ON BEHALF
OF THE REPUBLIC OF AZERBAIJAN
DECISION
OF THE REPUBLIC OF AZERBAIJAN
On interpretation of the Articles 107.2.1 and 107.5.1 of the Civil Code of the Republic of Azerbaijan
16 December 2011 Baku
city
attended
by the Court Clerk Ismail Ismaylov,
the
legal representative of the subject interested in special constitutional
proceedings: Inshallah Guliyev, Judge of the Court of Appeal of Sheki city, Vasif
Amiraslanov, senior advisor of Department of Economic Legislation of
Administration of the Milli Majlis of the Republic of Azerbaijan;
specialists:
Bagir Asadov, Judge of the Supreme Court of the Republic of Azerbaijan, Kamran
Babayev, Head of Legal Department of the State Securities Committee of the
Republic of Azerbaijan, Ekram Hasanov, Deputy Chairman of Board of the Open Joint
Stock Company Bank VTB (Azerbaijan);
the
expert: Sarvar Suleymanli, Deputy Dean of the Faculty of Law of Baku State
University, Associate Professor of Civil Law Department, Doctor of Philosophy
in Law;
based
on the Article 130.6 of the Constitution of the Republic of Azerbaijan has
examined in open court session via procedure of special constitutional
proceedings the constitutional case oninterpretation of Articles 107.2.1 and
107.5.1 of the Civil Code of the Republic ofAzerbaijan based on inquiry of
Court of Appeal of Sheki city;
having heard the report of Judge Rovshan Ismaylov, the reports of the legal representatives of the subjects interested in special constitutional proceedings and conclusions of expert and specialists, the Plenum of Constitutional Court of the Republic of Azerbaijan
DETERMINED AS FOLLOWS:
The Court of Appeal of Sheki city having
applied to the Constitutional Court of the Republic of Azerbaijan (hereinafter
referred to as the Constitutional Court) asks to give interpretation of
Articles 107.2.1 and 107.5.1 of the Civil Code of the Republic of Azerbaijan
(hereinafter referred to as the Civil Code) from the point of view of Articles
13 and 29 of the Constitution of the Republic of Azerbaijan (hereinafter
referred to as the Constitution) and Article 1 of Protocol N1 of the European Convention
“On Protection of Human Rights and Fundamental Freedoms” (hereinafter referred
to as Convention).
In
the inquiry it is specified that at consideration of the civil cases by Court
of Appeal of Sheki city on the claim of Nizami Aslanbekov and others concerning
invalidation of the actions which are carried out in connection with change of
an organizational and legal form of Mingechaur Temir-Tikinti Open joint stock
company (hereinafter referred to as the JSC Mingechaur Temir-Tikinti), and
also, concerning the requirement of the claimant Sakhavat Namazov about invalidation
of the protocol No. 3 of extraordinary general meeting of this joint-stock
company held of October 22, 2009arise a need for interpretation of a number of
articles of the Civil Code.
At
the extraordinary general meeting of JSC Mingechaur Temir-Tikinti held on
October 22, 2009 on which 25 shareholders of society from 188 participated
(79,47% owning the right of vote) decision on transformation of JSC Mingechaur Temir-Tikinti
into limited liability company by reorganization was made on acceptance of
shareholders of joint-stock company in limited liability company as
shareholders according to the shares, and on withdrawal from a turnover of shares
of JSC Mingechaur Temir-Tikinti.
According
to the applicant, articles 107-2.1 and 107-5.1 of the Civil Code contradict the
constitutional norms regulating the property right. Thus, it isn't allowed to
decide destiny of the actions belonging to shareholders without expression of
will of each shareholder in connection with transformation of open joint stock
company to limited liability company.
According
to the applicant, Articles 107-2.1 and 107-5.1 of the Civil Code contradict to
the constitutional norms regulating the property right. Thus, it is not allowed
to decide destiny of shares belonging to shareholders without expression of
will of each shareholder in connection with reorganization of open joint stock
company to limited liability company.
In
the inquiry it is also noted that in connection with these questions, lack of
the mechanism of protection of the property rights of the shareholders who did not
participate in voting at joint-stock company and were opponents of the made
decision does not exclude abuse of the rights in the course of enforcement, and
also existence of disagreements in opinions between shareholders in practice,
including emergence of unreasonable and illegal restrictions connected with the
rights and freedoms. Unambiguous application of noted norms of the Civil Code
by courts is possible only after their interpretation by means of the
constitutional justice.
