Minority Shareholder Rights in Close Corporations: A Comparative Analysis with Iranian Law

Introduction Close corporations, typically owned by a few shareholders and not publicly traded, operate in an environment shaped by personal trust and informal expectations. In the U.S., courts have developed equitable doctrines to protect minority shareholders from exclusion and abuse by majority shareholders. In contrast, Iranian commercial law, while offering general shareholder protections, lacks a robust framework for minority safeguards in closely held corporations. This blog explores key doctrines protecting minority rights and offers a comparative analysis with Iranian corporate law.

1. Fiduciary Duties in Close Corporations in the U.S., courts often treat shareholder relationships in close corporations similarly to partnerships, requiring all shareholders especially those with control to act in good faith and with loyalty toward each other.

• Minority shareholders must not be unfairly excluded from management or deprived of economic benefits such as dividends.

Iranian comparison: In Iran, fiduciary duties between shareholders are not formally recognized in statutory law. The Commercial Code focuses primarily on the rights and obligations of the board of directors and general meetings. Shareholders are generally seen as passive investors, and there is no legal mechanism to hold majority shareholders accountable for abuse of power unless fraud or criminal conduct can be proven. This leaves minority shareholders vulnerable to exclusion or unfair treatment with limited legal recourse.

2. Protecting Reasonable Expectations Minority shareholders often expect continued participation in company management, employment, or fair economic returns. U.S. courts protect these expectations when their denial appears arbitrary or driven by personal animosity.

Iranian comparison: Iranian law does not recognize “reasonable expectations” as a legal standard. Shareholders’ rights are defined strictly by the articles of association and decisions of the general assembly. If a minority shareholder is excluded from employment or decision-making, they generally cannot claim breach of an implied expectation unless a contractual right is clearly stated.

3. Enforceability of Shareholder Agreements Privately negotiated agreements in close corporations such as those covering voting rights, buy-sell terms, or management roles are enforceable in U.S. courts when clearly drafted and equitable in nature.

Iranian comparison: Shareholder agreements in Iran are often viewed as secondary to the articles of association. Courts may not enforce provisions that conflict with statutory formalities or corporate governance structures. Furthermore, enforcement depends heavily on how explicitly such agreements are incorporated into the company’s governing documents. Informal side agreements often lack legal force.

4. Legal Remedies for Deadlock and Oppression When minority shareholders are locked out of the company or when corporate governance reaches an impasse, U.S. courts may intervene by ordering dissolution, mandating a buyout at fair value, or awarding damages.

Iranian comparison: The Iranian Commercial Code does not address shareholder oppression or governance deadlocks. Dissolution of companies typically requires insolvency, a court order based on specific statutory violations, or a supermajority vote. Minority shareholders have limited avenues to challenge exclusionary practices or force resolution of governance stalemates.

5. Disclosure Obligations in Share Transactions Transparency and full disclosure are key duties in U.S. close corporations, particularly during share buybacks or transfers involving insiders. Failure to disclose material information can result in liability.

Iranian comparison: Iranian law generally lacks disclosure obligations for private company transactions unless the entity is publicly listed under the Securities Market Act. In closely held firms, there is no formal requirement to inform shareholders about company prospects or pending transactions during a buyback, giving controlling shareholders significant informational advantages.

Conclusion The U.S. legal system offers a wide range of equitable protections for minority shareholders in close corporations, with courts willing to enforce fiduciary standards, uphold shareholder agreements, and recognize implied expectations. Iranian corporate law, while structured and codified, lacks the flexibility and judicial discretion necessary to protect minority interests in complex intra-corporate conflicts. Legislative reform in Iran introducing fiduciary duties, clarifying enforceability of shareholder agreements, and providing remedies for oppression would help ensure corporate justice and investor confidence.

Written by Amin Alemohammad | 1844IranLaw.com