Member News

Post date: Friday, 31 July, 2015 - 10:54
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Securities Markets Law

New categories of professional participants in securities markets

Professional participants in securities markets are defined to include investment companies, stock exchanges, clearing houses, investment fund depositaries and a central depositary.  They are to be created in the form of joint stock companies and will be subject to licensing.

An investment company is defined as a joint stock company having a license to engage in the activities of an investment company and the sole activity of which consists of rendering primary and auxiliary investment services.  Investment companies will be issued a single license for a range of activities, including those of a broker, dealer and underwriter, subject to the limitations set forth in the terms of the license.

Certain licenses will be issued for an unlimited period of time

Unlike current requirements, according to which a license is issued for five years, the activities of stock exchanges, clearing houses and depositaries will be licensed for an indefinite period of time.

The review of an application for the issuance of the applicable license is conducted in two stages – initial and final.  There will also be a special procedure for the licensing of branches of foreign investment companies in Azerbaijan.  Only branches of foreign investment companies that have received the license in question may engage in the following services in the territory of Republic of Azerbaijan:

Primary investment services

  • The acceptance and execution of clients’ orders in relation to transactions with securities or derivative financial instruments
  • The management of individual investment portfolios
  • The provision of investment advice
  • The placement and underwriting of securities (with and without an underwriting commitment)
  • Transacting with securities and derivative financial instruments for their own account in the capacity of a member of a depository and stock exchange
  • Margin trading

Auxiliary investment services

  • The management of clients’ securities accounts, including executing transactions related to encumbering securities and derivative financial instruments
  • Lending funds or securities to investors for trading with securities and derivative financial instruments 
  • Conducting investment and financial analysis related to securities and derivative financial instruments
  • Acting as a security trustee for secured bonds
  • Foreign exchange activities in relation to conducting primary investment services

New minimum charter capital requirements will be promulgated by the regulator.

New qualification requirements for directors of professional participants in securities markets

In general, the laws of Azerbaijan do not require directors serving on the supervisory board or executive officers of professional participants in securities markets to possess any special qualification, nor does a prior criminal record normally disqualify a director or officer from such a position.  That will change with the introduction of new qualification requirements for such directors of investment companies, stock exchanges, clearing houses and central depositaries, including the introduction of educational requirements and requirements related to relevant professional experience.

New merger controls

Along with the general requirements contained in various other acts of legislation (e.g., antimonopoly consent), the prior written consent of the regulator must be obtained for the acquisition (whether directly indirectly) of a major shareholding in a professional participant in securities markets (i.e., 10 percent or more). Further, such consent would also be required each time a purchase will cause the purchaser’s shareholding to equal or exceed the thresholds of 25 percent, 50 percent or 75 percent, subject to the condition that no person may own more than 50 percent of the charter capital of more than one investment company.

Creation of a Clearing House Compensation Fund

One of the mandatory options that clearing houses must select in order to reduce the risks related to the activity of clearing transactions executed in the after-hours trading system is the establishment of a clearing house compensation fund (other options include the insurance of assets, obtaining guarantees or security for assets, etc.).

The Clearing House Compensation Fund shall be financed from a range of sources, including membership dues paid by the members of the clearing fund and income from investing in funds. Such funds may then be used to settle the mutual obligations of the members of the clearing house vis-à-vis each other in relation to transactions concluded during after-hours trading, where a member is unable to settle.

Amendments to the Civil Code

A new concept of derivative financial instrument was introduced into the Civil Code, defined as a contract to buy, sell or swap underlying assets.  Securities, foreign exchange, interest spots, profitability, derivative financial instruments, commodities, financial indices, credit risk, etc. may serve as underlying assets.

The proposed amendments provide for three types of derivative financial instruments – futures, options and swaps.

Futures are derivative financial instruments for the sale and purchase of a predetermined type and amount of an underlying asset at an agreed date and price.  Options are derivative financial instruments that grant a unilateral right to its holders to buy, sell or swap an underlying asset. Finally, swaps are derivative financial instruments under which two parties exchange the same type of underlying asset.

Consequently, derivative financial instruments will not be considered to be securities and will avoid regulation under the existing securities regulations (advertising, registration, etc.). That said, please note that the regulator is charged with preparing special rules on the placement and circulation of derivative financial instruments in a standardized form over stock exchanges.

Finally, derivative financial instruments are expressly excluded from the Azerbaijani gaming laws.