In
connection with the inquiry the Plenum of the Constitutional Court considers
necessary to note the following.
On
the basis of the Article 130.6 of the Constitution the courts may apply to the
Constitutional Court of the Republic of Azerbaijan on interpretation of the
Constitution and the laws of the Republic of Azerbaijan as regards the matters
concerning the implementation of human rights and freedoms.
The
question which is brought up in the inquiry of Court of Appeal of Sheki city is
directly connected with implementation of the property right fixed in the Article
29 of the Constitution. According to this article everyone has the right to own
property. Neither kind of property has priority. Ownership right including
right for private owners is protected by law. Everyone might possess movable
and real property. Right of ownership envisages the right of owner to possess,
use and dispose of the property himself/herself or jointly with others. Nobody can
be deprived of his/her property without decision of law court. Total
confiscation of the property is not permitted. Alienation of the property for
state or public needs is permitted only after preliminary fair reimbursement of
its cost.
The
content of this right should be understood, in view of provisions of Article 13
of the Constitution. The property as important institute of civil society is
one of the main factors making a basis of development of economy. Therefore,
the property, is declared inviolable under Article 13 of the Constitution and
is protected by the state. The property right, acting as the basis of freedom
of each individual of society, is an important condition for development of personality
and free business.
The
state has to abstain from illegal intervention in effective implementation of
the property right and prevent such actions. Systemically analyzing Article 29.1
and Article 71.1 of the Constitution it is possible to come to a conclusion
that for providing the property right to the state both negative and positive
obligations are assigned. Positive obligations cover implementation of some
measures, including definition of the legal regime providing effective
realization of the property right. On the basis of the Article 94.1.13 of the
Constitution these obligations are assigned on Milli Mejlis of the Republic of Azerbaijan
(hereinafter referred to as the Milli Mejlis).
Along
with it, despite the importance of noted right, it is not obligatory and can be
limited. It is necessary to take into consideration that besides that the
property bears important function in implementation of special interests of the
individual, it has also important social function in socially directed state on
the basis of contents of Article 15 of the Constitution. On the other hand, in
the Constitution and in the Constitutional Law of the Republic of Azerbaijan “On
regulation of implementation of the rights and freedoms of the individual in
the Republic of Azerbaijan” the limits of the general and special restrictions
of the property right are set. Milli Mejlis, at realization of the powers by
definition of the contents of the property right, has to consider these limits
and proportionality of functions of property.
The
property right found the reflection also in Article 1 of the Protocol No. 1 of
the Convention.
On
a legal position of the European Court of Human Rights (hereinafter referred to
as the European Court) the concept of “possessions” in the first part of
Article 1 of Protocol No. 1 has an autonomous meaning which is not limited to
ownership of physical goods and is independent from the formal classification
in domestic law: the issue that needs to be examined is whether the
circumstances of the case, considered as a whole, may be regarded as having
conferred on the applicant title to a substantive interest protected by that
provision. Accordingly, as well as physical goods, certain rights and interests
constituting assets may also be regarded as “property rights”, and thus as
“possessions” for the purposes of this provision. The concept of “possessions”
is not limited to “existing possessions” but may also cover assets, including
claims, in respect of which the applicant can argue that he has at least a
reasonable and “legitimate expectation” of obtaining effective enjoyment of a
property right (the decision of Grand Chamber of the European Court of November
30, 2004 on case of Öneryildiz v. Turkey, §124).
By
the opinion of the European Court a company share is a complex thing. It
certifies that the holder possesses a share in the company together with the
corresponding rights. This is not only an indirect claim on company assets but
also other rights, especially voting rights and the right to influence the
company (decision of the European Court on case of Shesti Mai Engineering OOD
and others v. Bulgaria of September 20, 2011, §77and decision on case of Sovtransavto
holding v. Ukraine of July 25, 2002, §92).
According
to Article 1077.1 of the Civil Code a share is a security, certifying a
membership in a joint stock society as well as certifying the right of an owner
(shareholder) to receive a part of income of a joint stock society in form of
dividend, the right to participate in the management of activities of a joint
stock society and the right to one part of the property of a joint stock
society left after its liquidation.
As
it became clear, the shareholder, being the member of society, has certain
rights in case management. These rights are concretized in Article 106-1 of the
Civil Code.
