Significant amendments regulating transactions between legal entities and parties related to them have been introduced into the Civil Code of the Republic of Azerbaijan and take effect from 2 June 2015. The changes affect the list of parties considered to be related parties and the transaction value thresholds for various approval mechanisms.

Related Parties/Persons

Pursuant to the amendments, any transaction or agreement entered into between a legal entity and a related party is a related party transaction.

The list of persons considered to be "related parties" is as follows:

  1. Heads and members of the board of directors (supervisory board) and executive body of the legal entity;
  2. Heads of structural units (e.g. branch, representative office, department, etc.) of a legal entity;
  3. Relatives (spouses, parents, including spouse's parents, grandparents, children, adopted children, siblings) of persons listed under 1 and 2 above;
  4. Any person directly or indirectly holding at least 10% of the shares or a 10% participatory interest in the charter capital of the legal entity;
  5. Legal entities in which the persons listed under 1, 2 and 4 above directly or indirectly participate;
  6. A legal entity holding at least 20% of the shares in the charter capital of the legal entity;
  7. Persons holding at least 20% of the shares/ a 20% participatory interest in the charter capital of the legal entities listed under 4 and 6 above;
  8. The heads of the boards of directors (supervisory board) and executive bodies of the legal entities listed under 4 and 6 above.

Limitations   

The rules applicable to related party transactions vary depending primarily on the value of a particular transaction. If the value of the transaction to be entered into with a related party is equal to or more than 5% of the total value of the legal entity's assets, such transaction requires the opinion of an independent auditor engaged by the legal entity and a decision adopted at the general meeting of the legal entity's shareholders/participants by a simple majority of votes. The related persons cannot participate in the voting.  

If the value of the transaction is less than 5% of the total value of the legal entity's assets, the transaction can be concluded by the general meeting of the legal entity's shareholders/participants, board of directors (supervisory board) or the executive body of the legal entity in accordance with the charter of the legal entity. Related persons cannot participate in the voting. If the head of the sole executive body of the legal entity, or persons related to it and listed under 3 and 5 above, are acting as related persons, the relevant decision must be adopted by the board of directors (supervisory board) or, in its absence, by the general meeting of shareholders/participants.

The conclusion of a transaction in violation of the above threshold requirements will trigger liability for the persons causing damage to the legal entity. Additionally, such a transaction may be challenged by the legal entity or any of its participants if a counterparty was aware of the violation at the moment of conclusion of the transaction.

The heads and members of the board of directors (supervisory board) and the executive body of the legal entity and any other parties must inform the competent body of the legal entity in writing about the conclusion of a related party transaction by themselves and the persons listed under 3 and 5 above, and provide details on their interest in the relevant transaction.

The amendments were introduced by the law On Amendments to the Civil Code of the Republic of Azerbaijan, dated 2 June 2015, which amended the Civil Code of the Republic of Azerbaijan of 1 September 2000.