Korporativ hüquq / 11 iyun 2025-ci il
In this article, I will provide a brief overview of directors' fiduciary duties in Azerbaijani corporate legislation and outline certain legislative challenges surrounding them. To begin with, it is worthwhile to introduce the underlying legal theory and emphasize its importance in comparative corporate law.
While shareholder provide the necessary investment for the establishment of the corporation, when it comes to the management of it, it is believed that those who are actually specialized in the business management can run the company more effectively on a daily-basis than the shareholders. Therefore, the authority to manage company is generally assigned to the directors responsible for the management of company assets[1] and day-to-day operations. When this authority is delegated to others, problem arises regarding how to ensure that those who manage company will act in the best interests of the company and its shareholders, rather than for their own personal gain.[2] To address these concerns, certain duties attributed to the company managers-fiduciaries of shareholders (beneficiary) in many jurisdictions such as good faith (which may be regarded as derived from the concept of the duty of loyalty), duty of care (or due care) - diligence or skill and duty of loyalty - acting in the best interest of the beneficiary rather than in one’s own interests.[3] This relationship between them and shareholders has been regarded as the fiduciary relationships in both Common and Civil Law traditions.
Directors’ duties are established in Article 49.3 of the Civil Code of the Republic of Azerbaijan (CCA or Civil Code), specifying that a person acting on behalf of a legal entity—including both supervisory and management board members—is obliged to act faithfully and in a professional manner and logically, and be careful while also being loyal to interests of the legal entity and all of its participants, consider the interests of the legal entity over his own interests, and be also fair and impartial in the course of decision-making.
These duties can be grouped into three main categories of commonly recognized fiduciary obligations:
Duty of care: act in a professional manner and logically and being careful;
Duty of loyalty: being loyal to interests of the legal entity and all of its participants, considering the interests of the legal entity over his own interests;
Good faith: acting faithfully, being fair and impartial in the course of decision-making.
Before exploring these duties of fudiciary nature in detail, the definition of “fiduciary” as someone “acting on behalf of a legal entity” is (Hüquqi şəxs adından çıxış edən şəxs) is overly broad, incorrectly suggesting that anyone acting on a company’s behalf, should be regarded as fiduciaries of the company. However, according to the general theory of fiduciary duties [4], "on behalf of" requirement is not the only element of a true fiduciary relationship, but one of them. To establish the true nature of a fiduciary relationship, this element must be combined with the existence of discretion (2) exercised during decision-making and control over critical resources (3) belonging to the beneficiary. Discretion means having freedom to choose among several perspectives in a particular situation or making any business decision. If these three requirements are not met—for example, if a person lacks discretion, or if person’s decision will not in any way affect the assets of beneficiaries, only criteria being "acting on behalf of the company" cannot be regarded as the sole element of fiduciary relationships only on its own. Therefore, the term "on behalf of" is not the best use of language to define fiduciary nature of relationships in Azerbaijanian legislation.
If the purpose of legislative body in using this expression was to hold accountable those who perform directors' duties factually without holding the official title of "director", more precise terminology may be adopted —such as "shadow directors," as used in the UK Companies[5]. Shadow directors are those who are nor registered as official directors/managers of the company but have clear and substantial influence in the decision-making process. This issue is of particular importance to legal practice in Azerbaijan since de facto management by shareholders or others with actual influence over decision-making is a widespread practice that is frequently encountered in Azerbaijan. in such cases those persons will also be considered fiduciaries of other shareholders despite the absence of official title.
Due-Care
According to the traditional theory of fiduciary duties, one of the core principles is the duty of care, which requires fiduciaries to exercise reasonable diligence and thoroughly inform themselves before making specific business decisions. However, I believe the expression “to be careful” (ehtiyatlı olmaq) in our legislation is vague and does not accurately reflect the true meaning of the duty of care in comparative law. This likely results from a literal mistranslation of the term “due care,” rather than a content-driven adaptation of this fiduciary principle into Azerbaijani legislation. While due care refers to exercising reasonable care and diligence, the lexical meaning of “to be careful” (ehtiyatlı olmaq) is limited to avoiding harm and lacks the specific legal and theoretical connotations of the duty of care. Nonetheless, directors are considered to have fulfilled their duty of care if they inform themselves using all reasonably available material information before making a decision—even if that decision ultimately results in a material loss to the company or its shareholders. However, to meet the requirement of being reasonably informed, directors are not expected to know every single fact.[6] This depends on the accessibility of relevant information and the time and opportunity at the director’s disposal. For example, a director managing a restaurant business is expected to conduct reasonable research before opening a branch in a specific area of Baku—such as assessing touristic appeal, population density, and foot traffic—before committing significant financial resources. Therefore, it is important to understand the legal concept of the duty of care and apply the relevant provisions of the CCA accordingly.
Duty of loyalty
Directors’ responsibilities not only involve acting reasonably and diligently in decision-making but also include the obligation to avoid conflicts of interest —specifically, not to engage in self-dealing, to avoid personal interests in company transactions, to refrain from competing with the company, and to avoid misusing corporate opportunities—all of which are attributed to the duty of loyalty. As mentioned above, the duty of loyalty is codified in Article 49.3 of the Civil Code, which requires directors to “remain loyal to the interests of the legal entity and all of its participants, prioritize the interests of the legal entity over personal interests, and act fairly”. In addition to these general standards of loyalty, specific rules regarding self-dealing are set out in Article 49.4 of the Civil Code, which holds directors liable for actions such as engaging in harmful transactions with affiliated parties (49.4.3), paying themselves bonuses when the company operates at a loss (49.4.1.), and concluding transactions involving underpriced asset transfers or overpriced purchases by a legal entity (49.4.2. and 49.4.4.).
