As mentioned in the Typology of Companies blog post, a public joint-stock company is recommended for entrepreneurs and investors that are needing large capital and are willing to raise public capital. In this detail-oriented post, we will delve into the ins and outs of legal requirements of establishing the public-joint stock company.

In order to found a public-joint stock company, the following five phase shall be thoroughly taken into consideration:

 

Phase One: Initial Actions of the Founders and Required Documents Shall Be Submitted to the Company Registration Office

First of all, according to the Article 6 of the Commercial Code Amendment Act (Hereinafter CCAA), to establish a public joint-stock company’ founders shall open an account with a bank under the name “Account for Company X Under Establishment”. Moreover, under the aforementioned Article, the founders must undertake to provide at least 20% of the proposed capital for the company themselves and deposit at least 35% of this amount into the aforementioned “Account for Company X Under Establishment”. Subsequently, all founders must sign the following three documents and under Articles 7-9 of the CCAA submit them to the Company Registration Office:

  1. a) Company Registration Declaration
  2. b) Draft Company Articles of Association
  3. c) Draft Prospectus for Share Subscription

 

Phase Two: Approval from the Company Registration Office for Share Subscription

After submitting the aforementioned documents, the Company Registration Office first reviews and verifies the compliance of their contents with the law; secondly, it obtains the approval of the Securities and Exchange Organization for the establishment of that company. This is because, pursuant to Article 25 of the Law Governing the Securities Market, the issuance of a “Share Subscription Prospectus” for the registration of public joint-stock companies or an increase in their capital requires the prior approval of the “Organization” (Securities and Exchange Organization) by the Company Registration Office.

In this regard, it shall be noted that the share subscription of any public joint-stock company, even if it does not intend to be listed on the stock exchange, requires obtaining the approval of the Securities and Exchange Organization.

After fulfilling the above conditions, the Company Registration Office issues the share subscription permit.

 

Phase Three: Share Subscription and Share Subscription Receipt

Following the above stages, pursuant to the Article 11 of the CCAA “Share Subscription Prospectus must be advertised by the founders in newspapers and also made available for interested parties to view at the bank where share subscription commitments are made.”

Furthermore, according to Article 12 of the CCAA, within the deadline specified in the Share Subscription Prospectus, interested parties shall visit the bank, sign the Share Subscription Receipt, pay the amount required to be paid in cash, and receive a receipt. In addition, as stipulated by the Article 9 of the CCAA, the amount to be paid by the subscriber for each share is determined by the founders and announced in the Share Subscription Prospectus. However, based on the Article 16 of the CCAA, the minimum amount that subscribers must pay in cash and immediately is 35% of the value of each share.

This process, where an individual undertake to provide a portion of the company’s capital in exchange for becoming a shareholder to the extent of their subscription, is called share subscription.

With regard to the share subscription period, Article 12 of the CCAA grants the founders the authority to determine the share subscription period, and Article 16 of the same Act allows them to extend this period. Having said this, if the company under establishment intends to offer its shares on the stock exchange, pursuant to Article 23 of the Law Governing the Securities Market, it must complete the share subscription within 30 days. The Securities and Exchange Organization may, upon the request of the founders and the establishment of valid reasons, extend the share subscription period by an additional 30 days. It is noteworthy that a company that offers its shares on the stock exchange known as an issuer.

In this regard, it should be borne in mind that unlike the initial commitment of the founders, which could be non-cash, share subscription must be a cash commitment. In other words, either the entire share amount is paid in cash, or a portion of it is undertaken to be paid in cash within a specified period.

It shall also be noted, as provided by the Article 81 of the Iran Constitution, share subscription by foreign nationals in Iran is strictly prohibited. In cases where foreigners have the right to own shares in an Iranian company, this can only be achieved after the share subscription process, through the purchase of shares from Iranian nationals.

After the share subscription process, the subscriber is issued a Share Subscription Receipt. The Share Subscription Receipt is the document evidencing the subscription, and its mandatory contents are specified in the Article 13 of the CCAA.

Within one month after the end of the subscription period, the founders review the extent of the subscribers’ commitments. The outcome of their review can result in three possible scenarios:

(1) If the total amount provided by the founders and subscribers is less than the intended and declared capital of the company to the Company Registration Office, the company is deemed void, and its establishment is nullified.

(2) If the entire capital of the company has been properly committed, the founders will determine and announce the number of shares for each subscriber and convene the Constituent General Assembly (Article 16 of the CCAA).

(3) If the subscribers’ commitments exceed the company’s capital, the prior subscribers are accepted, and the funds of those who subscribed after the company’s capital was fully committed are refunded.

