Labour Code 2026 Amendment: Employee Stock Ownership Plan Agreements 

The Law of the Republic of Azerbaijan "On Amendments to the Labour 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 Labour Code. The Law entered into force on 27 July 2026. 

The amendments introduce the right of employees to acquire shares (stocks) in their employer, establish the legal framework governing the exercise of this right, and regulate the consequences affecting such rights upon the termination of employment.

1. Employees' right to acquire shares (stocks)

Pursuant to the amendments to Article 3 of the Labour Code, employees are granted the right to acquire shares (stocks) in the employer. This right is implemented through an Employee Stock Ownership Plan Agreement (ESOP).

Such an agreement may be concluded at the initiative of the founder (participant) of a commercial legal entity or the employer acting under the authority granted by the founder. The agreement regulates the grant of shares (stocks) to employees on preferential terms or free of charge, or the employee's right to acquire such shares (stocks) in the future.

2. Terms and form of an Employee Stock Ownership Plan Agreement

The agreement may provide that the employee's ownership of the shares (stocks) shall vest subject to specified conditions.

Two types of vesting conditions are distinguished:

1. Time-based vesting – the employee's entitlement to the shares (stocks) becomes effective either gradually or in full upon the expiry of a specified period, provided that the employee continues the employment relationship with the employer throughout that period.
2. Performance-based vesting – the employee's entitlement to the shares (stocks) becomes effective upon the achievement of predetermined performance targets by either the employee or the commercial legal entity.

The agreement must be executed in writing and certified with the company's seal, however notarisation is not required.

The agreement must clearly specify the date of adoption of the plan, the vesting conditions, the exercise price (where the shares are to be acquired on preferential paid terms), and the duration of the plan. In addition, the company is required to maintain an internal register of all such agreements.

For the purposes of implementing the plan, the company may establish an authorised but unissued pool of shares (stocks) within its charter capital.

The agreement may also determine the consequences for the employee's share (stock) rights depending on the grounds for termination of the employment relationship.

3. Termination of labor contracts of employees participating in the ESOP

The legal consequences applicable to an employee's vested or unvested shares (stocks), or rights relating thereto, may vary depending on the grounds for termination of employment.

Accordingly, the agreement may provide that, in the following cases, all or part of the employee's unvested share (stock) rights shall become vested, or that the employee shall be required to sell the vested shares (stocks) back to the commercial legal entity or its founder (participant) at their fair market value:

• resignation at the employee's initiative;
• liquidation of the employer or termination of the activities of an employer who is a natural person;
• staff redundancy or workforce reduction;
• failure of the employee to successfully complete the probationary period;
• where an employee of a state-funded entity reaches the statutory retirement age;
• termination of a fixed-term employment contract;
• conscription of the employee for military or alternative service;
• reinstatement of a former employee to the relevant position pursuant to a final court judgment;
• where, unless a longer period is prescribed by law, the employee has continuously lost the ability to work for more than six months and it is impossible to adapt the workplace or transfer the employee to lighter duties in accordance with the employee's individual rehabilitation programme;
• where the employee has been declared legally incapacitated by a final court decision;
• death of the employee, or where the employee has been declared missing or deceased by a final court decision;
• where a former employee returns to his or her previous position after completing compulsory military service.

Conversely, the agreement may provide that, in the following cases, the employee shall forfeit all unvested share (stock) rights or be required to sell vested shares (stocks) back to the commercial legal entity or its founder (participant) at nominal value or below nominal value:

• where the it is decided that the employee lacks the professional competence or qualifications required for the position held;
• where the employee fails to perform his or her employment functions or contractual obligations, or commits a gross breach of employment duties in the circumstances specified under Article 72 of the Labour Code;
• where a court judgment becomes final depriving the employee of the right to drive, hold certain positions, engage in certain activities, or sentencing the employee to imprisonment for a fixed term or life imprisonment;
• where it is discovered that an employment contract for teaching activities has been concluded with a person who is legally prohibited from engaging in pedagogical activities.

Finally, pursuant to the amendment to Article 154 of the Labour Code, shares (stocks) acquired by an employee under an Employee Stock Ownership Plan Agreement do not constitute wages and may not be treated as remuneration in lieu of salary.