Advertising Law

The new Advertising Law contains certain restrictions related to the advertisement of securities in Azerbaijan, an activity which is defined as information distributed using various means and methods in any form for the purpose of attracting the attention of the consumer to the subject-matter of the advertisement, creating and maintaining interest in and increasing awareness about the product and stimulating the sale thereof.

These restrictions include, along with a previously effective prohibition to advertise unregistered securities, restrictions related to advertisement of securities before a decision about the sale of such securities is adopted, as well as providing information that contradicts information contained in the prospectus.

Law stated as at 15 July 2015.

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Post date: Friday, 17 July, 2015 - 15:34
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Global law firm Denton’s ­– a TEAS member company – has published the ninth edition of its invaluable guide to doing business in Azerbaijan. Entitled Succeeding in Azerbaijan, it is based on the collective knowledge and experience gained during the many years that the Baku branch has advised clients in Azerbaijan.

The Denton’s guide highlights some of the principal issues of interest to those currently in, or wishing to enter, this market. It serves as a good, practical introduction to the legal and business environment in the country. This edition was officially launched on 1 June 2015 at the Denton’s Baku annual client breakfast briefing held during the Caspian International Oil and Gas Exhibition. To download the full guide in pdf format, go to http://bit.ly/dentons2015

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Post date: Friday, 17 July, 2015 - 15:30
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The Baku branch of global law firm Denton’s – a TEAS member company – has issued a client alert related to recent amendments to the Azerbaijani Civil Code, which became effective on 24 May 2015. These specify new regulations for related party transactions, which now encompass all Azerbaijani legal entities.

Previously, similar regulations existed only for issuers of investment securities (company shares and bonds) and banks. The new rules are applicable to any transaction or series of related transactions between a legal entity and a related party with respect to such legal entity. To read the full client alert, go to http://bit.ly/dentonsrelatedparty.

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Post date: Friday, 10 July, 2015 - 10:27
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A client alert from the global law firm Dentons – a TEAS member

One consequence of this move was that loans granted by local banks to local customers in foreign currency became more expensive, because the Azerbaijani Manat (AZN) currency was weakened by 25 per cent. This raised a question of whether foreign currency-denominated loans between Azerbaijani residents were even constitutional. Article 19, paragraph III of the Azerbaijani Constitution prohibits using any monetary unit as a means for payment on the territory of the Republic of Azerbaijan, other than the AZN. At the same time, Article 439.1 of the Azerbaijani Civil Code, the cornerstone of commercial law in the country, states that monetary obligations must be denominated in AZN, except where one of the parties to a transaction is a foreign person or entity.

So the first issue presented before the Constitutional Court was whether foreign currency-denominated loans were constitutional in light of the prohibition in the Constitution against using any currency other than AZN as a means of payment and the first sentence of Article 439.1 of the Azerbaijani Civil Code (“monetary obligations must be denominated in AZN”). Here, the Court essentially ruled that the wording in question does not apply to obligations arising out of loan agreements because, in lending transactions, money is used not as a means of payment, but rather as something that is borrowed and must be returned.

The second issue was whether the second sentence of Article 439.1 of the Azerbaijani Civil Code (“if one of the parties is a foreign physical person or legal entity, the parties, if it is not prohibited by law, may specify monetary obligations in foreign currency”) was unconstitutional. The Court interpreted this provision as providing only the right to indicate the obligation in foreign currency in certain circumstances and not the right to make payment in such currency, which means that it is not unconstitutional, because the Constitution only prohibits using foreign currency as a means of payment.

As the Court addressed the constitutionality of Article 439.1 of the Civil Code, it necessarily also addressed the constitutionality of Article 439.2, which set forth the mechanism for the repayment of foreign currency denominated loans. Namely, it stated that if a foreign currency-denominated obligation must be performed in Azerbaijan, it must be paid in AZN, except where it is agreed that the payment should be made in foreign currency. It went on to state that, if the payment is to be made in AZN, the amount to be paid must be recalculated at the rate effective at the place and time of payment. The court ruled that payments under foreign currency-denominated loans (both principal and interest) must be made in the currency agreed by the parties. Alternatively, where the parties have failed to include such a term into the agreement, the loan may be repaid in AZN at the exchange rate prevailing at the place and time of payment.

