This article considers how UK buyers of Iraqi businesses using a locked-box price should test leakage against related-party payments and undocumented withdrawals. A locked box fixes the price by reference to historical accounts and prohibits value passing to the seller before completion. In an Iraqi share deal, that protection depends on a precise definition of leakage and the ability to trace payments, which can be difficult where the target routinely deals with its owners and their other businesses.
There is no standalone acquisitions code in Iraq. The Companies Law No. 21 of 1997 and Civil Code No. 40 of 1951, as amended, remain relevant even where the purchase agreement uses English-law terminology, together with the Income Tax Law No. 113 of 1982 and the Competition and Antitrust Law No. 14 of 2010. The Companies Registration Directorate records the share transfer, and the Competition and Antitrust Council may need to review the transaction.
Defining leakage and permitted payments
The agreement should identify the value transfers the parties intend to prohibit. Dividends, repayment of shareholder loans and transaction bonuses are obvious examples. Management fees, asset transfers at undervalue, waivers of debts owed by related parties and payment of the seller’s personal expenses need closer examination in family-owned Iraqi businesses, where boundaries between company and owner are often informal.
Permitted leakage should be described by recipient, basis and amount or an objective formula. A general exception for ordinary course payments can conceal disputed related-party arrangements. Review of Iraqi acquisition documents should link the definition to the target’s accounting records and state whether the remedy is a price adjustment, a pound-for-pound payment or another claim.
Investigating undocumented withdrawals
An unexplained cash withdrawal does not automatically show who benefited or whether it falls within the leakage definition. The buyer should examine cashbooks, bank statements, vouchers and the destination of funds. Cash transactions remain common in Iraq, which makes documentary trails thinner and due diligence more important; interviews help but should not replace primary records.
Investigation should distinguish genuine business expenditure with poor documentation from transfers to the seller or associated persons. It may also reveal a debt owed to the company or issues about a manager’s conduct. These findings affect both the buyer’s claim and rights belonging to the target itself, and should not be combined without considering who the claimant is and avoiding double recovery.
Corporate authority and mandatory requirements
A payment permitted under the purchase agreement may still require approval within the target or breach Iraqi law. Under the Companies Law, dividends must be paid from distributable profits and approved by the general assembly, and agreement between buyer and seller cannot validate an unlawful distribution or override creditors’ rights. Tax consequences may arise independently of the pricing mechanism.
Review of corporate governance in Iraq should therefore cover the legal basis for material payments and the authority of those who approved them. The buyer should also assess whether the acquisition needs competition or sector approval; a locked-box price does not change those requirements, and the Competition and Antitrust Council has become more active in reviewing transactions.
Tax and accounting quality
Locked-box pricing relies heavily on the quality of the reference accounts. Iraqi businesses sometimes keep accounts mainly for tax purposes, and assessments may be based on deemed profit rather than detailed bookkeeping. Buyers should test whether the accounts accurately reflect liabilities, including unassessed tax years and social security arrears, and consider a specific tax indemnity where historical exposure cannot be quantified.
Notification and recovery provisions
The agreement should provide a practical way to identify and notify leakage after completion: access to historical records, the information required in a claim, and responsibility for records held by former managers. A short notice period is hard to use where the seller controls the evidence.
Recoverability is as important as drafting. Retention of part of the price, escrow or a guarantee can provide security, subject to their legal implementation in Iraq or abroad. Currency, payment location and dispute provisions should be clear, and the agreement should state whether recoveries are paid to the buyer or to the target, as the accounting and tax consequences differ.
Pre-signing diligence on related parties
Before signing, buyers should map all related parties of the seller and the target, including family members and their companies, and review transactions with them over the locked-box period and a reasonable period before it. Bank statements are often more reliable than ledgers for this purpose. Where related-party arrangements will continue after completion, such as leases of family-owned premises or supply agreements, they should be renegotiated on arm’s-length terms as a condition of closing.
This exercise also informs the leakage definition, since the buyer will know which recurring payments need to be expressly permitted or prohibited.
Conclusion & how Etihad Law Firm can help
Locked-box protection works best when the leakage definition matches the target’s real payment practices and records, and when recovery is secured in advance.
As Iraq mergers and acquisitions lawyers for British companies, Etihad Law Firm conducts financial-legal due diligence on related-party dealings, drafts leakage, indemnity and retention provisions, and advises on corporate approvals and competition filings, separating the buyer’s contractual remedies from rights that remain with the acquired company.