Coming out of decades of centralised economic practices affecting major industries, Iraq's most lucrative business opportunities for private investors now come through public Government tenders. The oil and gas industry is a clear example of the Government's influence, which exerts its control through the Ministry of Oil and in turn through sixteen operating companies that cover all aspects of exploration, production, distribution, refining, and marketing activities.

International investors looking to enter the Iraqi market and wishing to incorporate locally have the option of establishing either a private or mixed company. Mixed companies are formed with governmental persons having a minimum 25% ownership, and are subject to specific rules, e.g. in relation to share subscription and appointment of board members. Mixed companies could be incorporated as a joint stock or limited liability company, yet, in practice, it is much more common to establish mixed joint stock companies rather than mixed limited liability companies.

The following is a review of corporate issues, including share subscription and ownership rules; requirements for transfer of shares and company management essentials for mixed companies in Iraq.

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Coming out of decades of centralised economic practices affecting major industries, Iraq's most lucrative business opportunities for private investors now come through public Government tenders. The oil and gas industry is a clear example of the Government's influence, which exerts its control through the Ministry of Oil and in turn through sixteen operating companies that cover all aspects of exploration, production, distribution, refining, and marketing activities.

International investors looking to enter the Iraqi market and wishing to incorporate locally have the option of establishing either a private or mixed company (See our previous Law-Now (http://tinyurl.com/y97womu) on Incorporation Options in Iraq). Mixed companies are formed with governmental persons having a minimum 25% ownership, and are subject to specific rules, e.g. in relation to share subscription and appointment of board members. Mixed companies could be incorporated as a joint stock or limited liability company, yet, in practice, it is much more common to establish mixed joint stock companies rather than mixed limited liability companies.

The following are characteristics of a mixed joint stock company and a mixed limited liability company under the Iraqi Companies Law No. 21 of 1997, as amended by CPA Order No. 64 of 2004 (the "Iraqi Companies Law"):

Shares Subscription/Ownership

In mixed joint stock companies, the requirement for a public offer restricts the initial subscription of the founding shareholders. Governmental and private shareholders are permitted to subscribe to an initial percentage ranging between 30% and 55% of the total company shares. This percentage should include the Governmental statutory percentage of 25%.

The remaining shares would be offered for public subscription, which must begin within 30 days from the date on which the Registrar has approved the establishment of the joint stock company. The following conditions apply to the subscription of the remaining shares:

(a) Public subscription should be offered for a period of no less than 30 days and no more than 60 days.

(b) During the first 30 days of the subscription period, the founding shareholders (private and governmental) are not permitted to subscribe for any shares on offer.

(c) If at the end of the subscription period more than 25% of the total company shares remain unsubscribed for, the subscription period may be extended for an additional 60 days.

(d) If at the end of the extended subscription period, the take up of shares has not reached 75% of the total company shares (including founders' shares), the founders must either reduce the capital of the company so that the issued shares will equal 75% of the decreased nominal capital, or cancel the establishment of the company.

(e) Within the 6 month period following the conclusion of the public subscription and the issue of the certificate of incorporation, the Board of Directors may dispose of any remaining shares either by offering them on the stock exchange or in a public offer similar to the initial public offering. If there are still unissued shares, the capital of the company must be reduced so that the subscribed shares will be equal to the decreased nominal capital.

In contrast, the shares of a mixed limited liability company are not subject to any of these public offer requirements. The Iraqi Companies Law does not stipulate any restrictions on the initial ownership of shares by the founding shareholders except that the governmental person's minimum share must be 25%.

This may suggest that the establishment of a limited liability company is usually preferred by founding shareholders over a joint stock company; nonetheless, financial considerations are an important factor in this regard which favour the latter type of companies, especially in case funds need to be raised through public offering.

It is worth noting that in both company types the shareholders may, by agreement, decide on a shareholding by the governmental person(s) higher than 25% - subject to the above initial subscription conditions for a joint stock company. If the governmental person(s) constitute less than 25% shareholding, the company would not be described as "mixed" and would be considered as a private company.

