This article examines how deadlock provisions in an Iraqi joint venture can be drafted so that the chosen exit route can actually be completed. Many joint venture agreements contain a deadlock clause that refers to escalation, a buy-sell mechanism or a winding up. Far fewer explain how the partner that exits will be paid, how the shares will be transferred in the registry or how the venture will continue operating while the partners are in dispute.
A deadlock usually arises when the partnership is already under strain. Cooperation that both parties took for granted at signing may no longer be available. An exit mechanism should therefore work with minimal goodwill, rely on objective steps and anticipate that one partner may try to delay. A clause that requires both parties to agree a valuer, sign transfer documents and attend the registry together can fail at every stage.
The Companies Law No. 21 of 1997, as amended, governs share transfers, general assembly decisions, management powers and the dissolution and liquidation of companies. The Iraqi Civil Code No. 40 of 1951 governs the contractual obligations of the partners where Iraqi law applies. The Income Tax Law No. 113 of 1982, as amended, is relevant to gains arising on transfer. Where the venture holds an investment licence or sector permission, the Investment Law No. 13 of 2006, as amended, or the applicable sector regulation may require approval for changes in ownership.
Defining when a deadlock exists
A deadlock clause is only as clear as its trigger. The agreement should define the decisions that can give rise to deadlock, the number of meetings at which the matter must be considered and the period after which the deadlock is treated as continuing. Including every disagreement risks turning ordinary negotiations into exit events. Including too little may leave the venture unable to approve a budget or renew a critical contract.
A useful distinction is between decisions that block operations and decisions that only delay growth. Failure to approve the annual budget, appoint auditors or renew a licence application can paralyse the company. Failure to approve a new project may be commercially frustrating but does not necessarily prevent the venture from operating. The agreement can provide a fuller exit route for the first category and a more limited response, such as continuation of the status quo, for the second.
Keeping the company operating during the dispute
The period between a deadlock and its resolution can be the most damaging. The agreement should provide interim rules to protect the business:
- Continue the previous budget. Where a new budget is not approved, the company can operate on the previous year’s budget adjusted for agreed items such as mandatory salaries, taxes and contractual payments.
- Preserve mandatory compliance. Filings, tax returns, social security contributions and licence renewals should continue regardless of the dispute. The agreement can authorise the general manager to complete these steps without fresh approval.
- Protect signing authority. Bank mandates and signatory arrangements should be reviewed so that one partner cannot freeze accounts or withdraw funds unilaterally while the deadlock procedure is running.
Corporate governance advice in Iraq can help ensure that these interim powers are reflected in the articles of association and management appointments, not only in the shareholder agreement.
Choosing an exit mechanism that suits the partners
Buy-sell mechanisms, sometimes described as Russian roulette or Texas shoot-out clauses, allow one partner to name a price at which it is willing either to buy or to sell. They can produce a fair price where the partners have similar financial resources and knowledge of the business. They can be unfair where one partner is a local operator with deep knowledge of the business and the other is a foreign investor dependent on management reports, or where one partner cannot raise funds quickly.
Alternatives include a put or call option at a valuation set by an independent expert, a sale of the whole company to a third party with both partners obliged to cooperate, or a staged process beginning with mediation and moving to a valuation-based buy-out. The right choice depends on who is the natural owner of the business, how the venture’s licences and contracts are held and whether either partner is willing to remain in the venture as a minority.
Making valuation workable
A valuation clause should identify how the valuer will be appointed if the partners cannot agree, the valuation date, the method and the information the valuer can access. It should state whether the valuation reflects a minority discount, how intra-group debt and shareholder loans will be treated and whether the valuer acts as an expert or as an arbitrator. A determination by an expert is typically final on value but does not resolve legal disputes about whether the deadlock procedure was properly triggered.
The company’s records must be available to the valuer even if one partner controls management. The agreement should require the company and both partners to provide documents within a set period and should address the consequences of non-cooperation, for example by allowing the valuer to proceed on the information available.
Implementing the transfer and payment
Once a price is fixed, the transfer must be completed in practice. The following steps deserve specific provisions:
- Transfer documentation. The partners should agree the form of transfer documents and general assembly resolutions in advance, and consider a power of attorney or escrow arrangement that allows completion if the outgoing partner refuses to sign. The enforceability of such arrangements should be tested against the registry’s practice.
- Approvals and pre-emption. Any approval required from the investment commission, a sector regulator or the competition authority should be identified, together with the time it is likely to take. Pre-emption rights under the articles should be waived or reflected in the procedure.
- Payment and security. The purchase price may be substantial. The agreement can provide for payment into escrow, staged payments with security or a long-stop date after which the selling partner may pursue an alternative remedy. Tax advisory services in Iraq should identify any tax clearance or withholding that could delay completion.
Addressing guarantees, contracts and continuing support
An exit is incomplete if the departing partner remains liable under a guarantee for the venture’s borrowing or continues to supply services without a contract. The agreement should require the remaining partner to procure a release of guarantees or provide an indemnity, and should state how services supplied by the departing partner will end or continue on a transitional basis.
Customer and supplier contracts may contain change of control provisions. Licences may be linked to the experience or nationality of a particular partner. If the venture depends on a permission obtained because of one partner’s participation, its exit may affect the company’s ability to operate. These dependencies should be identified when the deadlock clause is drafted, not when it is invoked.
Treating winding up as a last resort
Some agreements provide that persistent deadlock will lead to the dissolution of the company. Liquidation under the Companies Law involves its own procedure, settlement of creditors, employee entitlements and tax obligations before any surplus is distributed. It may also destroy value held in licences, contracts and goodwill. Winding up should be presented as a fallback that gives both partners an incentive to agree a buy-out, not as the default outcome.
Illustrative example. A local construction company and a foreign equipment supplier each hold fifty per cent of an Iraqi venture. The partners cannot agree whether to bid for a major public contract. Their agreement contains a buy-sell clause, and the local partner, which holds the contractor classification on which the venture relies, serves a notice offering to buy. The foreign partner has no realistic way to operate the business alone and is forced to sell at the stated price. A clause tailored to their position might have excluded single-project disagreements from the deadlock trigger, required an independent valuation and set out how the foreign partner’s equipment and guarantees would be released on exit.
Conclusion & how Etihad Law Firm can help
A deadlock clause should provide a credible route out of the venture that can be completed without the other partner’s goodwill. That requires attention to interim operations, valuation, transfer formalities, approvals, payment and continuing liabilities.
Etihad Law Firm advises joint venture partners in Iraq on the design of governance, deadlock and exit provisions, and on their implementation when relationships break down. Our dispute resolution team can assist where a deadlock becomes contentious and the partners need to enforce their contractual rights.