In Iranian joint stock companies, a “share” is more than just a unit of capital; it is the fundamental tool for exercising voting rights, participating in dividends, and defining a shareholder’s liability. Occasionally, due to strategic management needs or the desire to facilitate smoother transfers, companies may decide to change the nature of their shares.

This article provides a clear, practical overview of share conversion under Iranian law, explaining the differences between registered and bearer shares and the mandatory legal procedures for their conversion.

Understanding the Types of Shares

Before discussing conversion, it is essential to distinguish between the two types of shares recognized under the Iranian Commercial Code:

  1. Registered Shares: The identity of the owner is recorded in the company’s official share register. Any transfer of ownership must be formally recorded in this share register to be valid against the company.
  2. Bearer Shares: Ownership is not recorded in the company’s share register. Possession of the physical share certificate constitutes proof of ownership, and transfers occur simply through the delivery of the certificate.

Important Note: While a company can have all its shares in “registered” form, it cannot have 100% “bearer” shares. Iranian law requires directors to deposit a specific number of shares—known as “Security Shares”—with the company as collateral for potential damages caused by mismanagement. Since the law mandates that these security shares must be ‘registered,’ it is impossible for a company to have a purely bearer share structure.

 

Why Do Companies Convert Shares?

Companies generally pursue share conversion for specific strategic reasons:

  • Converting to Registered Shares: To improve corporate governance, identify the exact owners, enhance transparency, and prevent unauthorized or opaque transfers.
  • Converting to Bearer Shares: To simplify and accelerate the trading of shares, thereby increasing market liquidity and ease of transfer for shareholders.

Such decisions are typically made by the Extraordinary General Meeting or as stipulated in the company’s Articles of Association. Note that converting bearer shares to registered shares involves more rigorous legal formalities, as the current holders of the bearer shares are initially unknown to the company.

 

The Conversion Process

1. Converting Bearer Shares to Registered Shares

Given the anonymity of bearer shareholders, the law imposes strict notice requirements:

  • Notice Requirement: The company must publish a notice in its designated widely-circulated newspaper three times, with a minimum of 5 days between each publication.
  • Legal Deadline: Shareholders must be given at least 6 months from the first notice to exchange their bearer shares. The notice must explicitly state that all non-exchanged shares will be declared void after this period.
  • Consequences of Non-Compliance: If a shareholder fails to act within the deadline, their bearer shares are legally voided, and the company issues an equivalent number of registered shares. These new shares are then sold via the Stock Exchange (if the company is listed) or a Public Auction (if unlisted).
  • Handling Proceeds: Net proceeds from such sales are held in an interest-bearing bank account for 10 years. If the former shareholder claims them within this period, they receive the principal and interest. After 10 years, any unclaimed funds are deemed “ownerless property” and transferred to the State Treasury for public use.

2. Converting Registered Shares to Bearer Shares

This process is more straightforward:

  • Notice Requirement: A single notice published in the designated widely-circulated newspaper is sufficient.
  • Legal Deadline: Shareholders must be given at least 2 months to exchange their certificates.
  • Custody of Shares: After the deadline, the non-exchanged registered shares are canceled, and equivalent bearer shares are issued and kept in the company’s office, ready to be collected by shareholders whenever they present their old certificates.

 

Mandatory Registration

Once the conversion process is complete and the notice periods have elapsed, the company is legally required to draft minutes of the conversion and file them with the Companies Registration Office to ensure the change is officially registered and publicly disclosed.

 

Sanctions for Non-Compliance

Failure to convert shares within the specified deadlines results in a specific penalty: shareholders who fail to exchange their certificates forfeit their right to attend and vote in general meetings regarding those specific shares.

 

Required Documentation for Registration

To ensure the conversion is legally binding and recognized by the authorities, the following documents are mandatory:

  • Minutes of the Extraordinary General Meeting approving the conversion.
  • An updated list of shareholders.
  • Copies of National IDs for all shareholders (for registered shares).
  • Copies of the newspaper notices documenting the conversion process.

 

Final Thoughts

While share conversion is a standard corporate action, it is highly sensitive to procedural timelines and regulatory requirements. From ensuring proper newspaper notices to accurate filings with the Companies Registration Office, every step is vital to maintaining corporate transparency and protecting the rights of all shareholders. Given the potential for loss of voting rights or the voiding of shares, it is highly recommended to seek professional legal advice to ensure full compliance and to mitigate any risks before initiating the conversion process.