Amendments were made to the Civil Code of the Republic of Azerbaijan (hereinafter: the Code) with the Law of the Republic of Azerbaijan dated April 23, 2018. These changes can be classified in three directions:
1. the liability of persons authorized to act on behalf of a legal entity;
2. the legal entity's audit committee;
3. the right of first refusal of LLC participants to the shares
Responsibility of senior executives of the company
Persons authorized to act on behalf of a legal entity are senior executives and persons who are conferred such powers on contractual basis.
The majority of the amendments are about the responsibility of those people who act on behalf of a legal entity. Under the amendments, a person acting on behalf of a legal entity who does not fulfill or improperly perform its the duties set out in the Code for the benefit of a legal entity, as well as any person represented in the governing bodies of a legal entity (board of supervisors (directors), executive body) is liable for damages inflicted to a legal entity or the shareholder in following cases:
1. paying bonuses to members of governing bodies of legal entity while legal entity operates with loss or paying a disproportionate amount of bonuses compared with legal entity's interest;
2. the disposal or use of property of a legal entity with significantly lower price and conditions than the market conditions;
3. signing contracts with related parties by breaching the law or endangering the interests of the legal entity;
4. the purchase of goods (works, services) by the legal entity with significantly higher prices than their real value;
5. appropriating or wasting property of a legal entity for the purpose of ensuring the rights to material or non-material property (tangible or intangible assets) for himself, for related parties or for other persons;
6. concluding unfair agreements against the interests of the shareholders.
If one of these abuses occurs, or if there are substantial doubts about the occurrence of a misconduct, the legal entity's participants may require proper documents from the person who executes the cases listed above to verify these cases. It should be noted that in order to make such a request, it is sufficient for a shareholder to have a 5% share in the shareholder capital of the legal entity. If such circumstances have been determined, a person who has incurred damage to the legal entity may be dismissed from office by the decision of the general assembly. In this case, however, that person will still be liable for the damages inflicted on the legal entity. Moreover, injured parties of these transactions may file a lawsuit in court to declare such deals as null and void.
The members of the Audit Committee
Another change is about to the composition of the audit committee of the company. Until now, only the individuals could be selected to the audit committee, this restriction has been removed by amendments. Members of the Board of Directors (supervisory board) of the Company can be members of the Audit Committee now. This change applies both to the joint stock company and to the limited liability company.
The right of first refusal of LLC shareholders while the purchase of shares
Changes to the Code have allowed the limited liability company (LLC) shareholders to unambiguously have the right of first refusal while the purchase of shares. If one of the shareholders of LLC plans to dispose his/her own shares, he/she should offer these shares to other shareholders of LLC in the first place. In the previous text of law, terms differing from such imperative rule could be envisioned by the charter or the shareholder agreement.
In general, the changes are positively assessed as it promotes transparency in the business environment, the protection of the rights of persons who are contracting with legal entities and the participants of the legal entities.
You can contact us for more information about the changes mentioned above, as well as for taking this changes into account in your business.
Contact: (+994 50) 289 89 73
Office: (+994 12) 480 14 86
Email: [email protected]