As commercial activities expand and investment in companies with multiple shareholders or partners increases, regulating the relationships among equity holders has become an important aspect of corporate legal structures. Although the Iranian Commercial Code and other applicable corporate regulations establish the general framework for the incorporation, management and dissolution of companies, they do not necessarily address all the arrangements and expectations of shareholders concerning corporate governance, financing, share transfers, profit distribution and exit from an investment.

In this context, a Shareholders’ Agreement serves as a contractual instrument for regulating the relationships among shareholders. Such an agreement may address matters including shareholders’ rights and obligations, participation in major corporate decisions, board composition, restrictions on share transfers, mechanisms for protecting minority shareholders and the conditions under which investors may exit the company.

Under Iranian law, shareholders’ agreements may generally be concluded pursuant to Article 10 of the Iranian Civil Code. However, their validity and enforceability depend on compliance with mandatory legal provisions, specific corporate regulations and other applicable legal requirements. Accordingly, drafting such an agreement involves more than merely compiling a set of contractual clauses; it requires a thorough understanding of its legal status within Iran’s corporate law framework and its interaction with the company’s Articles of Association and resolutions adopted by its corporate bodies.

This article examines the legal nature of shareholders’ agreements under Iranian law, their distinction from the Articles of Association, the principal clauses that may be included in such agreements, and specific considerations relevant to foreign investors.

 

1. Legal Nature and Enforceability of Shareholders’ Agreements under Iranian Law

A Shareholders’ Agreement is a contractual arrangement entered into by all or some of a company’s shareholders and, in certain circumstances, by the company itself, with the purpose of regulating contractual relationships between the parties in matters extending beyond the general provisions of the Commercial Code.

Under Iranian law, the principal legal basis for the validity of such agreements is Article 10 of the Civil Code, which provides:

“Private contracts shall be binding upon those who have entered into them, provided that they are not contrary to the express provisions of the law.”

Accordingly, shareholders may, subject to applicable laws and regulations, agree on matters such as voting arrangements, share transfers, financing, profit distribution, confidentiality, dispute resolution and exit arrangements.

Nevertheless, the validity of a Shareholders’ Agreement does not confer unlimited freedom on the parties to regulate corporate relationships. Its provisions must not conflict with mandatory legal rules, public policy or specific regulations governing the relevant type of company. Furthermore, under Article 219 of the Civil Code, contracts lawfully concluded are binding upon the parties and their legal successors, unless terminated by mutual consent or rescinded on a legally recognised ground.

Another important consideration is the principle of privity of contract. Under Article 231 of the Civil Code, contracts generally produce legal effects only between the contracting parties and their legal successors. Consequently, where a Shareholders’ Agreement is entered into exclusively by certain shareholders, the company cannot automatically be required to comply with all its provisions without an appropriate legal basis.

For example, if shareholders agree that the company must distribute profits under certain circumstances, that agreement alone cannot replace the legally required resolution of the General Assembly concerning profit distribution. Similarly, where the performance of an obligation requires approval or action by the Board of Directors or the General Assembly, the statutory powers and procedures applicable to that corporate body must still be observed.

Therefore, when drafting a Shareholders’ Agreement, it is essential to distinguish between two matters: first, the contractual obligations of the individuals or entities that have signed the agreement; and second, the company’s corporate decisions and actions, which must be adopted in accordance with the Commercial Code, the Articles of Association and the statutory powers of the company’s corporate bodies.

 

2. Difference Between a Shareholders’ Agreement and the Articles of Association

One of the most important considerations when drafting a Shareholders’ Agreement is determining its relationship with the company’s Articles of Association.

The Articles of Association constitute a corporate document that establishes the company’s organisational structure and the fundamental rules governing its administration. This document is prepared within the framework of applicable legislation and, in joint-stock companies, constitutes one of the mandatory documents required for incorporation and registration.

By contrast, a Shareholders’ Agreement is a private contractual arrangement intended to regulate the relationships among shareholders in greater detail.

