Azerbaijan’s New Legal Framework for Corporate Agreements

What is a corporate agreement?

Corporate agreements provide a civil law foundation for horizontal relations among the participants in business entities. [4, p. 136] They ensure efficient operation and governance of corporate entities by regulating rights, obligations and responsibilities of their participants. [1, p. 3419] The most common types of corporate agreements include participants’ (shareholders’) agreements, joint venture agreements, and partnership agreements. [1, p. 3419-3420]

What was the regulatory framework in Azerbaijan before the Law?

In Azerbaijan, corporate arrangements have long been relevant to foreign investors and local entities, particularly because contract and corporate laws have historically provided limited guidance on corporate governance matters. Given unsettled interpretation and inconsistent application, investors have often relied on contractual arrangements to manage internal corporate relationships. Before the Law, corporate agreements were not expressly regulated under Azerbaijani legislation. While the Civil Code did contain certain provisions dealing with agreements between founders, these provisions were limited in scope to the incorporation stage and did not address ongoing corporate arrangements between participants or shareholders. [2, arts. 45.2 and 98.9] Hence, questions remained as to their effect on third parties and their enforceability, that is, the extent to which Azerbaijani courts would recognize and uphold them. The Law appears to shed light on these issues.

What is a corporate agreement under the new Azerbaijani legal framework and what is included in its scope?

Although the Law does not provide a specific definition of a “corporate agreement”, it sets out its potential parties. Participants or shareholders may enter into a corporate agreement among themselves or with the company, where its participation is necessary for the performance of obligations under the agreement. [2, art. 65-1.1]

The Law contains a non-exhaustive list of matters that may be included in a corporate agreement: [2, art. 65-1.2]

·       governance matters, such as voting procedures, reserved matters, nomination of executive body members;

·       transfer-related provisions, including rules on transfer, accession of new participants, buy-back mechanisms;

·       the consequences of breach;

·       financial and employment arrangements, dispute resolution and applicable law, irrespective of the parties' residency status; [2, art. 65-1.9]

·       special rights such as liquidation preferences, anti-dilution protections, veto rights, and pre-emption rights. [2, art. 65-1.8]

Parties are also free to agree on any other conditions that would not contradict Azerbaijani legislation. [2, art. 65-1.2.12]

What formal requirements are applicable to corporate agreements?

Corporate agreements must be concluded in writing and certified by seal. [2, art. 65-1.3] The wording of newly introduced Article 65-1.3 of the Civil Code appears to indicate that corporate agreements must always be stamped by the company and by the participants or shareholders, unless they are not legal entities. This requirement raises a number of practical questions, particularly regarding the notification and disclosure obligations discussed below.

The Law further requires that within 15 days of the execution of the corporate agreement, parties shall notify the company in writing of this. [2, art. 65-1.5]

Validity and enforceability of corporate agreements

Under the new framework, a corporate agreement prevails over the charter in internal relations between its parties, provided that it does not conflict with mandatory provisions of law or infringe the rights of third parties. [2, art. 65-1.3] By contrast, in relations with the company, where the company is not a party to the corporate agreement, and in relations with third parties, the provisions of the charter continue to apply. [2, art. 65-1.3] This represents a significant clarification of the previously uncertain legal position regarding the hierarchy between the corporate agreement and the charter.

The Law also establishes consequences for breach of a corporate agreement. A breach gives rise to the consequences specified in the agreement and an obligation to compensate the other parties for losses suffered. [2, art. 65-1.4] It further sets out remedies available to the parties, encompassing liability for non-performance or improper performance, contractual penalties, and specific performance in kind. [2, art. 65-1.7] The parties may also agree on security arrangements, such as pledge or guarantee. [2, art. 65-1.7]

Framework for transfer of participatory interests (shares)

One of the most significant aspects of the Law is the regulation of the transfer procedures for participatory interests (shares). Prior to the Law, such provisions were governed by the restrictive rules of the Civil Code, which afforded limited flexibility for participants or shareholders to deviate from the statutory framework. Moreover, the inclusion of detailed transfer procedures in the charters, even within the statutory framework, was subject to scrutiny by the registration authorities. The Law now allows parties to agree on different transfer terms, a considerable departure from the previously rigid position. [2, art. 65-1.2.2. and 65-2]

The Law permits parties to agree on three transfer-related rights.

