Related party transactions, transactions between the company and parties with relationships to the company that could affect dealing on arm’s length terms are an inherent feature of corporate life. Directors, significant shareholders, group affiliates, and their associates frequently transact with the company in various capacities. The Iraqi framework addresses these transactions through restrictions, approval procedures, and disclosure requirements designed to ensure that the company’s interests are protected against potential abuse of related party positions.
Identification of Related Parties
Related parties for Iraqi JSCs typically include:
- Directors and senior officers of the company.
- Significant shareholders, typically defined by reference to holding above a defined threshold.
- Companies in the same group (parent, subsidiaries, sister companies).
- Close family members of directors and significant shareholders.
- Entities controlled by directors, significant shareholders, or their associates.
- Other parties with relationships giving them ability to influence company decisions.
- Where applicable, parties with continuing relationships such as long-term service providers with positions giving rise to similar concerns.
Identification of related parties requires ongoing diligence as relationships develop.
Categories of Related Party Transaction
Related party transactions take many forms:
- Purchases and sales of goods or services between the company and a related party.
- Financing arrangements including loans, guarantees, and security.
- Real estate transactions including leases between the company and related parties.
- Employment and consultancy arrangements with related parties beyond their primary roles.
- Investment transactions including share dealings between the company and related parties.
- Intragroup arrangements within group structures involving the JSC.
- Other transactions where the related party position could affect commercial terms.
Each category engages the related party framework with potentially different procedural and disclosure consequences.
Conflict of Interest Disclosure
Directors and senior officers have continuing obligations to disclose their interests in matters before the company. Disclosure typically includes:
- Initial disclosure of relevant interests at appointment.
- Ongoing disclosure of new interests as they arise.
- Specific disclosure in connection with particular decisions before the board.
- Disclosure of indirect interests through controlled entities, family members, or other related parties.
- Documentation of disclosures in board records.
- Updates of disclosures as circumstances change.
Disclosure supports both legal compliance and the board’s ability to manage conflicts appropriately.
Approval Procedures
Related party transactions typically require specific approval procedures. Common elements include:
- Recusal of the related party from the decision-making process on the transaction.
- Independent review by directors without conflicting interests.
- Where appropriate, valuation or fairness opinions supporting the transaction terms.
- Documentation of the rationale for entering the transaction.
- Where applicable, shareholder approval for substantial related party transactions.
- Specific disclosures to the general assembly and in periodic reporting.
The procedures balance commercial flexibility with protection against abuse.
Disclosure to Shareholders and Regulators
Disclosure of related party transactions extends beyond internal governance:
- Disclosure in the annual financial statements through related party transaction notes.
- Disclosure in board reports to general assembly meetings.
- Continuous disclosure of material related party transactions for public JSCs through the Iraq Securities Commission framework.
- Where applicable, sector-specific disclosure to relevant regulators.
- Disclosure supporting transfer pricing positions for tax purposes.
- Where applicable, disclosure in connection with substantial transactions including M&A and capital transactions.
Disclosure should be sufficient to allow stakeholders to evaluate the transaction and its appropriateness.
Substantive Limits
Beyond procedural requirements, substantive limits apply to related party transactions. Transactions must be on terms fair to the company, with pricing and other terms consistent with what would be agreed with unrelated parties. Transactions that are abusive, extracting value from the company for the benefit of related parties — can be challenged by shareholders or by the company itself in later proceedings, and can support directors’ liability for breach of duty. The framework is more protective than purely procedural disclosure-based approaches.
Banking and Sector-Specific Restrictions
Where the JSC operates in regulated sectors, sector-specific related party restrictions apply. Banks face restrictions on dealings with related parties (significant shareholders, directors, associates) imposed by the banking framework. Other regulated sectors have their own analogous restrictions. These sector-specific frameworks supplement the general framework and impose additional constraints that should be respected alongside Companies Law requirements.
How We Can Help
Etihad Law Firm advises joint stock companies, directors, and shareholders on related party transaction matters in Iraq, policy development, conflict disclosure procedures, approval and documentation of specific transactions, defence of transactions in disputes, and the integration of related party management with broader corporate governance.