Transfer of Shares

For the transfer of shares in mixed joint stock companies, the Iraqi Companies Law imposes general restrictions that apply to all shareholders (i.e. private and governmental persons) and specific restrictions that apply to private shareholders.

All shareholders are precluded from transferring shares during the first year of incorporation, and no transfer could be made unless the company has already distributed dividends with a value of no less than 5% of the total paid-up nominal capital.

In more particular cases, a private shareholder may not transfer shares if:

(a) the shares are mortgaged, seized, or sequestered based on a court decision;
(b) the share certificates have been lost and no replacement has been issued;
(c) the company has a debt against the shares in question; or
(d) the transferee is prohibited from owning shares in the company under a law or a decision issued by a competent authority.

Although these restrictions apply only to mixed joint stock companies and do not restrict a transferor shareholder in limited liability companies, the transfer of shares in the latter type of company is made more cumbersome by the pre-emptive rights of the other shareholders. The transferor must first notify the other shareholders through the Managing Director of its desire to sell. The notice must clearly indicate the quantity of the shares (with reference to their certificate numbers) and specify the selling price being asked by the transferor or being offered by a buyer. The other shareholders will have a right of first refusal that may be exercised within a period of 30 days, following which the transferor may dispose of the shares.

Company Management

The major difference under the Iraqi Companies Law between the management of a limited liability company and a joint stock company is that the statutory board of directors must be created by a resolution of the General Assembly for a joint stock company. The board of directors will appoint a General Manager to serve under its supervision. This General Manager may be one of the directors on the company's board of directors - other than the President and Vice President of the board of directors - or be chosen from outside the company. In contrast, the management of a limited liability company is carried out by a General Manager who is directly appointed by the General Assembly, and no board of directors is created. The General Assembly in both types of company consists of all the shareholders, each having a voting right equal to its percentage shareholding.

In mixed joint stock companies the board of directors consists of 7 members, with 7 others as reserve members. This statutory number is fixed by the Iraqi Companies Law and may not be reduced or increased in the bylaws of the company.

One important aspect of the board of directors in a mixed joint stock company is that some board members are not elected by the General Assembly, but are directly appointed by the governmental authority. In companies where the governmental person's share ranges between 25% and 50%, 2 board members ("Governmental Board Members") would be appointed by the authorized Minister or a deputy on his behalf. Whenever the governmental person's share exceeds 50%, 3 out of 7 board members will have to be Governmental Board Members.

This strengthens the governmental person's position over the private investor since, in addition to the practical influence that the governmental person may have in the appointment of the Governmental Board Members, the latter will also have voting rights in respect of the remaining board members through the General Assembly.

However, there is ambiguity over the removal of a Governmental Board Member. The Iraqi Companies Law does not expressly give the General Assembly a right to remove a Governmental Board Member. This seems to imply that the Governmental Board Member may only be removed by the same governmental authority that made the appointment. In practice, this may result in undue complication should the performance or behaviour of the Governmental Board Member be contrary to the interests of the company.

In contrast, the governmental authority has no right to appoint a non-elected director in a mixed limited liability company. This may make the limited liability company a more attractive option for the private investor as risks that may exist with having board members parachuted in by the governmental authority should be avoided.

In practice, joint stock companies remain, for a number of reasons, the more commonly chosen type for mixed Iraqi companies. Some of the reasons for this include the potential to raise more capital for investment purposes, and the ease of transferring shares without the restrictions caused by pre-emptive rights. An additional reason is the cap placed on the permitted number of shareholders in each company type; this number must not exceed 25 in limited liability companies, whereas joint stock companies may have up to 100 founding shareholders and an unlimited number of shareholders beyond that. Furthermore, Iraqi Companies Law says that Insurance, Re-Insurance, and Financial Investment businesses may only be exercised through joint stock companies.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 01/03/2010.