This article considers how private equity investors can test their exit rights in an Iraqi investment before relying on them. Exit is central to the private equity model. The investor needs to know that it can sell its stake within its fund life, to a buyer willing to pay full value, and without being blocked by other shareholders, regulators or the company’s own constitutional documents.
Exit rights in shareholder agreements are frequently drafted by reference to precedents from other markets. They may assume that shares can be freely transferred once contractual restrictions are waived, that any buyer can acquire the investor’s stake and that completion can occur on signature. In Iraq, statutory pre-emption, registry formalities, sector approvals and ownership restrictions can each affect whether a planned exit can proceed and how long it will take.
The Companies Law No. 21 of 1997, as amended, governs share transfers in Iraqi companies, including formalities and members’ rights. The Investment Law No. 13 of 2006, as amended, and sector legislation may impose approval requirements or ownership conditions. The Competition and Antitrust Law No. 14 of 2010 can be relevant to a sale to a competitor, while the Anti-Money Laundering and Counter-Terrorism Financing Law No. 39 of 2015 affects the information banks and authorities may require about buyers. Listed companies are also subject to the rules of the Iraq Securities Commission and the Iraq Stock Exchange.
Mapping the exit routes available
An investor should identify the realistic exit routes when it invests, not when its fund term is ending. Each route depends on different conditions:
- Trade sale. A sale to a strategic buyer may deliver the highest price but may require regulatory approvals, competition clearance and the cooperation of other shareholders.
- Secondary sale. A sale to another financial investor may be faster but depends on the new investor accepting the existing shareholder arrangements or negotiating new ones.
- Sale back to the founder or company. A put option or buy-back provides certainty of route but depends on the counterparty’s ability to pay and on restrictions on a company acquiring its own shares.
- Listing. An offering on the Iraq Stock Exchange may be available for some companies, but requires conversion into an eligible company form, regulatory approval and sufficient market liquidity.
Mapping these routes reveals which rights the investor needs, such as drag-along, tag-along, registration rights or cooperation undertakings.
Testing statutory and constitutional transfer restrictions
The Companies Law contains rules on the transfer of shares that apply in addition to any contractual arrangements. In certain company types, existing members have priority rights when shares are transferred to non-members, and the company’s articles may impose further conditions. A drag-along right in a shareholder agreement does not automatically override a statutory pre-emption right held by a shareholder who is not a party to that agreement.
The investor should therefore review the articles and the membership of the company to confirm that all members are bound by the exit arrangements, that pre-emption has been waived to the extent possible and that the articles mirror the shareholder agreement. Corporate advice in Iraq can identify whether amendments to the articles are needed at the time of investment to support a future exit.
Assessing buyer eligibility
Not every interested buyer will be able to acquire the investor’s stake. The analysis should consider:
- Nationality and ownership restrictions. Certain activities, land rights and licences may be limited to Iraqi persons or require additional approvals where a foreign buyer is involved.
- Sector approvals. Banking, insurance, telecommunications and other regulated sectors commonly require regulatory approval for changes in significant shareholdings, together with fit and proper assessments of the incoming owner.
- Investment licence conditions. A project benefiting from an investment licence may require the investment commission’s approval for a transfer, and incentives may be linked to the original investor’s commitments.
- Sanctions and compliance. Banks handling the sale proceeds will apply their own compliance checks to the buyer and the source of funds. A buyer that cannot satisfy those checks may be unable to complete.
Identifying these constraints early helps the investor shape a sale process aimed at eligible buyers and avoid negotiating with a party that cannot close.
Drafting drag-along and tag-along rights that operate
A drag-along right allows the investor to require other shareholders to sell on the same terms. It should state the minimum threshold, the information to be provided to dragged shareholders, the form of consideration and the warranties they must give. It should also address how the transfer will be completed if a dragged shareholder refuses to cooperate, for example through a power of attorney, escrow of share transfer documents or a contractual obligation backed by a meaningful remedy.
A tag-along right protects minority shareholders but can also affect the investor’s exit if a buyer does not want to purchase the entire company. The investor should consider whether tag-along rights held by others may deter buyers and whether the shareholder agreement allows flexibility in how the sale is structured.
Coordinating approvals, completion and payment
Regulatory approvals, registry formalities and payment arrangements determine the timetable between signing and completion. The sale agreement should include conditions for each required approval, a long-stop date and interim covenants preventing changes to the business. Payment should be structured so that the buyer pays against registration of the transfer or against evidence that registration will occur. Where proceeds will be transferred outside Iraq, the banking route and any tax clearance should be confirmed in advance. Tax advisory services in Iraq can identify the tax consequences of the exit and any clearance required for registration.
Preparing the company for sale
Exit readiness depends on more than legal rights. Buyers will expect complete corporate records, an up-to-date registry file, audited financial statements, valid licences and a clear picture of tax and employment compliance. An investor that has not maintained these records during its ownership may face price reductions or extended negotiations.
Preparing a vendor due diligence report, regularising registry filings and resolving known disputes before launching a sale can shorten the process considerably. Management cooperation should also be secured through the shareholder agreement and incentive arrangements.
Considering partial exits and continuing obligations
Not every exit involves a sale of the investor’s entire stake at once. An investor may sell part of its holding to a co-investor, sell down gradually through a listing or transfer its interest to a continuation vehicle managed by the same sponsor. Each route raises its own questions. A partial sale may trigger tag-along or pre-emption rights that the investor did not anticipate. A transfer to a continuation vehicle may require consent under the shareholder agreement, the articles or regulatory approvals, even though the economic owner appears unchanged.
The investor should also consider what obligations it will retain after exit. Buyers commonly ask for warranties about the company’s business, not only about the investor’s title to its shares. A financial investor that did not manage the business may resist giving operational warranties, while the founder or management may be unwilling to give them alone. Warranty and indemnity insurance may be available in some transactions but should not be assumed. Agreeing in the shareholder agreement which shareholders will give which warranties on exit, and on what limits, avoids a negotiation between existing shareholders at the moment the investor is trying to close a sale.
Illustrative example. A fund holds a forty per cent stake in an Iraqi food distribution company. The shareholder agreement gives it a drag-along right after five years. When it finds a regional buyer for one hundred per cent of the company, a small shareholder who never signed the shareholder agreement asserts a statutory priority right to purchase the shares being transferred. The buyer is unwilling to proceed until the issue is resolved. Had the fund confirmed at entry that all members were bound by the exit provisions and that the articles reflected the agreed drag-along process, the sale could have proceeded without delay.
Conclusion & how Etihad Law Firm can help
Exit rights in Iraqi private equity investments should be tested against statutory transfer rules, sector approvals and buyer eligibility from the outset. Rights that cannot be implemented when needed provide little protection, however carefully they are drafted.
Etihad Law Firm advises private equity investors on entry structuring, exit planning and the implementation of share sales in Iraq. We help investors align their shareholder agreements with Iraqi law and prepare their portfolio companies for a successful exit.