Along
with it, it is necessary to take into consideration that the rights of
shareholders connected with management of joint-stock company are carried out
on the basis of the principle of the majority.
Joint-stock
company, in essence, being the cofounder commercial organization and formed
directly on investments, surely has to be governed by such principle as well.
The
principle of the majority found the reflection in the civil legislation in the
form “one voting share is one vote” (Article 107-3.5 of the Civil Code). On the
basis of this principle, the majority – is defined not by the number of
shareholders, but volume of the participating share in authorized capital. In
other words, in joint-stock company, the rights are determined not by the
person but by the made investments.
Otherwise,
recognition for each new shareholder of the right of veto, irrespective of
number of the shares which are in its property actually means application of
the principle of unanimity in management of joint-stock company. It, in turn,
can paralyze management of such legal entity. It does not answer the purpose
and duties as support of business activity and creation of conditions for
development of free market economy, provided in Article 15.2 of the
Constitution and in Article 1 of the Civil Code, defining creation of
conditions for development of economy on the basis of the market relations.
On
the other hand, if, for the purpose of protection of the rights of minority,
the principle of unanimity in management of joint-stock companies is recognized
and for each shareholder will be granted the right of veto in view of the fact
that the shareholders representing the majority won't be able to predetermine
legal destiny of the shares, it can become a cause of infringement of their
rights in even bigger volume. Thus, at collision of those who represents
smaller part of the capital in joint-stock company and does not want change of
a legal and organizational form of joint-stock company of a form and those who
represents the most part of the capital in joint-stock company and the
preference of will of those who represents the majority of the capital wants
change of a legal and organizational form of joint-stock company, it is
considered more fair and expedient from the point of view of the equilibrium
principle.
Main
objective of each commercial organization is profit earning. For achievement of
this purpose, they make different decisions, including the decisions connected
with reorganization of the organization. In such cases, authorized bodies of
the state have no right to check expediency of such decisions from the economic
point of view. Nevertheless, the state as the guarantor of property rights of
all participants of joint-stock company, establishing the corresponding
procedural rules, performs a duty to control their observance and by means of
effective protective mechanisms has to protect persons which rights was
violated.
According
to it the Milli Mejlis at implementation of the discretionary (exclusive)
powers on the basis of part I of point 13 of Article 94 of the Constitution,
for the purpose of protection of the rights of all shareholders, in view of
conditions of authority of general
meeting of joint-stock company, sets various limits of the majority demanded
for decision-making depending on the importance of the made decision in
joint-stock company. Thus, according to Article 107-2.1 of the Civil Code general
meeting is valid if holders of 60 % voting shares participate in shareholders’
general meeting. At the same time according to contents of Article 107-5.1 of
the specified Code the decision of general shareholder meeting is made by a
simple majority vote, participating at general shareholder meeting, taking into
account the situation “one voting share is one vote”. Decisions concerning
reestablishment, liquidation of company, amendments and addendums to the
charter are accepted by 2/3-majority vote of shareholders having voting right
in the general meeting.
Definition
of such limits completely corresponds to practice of corporate management of
foreign countries. Also in the countries entering into continental legal system
(Romano-German) (German Law of Share Partnership, Article 179; Civil Code of
Switzerland, Article 647, 703; Civil Code of Italy, Article 2368), and in
Anglo-Saxon legal systems (Law on the Companies of England, Article 378; Law on
Corporations of the State of Delaware the USA, Article 216) authority on making
decision on legal destiny of joint-stock company is conferred to the
shareholders owning the prevailing share in authorized capital.
Nonparticipation
of shareholders in decision-making in connection with change of the charter of
society or with reorganization of society or vote by shareholders against these
decisions, in itself does not violate their property right.
The
legal regime governing the corporate relations is not applied to shareholders
irrespective of their will and because these relations are based on
multilateral agreements, participation in them is optional. Each shareholder
foreknows or has to know that one of features of a legal regime of joint-stock
company is possibility of change of the charter of society or reorganization of
society can be carried out from the shareholders owning the prevailing share in
authorized capital. According to it when the person joins joint-stock company,
it is considered the accepted introduction of such changes in the order
provided by the law. At the same time it is necessary to take into account that
one share grants to the owner the right to participate in management of
society, but not to define destiny of joint-stock company.