 

Phase Four: Convening the Constitutive General Assembly and Approving the Articles of Association and Appointing the Company’s Organs

After completing the aforementioned initial actions of the founders, submitting the three documents to the Company Registration Office, obtaining the subscription permit, conducting the share subscription process, and ensuring the commitment of the entire company’s capital, it is necessary for the initial founders and subscribers to convene together and establish the company. Such a gathering is referred to as the “Constitutive General Assembly.” In fact, the Constitutive General Assembly comprises the capital providers of the company, and this assembly establishes the company.

The duties and responsibilities of the Constitutive General Assembly, in accordance with Articles 17 and 74 of the CCAA, are as follows:

  1. a) Approval of the Company’s Capital: Based on the Article 74 of the CCAA, the first duty of the Constitutive General Assembly is to review the report of the founders, make decisions regarding it, and ensure the subscription of all company shares and the payment of necessary amounts. For this purpose, the founders’ report must be made available for inspection by the subscribers at least five days prior to the convening of the assembly at the assembly’s location.
  2. b) Approval of Non-Cash Contributions by Founders and Their Requested Privileges: As previously mentioned, the founders may provide a portion of their contribution in a non-cash form or request certain privileges. The valuation of non-cash contributions and the acceptance of their requested privileges must be approved by the Constitutive General Assembly.

The process for approving non-cash contributions and privileges of the founders is as follows:

1) In accordance with Article 76 of the CCAA, “if one or more founders have non-cash contributions, the founders must, prior to proceeding with the invitation to the Constituent General Assembly, obtain the written opinion of an official expert from the Ministry of Justice regarding the valuation of the non-cash contributions, and include it in their report of actions to be submitted to the Constituent General Assembly.” Furthermore, “if the founders have claimed any benefits for themselves, they must provide a justification for such benefits, which should be appended to the aforementioned report and submitted to the Constituent General Assembly“.

  1. c) Approval of the Company’s Articles of Association: The Articles of Association is the most important document in any company, which determines the company’s objectives, capital, organs, and the methods of operation and management. In fact, the Articles of Association determine the generalities of the company, and subsequent resolutions of the general assemblies cannot contravene its provisions.
  2. d) Election of the Company’s First Directors and Auditor(s) and Their Written Acceptance of the Position: Another duty of the Constitutive General Assembly is to select the company’s first directors and auditor(s), as they constitute the company’s organs. After their election and written acceptance of the position, the company’s organs (the decision-making organ of the general assemblies, the management organ of the directors, and the supervisory organ of the auditor(s)) are fully formed.
  3. e) Determining the widely circulated newspaper in which the company’s announcements will be published until the convening of the first Annual General Assembly.

Regarding the widely circulated newspaper of the company, it should be noted that under Article 17 of the CCAA, the invitations and announcements for shareholders until the convening of the first Annual General Assembly must be published in two newspapers, one of which is determined by the Constituent General Assembly, and the other by the Ministry of Culture and Islamic Guidance.

After completing the aforementioned steps, the company is formed and considered “established,” but it does not yet possess legal personality. The acquisition of legal personality by the established company is contingent upon registration. In fact, after the establishment and voting in the Constitutive General Assembly, and the appointment of the company’s organs, the body of the company has been formed, but the legal personality, which is akin to the soul of the company, does not yet exist.

 

Phase Five: Company Registration

Company registration is the final stage of company establishment. The process and effects of registration or non-registration of the company are as follows:

(a) Required Documents for Registration: In accordance with Article 18 of the CCAA, (1) the Articles of Association approved by the Constitutive General Assembly, accompanied by (2) the minutes of the Constitutive General Assembly, and (3) the acceptance statements of the directors and auditor(s), will be submitted to the Company Registration Office for registration.

(b) Registration Deadline: According to Article 19 of the CCAA, the registration deadline for the company is a maximum of six months from the date of submission of the registration declaration, which was originally submitted by the founders to the Company Registration Office at the beginning of the company establishment process.

The legal consequence for failure to register within the six-month period, as stipulated in Article 19 of the CCAA, is as follows: “If the company has not been registered within six months from the date of submission of the aforementioned declaration in Article 6 of this Act, upon the request of any of the founders or subscribers, the Company Registration Office to which the declaration was submitted shall issue a certificate attesting to the non-registration of the company, and send it to the bank where the share commitments and payments were made, so that the founders and subscribers can approach the bank and retrieve their subscription receipts and paid amounts. In this case, any expenses incurred or committed for the establishment of the company shall be borne by the founders.”

 

In conclusion, establishing a public joint-stock company in Iran is a multi-step process that requires careful adherence to legal requirements and regulations. From the initial actions of the founders to the final registration stage, each phase plays a crucial role in ensuring the successful formation of the company. It would be well-advised to seek professional guidance from legal experts and consultants to navigate the complexities and ensure compliance with all applicable laws and regulations.