This article examines how conflicts of interest should be managed when investment vehicles transact with businesses related to their sponsors, managers, directors or significant shareholders. Investment vehicles with exposure to Iraq, whether funds, holding companies or listed investment companies, often operate in environments where sponsors and managers have other business interests in the same market. A sponsor may own a construction company that could build a fund’s project, a director may own a supplier to a portfolio company, or a shareholder may wish to sell an asset to the vehicle.
These transactions are not necessarily improper. Related businesses may offer the best terms or capabilities. But they create a risk that the vehicle will pay too much, accept inferior terms or forgo better opportunities to benefit the related party. Investors in the vehicle, particularly minority and institutional investors, expect conflicts to be identified, managed transparently and approved by persons without an interest.
The Companies Law No. 21 of 1997, as amended, governs the duties of directors and managers of Iraqi companies and restrictions on dealings in which they have an interest. The Iraqi Civil Code No. 40 of 1951 provides general principles of agency and liability. The Interim Law on Securities Markets (Coalition Provisional Authority Order No. 74 of 2004) and Iraq Securities Commission rules govern disclosure and conduct of listed companies and market participants. Sector legislation, such as the Banking Law No. 94 of 2004, imposes specific related-party rules. Fund documents and the law of the fund’s domicile govern the obligations of fund managers.
Identifying related parties and conflicts
The first step is to identify who is a related party. This usually includes:
- Sponsors and managers. The fund sponsor, the manager and their affiliates.
- Directors and senior managers. Of the vehicle and of its portfolio companies.
- Significant shareholders. Investors holding interests above a threshold.
- Family members and associated businesses. Relatives of the above and companies they control.
The vehicle should maintain a register of related parties, updated regularly, and require persons to declare their interests.
Recognising types of conflicted transactions
Common conflicted transactions include:
- Acquisitions from or disposals to related parties.
- Service contracts with related businesses, such as construction, management or advisory services.
- Co-investments between the vehicle and related parties.
- Financing provided by or to related parties.
- Allocation of investment opportunities between the vehicle and other vehicles or businesses of the sponsor.
Each type raises different concerns. Asset transfers raise valuation concerns. Service contracts raise pricing and performance concerns. Co-investments and opportunity allocation raise fairness concerns.
Establishing an approval process
Conflicted transactions should be approved by persons without an interest. Depending on the vehicle, this may be an independent board committee, an investor advisory committee or a general assembly vote excluding interested shareholders. The approval process should provide the approving body with full information, including the related party’s interest, the terms, alternative options considered and evidence of fair value.
Interested persons should abstain from deliberation and voting. The Companies Law contains rules on directors’ interests in company transactions, which should be followed for Iraqi companies. Corporate governance advice in Iraq can help design approval processes that meet legal requirements and investor expectations.
Demonstrating fair terms
The vehicle should be able to show that conflicted transactions are on terms at least as favourable as those available from unrelated parties. Evidence may include independent valuations, competitive tenders, benchmarking against market rates and fairness opinions. For service contracts, performance standards and termination rights should be no weaker than for unrelated providers.
Disclosing conflicts
Investors should be informed of conflicted transactions. Listed vehicles must comply with disclosure obligations under securities rules. Funds should disclose conflicts in reports to investors and, where required by fund documents, obtain investor consent. Disclosure should be meaningful, explaining the relationship, the terms and how the transaction was approved. Commercial and regulatory advice in Iraq can help determine disclosure obligations.
Monitoring ongoing arrangements
Conflicts do not end at approval. Ongoing service contracts and financing arrangements should be monitored for performance and pricing. Periodic reviews by independent directors or committees can confirm that arrangements remain appropriate. Renewals and amendments should go through the same approval process as the original transaction.
Addressing failures
Where a conflicted transaction was not properly approved or was on unfair terms, the vehicle and its investors may have remedies, including rescission, recovery of losses from interested persons or claims against directors for breach of duty. The availability of remedies depends on the vehicle’s documents and applicable law. Litigation and dispute resolution advice in Iraq can assess claims arising from conflicted transactions.
Allocating investment opportunities
Where a sponsor manages several vehicles, or has its own business interests in the same sector, conflicts arise in allocating investment opportunities. An attractive opportunity may suit more than one vehicle, or the sponsor may prefer to take it for itself. Investors in each vehicle expect a fair approach.
An allocation policy should set out how opportunities are allocated, for example by reference to each vehicle’s investment strategy, available capital and concentration limits, or on a rotational or pro rata basis. The policy should be disclosed to investors and applied consistently. Departures should be documented and, where significant, approved by an independent body or investor committee.
Co-investments between vehicles, or between a vehicle and the sponsor, should be on the same terms and at the same time, so that one party does not obtain better entry pricing or rights. Exits should be coordinated similarly. A clear allocation policy reduces the risk of investor disputes and supports the sponsor’s reputation for fair dealing.
Recording and reviewing conflict decisions
Each decision on a conflicted transaction should be recorded with the information considered, the alternatives evaluated, the evidence of fair terms and the identity of those who approved and abstained. These records protect the decision-makers if the transaction is later challenged and allow investors and regulators to review how conflicts were managed.
Periodic review of conflict decisions as a whole, for example annually by the audit committee or investor advisory committee, can reveal patterns. If a large share of the vehicle’s contracts are awarded to related businesses, investors may question whether the approval process is working, even if each individual decision was properly documented. Such reviews help the vehicle refine its policies and maintain investor confidence over time.
Illustrative example. A real estate investment company with Iraqi and foreign investors plans to appoint a construction company owned by its chairman to build a residential project. The board establishes a committee of independent directors, which obtains competitive bids from two unrelated contractors and an independent cost review. The chairman’s company offers terms comparable to the lowest bid with stronger completion guarantees. The committee approves the contract, the chairman abstains and the transaction is disclosed to shareholders with details of the process followed.
Conclusion & how Etihad Law Firm can help
Conflicts of interest in transactions between investment vehicles and related businesses can be managed through identification, independent approval, evidence of fair terms, disclosure and monitoring. These steps protect investors and the integrity of the vehicle while allowing beneficial transactions with related parties to proceed.
Etihad Law Firm advises investment vehicles, fund managers, boards and investors on conflict of interest policies, related-party transactions and governance in Iraq. We help clients design processes that withstand scrutiny.