Besides,
the shareholder possesses a share of the co-owner and in the reorganized
limited liability company is proportional to the balance cost of the share
which is available in authorized capital of former joint-stock company. On the
other hand the share and the right of a share in limited liability company has
the same contents: both, being the undivided right in authorized capital of economic
society, grant to the owner the identical rights (profit earning, the right of
participation in management) in society. Only the making decision on assignment
of a share of minority or reduction of its cost, and other cases of this kind can
promote violation of the property rights of the corresponding shareholders.
Thus,
when at general meeting of joint-stock company the decision on reorganization
of this society to Limited Liability Company is made according to requirements of
Articles 106-1.3, 107-2.1 and 107-5.1 of the Civil Code, the property rights of
the shareholders who are not participating at this meeting or voting against
the decision on reorganization are not broken.
However,
in the civil legislation there are no rules of exact regulation of division of
shares of shareholders who not interested to participate in the reorganized
society.
In
this regard the Plenum of the Constitutional Court notes the following:
Reorganization
of joint-stock company, being multi-stage process, includes liquidation of
former legal entity and creation of the new legal entity on its property base.
Because this process is very difficult and can influence the rights of
different subjects, it has to be precisely settled in the legislation.
Before
transformation of joint - stock company to Limited Liability Company, the
decision on reorganization is made at general shareholder meeting, on the basis
of contents of Article 107-5.1 of the Civil Code. The actions which are carried
out at the subsequent stages and the made decisions, are related to the
reorganized society. Thus, according to contents of Article 87.2 of the Civil
Code Company can be established via foundation of new entity in accordance with
the Code hereof and re-organization (merger, joining, division and transfer).
According to Article 87.3 of the Civil Code establishment of the Company covers
implementation of the foundation meeting and making of agreement (in cases
stipulated under Article 45.2 of the Code) or decision on establishment of the
company (if company is founded by one person, payment of the charter capital
and preparation of the charter. At the same time according to Article 87.6 of
the Civil Code in the foundation meeting of the Company, decisions on
foundation of the company, approval of the Charter, approval of value of the
non-monetary assets paid into the Charter Capital when establishing the
company, organization of management authorities accepted by the founders
unanimously and decisions on other issues- with the majority of votes.
As evident, irrespective of a form of the
organization, all participants have to approve the charter of the founded
limited liability company. However, as well as it was specified in the inquiry,
shareholders of former joint-stock company have the right not to participate in
the reorganized limited liability company as the participant (founder) and
nobody can force them to it. Where there is such compulsion the right of free
enterprise affirmed in Article 59 of the Constitution and the principle of
freedom of contracts following from this right is violated. Thus, the content
of the right of free enterprise consists from that everyone has the right to
make the free and independent decision on use of the opportunities, ability and
property individually and together with others within the organizational and
legal forms provided by the legislation.
At the same time, there is no the clear
reflection in the legislation to what legal consequences will lead the not
adoption of the charter of limited liability company by those who does not want
to become the participant (founder) of new society with limited responsibility,
founded by reorganization.
In
this regard, Plenum of the Constitutional Court considers that the liquidating
share has to be given out to those shareholders who does not interested to
participate in the reorganized legal entity created by transformation, and the
charter has to be approved by the persons wishing to be participants of again
created society with limited responsibility.
Contents
of Article 1077.1 of the Civil Code also confirms it. Thus, the share along
with the other rights, confirms the right of shareholders for the rest of the
property that remained after liquidation of society. At the same time, as it
was already noted, transformation of joint-stock company, being multi-stage
process, includes also liquidation of former legal entity. At rendering at
general meeting of the decision on transformation, shareholders at the same
time also pass the decision on liquidation of joint-stock company. After it the
shareholder, who will not interested to participate in the reorganized legal
entity, can demand delivery of the liquidating share.
However,
the absence in the legislation of the clear regulating rules of all stages of
transformation of joint-stock company into limited liability company, can
negatively influence the rights of both all shareholders and creditors of
joint-stock company, including the interests of state (for example, in tax
questions).
In
the decision of Plenum of the Constitutional Court of September 26, 2007
according to complaint of R.Agalarov it is specified that the legislation
can not fully embrace the changes and general diversity of civil relations in
society. Even if the legislators attempt to adopt the legal norms that embrace
all the cases and regulate permanently developing legal relations, sometimes it
is objectively impossible …As a result, certain cases to be regulated are left
aside from the legal regulation due to the absence of a relevant norm.