The principal differences between these two documents are as follows:

Criterion Articles of Association Shareholders’ Agreement
Legal nature Corporate organisational document Private contractual agreement
Legal basis Commercial Code and corporate regulations Article 10 of the Civil Code and general principles of contract law
Relevant parties The company and persons bound by the applicable corporate framework The parties to the agreement
Subject matter Corporate structure and governance Contractual relationships and obligations among shareholders
Amendment Subject to statutory procedures and the powers of corporate bodies Generally subject to the parties’ agreement and contractual rules
Registration Subject to company registration requirements and registration of amendments Generally not subject to public registration requirements

For example, matters such as the convening of General Meetings, the powers of corporate bodies and the company’s overall governance structure are regulated through the Articles of Association and applicable legislation. By contrast, obligations relating to confidentiality, non-disclosure of trade secrets, personal commitments of founders and certain contractual investor exit mechanisms are generally addressed in a Shareholders’ Agreement.

However, whether a particular provision belongs in the Articles of Association or the Shareholders’ Agreement cannot be determined solely by reference to its title or subject matter. Certain arrangements, including restrictions on share transfers or special shareholder rights, may need to be reflected in the Articles of Association or supported by the relevant corporate resolutions in order to produce corporate-level effects.

For instance, where shareholders agree that the transfer of shares is subject to specific procedures, it must be examined whether such a restriction is compatible with the regulations governing the relevant type of company and whether its inclusion in the Articles of Association is also necessary.

In joint-stock companies, amendments to the Articles of Association generally fall within the competence of the Extraordinary General Assembly. Under Article 83 of the Law Amending Certain Provisions of the Commercial Code, such decisions must be adopted in compliance with the applicable statutory requirements.

Consequently, drafting a Shareholders’ Agreement without simultaneously reviewing the Articles of Association and other corporate documents may result in contractual obligations that encounter legal or procedural obstacles when implemented at the corporate level.

 

3. Key Clauses of a Shareholders’ Agreement

The content of a Shareholders’ Agreement depends on the type of company, the number of shareholders, the capital structure, the investment objectives and the nature of the company’s business. Nevertheless, certain matters are of fundamental importance in many such agreements.

3.1. Ownership Structure, Shareholdings and Shareholder Contributions

The agreement should clearly identify each shareholder’s ownership position and percentage of participation in the company’s capital. It should also specify the nature and value of each shareholder’s contribution, whether in cash or in kind.

Where a founder contributes professional services, technical know-how, technology or other resources in exchange for participation in the incorporation or development of the company, the nature of the obligation, its valuation and the manner in which it is to be performed should be clearly defined.

In this regard, it should be noted that an obligation to provide services or technical know-how does not necessarily constitute a capital contribution. Furthermore, once a contribution has been legally transferred to the company, the relevant asset generally becomes the property of the company as a separate legal entity. The contributor cannot retain personal ownership of the transferred asset merely on the grounds that they originally provided it.

3.2. Management Structure and Major Decision-Making

One of the principal purposes of a Shareholders’ Agreement is to establish a framework for shareholders’ participation in corporate governance and major decision-making processes.

This section may address matters such as:

  • Procedures for nominating and appointing members of the Board of Directors;
  • Conditions for the removal or replacement of board members;
  • Procedures for holding meetings and exchanging information;
  • Shareholders’ participation in major corporate decisions;
  • Obligations to provide financial and operational reports; and
  • Decision-making procedures concerning major transactions and new investments.

3.3. Protection of Minority Shareholders

In companies where shareholders hold unequal voting rights or different proportions of the company’s capital, protecting minority shareholders becomes particularly important.

A Shareholders’ Agreement may safeguard minority shareholders’ interests through mechanisms such as:

  • Rights of access to financial and operational information;
  • Entitlement to periodic reports;
  • Participation in the appointment of members of the Board of Directors;
  • Identification of reserved matters requiring special approval;
  • Restrictions on transactions with related parties; and
  • Contractual remedies in the event of a breach by majority shareholders.

