This article examines how a buyer can acquire a distressed Iraqi business while preserving the licences and contracts that make it worth buying. Distressed businesses can offer opportunities: established operations, trained staff, market position and, sometimes, licences or contracts that would be difficult to obtain from scratch. They also carry risks. The seller may be under pressure from creditors, its records may be incomplete and the business’s most valuable rights may be at risk of termination or revocation because of the seller’s financial difficulties.
A distressed acquisition also tends to proceed faster than a conventional transaction. The seller may need cash quickly, creditors may be threatening enforcement and employees may be leaving. The buyer must decide what diligence is essential, what risks it can accept and how to structure the transaction so that the rights it is paying for actually transfer.
The Companies Law No. 21 of 1997, as amended, governs share transfers and corporate approvals. The Iraqi Civil Code No. 40 of 1951 governs asset sales, assignment of contracts and challenges by creditors to transactions that prejudice them. The Execution Law No. 45 of 1980 is relevant where assets are subject to attachment. The Labour Law No. 37 of 2015 governs the position of employees on a transfer of the business. Sector legislation and the Investment Law No. 13 of 2006, as amended, govern licences, and the Income Tax Law No. 113 of 1982, as amended, determines tax exposure that may follow the business.
Identifying the source of value
The buyer should first identify exactly what it is paying for. In a distressed business, value often lies in a limited number of rights:
- Licences and permissions. Operating licences, sector permits, investment licences, import registrations or contractor classifications that would take time or effort to obtain independently.
- Key contracts. Customer contracts, concessions, supply agreements or leases on favourable terms.
- Physical assets and premises. Equipment, facilities and land use rights needed to operate.
- People and know-how. Experienced staff and operational knowledge.
Once the sources of value are identified, the buyer can focus diligence and structuring on preserving them.
Assessing whether rights survive the distress
The seller’s financial difficulties may already have affected its rights. Licences may be subject to suspension for unpaid fees or non-compliance. Contracts may contain termination rights triggered by insolvency, non-payment or failure to perform. Leases may be in arrears. Assets may be subject to attachment or security in favour of creditors.
The buyer should verify the current status of each key right directly with the relevant authority or counterparty where possible. A licence that appears valid on paper may be subject to a pending revocation procedure. A contract may have been suspended by the customer. Commercial contract advice in Iraq can help assess termination and assignment provisions in key contracts.
Choosing between share and asset acquisition
The transaction structure has a major effect on which rights transfer and which liabilities follow:
- Share purchase. The company remains the holder of its licences and contracts, so rights are generally preserved unless change of control provisions apply. However, the buyer acquires the company with all its liabilities, including undisclosed debts and tax exposure.
- Asset purchase. The buyer selects the assets it wants and leaves liabilities with the seller. However, licences may not be transferable, contracts require assignment or novation with counterparty consent and certain liabilities may follow the business under applicable law, particularly employment obligations.
- Hybrid approaches. The seller transfers the desired assets and rights to a new subsidiary, which the buyer then acquires. This can isolate liabilities but requires each transfer to be valid and approved.
Corporate transaction advice in Iraq can help compare these options against the specific rights and liabilities of the business.
Managing creditor risk
A sale by a distressed seller may be challenged by its creditors if it is made at an undervalue or in a manner that prejudices them. The Iraqi Civil Code contains rules allowing creditors to challenge certain transactions, and bankruptcy proceedings, if they follow, may provide further grounds. The buyer should ensure that the price reflects fair value, that the transaction is properly approved and documented and that it is paid in a way that can be traced.
Where assets are subject to security or attachment, the buyer should obtain releases from the secured creditor or the execution directorate as part of completion. Paying the purchase price directly to secured creditors in exchange for releases can help ensure clean title.
Preserving licences and contracts through completion
Where a share purchase is chosen, the buyer should identify change of control consents and obtain them before completion where possible. Where an asset purchase is chosen, it should determine whether each licence can be transferred or whether the buyer must apply for a new licence, and coordinate timing so the business can continue operating. Interim arrangements, such as a transitional services agreement or a period in which the seller continues to hold a licence for the buyer’s benefit, should be examined for legality and approved where necessary.
Key counterparties should be approached carefully. A customer who learns of the seller’s distress may prefer to terminate rather than consent. A well-prepared approach explaining the buyer’s credentials and plans may encourage consent.
Addressing employees
Employees are often critical to preserving a distressed business. The Labour Law contains provisions on the transfer of an enterprise that may carry existing employment obligations to the successor. The buyer should review payroll arrears, unpaid social security contributions and accrued end-of-service entitlements, and decide how these will be handled in the price. Employment law advice in Iraq can help determine the obligations that will follow the business.
Protecting the buyer contractually
Warranties and indemnities from a distressed seller have limited value, because the seller may not have the means to pay claims. The buyer should consider alternative protections:
- Retentions and escrow. Retain part of the price for a period to cover identified risks.
- Price adjustments. Reduce the price to reflect known liabilities rather than relying on later claims.
- Third-party guarantees. Seek guarantees from shareholders or affiliates of the seller with substance.
- Conditions precedent. Make completion conditional on key consents, releases and confirmations.
Planning the first months after acquisition
Once the acquisition completes, the buyer must stabilise the business quickly. Staff, customers and suppliers may be uncertain about the future, and the business may still be carrying the effects of the seller’s difficulties. A stabilisation plan should address immediate cash needs, payment of priority arrears such as wages, communication with key counterparties and confirmation that licences and permits remain in good standing.
The buyer should also review whether any obligations accepted at completion require early action. Transitional services from the seller, licence transfer applications and the replacement of guarantees may each have deadlines. Monitoring these deadlines closely helps the buyer secure the value it paid for and avoid disputes with the seller or authorities in the period immediately after completion.
Illustrative example. A buyer agrees to acquire the assets of an Iraqi waste management company that holds a municipal service contract. The company is behind on payments to suppliers and employees. The buyer assumes it can take over the contract, but the contract requires the municipality’s approval for assignment, and the municipality has already issued a warning notice for poor performance. By approaching the municipality before signing, presenting a remediation plan and making completion conditional on approval of the assignment, the buyer can avoid paying for a contract it may not be able to keep.
Conclusion & how Etihad Law Firm can help
Acquiring a distressed Iraqi business can be valuable if the buyer identifies the rights that create value, verifies that they survive the distress and structures the transaction so that they transfer. Creditor, employee and contractual risks should be addressed through structure and price rather than reliance on a seller who may be unable to stand behind its promises.
Etihad Law Firm advises buyers and sellers on distressed transactions in Iraq, from diligence and structuring through to completion and integration. Our dispute resolution team can assist where creditor challenges or contractual disputes affect the transaction.