First, a tag-along right, allowing other participants or shareholders to join a sale to a third party on the same terms and price where the selling participant or shareholder holds more than the agreed threshold. [2, art. 65-2.1.1]

Second, a drag-along right, allowing a participant or shareholder holding more than the agreed threshold to require the others to sell their participatory interests (shares) on the same terms in the event of a sale of all participatory interests (shares) or a controlling stake to a third party. [2, art. 65-2.1.2]

Third, a right of first refusal, requiring a participant or shareholder, except in OJSCs, to first offer its participatory interest (shares) to a specified category of participants or shareholders before selling to a third party, on the same terms. [2, art. 65-2.1.3]

Areas of uncertainty under the new framework

1.     Do corporate agreements under the Law extend to pre-incorporation agreements?

One question arising under the Law is whether corporate agreements may cover arrangements entered into before incorporation in relation to the company to be established. Article 65-1.1, which sets out the general framework for corporate agreements, appears to contemplate only existing company’s participants or shareholders as parties to such agreements. In addition, the 15-day notification period appears to be based on the assumption that the corporate agreement is executed after the company has been incorporated. Even further, the Law requires corporate agreements to be stamped by the company, which further implies that such agreements are intended to be post-incorporation. This suggests that pre-incorporation agreements may fall outside the Law’s scope and may not qualify as corporate agreements under Azerbaijani law.

Given that parties often enter into corporate agreements before incorporation in the ordinary course of business, excluding such pre-incorporation agreements from the Law’s scope may leave uncertainty as to their legal status and enforceability under Azerbaijani law.

2.     What must the notification to the company contain, and is disclosure of the agreement required?

Another area of uncertainty concerns the notification obligation of the parties to a corporate agreement, as well as the practical implications of the stamp requirement referred to above. Two points remain open. Firstly, the Law does not clarify the procedure applicable when the company itself is a signatory of the corporate agreement. Secondly, it does not specify the content of notification and whether disclosure of the agreement is required. In this regard, it is worth noting that the Law also requires the corporate agreement to bear the stamp of the company. This could be read to imply that, upon execution, the company is already aware of both the existence and content of the corporate agreement, making separate notification redundant and suggesting that disclosure is inherent in the execution process.

Full disclosure would raise confidentiality concerns, as corporate agreements often contain commercially sensitive terms. It would also be unusual compared with jurisdictions such as the United Kingdom, Germany and France, where participants’ (shareholders') agreements are generally treated as private arrangements not subject to mandatory disclosure to the company.

On a plain reading, participants or shareholders may only need to notify the company that a corporate agreement has been concluded, without disclosing its contents. The position is more complex where the company is a party, given disclosure and confidentiality concerns. However, in the absence of judicial guidance, this question remains open. 

3.     Can tag-along and drag-along rights be activated by trigger events rather than ownership thresholds alone?

The Law also appears to limit the applicability of transfer rights to cases where a participant or shareholder holds participatory interests (shares) exceeding a specified threshold. This is particularly concerning because, while Article 65-1.2.2 generally permits the parties to regulate the acquisition or transfer of shares upon the occurrence of specified events, Article 65-2 defines tag-along and drag-along rights specifically by reference to ownership thresholds and a contemplated third-party sale. In practice, it is widespread to agree on forced or co-sale transfer rights in circumstances such as a change of control, deadlock situations, an initial public offering, or any other commercially significant event that the parties may determine in their corporate agreement. This creates uncertainty as to whether the parties may structure those particular rights solely by reference to such trigger events rather than purely quantitative shareholding criteria.

4.     What is the scope of "corporate rights" and "special rights" under the new framework?

The next issue with the Law is its use of ambiguous and unprecedented terms in Azerbaijani legislation. In particular, the Law refers to “corporate rights” and “special rights” without defining them. The principal concern relates to the term “corporate rights”. Since the Law does not define this term, it remains unclear which rights fall within its scope. This is particularly important since under the Law, corporate agreements are linked to the exercise of corporate rights. Without a clear definition, there is a risk of disputes as to whether certain matters constitute corporate rights and, consequently, whether they fall within the permissible scope of corporate agreements.

Concluding remarks

The Law represents a positive and long-awaited step towards recognizing and regulating corporate agreements in Azerbaijan, introducing a framework and greater flexibility in areas such as the transfer rights.

Beyond the uncertainties discussed above, the Law raises further practical considerations that are likely to come to the fore over time. These include the treatment of corporate agreements by registration authorities and notaries, review by the competition authority for competition clearance purposes, particularly for concentrations under the Competition Code of the Republic of Azerbaijan, related-party considerations where the company itself is a party, and the effectiveness of foreign governing law clauses, given that Azerbaijani courts will apply the imperative norms of Azerbaijani legislation, including the superiority of the charter over the corporate agreements in relations with third parties. [3, art. 5.1]

Notwithstanding these points, the Law marks a meaningful development in Azerbaijani legislation, and the practical considerations noted above will need to be revisited and analyzed more thoroughly once judicial practice and practical experience have had time to develop.