These rights must, however, be structured in a manner that does not conflict with shareholders’ statutory rights or mandatory rules governing corporate administration.

3.4. Capital Increases, Financing and Share Dilution

During the course of a company’s operations, additional financing may be obtained through further shareholder contributions, the admission of new investors or other legally recognised methods.

In such circumstances, the Shareholders’ Agreement should specify:

  • Who may propose additional financing;
  • Under what circumstances shareholders are required to participate in a capital increase;
  • The consequences of a shareholder’s failure to participate;
  • The conditions under which new investors may be admitted; and
  • How the reduction in existing shareholders’ ownership percentages will be calculated.

In this context, a distinction must be made between the statutory pre-emptive right to subscribe for newly issued shares and contractual rights such as Anti-Dilution Protection.

In joint-stock companies, statutory pre-emptive rights in capital increases are governed by the provisions of the Law Amending Certain Provisions of the Commercial Code. By contrast, anti-dilution mechanisms are generally included to provide contractual protection to investors against a reduction in their ownership percentages or changes in the economic terms of their investment.

Such mechanisms must be structured consistently with the applicable capital increase regulations, the rights of other shareholders and the company’s statutory procedures.

3.5. Vesting Arrangements and Incentive Rights for Founders and Employees

In certain companies, particularly start-ups, the entitlement of founders or key employees to shares or related economic benefits may be structured so that their ultimate entitlement depends on continued engagement with the company or the achievement of specified objectives.

For example, the parties may agree that a founder will gradually become entitled to a portion of the shares or associated economic benefits over a four-year period, subject to an initial vesting period.

Under Iranian law, implementing such an arrangement requires the selection of an appropriate contractual and corporate structure. Merely including a provision stating that shares will automatically revert to the company does not necessarily produce the intended legal effects.

Accordingly, the parties must determine whether the proposed arrangement will be implemented through the gradual transfer of shares, a call option, an undertaking to transfer shares, a separate agreement or another legally permissible mechanism.

Restrictions relating to a company’s acquisition of its own shares and the statutory requirements governing share transfers must also be taken into consideration.

3.6. Profit Distribution and the Company’s Financial Policy

Profit distribution is one of the matters that may give rise to disagreements among shareholders, particularly where some shareholders seek periodic distributions while others prefer that profits be reinvested in the company to support its development.

A Shareholders’ Agreement may establish a framework for the company’s dividend policy, including:

  • Conditions for proposing dividend distributions;
  • Relevant financial and operational criteria;
  • The amount of profits available for distribution;
  • The policy on retaining profits for business development; and
  • Procedures for informing shareholders.

Nevertheless, an agreement among shareholders cannot replace the statutory requirements governing the approval of financial statements and the distribution of profits.

In joint-stock companies, profit distribution must comply with the provisions of the Law Amending Certain Provisions of the Commercial Code, including the rules governing distributable profits.

3.7. Intellectual Property and the Company’s Intangible Assets

In companies operating in technology, software development, content production, industrial design, digital services and creative industries, intellectual property may constitute one of the company’s most valuable economic assets.

Accordingly, a Shareholders’ Agreement should clearly establish the ownership and status of intellectual property rights associated with the company’s business activities.

Key matters in this regard include:

  • Ownership of intellectual property rights created before the company’s incorporation;
  • Assignment or licensing of founders’ intellectual property assets to the company;
  • Ownership of works, inventions, software and designs created during the company’s operations;
  • Allocation of rights in source code, technical documentation and know-how;
  • Confidentiality of information and trade secrets;
  • Founders’ and employees’ obligations not to make unauthorised use of the company’s intellectual property assets; and
  • Arrangements governing the exploitation of intellectual property rights following a shareholder’s exit.

An important point is that including a general provision stating that all intellectual property assets belong to the company does not necessarily suffice to transfer ownership of the relevant rights.

