The Supreme Court’s ruling on the validity of the articles of association of a private joint stock company and the necessity of the board of directors’ approval for the transfer of shares

Nouraei & M. Mostafavi Law Offices – 8 January 2025 -Tehran- The Supreme Court is the highest judicial authority in Iran. Among its various tasks and powers, the main mandate is dealing with the courts’ disagreements regarding the law’s implementation in similar cases. The Supreme Court’s rulings are binding on all the Supreme Court branches and the judicial and nonjudicial authorities.

In many private joint stock companies’ articles of association (statutes), the transfer of shares is subject to the board of directors’ approval. However, Article 41 of the Amendment to the Commercial Code stipulates that “in public joint-stock companies, the transfer of shares cannot be subject to the approval of the company’s managers or the general meetings of shareholders.”

In this regard, one of the Iranian courts has extended the provisions of Article 41 to private joint-stock companies and has considered the related article in the company’s articles of association invalid. Another court has validated the condition of the board of directors’ approval in the articles of association. As a result, this dispute was raised in the Supreme Court, and the Court’s decision No.856 dated 02/10/1403 (22 December 2024) was issued as follows:.

“Considering that the articles of association are the most crucial element of a private joint-stock company in which the relations between partners and the limits of the powers of the board of directors and shareholders are determined, therefore, if, according to this document, the transfer of shares is subject to the approval of the board of directors, and the shareholder attempts to transfer his shares to a third party without respecting the priority rights of other shareholders and the approval of the said board, the transfer made is invalid and is condemned to be null and void without the approval of the board of directors.

Therefore, the provisions of Article 41 of the bill amending part of the Commercial Code apply only to public joint stock companies and do not apply to private joint stock companies”.

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