This article examines how an investor subscribing for shares in an Iraqi company can structure funding milestones, conditions and remedies. Many equity investments are staged. The investor commits a total amount but releases it in tranches as the company achieves defined milestones. This protects the investor against funding a business that is not performing, but it also creates risks for the company and its existing shareholders if funding is withheld at a critical moment.
Staged investments in Iraqi companies raise particular questions about how each tranche will be issued as share capital, how milestones will be verified and what happens if the investor or the company fails to perform. The investment agreement should answer these questions in a way that can be implemented through the company’s corporate procedures and the registry.
The Companies Law No. 21 of 1997, as amended, governs capital increases, the issue of new shares and the registration of changes in members and capital. The Iraqi Civil Code No. 40 of 1951 provides the contractual framework for conditions, warranties and damages where Iraqi law applies. The Investment Law No. 13 of 2006, as amended, and sector regulations may require approval for the investor’s entry. The Income Tax Law No. 113 of 1982, as amended, and the Anti-Money Laundering and Counter-Terrorism Financing Law No. 39 of 2015 affect the transfer of funds and the information required by banks.
Defining the funding structure
The agreement should state clearly what the investor will contribute and in what form:
- Share subscription. The investor subscribes for new shares at a defined price. Each subscription requires a capital increase approved by the general assembly and registered. If several tranches are planned, the parties should consider whether each tranche will be a separate capital increase.
- Convertible instruments. The investor provides funding as a loan that converts into equity on agreed events. This can provide flexibility but requires clear conversion mechanics and a corporate route to issue the shares at conversion.
- Mixed structures. Part of the funding is equity and part is a shareholder loan. The agreement should explain the ranking of each and how they interact with third-party financing.
The choice affects the investor’s protection if the company fails, the existing shareholders’ dilution and the speed with which funds can be released.
Setting milestones that can be verified
Milestones should be objective and capable of verification. Examples include the grant of a specified licence, signature of a customer contract above a defined value, completion of construction certified by an engineer or achievement of revenue targets confirmed by audited accounts. Milestones based on subjective judgment, such as satisfactory progress, are likely to cause disputes.
The agreement should identify who confirms each milestone, the evidence required and the period within which the investor must fund once the milestone is achieved. If the investor disputes achievement, an expert determination mechanism can provide a faster answer than arbitration. The agreement should also state whether the investor may waive a milestone and fund anyway.
Structuring conditions precedent
Before the first tranche, the investor will usually require conditions such as corporate approvals, waivers of pre-emption rights by existing shareholders, regulatory consents, amendments to the articles of association and satisfactory due diligence. Each condition should be specific, with responsibility for satisfying it allocated to a party.
The investor should also consider conditions for later tranches. These may include the absence of a material adverse change, continued accuracy of warranties and compliance with covenants. Corporate transaction advice in Iraq can help ensure that conditions are framed in a way that matches the approvals actually required by Iraqi law and the registry.
Implementing each tranche
Each tranche of share capital needs to be issued and registered. The following points deserve attention:
- Advance approvals. Existing shareholders may agree at the outset to approve future capital increases on achievement of milestones. The agreement should include voting undertakings and, where possible, a mechanism for completing the capital increase if a shareholder fails to cooperate.
- Pre-emption rights. Statutory or constitutional rights of existing shareholders to subscribe for new shares should be waived for each tranche, or the structure should account for them.
- Funds flow. The investor’s payment should be made into an account from which it can be verified for registration purposes. Where funds come from abroad, the bank’s documentary requirements should be confirmed in advance.
Allocating warranties and disclosure
The company and its founders will usually give warranties about the company’s legal status, capital, assets, contracts, compliance, tax and employment. The investor relies on these warranties because it is investing in the company’s future and accepting its existing liabilities. The agreement should identify who gives the warranties, whether they are repeated at each tranche and the disclosure against which they are given.
Warranties given by the company itself may have limited value, because a claim against the company reduces the value of the investor’s own shares. Founder warranties or specific indemnities may provide better protection, provided the founders have the means to pay. Tax advisory services in Iraq can help identify historical tax exposures that may warrant a specific indemnity.
Designing investor remedies
If the company fails to meet a milestone, the investor’s primary remedy is to withhold further funding. The agreement should also consider:
- Price adjustment. If milestones are missed, later tranches may be issued at a lower price, increasing the investor’s shareholding. This must be capable of implementation through the capital increase process.
- Additional governance rights. A material breach may entitle the investor to appoint additional directors or require approval for further decisions.
- Exit rights. Serious breaches may trigger a put option or a right to require a sale.
The company and founders will want protection if the investor fails to fund. Remedies may include dilution of the investor, loss of governance rights or a right to seek funding elsewhere. Balanced remedies make the agreement more acceptable and reduce the risk of litigation.
Coordinating the investment with existing shareholders and lenders
An equity investment changes the position of everyone already involved with the company. Existing shareholders will be diluted and may lose blocking rights they previously held. Lenders may have negative covenants restricting changes in capital or ownership, or may require that new equity be used for specific purposes. Key customers or licensing authorities may need to be notified of a change in shareholding.
The investor should therefore map these interests before signing and decide which consents must be obtained as conditions precedent. Existing shareholders should sign the investment agreement or a separate deed confirming their voting undertakings, waiver of pre-emption rights and acceptance of the new governance terms. Where a lender’s consent is needed, the investor should review the consent letter to confirm that it covers all planned tranches and not only the first. If the investor’s funding will be used to repay existing debt or shareholder loans, the agreement should say so expressly, because an investor will rarely want its new capital used to provide an exit for existing creditors or shareholders without its approval.
Illustrative example. An investor agrees to subscribe for shares in an Iraqi agritech company in three tranches. The second tranche is due when the company obtains a land lease for a new farm. The company signs a lease, but the investor discovers that it is subject to an unresolved ownership dispute. The agreement defines the milestone as the signature of a lease rather than a registered and unencumbered lease. A milestone requiring registered title, verified by the investor’s advisers, would have avoided the dispute over whether the second tranche was due.
Conclusion & how Etihad Law Firm can help
Staged equity investments in Iraq can align funding with performance, but only if milestones are objective, conditions are realistic and each tranche can be issued through the corporate process. Remedies should be balanced and capable of implementation, so that the agreement provides real protection when performance falls short.
Etihad Law Firm advises investors and companies on equity investment agreements in Iraq, from term sheet to completion of each tranche. Our dispute resolution team can assist if disagreements arise over milestones, warranties or funding obligations.