Mergers and acquisitions are a tool to grow business, to make more money and serve a larger customer base, at a rapid pace (in contrast with organic growth). This notwithstanding, pursuing mergers and acquisitions does not come without, among others, financial and legal challenges. The due diligence process, assessing the financial and legal status of merging companies or target, is arguably the most important part of a merger and acquisition, as it can prevent financial and legal problems in the future.

From the legal point of view, assessing the strengths and weaknesses of merging companies/target, successful tax planning and locating regulatory requirements are among key indicators for success in merging or taking over. For this, good correspondence (timely and detailed communication of relevant information and documents) is vital.

Non-Disclosure Agreements

Companies are, in general, cautious to share information, especially, financial information, important contracts, information on income (salaries, bonuses) and employees' personal data, and often seek reliable tools to protect the sensitive information. Confidentiality of information in Azerbaijan is regulated, among others, by Law No 224-IIQ of the Republic of Azerbaijan, On Commercial Secrecy, dated 4 December 2001, (the "Commercial Secrecy Law") and Law No 998-IIIQ, On Personal Data, dated 11 May 2010.

The Commercial Secrecy Law establishes the list of information, which is open. Information in constitutional documents (excluding a shareholder/participant's share/interest), information in licenses and permits, financial statements (including audit opinion), information on taxpayer (excluding tax secrets), information on salaries and social payments are, among others, open.

An owner of confidential information determines the regime of such information. Persons other than the owner of confidential information may determine the regime of such information based on a non-disclosure agreement entered with the owner. Such agreement embraces provisions, among others, on acquisition and disclosure of confidential information, ways of protection, methods and means of transmission of confidential information and terms of use of confidential information.

Law does not stipulate timeframes for protection of confidential information, nor does it set forth limits on remedies in case of a breach of confidentiality obligation. These are left to parties' sole discretion.

Some Issues to Review

Merger Control

Azerbaijan's merger control is governed by Law No 526, On Antimonopoly Activity, dated 4 March 1993.

Azerbaijani antimonopoly regulations apply to local-to-local transactions, as well as, local-to-foreign and foreign-to-local transactions provided that these transactions impair competition in the relevant Azerbaijani market. The State Service for Antimonopoly Policy and Protection of Consumer Rights under the Ministry of Economy of the Republic of Azerbaijan (to be reorganised into the State Antimonopoly and Control of Consumer Market Agency) extends its reach to also foreign-to-foreign transactions which lead to the restraint of competition in Azerbaijan.

If the restraint of competition is established, the transaction must meet the filing criteria applicable to mergers – acquisition of more than 35 per cent of the relevant market and acquisitions – acquisition of more than 20 per cent of the shares of a company in Azerbaijan or acquisition of assets in Azerbaijan constituting more than 10 per cent of the balance value of the seller. If this criterion is met, further thresholds will apply.

A failure to notify a qualifying transaction is punishable by a financial sanction of up to AZN5,500. The antimonopoly authority is allowed also to impose a sanction for a failure of business subjects to implement its (the Ministry of Economy's) instruction at AZN55 per each day of a failure not exceeding AZN22,000 in total. Upon a failure to pay these for more than 30 days, these are written off in an uncontested manner.


When a company is considering a merger or weighing the idea of an acquisition, it is critical to assess the impact on employment issues, such as transfer of employees to a new company, transfer of the liability of preceding employer to the succeeding employer.

Azerbaijani employment laws are considered generally employee-friendly. A change of ownership of an enterprise does not affect employment agreements of employees (except for the head of an enterprise, his/her deputies, chief accountant, and heads of departments) and they continue in effect. In connection with the change of ownership, employment agreements of the head of an enterprise, his/her deputies, chief accountant and heads of departments can be amended or terminated.

Mass termination of employment agreements within three months of the change of ownership is not allowed without a reasonable ground. Mass termination means termination of: (i) 50 percent of employees in enterprises with 100-500 employees; (ii) 40 percent of employees in enterprises with 500-1,000 employees; and (iii) 30 percent of employees in enterprises with over 1,000 employees.


Uncareful consideration of tax issues in mergers and acquisitions may result in large taxation, thereby, potentially affecting the overall price, at which the transaction was undertaken. Taxwise, an acquisition can take place in various forms, namely, share purchase, enterprise sale, and asset sale.

Share Deal

The major tax implication of share acquisition is liability to a tax on the capital gains. The Azerbaijani Tax Code does not define a capital gain or provide for a capital gains tax. Nevertheless, there is a concept of "out-of-sale" proceeds defined generally as proceeds from transactions not directly related to the production or sale of goods, performance of works, and provision of services; such proceeds include "income from participation in operations of other enterprises, income from taxpayer's shares, bonds, and other securities". There are no rules in the Tax Code in relation to taxation of "out-of-sale" proceeds in the context of the personal income tax.

One issue with the taxation of share sale is valuation of shares when they are sold at a nominal value. When shares are sold at a price higher than the company's net asset value per share, the difference between the intrinsic sale price and the nominal value of the sold shares is taxable. When shares are sold at a price lower than the company's net asset value per share, income received from the difference between the value of respective net assets at a date of contract conclusion and the nominal value of interest/share in the charter capital is taxable.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.