Depending on the nature of the asset and the right concerned, a separate assignment agreement, compliance with statutory formalities or consent from the relevant rights holders may be required.

For example, the legal treatment of software economic rights, patent rights, trademarks and trade secrets is not identical. Therefore, the Shareholders’ Agreement should be coordinated with separate intellectual property documents and relevant assignment or licensing agreements.

3.8. Confidentiality and Non-Competition

Shareholders, particularly founders and directors, may have access to confidential and strategic company information during their involvement in the business.

A Shareholders’ Agreement may establish obligations concerning the protection of such information.

A confidentiality clause should ideally define the scope of confidential information, the persons bound by the obligation, applicable exceptions, the duration of the obligation and the remedies available in the event of a breach.

Some agreements also include non-compete clauses. Under such provisions, a shareholder or founder undertakes not to engage in activities competing with the company within a specified period and defined scope.

However, the validity of such clauses under Iranian law cannot be assumed without examining their scope and conditions. The prohibited activities, duration of the restriction, geographical scope and the company’s legitimate interests should be defined in a manner that avoids conflict with mandatory legal provisions and public policy.

Accordingly, a broad and unlimited provision prohibiting a shareholder from engaging in any economic activity after leaving the company may give rise to legal challenges.

3.9. Deadlock and Exit Mechanisms

In companies where major decisions require the agreement of several shareholders, disagreements may result in operational disruption or a paralysis of corporate management.

To prevent such situations from continuing indefinitely, a Shareholders’ Agreement may establish a series of mechanisms for resolving deadlocks, including:

  1. Direct negotiations between shareholders;
  2. Referral of the matter to senior management or designated representatives;
  3. Mediation;
  4. Referral of technical or financial matters to an independent expert;
  5. Mechanisms for the purchase of one party’s shares; and
  6. Exit arrangements or, in specific circumstances, the dissolution of the company.

Where the parties opt for a compulsory share purchase mechanism, the valuation criteria, method of appointing the valuer, payment deadlines and share transfer procedures should be clearly specified.

A general provision stating that “the parties shall negotiate in the event of a dispute” is usually insufficient to resolve serious deadlocks, as it neither establishes the duration of negotiations nor determines the consequences of their failure.

3.10. Death, Incapacity or Exit of a Shareholder

A Shareholders’ Agreement should address the legal and commercial consequences for the company in the event of the death, legal incapacity, bankruptcy or exit of a shareholder.

This section may cover matters such as share transfer procedures, heirs’ rights, the possibility of other shareholders purchasing the relevant shares, valuation methods and the consequences of the departure of a key founder.

Such provisions must be consistent with inheritance laws, regulations governing the transfer of shares or partnership interests, and other applicable statutory requirements.

In particular, the legal rights of third parties or heirs cannot be disregarded merely by including a contractual provision without an appropriate legal basis.

3.11. Remedies and Compensation for Breach

A Shareholders’ Agreement should specify the remedies available in the event of a breach of the parties’ obligations.

Without appropriate remedies, certain important obligations may be difficult to enforce in practice when breached.

Potential contractual remedies may include:

  • Specific performance;
  • Compensation for losses arising from a contractual breach;
  • Liquidated damages;
  • Termination of the agreement in specified circumstances; and
  • Recourse to contractual share purchase or transfer mechanisms, where legally valid.

Under Iranian law, Article 230 of the Civil Code provides an important legal basis for contractual penalty clauses. Under this provision, where the parties have stipulated a specific amount as compensation for non-performance or delay in performing an obligation, the court generally cannot order the obligor to pay an amount greater or lower than the agreed sum.

Nevertheless, a liquidated damages clause should be drafted with due consideration of the nature of the obligation, the conditions triggering liability and other applicable legal provisions.

 

4. Specific Considerations for Different Types of Companies

One of the fundamental considerations when drafting a Shareholders’ Agreement is the type of company concerned. The rules governing ownership transfers, management structures and decision-making procedures are not identical across different corporate forms.

