Capital increases, issuing new shares to raise additional capital, are a recurring feature of joint stock company life. Capital increases support business expansion, debt reduction, acquisitions, and other purposes that benefit from additional equity funding. The Companies Law No. 21 of 1997 (as amended) establishes the procedural framework, with public companies engaging the Iraq Securities Commission for capital increases that involve public offerings or that affect the publicly traded shares.
Forms of Capital Increase
Capital increases take several forms:
- Cash capital increase, issuing new shares against cash subscriptions from existing or new shareholders.
- Capital increase in kind, issuing new shares against contributions of assets rather than cash.
- Capitalisation of reserves, converting accumulated reserves into share capital through bonus share issues.
- Conversion of debt to equity, issuing shares in exchange for cancellation of debt to creditors.
- Capital increases linked to specific transactions (acquisitions paid in shares, employee share schemes, conversion of convertible instruments).
Each form has its own procedural framework and its own tax and accounting treatment.
Approval Process
Capital increases typically require:
- Board resolution recommending the capital increase, with rationale and proposed terms.
- Extraordinary general assembly resolution approving the capital increase, typically with qualified majority requirements.
- Where the increase requires amendment to the authorised capital specified in the articles, amendment of the articles.
- Subscription period during which eligible parties can subscribe to the new shares.
- Payment of subscribed amounts within specified deadlines.
- Registration of the capital increase with the Companies Registrar at the Ministry of Trade.
- Where applicable, approval from the Iraq Securities Commission for public offerings or transactions affecting publicly traded shares.
- Where applicable, sector-specific approvals for capital increases in regulated companies.
The process can take significant time, and capital-raising plans should accommodate the procedural timeline.
Pre-Emption Rights
Existing shareholders typically have pre-emption rights, the right to subscribe to new shares proportionate to their existing holdings, before the shares are offered to outside parties. Pre-emption protects existing shareholders against dilution and supports continued proportionate ownership through capital changes. The Companies Law establishes the default pre-emption framework, with the articles potentially elaborating on procedures. Pre-emption rights can be waived in specific circumstances (typically by qualified majority of the general assembly) where the company’s interests support issuing shares to specific parties outside the pre-emption framework.
Pricing of New Shares
New shares are typically issued at a price reflecting their actual value rather than just nominal value. Where the issue price exceeds nominal value, the excess (share premium) is allocated to a share premium reserve subject to the framework for such reserves. Pricing decisions affect existing shareholders (where new shares are issued at a discount, existing holders are diluted in value as well as in proportion) and should be addressed deliberately. Independent valuation may support pricing decisions in larger transactions or where the pricing is potentially controversial.
Subscription and Payment
Subscription to new shares follows defined procedures. Shareholders exercising pre-emption rights subscribe through the company’s procedures. New investors invited to subscribe (where pre-emption has been waived) follow similar procedures. Payment must be made within specified deadlines, with unpaid amounts treated under the framework for unpaid capital. Where in-kind contributions are involved, valuation and transfer procedures apply alongside the subscription documentation.
Public Offerings
Where the capital increase involves a public offering, soliciting subscription from the general public rather than identified parties, Iraq Securities Commission framework engages. This includes prospectus requirements, marketing restrictions, allocation procedures, listing arrangements where the new shares will be admitted to trading on the Iraq Stock Exchange, and disclosure obligations during and after the offering. Public offerings require materially more procedural and disclosure work than private capital increases.
Registration
Following subscription and payment, the capital increase is registered with the Companies Registrar at the Ministry of Trade through formal procedures. Registration confirms the new capital position, updates the company’s records, and supports the new shareholders’ position. The new shares can be issued in certificate form or through electronic book-entry depending on the company’s arrangements and applicable rules.
How We Can Help
Etihad Law Firm advises joint stock companies and investors on capital increases in Iraq, structuring, board and general assembly procedures, pre-emption arrangements, subscription documentation, registration with the Companies Registrar, and where applicable engagement with the Iraq Securities Commission for public offerings. We work alongside financial advisors and accounting firms.