Key Considerations in Drafting the Articles of Association of a Parent Company
On 19 February 2007, the Research Department of the Securities and Exchange Organization issued a model articles of association for investment companies as a proposed text, with the objective of standardization across investment companies and holding structures. Under Clause 3 of that model, the principal activity of an investment company, in addition to activities such as discretionary portfolio management on behalf of others, management of investment funds, investment advisory services, and risk management advisory services, is defined as the formation and administration of a portfolio of securities from the company’s own assets, in the company’s name, for the purpose of generating profit, subject to considerations including the following:
- More than 5 percent of the company’s assets allocated to this activity must not be invested in the securities of a single issuer.
- The level of investment in the securities of a single issuer must be such that the company and its affiliates hold less than 20 percent of the voting rights required to elect that issuer’s board of directors.
- The portfolio must not include securities issued by investment companies.
- No more than 20 percent of the assets allocated to this activity may be used to purchase securities of issuers operating in the same industry.
Under Note 1 to the same provision, the company must allocate at least 70 percent of its assets to the above activity. The remaining assets may consist of those necessary to carry out the company’s operations.
Dispute Resolution Mechanisms Between Partners and Stakeholders
Key Elements in Drafting the Articles of Association of a Parent Company or Holding Company
It is necessary to note that the registration declaration and the articles of association of a parent company must be signed by all founders. In practice, the registration declaration functions as the company’s identity record. The holding company’s articles of association serve as the governing document for how the company is administered.
After obtaining the subscription announcement in accordance with Clause 20 of Article 1 of the Capital Market Law, and given the requirement to complete the formation and incorporation process, approval of the Securities and Exchange Organization is mandatory. It should also be noted that, pursuant to Note 1 of Article 22 of the Securities Market Law, the public offering of securities must occur within the period determined by the Securities and Exchange Organization, which may not exceed 30 days.
When preparing a draft of the articles of association for a parent company, the matters below should be addressed to ensure the articles align with the nature of such a company. Portions of this framework are derived from the articles of association of a specialized state parent company, approved by the Council of Ministers on 16 June 2004, based on Proposal No. 1/17976 dated 15 December 2003 of the Ministry of Commerce, pursuant to Article 4 of the Third Economic, Social, and Cultural Development Plan of the Islamic Republic of Iran (approved in 2000).
A parent company may be formed as a public joint-stock company, a private joint-stock company, or, in certain cases, a limited liability company. Key drafting points include:
- The company name must expressly include the term “specialized parent company” or “holding company.”
- The purpose of incorporation should be stated, namely, the creation of value beyond the aggregate value of individual units and companies, and it should specify the organization and governance of subsidiaries and group entities.
- The registered head office must be stated, and the articles should address whether the company may, where necessary, establish branches or representative offices inside or outside the country with approval of the general meeting and in compliance with applicable laws and regulations, for the purpose of executing the operations set out in the articles.
- General provisions should confirm that the company has an independent legal personality and that the parent company and all subsidiaries have financial independence and are governed exclusively by their own articles and applicable laws.
- The company’s term should be stated, which is typically unlimited.
- The scope of activities and duties should be defined, including management of shares and investments of subsidiaries, oversight of operations, and the execution of transactions necessary to achieve the company’s objectives, either through subsidiaries or, where required and subject to approval of the general meeting, by the parent company itself. In substance, the role of the parent company and its participation in subsidiary shareholders’ meetings should be clearly determined.
Note on Shareholder Rights Under Iranian Commercial Law
Rights attached to shares in an investment company’s capital, in accordance with the Commercial Code, include:
- Capital shares: shares that entitle the holder to dividends prior to liquidation and to a share of distributed assets upon liquidation.
- Beneficiary shares: shares that entitle the holder to receive dividends prior to liquidation, but do not entitle the holder to a share of distributed assets upon liquidation.
Frequently Asked Questions About Key Considerations in Drafting the Articles of Association of a Parent Company
The articles of association of a parent company or holding company operate as the governing framework for corporate administration and for the management of subsidiaries. This document defines the legal and managerial structure of the company’s activities and functions as a core corporate record. It must be signed by all founders.
Key matters include the company form (public joint stock, private joint stock, or limited liability), inclusion of the term holding company or specialized parent company in the name, the purpose of incorporation, the registered head office and the ability to establish branches or representative offices, general provisions confirming legal and financial independence, the company’s term, the scope of activities and duties, and the method of management and oversight of subsidiaries.
The principal activities include managing shares and investments of subsidiary companies, portfolio formation and administration, management of investment funds, investment advisory services, and risk management advisory services. The parent company may also undertake transactions necessary to achieve its objectives, either through subsidiaries or, where required, directly with approval of the general meeting.
Limitations include that more than 5 percent of the assets allocated to the portfolio activity should not be invested in securities of a single issuer, investment should not result in the company and its affiliates holding 20 percent or more of the voting rights required to elect that issuer’s board, the portfolio should not include securities issued by investment companies, and no more than 20 percent of the allocated assets may be used to purchase securities of issuers operating in the same industry.
Capital shares entitle the holder to dividends prior to liquidation and to receive a share of distributed assets upon liquidation. Beneficiary shares entitle the holder to dividends prior to liquidation but do not entitle the holder to any share of distributed assets upon liquidation.
A parent company may establish branches or representative offices inside or outside the country, where necessary, subject to approval of the general meeting and compliance with applicable laws and regulations, in order to carry out the operations set out in its articles of association. Why is drafting the articles of association of a parent company important?
What key matters should be included in a parent company’s articles of association?
What is the scope of activity of a parent company?
What investment limitations apply to the parent company’s portfolio activity?
What is the difference between capital shares and beneficiary shares?
How may a parent company establish branches or representative offices?
