The amendments introduced 'corporate agreement' as a legal institution into Azerbaijani legislation for the first time, established specific legal mechanisms concerning the transfer of shares in companies, and introduced legal regulation of convertible financial instruments. In addition, a legal framework governing the legal status, establishment and operation of venture capital funds was established, laying the foundations for the regulation of this area.
The Law of the Republic of Azerbaijan “On Amendments to the Labor Code of the Republic of Azerbaijan, the Civil Code of the Republic of Azerbaijan, and the Laws of the Republic of Azerbaijan ‘On Currency Regulation’, ‘On Investment Funds’ and ‘On the Securities Market’” introduced a number of significant amendments to the corporate legislation. The Law was entered into force on 27 July 2026.
The amendments introduced the corporate agreement as a legal institution into Azerbaijani legislation for the first time, established specific legal mechanisms concerning the transfer of shares in companies, and introduced legal regulation of convertible financial instruments. In addition, a legal framework governing the legal status, establishment and operation of venture capital funds was established, laying the foundations for the regulation of this area.
Under the amendments, participants of all business companies, regardless of their organizational and legal form, have been granted the right to enter into a corporate agreement among themselves or with the company.
A corporate agreement is a civil-law agreement governing the exercise of the corporate rights of participants, as well as matters relating to the management and organization of the company's activities.
Under the Civil Code, provided that its provisions do not contradict the requirements of applicable legislation, a corporate agreement may regulate the following matters:
In addition, the corporate agreement may establish special rights granting participants or shareholders different voting, dividend and liquidation rights. Such rights may include, in particular:
Furthermore, regardless of whether the parties to the corporate agreement are residents or non-residents of the Republic of Azerbaijan, they may agree to apply the law of a foreign state to disputes arising out of the corporate agreement.
A corporate agreement must be concluded in writing and certified by a seal, however, notarization of the agreement is not required.
A corporate agreement is legally binding only upon the parties that have signed it. Where a conflict arises between the provisions of the corporate agreement and the company's charter, the provisions of the corporate agreement shall prevail only in the context of the internal relations between the parties to the agreement.
At the same time, in relations with the company (except where the company itself is a party to the agreement) and with third parties, the provisions of the company's charter shall apply.
The parties to a corporate agreement are also required to notify the business company in writing of the conclusion of the agreement within 15 days from the date of its conclusion.
The amendments have introduced three important legal mechanisms concerning the transfer of shares (participatory interests) that are widely used in international corporate practice. These rights include:
Under the tag-along right, where a founder (participant) or shareholder holding more than the threshold specified in the company's charter or corporate agreement of the shares (participatory interests) in the charter capital of a business company sells their shares (participatory interests) to a third party, the other founders (participants) or shareholders are also entitled to sell their shares (participatory interests) to the same purchaser at the same price and on the same terms.
This mechanism serves to protect the interests of minority participants and is aimed at preventing them from being placed in a disadvantageous position as a result of the sale of the controlling stake.
Under the drag-along right, where a founder (participant) or shareholder holding more than the threshold specified in the company's charter or corporate agreement of the shares (participatory interests) in the charter capital of a business company agrees to the sale of all shares (participatory interests) in the company or of a controlling stake to a third party, they may require the other founders (participants) or shareholders to sell their shares (participatory interests) to the same purchaser at the same price and on the same terms.
This mechanism facilitates the sale of the business as a whole and reduces the risk of a transaction failing due to objections from minority participants.
The right of first refusal provides that, except in the case of open joint-stock companies, where a founder (participant) or shareholder of another type of business company intends to transfer their share (participatory interest) to a third party, they are required to first offer such share (participatory interest) to the person specified in the company's charter or corporate agreement at the same price and on the same terms.
The share (participatory interest) may be sold to a third party only if the person holding the right of first refusal duly declines the offer or fails to exercise this right within the period prescribed by law or the relevant agreement.
Another significant development introduced by the amendments is the use of convertible financial instruments as one of the mechanisms for creating new shares (participatory interests) in a company.
