Private Equity (Transactions)

Consulting editors

Atif Azher

Simpson Thacher & Bartlett LLP

Quick reference guide enabling side-by-side comparison of local insights, including into types of private equity transaction; corporate governance, disclosure and timing considerations; dissenting shareholder rights; key purchase agreement provisions; participation of target company management; tax; fnancing; shareholders’ agreements; exit strategies (including IPOs); target sectors; cross-border considerations; club/group deals; and key recent developments.

Generated 13 March 2023

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TRANSACTION FORMALITIES, RULES AND PRACTICAL CONSIDERATIONS

Types of private equity transactions

What different types of private equity transactions occur in your jurisdiction?What structures are commonly used in private equity investments and acquisitions?

In Iran, private equity (PE) transactions occur in venture capital, growth capital, buyouts and leveraged buyouts and acquisitions, and public-to-private transactions. PE transactions generally consist of purchasing a controlling stake in private companies. In some cases, the PE companies will acquire 100 per cent of shares of the private company. They invest in acquiring the shares and other investment instruments, such as proft participation rights or a silent partnership interest. They can also invest in private companies by granting loans in exchange for the company’s shares.

PE entities can invest in public non-stock companies and public stock companies not accepted by the Stock Exchange Organization. Article 141 of the Commercial Code of Iran (CCI) refers to companies with a loss of a minimum of half their capital: ‘In the case of the loss of a minimum of half the company’s capital, the Board of directors is bound to call an extraordinary general meeting immediately, to decide whether the company shall be wound up or shall continue its operations.’ A private equity entity can invest in such companies and assist the company’s growth by acquiring the controlling stakes. PE investment is primarily expected in the consumer, fnancial, technology and real estate sector

Corporate governance rules

What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?

PE companies will be established as limited liability companies (LLCs) or private joint stock companies (PJSCs) and generally consist of limited partners (LPs) as prominent investors in the Mutual Fund, general partners, and fnancial consultants. The CCI sets corporate governance rules for each type of company.

Regardless of the type of company, LPs will not be active in managing and decision-making for the company, and their responsibility will be limited to the amount of their investment. The founders of the PE company, who were able to obtain the authorisation of the Tehran Stock Exchange (TSE), own the preferred stocks. Other shareholders own the usual stock of the company. General managers will determine the company’s strategies in line with the general meeting’s decision and with the assistance of the fnancial consultants

The corporate governance rules are much more ąexible in private LLCs than in PJSCs. For instance, unlike PJSCs, the presence of the inspectors is not mandatory in an LLC company

PJSCs are stricter than private joint stock companies. For instance, PJSCs should have a minimum of ăve directors, including a chairperson and a vice chair. However, PJSCs must only have a chairperson and vice chair.

If shareholders are foreign investors, stock exchange restrictions apply to them. In particular the regulations specify:

foreign investors shall invest not more than 10 per cent of each listed company at the same time;
all foreign investors shall not own a maximum of 20 per cent of the shares of each listed company at the same time;
foreign investors shall be permitted, after two years of practice in the Stock Exchange, to transfer abroad the
principal investment and related capital gains, in compliance with the articles of the Foreign Investment Promotion and Protection Act (FIPPA); and
yearly dividends may be transferred abroad in compliance with the FIPPA.

By obtaining a FIPPA investment certiăcate and authorisation from the TSE, foreign investors can get managerial roles in listed companies. In this case, the restrictions above do not apply to foreign direct investment in the TSE.

If a company remains or becomes public after a private equity transaction, it will be a PJSC. The CCI, the By-Law on Corporate Governance System 2007 and the Instruction on the Corporate Governance of Public Companies 2018 govern PJSCs.

Issues facing public company boards

What are some of the issues facing boards of directors of public companies considering entering
into a going-private or other private equity transaction? What procedural safeguards, if any, may
boards of directors of public companies use when considering such a transaction? What is the
role of a special committee in such a transaction where senior management, members of the
board or signifcant shareholders are participating or have an interest in the transaction?

The public companies’ boards of directors should consider the Law Governing the Stock Market 2005, the By-Law on the Corporate Governance System 2007 and the Instruction on the Corporate Governance of Public Companies 2018. In addition, the provisions of the CCI regarding corporate governance in public and private companies should be considered. When entering a PE transaction, the directors owe a fduciary duty of care and loyalty to the company.

The responsibility of care requires directors to perform their duties with the care that an ordinarily prudent person in a similar position would use under similar circumstances. The duty of loyalty requires the directors to place the company’s interests above their interests and the interests of other parties.

