Every joint-stock company, according to the law, has three main pillars, each playing a specific role in the company’s existence and management: the decision‑making body (general assemblies), the executive body (board of directors), and the supervisory body (auditors).

Among these, the board of directors in joint-stock companies is responsible for the executive and managerial affairs of the company. Many legal disputes within companies arise from a lack of awareness regarding the scope of authority, responsibilities, and legal obligations of directors. In this article, we review the most important points regarding the board of directors in joint‑stock companies in a clear and practical manner.

 

Who Are the Board of Directors in Joint-Stock Companies?

The board of directors is a group of shareholders elected for a specific period who are responsible for managing the company’s affairs. In simple terms, if the general assembly is the decision‑making body of the company, the board of directors is the body that executes and administers those decisions.

 

Number of Board Members in a Joint‑Stock Company

According to the Commercial Code of Iran, the minimum number of directors in a public joint‑stock company is five, and in a private joint‑stock company it is three.

A director may be either a natural person or a legal entity.

If a legal entity is elected as a member of the board of directors, it must appoint a representative to carry out the managerial duties on its behalf.

Members of the board of directors in joint‑stock companies must be selected from among the shareholders. However, if a legal entity serves as a director, its representative does not need to be a shareholder; the legal entity itself must hold shares in the company to qualify for board membership.

 

Appointment and Removal of Board Members

Members of the first board of directors are appointed:

  • In a public joint‑stock company, by the constituent general meeting.
  • In a private joint‑stock company, by a written resolution signed by all shareholders.

Members of subsequent boards, in both public and private joint‑stock companies, are elected by the ordinary general meeting.

The required quorum for election is a relative majority of votes (i.e., those receiving the highest number of votes are elected).

If a person who is legally disqualified is elected—or becomes disqualified after appointment—the court may remove them upon request of any interested party.

Board members may be dismissed before the end of their term. The general assembly, which appoints them, may also remove them at any time. Such dismissal requires an absolute majority (more than 50%) of the votes present at the meeting.

 

Term of Office of Directors

The term of office of board members is specified in the articles of association, but it cannot exceed two years. Re‑election for consecutive terms is permitted.

This two-year limitation does not apply to the managing director. However, if the managing director is also a board member, their term as managing director cannot exceed their board membership term.

If the term of directors expires, they remain responsible for managing the company until new directors are appointed.

 

Chairman and Vice Chairman of the Board

At its first meeting, the board elects a chairman and a vice chairman from among its members.

These positions must be held by natural persons. Therefore, legal entities cannot directly serve as chairman or vice chairman. However, the natural person representing a legal entity board member may be appointed to these roles.

The board may remove the chairman or vice chairman at any time.

In some cases, the general assembly may appoint them directly. In such cases, only the general assembly has the authority to remove them, unless it has delegated this power to the board.

Their term lasts until the end of their membership on the board.

 

Duties of the Chairman of the Board

  1. Convening meetings of the board of directors
  2. Presiding over board meetings
  3. Convening general assemblies when the board is obliged to do so
  4. Presiding over general assemblies

If the chairman is temporarily unable to perform their duties, the vice chairman assumes those responsibilities. In case of permanent incapacity (e.g., death), a new chairman is elected.

 

Key Duties of the Board of Directors

  1. Convening the general meeting within the prescribed time specified in the articles of association
  2. Submitting the company’s financial reports to the inspectors every six months
  3. Deducting and reserving one‑twentieth of the company’s net profit annually as a legal reserve until it reaches one‑tenth of the company’s capital
  4. Submitting a report to the extraordinary general assembly regarding proposals to increase the company’s capital
  5. Determining and distributing profits within a maximum of eight months after the general assembly’s decision to distribute profits, unless the assembly itself determines the distribution method
  6. Preparing financial statements for submission to inspectors and presentation at the annual general assembly
  7. Depositing guarantee shares with the company
  8. Preparing a report regarding the withdrawal of shareholders’ pre‑emptive rights in purchasing new shares
  9. Appointing the managing director and determining their authority and remuneration
  10. Amending the articles of association after implementing a capital increase and notifying the Companies Registration Office
  11. Reviewing the commitments of subscribers during capital increases
  12. Proposing capital reduction to the ordinary general assembly

 

Who Cannot Be a Board Member?

The following individuals are disqualified:

  1. Legally incapacitated persons
  2. Bankrupt individuals until they regain their legal standing
  3. Persons convicted of crimes, such as:
    • Theft
    • Breach of trust
    • Fraud
    • Embezzlement
    • Deception
    • Misappropriation of public property
  1. Government officials (e.g., President, ministers, public employees) cannot serve in private companies, except in cooperative entities of public institution.

If a person whose election is legally prohibited becomes a board member, or if the legal requirements for their election were not properly observed:

The decisions and actions taken by that director or managing director remain valid with respect to third parties, and the responsibilities of the managerial position still apply to them. In other words, third parties may ignore the invalidity of that person’s management and may seek enforcement of contractual obligations from the company.

However, any interested party may request the court to remove such a person from their position.

 

Simultaneous Membership in Multiple Companies

The following points should be considered:

  • Members of the board of directors of a joint‑stock company, including the chairman and vice‑chairman, may simultaneously serve on the board of another company, even as chairman, vice‑chairman, or managing director.
  • The managing director of a joint‑stock company may serve as a board member (or even chairman or vice‑chairman) of another company but cannot serve as managing director of another company simultaneously.
  • The managing director may also be a member of the board of the same company; however, if they are to serve as chairman of the board, this requires approval by at least three‑quarters of the votes present at the ordinary general assembly.
  • No individual may simultaneously serve in more than one company where capital is owned (fully or partially) by the government or public institutions.

Scope of Authority of Directors in Joint‑Stock Companies

One of the most important practical issues for business owners is the scope of directors’ authority in company transactions. Transactions conducted by members of the board fall into two categories:

  1. Transactions within the company’s business activities

If the transaction is within the scope of the company’s activities, the board of directors possesses all necessary authority to manage the company, and such authority cannot be restricted through the articles of association or decisions of the general assembly in relation to third parties.

For example, if a company’s business is the import of medical equipment and the directors are internally authorized to conclude contracts up to 5 billion tomans, but they enter into a contract worth 8 billion tomans to purchase medical equipment, the obligation still binds the company. Third parties who contracted with the company may enforce the 8‑billion‑toman obligation, and the company cannot rely on internal limitations on the directors’ authority against them.

However, if directors exceed their internal authority and the company is forced to fulfill those obligations, the company may seek compensation from the directors who signed the contracts.

  1. Transactions outside the company’s business activities

If board members conclude a contract that is outside the company’s stated activities, the company is not bound.

For example, if a company whose activity is the import and distribution of medical equipment signs a contract in the company’s name to sell rice, the other party cannot claim against the company and must instead pursue the directors who signed the contract. This is because the transaction falls completely outside the company’s business scope.

 

Conclusion

The board of directors is the executive heart of a joint‑stock company and holds extensive authority. However, these powers come with significant responsibilities. Many corporate legal disputes arise from lack of awareness of the limits of authority, failure to observe legal requirements, improperly drafted articles of association, or insufficient shareholder oversight.

Understanding the legal framework governing the board of directors helps prevent disputes and, when problems arise, clarifies the correct path for decision‑making. Obtaining specialized legal advice in this area can significantly reduce potential future risks.