This article examines the choice between a locked box and completion accounts when pricing an acquisition of an Iraqi business. Both mechanisms are used in international transactions, but their effectiveness depends on the target’s financial records and the parties’ ability to verify the agreed figures. Choosing a familiar label without defining its components can move the price dispute into the period after completion.
The Iraqi Civil Code No. 40 of 1951 provides the principal contractual framework where Iraqi law governs the agreement. The Companies Law No. 21 of 1997, as amended, is relevant to corporate records, authority and distributions, while the Income Tax Law No. 113 of 1982, as amended, affects the treatment of relevant income and liabilities. These laws do not make an imported purchase price formula self-executing. The agreement must define the calculation and operate consistently with mandatory Iraqi requirements.
Understanding where economic risk changes hands
The choice between a locked box and completion accounts determines how the parties measure the price and allocate changes in value:
- Under a locked box, the price is generally based on an agreed historic balance sheet. The contract restricts value leaving the target for the seller’s benefit after that reference date, except for expressly permitted items. The quality of that balance sheet is therefore central.
- Under completion accounts, specified adjustments are measured by reference to the target’s financial position at completion. The agreement needs workable definitions of cash, debt, working capital and other components, supported by an agreed accounting method.
- The payment timetable should follow the chosen mechanism. Completion accounts may involve a provisional payment and a later balancing amount. A locked box usually places greater emphasis on the agreed reference position and protection against unauthorised leakage.
Neither mechanism removes the need for diligence. The parties should choose the approach that the target’s records, reporting systems and negotiated risk allocation can support.
Testing the quality of the underlying records
The transaction team should establish whether the accounts reconcile with bank statements, customer balances, payroll and tax records. Unrecorded obligations, uncertain receivables or inconsistent project accounting can affect either mechanism. A historic balance sheet is useful only if the parties understand its scope and limitations.
An Iraqi business may have related-party balances or obligations supported by documents held outside its finance department. Corporate due diligence in Iraq should therefore be coordinated with financial diligence. The objective is to identify legal obligations that the financial model might otherwise omit, including guarantees and disputed payment commitments.
Defining leakage under a locked box
The agreement should explain which payments or benefits constitute leakage. Relevant items can include dividends, seller expenses paid by the target, repayment of shareholder balances and transfers to connected persons. Legitimate continuing payments should be identified clearly if they are permitted.
The drafting should also address who must reimburse leakage, the information available to the buyer and how claims are notified. A reference to normal business practice may be too uncertain where the seller historically used the target to meet group expenses. The permitted arrangements should be tied to an identified amount or an objectively verifiable basis.
Building completion accounts that can be prepared
Completion accounts need a hierarchy of accounting rules, defined components and a timetable. The parties should decide how to treat restricted cash, tax provisions, overdue receivables, customer advances and related-party liabilities. A sample calculation can expose differences before they become expensive disagreements.
The definition of working capital should be consistent with the way the business is valued. If a liability is deducted as debt, the same amount should not also reduce working capital unless that treatment is intentional. Tax advice for Iraqi transactions is particularly useful where tax liabilities, retentions and prepayments could fall into more than one component.
Providing access and a proportionate dispute process
The party preparing the accounts should have access to the relevant records and personnel. The reviewing party needs a defined period to raise specific objections and obtain supporting material. The agreement should explain how undisputed amounts are paid while disputed items remain open.
An independent accountant may be suitable for calculation disagreements, but the appointment and mandate should be workable. The parties should distinguish accounting questions from legal disputes over contractual interpretation, fraud or authority. The effect of an expert determination and the relationship with the chosen court or arbitration clause need express treatment under the governing law.
Matching the payment arrangements to the mechanism
The financial calculation should be matched with payment instructions that the parties and their banks can perform:
- Agree the currency treatment. Where accounts are prepared in Iraqi dinars and consideration is paid in another currency, define the conversion source, relevant date and treatment of rounding or exchange movements. Avoid leaving these matters to a later unilateral calculation.
- Define the adjustment payment process. Identify when the amount becomes payable, what evidence triggers payment and how any disputed portion is handled. Consider the security needed if a balancing payment may be due from either party.
- Confirm any retention or escrow arrangement. Check the proposed provider’s ability to hold and release the funds under the agreed instructions. A familiar foreign-market form should not be assumed to fit the provider’s terms or onboarding requirements.
Illustrative example. The buyer pays a provisional price at completion, with working capital to be calculated later. A significant customer receipt arrives shortly after closing and relates to a receivable already included in the completion balance sheet. The accounting rules should establish how that receipt supports valuation of the receivable and prevent it from being counted twice in the adjustment. The parties also need access to the bank statement and supporting invoice. This is why definitions, evidence access and the payment process should be agreed together before the initial consideration is released.
Conclusion & how Etihad Law Firm can help
The better price mechanism is the one supported by reliable evidence and a calculation the parties can apply consistently. Clear definitions and access rights reduce the risk that apparent price certainty disappears after completion.
Etihad Law Firm assists with Iraqi acquisition agreement drafting, including purchase price definitions, leakage protections and adjustment procedures. We work with financial advisers to ensure that the contractual mechanism reflects the target’s actual records and the commercial allocation agreed by the parties.