When it comes to misusing corporate opportunities, Azerbaijani legislation does not contain clear rules imposing a duty of confidentiality on directors or prohibiting them from managing or owning competing business entities. As a result, directors’ liability for breaches of these duties often depends on the general principle of loyalty or on non-compete and confidentiality clauses included in contractual agreements. However, when directors operate under employment contracts, they are bound by obligations under labor law. While the Labor Code imposes material liability[7]on all employees for disclosing confidential information, it does not prohibit them from engaging in competitive activities against the company. Considering that members of management boards in Azerbaijan typically operate under employment contracts, the introduction of clear legislative rules to prevent directors from engaging in competitive activities could help deter the misuse of corporate opportunities and confidential information they access during their time in office.
It should be mentioned that when it comes to the judicial enforcement of these duties under Azerbaijani jurisdiction, there is no comprehensive, precedent-setting case law in Azerbaijan, and directors are typically held liable only in cases of criminal misconduct, such as embezzlement or misappropriation of company assets.
To whom directors owe these duties?
One modern trend in corporate governance, as reflected in comparative law, is the growing expectation that, while the primary beneficiaries of directors’ fiduciary duties remain the company and its shareholders, directors should also balance those duties with the interests of other parties affected by the company’s operations. As a result, the decisions they make may not always maximize immediate benefit for the company, but instead reflect a more balanced approach among conflicting interests. Under the CCA, directors owe their duties solely to the company and its shareholders; there is no reference to other stakeholders. Various groups affected by or interested in a company are commonly referred to as “stakeholders” in many jurisdictions. It is widely acknowledged that the operations of large companies can significantly impact the environment, local communities, employees, creditors, and consumers. For example, the UK Companies Act 2006 outlines one of the most comprehensive legal frameworks for corporate governance. Under Article 172 of this law, while exercising their general duties, directors also (alongside promoting company’s success and profitability) should have regard to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment.
This shows that decision-making by company directors in the UK is a much more complex process, as it involves balancing the interests of a wider range of stakeholders alongside the company's shareholders. However, individuals and groups likely to be affected by the company’s business activities are entirely excluded from the decision-making process under Azerbaijani corporate law, which may lead companies operating in the territory of Azerbaijan to act irresponsibly toward environmental concerns, local communities, employees, and others whose well-being depends on, or who have a legitimate stake in, the company’s operations—solely for the purpose of maximizing profit.
As discussed above, while directors’ fiduciary duties are outlined in Azerbaijani legislation, certain systemic and legislative challenges still call for further reform. In particular, the structure and scope of the CCA provisions on directors’ fiduciary duties of loyalty and care should be strengthened by introducing specific rules that expressly prohibits directors from competing with the company or misusing corporate opportunities, as general clauses requiring faithful and fair conduct may not provide sufficient legal protection for the company. Therefore, to align with the evolving nature of directors’ duties, Azerbaijani corporate legislation should incorporate global best practices and ensure that stakeholders have a meaningful role in the decision-making process by introducing relevant provisions on fiduciary responsibilities—such as environmental responsibility and stakeholder protection. Such reform would ensure that the directors’ duty to promote the company’s success is not treated as absolute but is balanced with broader legal obligations.
BIBLIOGRAPHY
Legislation
Civil Code of the Republic of Azerbaijan (1999).
German Stock Corporation Act (AktG) (1965)
Companies Act 2006 (The United Kingdom)
Act on Corporate Due Diligence Obligations in Supply Chains 2021 (Germany)
Books
Andreas Cahn and David C. Donald, Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK, and the USA (2nd edn, Cambridge University Press 2010).
Thilo Kuntz, How ESG is Weakening the Business Judgment Rule, in Research Handbook on Environmental, Social, and Corporate Governance (Edward Elgar Publishing, forthcoming).
Kərimov Emin, Azərbaycan Korporativ Hüququ, “Qanun” 2014
Journal Articles
William M Lafferty, Lisa A Schmidt, and Donald J Wolfe Jr, ‘A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law’ (2012) Penn State Law Review 842.
‘The Evolving Structure of Directors’ Duties in Europe’ (2014) European Business Organization Law Review.
Case Law
ARAG v Garmenbeck, BGH, Federal Court of Justice, Germany, 21 April 1997, II ZR 175/95, BGHZ 135.
Vereniging Milieudefensie and others v Royal Dutch Shell plc, The Hague District Court, Judgment of 26 May 2021, case no C/09/571932/HA ZA 19-379.
Case no 2-2(102)-420/2024, 06.09.2024, The Supreme Court of Azerbaijan (https://sc.supremecourt.gov.az/storage/Iqtisad/2024/3_420+06.09.2024.pdf)
Other Sources
SOCAR Code of Business Ethics and Conduct (https://socar.az/en/page/socar-standards2)
[1] Andreas Cahn and David C. Donald, Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA (2nd edition, Cambridge University Press 2010), p.369.
[2] Susan McLaughlin, Unlockıng Company Law (2nd edition, Routledge 2013) p.8
[3] Donald and Cahn p.335
[4] D. Gordon Smith, "The Critical Resource Theory of Fiduciary Duty" (2002)
[5] UK Companies Act, 2006 (251 (5))
[6] William M. Lafferty1, Lisa A. Schmidt2 , and Donald J. Wolfe, Jr , A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law, Penn State Law Review, 2012, p. 842.
[7] Labor Code of Azerbaijan, 1999, (199(e))
