Mergers and

acqusitions in the banking industry has been buoyant for the past couple of

years in Armenia. This activity has been fuelled by the regulatory requirements

for increase of the charter capital of the banks due to the desire of the

regulator, the Central Bank of Armenia, to see larger and predictable players

in the market easy to supervise. This has been coupled with the increasing

interests of international players and investors towards the robust banking

sector or Armenia which has offered stable exchange rates and much higher

interest on debt and equity compared to that of developed markets such as

Western Europe, North America and Middle East.

In this context

Legelata has consitently faced the same issues with regard to interpretation of

the provisions in banking and company law related legislation which are crucial

in the context of transfer and acquisition of shares in banks and banking

institutions. One of those issues seem to be the right of refusal of the bank

with respect to its own share under transfer.

Most of the

banks in Armenia are formed as joint stock companies (either closed joint stock

companies or open joint stock companies). One of the crucial differences

between the open and closed joint stock companies in accordance with companies

law is that the transfer of the shares to third parties in open joint stock

companies, as opposed to closed joint stock companies, takes place without

regard to any pre-emptive or first refusal rights with respect to shares under

transfer.

In general the

legislation on joint stock companies provides that the existing shareholders of

the company have the right of first refusal in case of transfer of the shares

by one of the shareholders to a third party. The company has the second right

of first refusal to acquire the shares if the existing shareholders have not

exercised the rights of first refusal with respect to the shares under

transfer.

The law on joint

stock companies (Article 8) provides that the closed joint stock company has

the right of first refusal after the existing shareholders to purchase its own

shares, whereas the law on banks and banking activity (Article 37.1) provides

that the banks are prohibited from purchasing its own shares (except for

redemption – Article 36).

While many would

try to find a collision in these provisions, the issue is plainly

straightforward. Article 1.4 of the law on Joint Stock Companies, as long as

the banks are concerned, gives priority to the laws which are of more specific

nature with regard to banks and finance institutions. Moreover, the law on

Legal Acts of Armenia (article 40) reiterates that in case of collision of

norms of general and specific nature, the norms of specific nature (in our case

the provisions in the law on Banks and Banking Activity) prevail.

Last but not least, the general analaysis of the laws in question reveals that

the same principle of differentiation applies in different contexts with regard

to the issuance, allotment and redemption of shares.

Hence, whenever it comes to decision of application of the law on Banks and

Banking Activity and the law on Joint Stock Company, the first prevails as lex

specialis over the second as lex generalis.

There should be no doubt therefore, that the banks are prohibited from

exercise of the right of first refusal when the shares of the latter are

transferred by the shareholders.

Author:

GOR MARGARYAN, Partner

[email protected]

CONTACTS:

LEGELATA CJSC,

105/1 Teryan street, office 606, Yerevan,

0009, Armenia

Phone: +374 10 51 43 45

Email: [email protected]

Website: www.legelata.am

Disclaimer:

This material is produced by Legelata CJSC. The material

contained in this newsletter is provided for general information purposes only

and does not contain a comprehensive analysis of each item described. Before

taking (or not taking) any action, readers should seek professional advice

specific to their situation. No liability is accepted for acts or omissions

taken in reliance upon the contents of this material.