This article considers how the partners in a new Iraqi joint venture can ensure that their joint venture agreement, the company’s incorporation documents and the funding steps work together. The commercial agreement between the partners is typically negotiated first and in detail. The articles of association, registration filings and bank arrangements are then prepared, often under time pressure and sometimes by different advisers. The result can be a venture whose legal documents do not reflect the partners’ bargain.
Inconsistencies at formation can be difficult to correct later. Amending the articles requires corporate approvals and registry filings, and a partner that benefits from the inconsistency may not cooperate. Third parties, including banks, authorities and courts, will usually rely on the registered documents rather than on a private agreement they have not seen. Aligning the documents from the start avoids these problems.
The Companies Law No. 21 of 1997, as amended, governs the incorporation of Iraqi companies, the content of the articles of association, capital requirements and registration with the Companies Registration Department. The Iraqi Civil Code No. 40 of 1951 governs the joint venture agreement where Iraqi law applies. Foreign partners should also consider the Investment Law No. 13 of 2006, as amended, sector licensing requirements and, where a public company participates, the Public Companies Law No. 22 of 1997, as amended. Ventures in the Kurdistan Region are subject to regional registration procedures.
Choosing the vehicle and its legal form
The partners should first confirm the type of company that suits their venture. The Companies Law provides for several forms, including limited liability companies and joint stock companies, each with different requirements on the number of members, capital, management and share transfers. The form chosen affects how decisions are taken, whether a board is required and how easily shares can later be transferred.
Sector requirements may dictate the form. Certain regulated activities can only be conducted by a particular type of company or require a minimum capital. A foreign partner may also need to consider whether it will participate directly or through a holding vehicle, and the effect of that choice on approvals, tax and exit.
Reflecting the bargain in the articles of association
The articles of association are the company’s constitutional document and are filed with the registry. The partners should consider which terms of the joint venture agreement need to be reflected in the articles:
- Capital and shareholdings. The registered capital, the number of shares and each partner’s holding should match the agreed structure. Any staged contribution should be recorded in a way the registry will accept.
- Management and decision-making. Appointment rights, quorum requirements and reserved matters requiring a higher majority or unanimity should be reflected so they bind the company and not only the partners.
- Transfer restrictions. Pre-emption rights, lock-up periods and approval requirements for transfers should be consistent with the agreement and the Companies Law.
Not every term will be accepted in the articles, and some registries apply standard forms. Where a term cannot be included, the agreement should explain how the partners will exercise their voting rights to achieve the agreed outcome. Corporate structuring advice in Iraq can identify which provisions are likely to be accepted in the articles and which must rely on contract.
Coordinating capital contributions with incorporation
Incorporation commonly requires evidence that capital has been deposited, or a defined portion of it, before registration. The partners should agree who will make the deposit, from which account and in what currency. A foreign partner may face delays transferring funds into a bank account of a company that does not yet exist, so the parties should understand the bank’s requirements for a company under formation.
Contributions in kind, such as equipment, intellectual property or land use rights, require valuation and may require approval under the Companies Law. If one partner’s contribution consists of assets that must be transferred after incorporation, the agreement should state what happens if the transfer cannot be completed. The other partner should not be left having paid cash for shares while the in-kind contribution remains with its counterpart.
Sequencing licences and approvals
Many ventures need licences before they can operate. The partners should identify which licences can be obtained by the company after incorporation, which must be held by a partner and transferred, and which depend on a partner’s qualifications or experience. Where a licence depends on a partner, the agreement should state how long that partner must remain involved and what happens if it exits.
Investment licences may be applied for by the company or in some cases by an investor before the company is formed. The partners should confirm which route applies and ensure that the incentives and obligations of the licence are allocated in the agreement. The timetable for formation should reflect the time required for each approval.
Managing pre-incorporation costs and contracts
Before the company exists, partners often incur costs and sign contracts for the venture’s benefit. The agreement should identify which costs will be reimbursed, the evidence required and the approval process. It should also identify contracts that will be transferred to the company after incorporation and confirm that the counterparties will accept the transfer.
Where one partner signs a lease, procurement contract or employment offer on behalf of the future company, it may remain personally liable if the company does not adopt the contract. The agreement should allocate that risk and provide for the company to ratify or assume the contract promptly. Commercial contract advice in Iraq can help structure pre-incorporation arrangements to minimise the risk of a partner being left with an unwanted obligation.
Setting up banking, accounts and initial governance
After incorporation, the company needs bank accounts, signatories, a tax registration and accounting systems. The agreement should set out who will be the initial signatories, the limits of their authority and the reporting the partners will receive. Initial board or management meetings should approve the first budget, the delegation of authority and key appointments.
These first steps are often taken informally by the partner with a local presence. The other partner should ensure that its information rights and approval rights apply from the first day, not only after the first general assembly. Tax advisory services in Iraq can confirm registration requirements and the treatment of initial contributions and pre-incorporation costs.
Illustrative example. An Iraqi engineering firm and a foreign technology partner agree to form a limited liability company with equal shareholdings. Their agreement provides for unanimous approval of the budget and gives the foreign partner the right to appoint the finance manager. The articles filed with the registry follow a standard form under which most decisions are taken by simple majority and the general manager, nominated by the local partner, has wide powers. When the partners disagree over spending, the general manager relies on the articles. Had the articles been prepared alongside the agreement and reviewed before filing, the reserved matters and appointment rights would have been reflected in the constitutional documents.
Conclusion & how Etihad Law Firm can help
A joint venture is most secure when the partners’ agreement, the company’s articles, its capital structure and its licences tell the same story. The formation stage is the best opportunity to achieve that alignment, before divergent interests make amendments difficult.
Etihad Law Firm assists local and international partners with the formation of Iraqi joint ventures, from structuring and negotiation through incorporation, capitalisation and initial governance. We help ensure that the documents filed with the authorities reflect the commercial bargain the partners have agreed.