Under this mechanism, an investor provides funds to the company and, upon the occurrence of the conditions stipulated in the charter or agreement, such funds are converted into a share (participatory interest) in the company. At the same time, until the conversion takes place, such funds are not considered a security or a derivative financial instrument, and the execution of such agreements is not regarded as an issuance or public offering of securities.
For this purpose, two types of agreements may be concluded with an investor:
Under a convertible loan agreement, the investor provides financial funds to the company in the form of a loan. Upon the maturity of the loan or when the company raises funds from new investors (qualified financing), the relevant amount may, by agreement of the parties, be converted into an equity in the company instead of being repaid.
A convertible loan agreement must be concluded in writing and certified by a seal, and notarization is not required.
If the term of the agreement expires and the event triggering the conversion into a share (participatory interest) has not occurred, the investor may, at their discretion:
Under a future participatory interest (share) agreement, the funds paid by the investor to the company do not create a debt obligation, do not accrue interest, and are not subject to a repayment maturity date. Instead, in consideration for such funds, the investor obtains the right to acquire shares (participatory interests) in the company in the future.
Such an agreement must be concluded in writing and certified by a seal (and, where the investor is a legal entity, also by the investor's seal), and notarization is not required.
Under this agreement, the investor's funds are converted into a share (participatory interest) upon the occurrence of any of the following events:
If a liquidity event occurs before the conversion into a share (participatory interest), the investor's claim for the return of their investment shall be satisfied after the claims of the company's other unsecured creditors, but before the distribution of the remaining assets among the founders (participants, shareholders).
One of the amendments to the Civil Code concerns the Employee Stock (Share) Ownership Plan Agreement. This mechanism enables business companies to introduce participatory interest (share) ownership plans for the purpose of providing long-term incentives to employees and members of management bodies.
Within this framework, a company may enter into agreements with employees and members of its management bodies granting them the right to acquire stocks (shares) in the company in the future at a predetermined price (exercise price) or free of charge.
ESOP agreement must be concluded in writing and certified by the company's seal, and notarization is not required.
Amendments to the Law of the Republic of Azerbaijan “On Investment Funds” introduced a new concept into the legislation, the “venture capital fund”, and added Chapter II-I, which regulates matters relating to the establishment, registration, operation, management and organizational structure of such funds.
Under the Law, a venture capital fund is an investment fund established with the objective of investing funds raised from professional investors solely for the purpose of generating income for investors. As a general rule, such funds are prohibited from engaging in other commercial activities.
A venture capital fund may be established in the form of a limited liability company, closed joint-stock company, limited partnership, or closed-ended investment fund.
The Law also defines the entities into which venture capital funds may invest. Accordingly, the funds may invest only in innovative projects of entrepreneurs that:
The Central Bank of the Republic of Azerbaijan is the competent authority responsible for maintaining the register of venture capital funds and exercising general oversight over their activities.
Under the legislation, venture capital funds may operate under two regimes:
A fund may operate under the light-reporting venture capital fund regime if it meets both of the following criteria:
No license is required for the operation of a light-reporting venture capital fund. However, before commencing its activities, the fund must be registered in the register maintained by the Central Bank, and during its operation it must submit an annual report to the Central Bank.
If the value of the assets managed by the fund exceeds the threshold specified above, the fund must notify the Central Bank and its investors within 10 business days. In addition, from the date on which the threshold is exceeded, the fund must apply to the Central Bank within 90 calendar days (the transition period) for a license to operate as a licensed venture capital fund.
Failure to comply with this requirement shall result in the suspension of the fund's activities and its removal from the register maintained by the Central Bank.
During the transition period, the fund may not attract new investors. However, it retains the right to continue its existing investment activities, including calling unpaid capital commitments from existing investors and making additional investments in portfolio companies.
Venture capital funds that do not meet the criteria specified in Section 5.1 must operate as licensed venture capital funds. At the same time, funds that meet those criteria may voluntarily elect to operate as licensed venture capital funds.
To obtain a license, the fund must submit an application to the Central Bank of the Republic of Azerbaijan in accordance with the applicable procedure.
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