What are the main differences in the legal frameworks of companies, especially startups in Iran? Read the article to find out more.
There’s a saying which goes: Show me the criminal procedure law of a country and I will tell you how this government treats the people. The same quote is logical in business and development. The legal instruments in every country can determine the scope of freedom of trade and can also directly affect a country’s speed of development.
As a lawyer interested in startup companies and their legal subject matters, what I’ve witnessed is that even in developing countries with a totally different legal framework such as Iran, the founders and even the lawyers use the same notions that are being practiced in other countries.
But there are still some legal notions and instruments which don’t exist in other countries and are specific to Iran.
In this article, I will clarify some of the important legal frameworks in Iran and point out the differences comparing to other countries. This article has been written exclusively for TechRasa.
A- The starting point: Company establishment and structure
- Starting a startup business in Iran requires establishing a company.
- Foreign companies can also work through a branch;
- Establishing a branch has an easier process than registering a new company, however, a branch works under the title and responsibility of the parent company.
- IP registration and protection, and also funding are different in a branch company and could be described as more difficult.
- Foreigners can establish a company in Iran with or without an Iranian partner.
- Advantages of a branch:
- Easier process
- Easier assessment, especially if the parent company is a known one
- More access to foreign fundings
- Negative aspects of a branch:
- Joint responsibility with the parent company
- A more difficult process for IP registration and protection
- Mutual effects of the branch and the parent company in financial issues such as tax and bankruptcy
- Advantages of establishing a new company:
- Separate responsibility from the parent company
- The ability to being more precise about IP, financial, tax, and contract matters
- Negative aspects of establishing a new company:
- Less access to foreign funding
- Less legal instruments for supervision
- Most common structures for startup companies in Iran are: Limited Liability Company (LLC) and Private Joint Stock company (PJSC).
- The first one needs at least two partners without a maximum limit.
- The second one needs at least three partners, also without a maximum limit.
- As it is common in the company laws in almost every country, the share allocations and the management system depends on the partners’ choice.
B- IP issues
- IP forms which usually exist in startup companies: Patents, copyrights, trade secrets and trademarks, service marks and trade names.
- Patent definition and protection in Iran are almost the same with the international notion of the patent.
- One important thing that might happen in a startup company is when an invention which qualifies as a patent happens during the performance of the startup company.
- In this situation, Iran Patent Law has a special rule: If an invention arises under the employment contract, the patent belongs to the employer unless the employment contract says differently.
- In cases which there is a possibility of an invention in a startup company, it is necessary to clarify the ownership of the patent.
- Patents that belong to the parent company cannot be used in a branch unless a contract about this issue was concluded between the branch and the parent company.
- A patent has to be registered in Iran. It is the same for other intellectual properties. Although Iran has joined most of the international treaties about IP, however, the recognition and the protections are still country based. Furthermore like any other developing country, there is no strong remedy system for violating the IP rights especially when it comes to a foreign country.
- Trademarks also have to be registered in Iran except for famous trademarks.
- In case of famous trademarks I should mention that some of them have been registered in Iran by Iranian individuals and companies, however since it is the right of the owner to seek the formal remedies, they can work and perform until the owner prosecutes this violation.
- Among intellectual properties, trade secrets have a way more unsecured situation. Of course, this is not only in Iran, on the international scale there are a few protections for trade secrets.
- Internationally speaking, in Art. 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) there are some protections for trade secrets.
- Here is what you should know about it in Iran:
- There is no legal definition and protection of trade secrets except in the field of e-commerce. In this regard, only trade secrets in data messages can be the subject of an unlawful act.
- Furthermore releasing the secrets in this context should be in the cyberspace in order to be conducted as an illegal action.
- There are general rules about civil liability which can be used in protecting the trade secrets. Civil liability is a liability to compensate the losses in case of an unlawful act. This liability requires three elements to be proven in the court: A. An unlawful act such as unauthorized access to secrets B. To cause a loss and C. Causality relationship between the unlawful act and the losses. It is obvious that these elements are all difficult to prove.
- Another protection for trade secrets is in case a member of a company uses the secrets for a similar business activity. The problem is that what if someone else uses the information? What if they didn’t use the information for a similar activity? Unfortunately there is no protection. So the only and the best way is to sign a NCND contract or a confidentiality contract with anyone who is involved in the startup company.
- Official authorities like lawyers and notaries should consider all the information about the clients as a secret. As a lawyer sometimes even mentioning the name of our clients can be considered as a violation of confidentiality.
C- Shares and shareholders
- The last changes in Iran’s Commercial Code return back to almost half a century ago, so it is not surprising that there is no trace of new business notions.
- Since the LLC and PJSC are the most common types of companies in startups, I will be focusing on these structures.
- In LLC, members are called “partners”. In PJSC, members are called “shareholders“. So what difference does it make?
- In every company that consists of partners (such as LLC, General Partnership) shares are not transferable without the consent of other partners unless the statute of the company says otherwise.
- Vesting is a notion which is kind of the most important instruments in order to keep the productivity of a startup company.
- “Vesting is the process by which an employee accrues non-forfeitable rights over employer-provided stock incentives or employer contributions made to the employee’s qualified retirement plan account or pension plan. Vesting gives employee rights to employer-provided assets over time, which gives the employee an incentive to perform well and remain with the company. The vesting schedule set up by the company determines when the employee acquires full ownership of the asset. Generally, non-forfeitable rights accrue based on how long the employee has worked there.” See: https://www.investopedia.com/terms/v/vesting.asp
- There is no such thing as Vesting in Iran’s Commercial Code.
- In every company in Iran’s legal system, partners or shareholders should own all of the company’s shares. Similarly there is no such notion as Option Pool.
- For a company to be registered in Iran, founders have to provide a part of the company’s capital and own a number or a percentage of the company’s shares. If the statute of the company includes a vesting clause (suspended ownership over some shares), that company will not be considered as a legally established company.
- I need to mention that the founders might insert a vesting clause in the statute of the company and the company registration office would register this company but there are two issues:
- The company registration office is not a judicial authority so in most cases it will not preclude the registration because of this fact.
- Even if this company would be registered and publicly announced, still it will not become a legally established company. What will happen in this situation?
- This company might work for years and not a single problem arises, however if this company goes to a court for any judicial claim, even as a plaintiff, the court will nullify the company.
- In case of nullification of a company, each and every current and previous partners and shareholders will be conducted as partners of a General Partnership. In a General Partnership (which is a type of company in Iran) every partner has individual responsibilities toward the company’s debts and obligations.
- As I mentioned before, the notion of Option Pool also doesn’t exist in Iran’s law.
- A quite similar legal instrument that can be used instead of vesting and option pool is to oblige to give ownership of the future shares of the company.
- In this regard, the existing partners or shareholders own the whole company’s shares, so only those shares that would be issued in future can be subject to obligation.
- Of course another way is to transfer some of the existing shares from one shareholder to the employee.