A full version of the Constitutional Court Decision may be accessed at www.constcourt.gov.az/decisions/330

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Post date: Friday, 10 July, 2015 - 10:22
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Dentons, the global law firm, has advised Petronas, the Malaysian oil and gas giant, on its acquisition of the 15.5 per cent Statoil stake in the Azerbaijani Shah Deniz gas field production-sharing agreement, including associated pipelines. The deal was completed in April 2015.

Shah Deniz is one of the largest gas projects in the world, paving the way for Caspian gas to be delivered directly to European markets for the first time through the Southern Energy corridor into Italy, thereby providing diversity of supply for Europe.

This major transaction was completed in a short time period due to Petronas’ focused in-house legal and commercial teams. The deal represents one of Petronas’ largest acquisition deals.

The Dentons team was led by Humphrey Douglas, Energy Partner; Nigel Webber, Corporate Partner; and James Hogan, Partner, Azerbaijan. Senior Associates included Joseph Altendorf, Helen Bowdren and Ophelia Abdullayeva.

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Post date: Friday, 19 June, 2015 - 10:54
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A client alert from the global law firm Denton’s – a TEAS member

One consequence of this move was that loans granted by local banks to local customers in foreign currency became more expensive, because the Azerbaijani Manat (AZN) currency was weakened by 25 per cent. This raised a question of whether foreign currency-denominated loans between Azerbaijani residents were even constitutional. Article 19, paragraph III of the Azerbaijani Constitution prohibits using any monetary unit as a means for payment on the territory of the Republic of Azerbaijan, other than the AZN. At the same time, Article 439.1 of the Azerbaijani Civil Code, the cornerstone of commercial law in the country, states that monetary obligations must be denominated in AZN, except where one of the parties to a transaction is a foreign person or entity.

So the first issue presented before the Constitutional Court was whether foreign currency-denominated loans were constitutional in light of the prohibition in the Constitution against using any currency other than AZN as a means of payment and the first sentence of Article 439.1 of the Azerbaijani Civil Code (“monetary obligations must be denominated in AZN”). Here, the Court essentially ruled that the wording in question does not apply to obligations arising out of loan agreements because, in lending transactions, money is used not as a means of payment, but rather as something that is borrowed and must be returned.

The second issue was whether the second sentence of Article 439.1 of the Azerbaijani Civil Code (“if one of the parties is a foreign physical person or legal entity, the parties, if it is not prohibited by law, may specify monetary obligations in foreign currency”) was unconstitutional. The Court interpreted this provision as providing only the right to indicate the obligation in foreign currency in certain circumstances and not the right to make payment in such currency, which means that it is not unconstitutional, because the Constitution only prohibits using foreign currency as a means of payment.

As the Court addressed the constitutionality of Article 439.1 of the Civil Code, it necessarily also addressed the constitutionality of Article 439.2, which set forth the mechanism for the repayment of foreign currency denominated loans. Namely, it stated that if a foreign currency-denominated obligation must be performed in Azerbaijan, it must be paid in AZN, except where it is agreed that the payment should be made in foreign currency. It went on to state that, if the payment is to be made in AZN, the amount to be paid must be recalculated at the rate effective at the place and time of payment. The court ruled that payments under foreign currency-denominated loans (both principal and interest) must be made in the currency agreed by the parties. Alternatively, where the parties have failed to include such a term into the agreement, the loan may be repaid in AZN at the exchange rate prevailing at the place and time of payment.

A full version of the Constitutional Court Decision may be accessed at www.constcourt.gov.az/decisions/330

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Post date: Friday, 19 June, 2015 - 10:39
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Dentons, the global law firm, has advised Petronas, the Malaysian oil and gas giant, on its acquisition of the 15.5 per cent Statoil stake in the Azerbaijani Shah Deniz gas field production-sharing agreement, including associated pipelines. The deal was completed in April 2015.

Shah Deniz is one of the largest gas projects in the world, paving the way for Caspian gas to be delivered directly to European markets for the first time through the Southern Energy corridor into Italy, thereby providing diversity of supply for Europe.

This major transaction was completed in a short time period due to Petronas’ focused in-house legal and commercial teams. The deal represents one of Petronas’ largest acquisition deals.

The Dentons team was led by Humphrey Douglas, Energy Partner; Nigel Webber, Corporate Partner; and James Hogan, Partner, Azerbaijan. Senior Associates included Joseph Altendorf, Helen Bowdren and Ophelia Abdullayeva.

Link: view

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