimum capital is very low so while evaluating an Iranian company, pay attention to its assets too. “Iran Chamber Of Commerce” is a reliable authority in this regard. See http://iccima.ir/
- As mentioned above, if the contribution of a member is in non-cash form, it has to be evaluated. Furthermore, founders are responsible for this evaluation not for the property itself. Why is this important? Because if a founder who brings a real estate or an intellectual property to the company, he/she wants to reduce his or her responsibility to the minimum amount. This happens a lot in a market full of uncertainties. So in transactions with a company that holds an intellectual property like a patent or a brand, focus on the market value of that property not its value in the company’s papers.