4.1. Private Joint-Stock Companies

In a private joint-stock company (Sherkat-e Sahami Khas), the company’s capital is divided into shares, and shareholders participate in the company through their ownership of those shares.

In this type of company, a Shareholders’ Agreement may regulate matters such as contractual restrictions on share transfers, special shareholder rights, procedures for nominating members of the Board of Directors and major corporate decisions.

However, any provision concerning share transfers must be consistent with the Law Amending Certain Provisions of the Commercial Code, the Articles of Association and the statutory formalities governing share transfers.

4.2. Public Joint-Stock Companies

In a public joint-stock company (Sherkat-e Sahami Aam), restrictions imposed by contract require more careful consideration due to the public nature of the company’s capital and the importance of share transferability.

In particular, Article 41 of the Law Amending Certain Provisions of the Commercial Code prohibits making the transfer of shares in a public joint-stock company conditional upon the approval of the company’s directors or General Assembly.

Accordingly, contractual mechanisms restricting share transfers cannot be introduced without taking this statutory prohibition into account.

4.3. Limited Liability Companies

In a limited liability company (Sherkat-e Ba Masouliat Mahdood), capital is not divided into shares. Instead, each partner holds a partnership interest (Sahm-ol-Sherkeh).

Under Article 102 of the Iranian Commercial Code, the transfer of a partnership interest to another person requires the consent of partners holding at least three-quarters of the company’s capital, together with a numerical majority of the partners, unless otherwise permitted by applicable law or valid corporate provisions.

Furthermore, under Article 103 of the Commercial Code, the transfer of a partnership interest must be executed by means of an official deed.

 

5. Common Mistakes When Drafting Shareholders’ Agreements

Certain contractual drafting mistakes may create significant difficulties when a dispute arises or a shareholder exits the company.

The most common mistakes include:

  • Using foreign templates without adapting them to Iranian law;
  • Overlooking the distinction between a Shareholders’ Agreement and the Articles of Association;
  • Imposing share transfer restrictions without considering the type of company;
  • Failing to establish a clear share valuation methodology;
  • Providing veto rights without considering the statutory powers and quorum requirements of corporate bodies;
  • Failing to determine the ownership of intellectual property created by founders or the company;
  • Leaving shareholders’ financial and non-financial obligations ambiguous;
  • Establishing exit mechanisms without specifying how they will operate in practice;
  • Failing to address corporate deadlock situations;
  • Omitting appropriate remedies for contractual breaches; and
  • Failing to align the Shareholders’ Agreement with the Articles of Association and other corporate documents.

To avoid these issues, the agreement should be drafted in accordance with the company’s actual structure, business activities, shareholder composition and investment objectives.

Furthermore, its provisions should be reviewed whenever significant corporate changes occur, including the admission of a new investor, a capital increase or a change in the management structure.

Conclusion

A Shareholders’ Agreement is an important legal instrument for regulating relationships among equity holders and reducing the risk of corporate disputes.

Under Iranian law, such an agreement may generally be concluded pursuant to Article 10 of the Civil Code and may address matters including management structure, minority shareholder rights, financing, share transfers, intellectual property, confidentiality and exit arrangements.

Nevertheless, the contractual validity of a provision does not necessarily mean that it can be implemented at the corporate level. The provisions of the agreement must be consistent with mandatory legal requirements, the Articles of Association and the statutory powers of the company’s corporate bodies.

Furthermore, the differences between private joint-stock companies, public joint-stock companies and limited liability companies must be taken into account when designing contractual mechanisms.

For both domestic and foreign investors, a carefully drafted Shareholders’ Agreement can enhance transparency in corporate relationships, anticipate potential disputes and facilitate the effective management of investment risks.

For this reason, each agreement should be tailored to the specific legal and commercial structure of the relevant company rather than treated as a standard document suitable for all corporate arrangements.