Taking
the above-stated into consideration, Plenum of the Constitutional Court comes
to conclusion that the establishment in the legislation of the clear rules regulating
the all stages of transformation of joint-stock company into limited liability
company has to be recommended to Milli Mejlis.
Such
regulation is expedient also from the point of view of Article 88.1 of the
Civil Code. On the basis of this article number of participants of limited
liability company should not exceed the limit specified by the legislation.
However,
in the legislation this number is not determined. On the basis of point 1 of
the resolution No. 224 of the Cabinet of Ministers of the Republic of Azerbaijan
“On the solution of some issues following from adoption of the Civil Code of the
Republic of Azerbaijan” the limit number of participants of closed joint stock
company has to consist of 50 natural or legal entities.
Nevertheless,
as the limited liability company and closed joint stock company carry out
identical economic functions (consolidation of the small and average capital),
the number of participants of limited liability company should not exceed
number of participants of closed joint stock company.
Along
with above-stated, Plenum of the Constitutional Court in connection with the
inquiry considers necessary the examination of some provisions of the Civil
Code.
Thus,
on the basis of Article 58.2 of the Civil Code the creditor of a reorganized
legal entity is entitled to demand require termination or early performance of
obligations where the reorganized legal entity is a debtor and to recover losses.
On
this norm the impression can be made that creditors anyway have these rights at
reorganization of the legal entity.
In
this regard, Plenum of the Constitutional Court notes that if the fact of pure
reorganization in itself does not constitute a menace for these requirements of
creditors, unconditional existence of such right does not correspond to the
principles of balance and proportionality, and also interests of the state in
the field of business activity. Only when, the guarantee of payment of
requirements of creditors of the reorganized organization is exposed to real
threat (for example if authorized capital of the new founded organization is
much less than authorized capital of the former organization), creditors can
have a right to make the demands provided in Article 58.2 of the Civil Code.
On
the basis of the above, Plenum of the Constitutional Court comes to conclusion:
-
the decision adopted at general meeting of joint-stock company, on
transformation of joint-stock company into limited liability company with
observance of requirements of Articles 106-1.3, 107-2.1 and 107-5.1 of the
Civil Code, does not violate the property right of shareholders who did not
participate at this meeting or voted against the decision on transformation.
-
the establishment in the legislation of the clear rules regulating the all
stages of transformation of joint-stock company into limited liability company
has to be recommended to Milli Mejlis.
-
before entering of the corresponding additions and changes into the civil
legislation courts have to take into account that the requirement concerning
deliveries of a liquidating share of shareholders who not interested to
participate in the reorganized limited liability company, has to be satisfied
after making decision of general meeting on transformation.
According
to the above stated, Plenum of the Constitutional Court comes to the following conclusions:
The
provision of Article 1203.1 of the Civil Code "the circumstances which are
the reason of deprivation of a right of succession" covering the
circumstances specified in Articles 1137 and 1138 of this Code means not only
the last will of the testator but also the circumstances directed against the
testator.
Being guided by Article 130.6 of the Constitution of the Republic of Azerbaijan and Articles 60, 62, 63, 65-67 and 69 of the Law of the Republic of Azerbaijan “On Constitutional Court”, Plenum of the Constitutional Court of the Republic of Azerbaijan
DECIDED:
1.
The decision adopted at general meeting of joint-stock company, on
transformation of joint-stock company into limited liability company with
observance of requirements of the Articles 106-1.3, 107-2.1 and 107-5.1 of the
Civil Code, does not violate the property right of shareholders who did not
participate at this meeting or voted against the decision on transformation.
2.
Taking into consideration the legal position reflected in the given Decision to
recommend to Milli Mejlis to establish in the legislation of the clear rules regulating
the all stages of transformation of joint-stock company into Limited Liability
Company.
3.
Before entering of the corresponding additions and changes into the civil
legislation courts have to take into account that the requirement concerning
deliveries of a liquidating share of shareholders who not interested to
participate in the reorganized limited liability company, has to be satisfied
after making decision of general meeting on transformation.
4.
The decision shall come into force from the date of its publication.
5.
The decision shall be published in “Azerbaijan”, “Respublika”, “Xalq Qazeti”
and “Bakinskiy Rabochiy” newspapers, and “Bulletin of the Constitutional Court
of the Republic of Azerbaijan”.
6.
The decision is final and can not be cancelled, changed or officially
interpreted by any body or official.