In general, managers need skills in investing (both in buying and selling) and improving operational management. The board of directors requires information and knowledge on the company’s value (current value compared to projected
value) and its realistic alternative.
According to article 13 of the Executive Guideline for Disclosure of the Information of the Public Companies Registered
in the Stock Market 2007, the board should disclose information regarding selling more than 5 per cent of the
company’s assets or purchasing more than 5 per cent of another company’s shares.
When a public company is entering into a going-private transaction, the board of directors should balance short-term
considerations with the company’s long-term outlook and decide whether taking in a fnancial partner makes sense on
the long term.
The board should participate in critical due diligence sessions with prospective buyers.
Article 129 of the CCI deals with confict of interests and states that the company cannot enter into any transaction
with a party that the director is involved with directly or indirectly. If the board permits such a transaction, then a report
must be prepared for and delivered to the general meeting, and the auditor must scrutinise the details of the
transaction. After receiving a report from the auditor, they can vote in the general meeting, where the director will forfeit
their vote. Should the board vote against allowing the director’s involvement in the transaction, the solution might be to
not proceed with the transaction or fnd an alternative third party to complete a similar transaction with.

Disclosure issues

Are there heightened disclosure issues in connection with going-private transactions or other
private equity transactions?

As per the Iranian Securities Market Act, any public company is obliged to disclose at least the following:

annual audited fnancial statements;
interim fnancial statements, including semi-annual audited fnancial statements and quarterly statements;
reports of the board of directors to the shareholders’ meetings and related comments of the auditor; and
any information that signifcantly affects the price of the securities and the investors’ decisions.

In addition, article 13 of the Executive Guideline for disclosure of the information of the public companies registered in
the stock market 2007 defnes the critical information and transaction that should be disclosed immediately. Goingprivate transactions and PE transactions are considered essential information according to the Iranian Securities
Market Act.

Timing considerations

What are the timing considerations for negotiating and completing a going-private or other
private equity transaction?

Iranian regulations do not specify time limits for the merger and acquisition (M&A) of public companies by private companies. However, generally, a merger procedure can take between three to four months, depending on the complexity and tax and regulatory compliance clearance. Another approach is a tender offer, especially in relation to state-owned public companies. The timing depends on whether the tender offer is in one or two stages, and the procedure can sometimes take up to six months to be completed.

Dissenting shareholders’ rights

What are the timing considerations for negotiating and completing a going-private or other
private equity transaction?

If M&A is the structure for the going-private transaction, it should be conducted in accordance with the CCI and its 2005 amendment. According to article 605 of the CCI amendment, the formal merger regulations should be complied with; otherwise, any benefciary, including shareholders, can bring a claim to the court for the termination of the merger. Article 284 requires the decision of the extraordinary general meeting, where the shareholders with the majority of the voting power have opted for a going-private by merger procedure, to be published in the Ofcial Gazette.

The minority shareholders can dissent or object to the published decision. The board should consider the objection, and the minority shareholders have the right to bring the claim to court if the board does not handle their complaint.

In addition, if in any going-private transaction the minority shareholders dissent from the transaction, they can sell their shares and exit the company on the condition that:

they cannot bring a claim against the board or majority shareholders; and the majority
shareholders and the private company are not obliged to purchase the minority shareholder stocks.

Purchase agreements

What notable purchase agreement provisions are specifc to private equity transactions?

Generally, PE purchase agreements include the same provisions as M&A transaction agreements. Incorporation of the seller’s requirement to disclose certain information related to the business is one of the provisions that should be included in such agreement. In addition, there should be representations and warranties that the disclosure schedule is complete and that certain conditions designated in the purchase agreement are accurate at closing the contract.

The purchase price will often be subject to pre-closing and post-closing adjustments to address the required working capital. The provisions for an alternative pricing mechanism can be negotiated, and the parties agree on the fnal purchase price using the company’s most recent audited fnancial statements, and there is no post-completion adjustment. Other provisions include warranties, compositions, powers of the board and management of the company, confdentiality, tag-along and drag-along rights, and an arbitration clause.

Participation of target company management

How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations for when a private equity acquirer should discuss management participation following the completion of a goingprivate transaction?

Going-private transactions involving a controlling stockholder or an afliate of the company may be viewed as creating a confict of interest for the target’s board of directors and may be subject to an entire fairness review.

The management of the target company cannot, without the permission of the board of directors, be a party, whether directly or indirectly, to a transaction consummated with or on account of the company or share in the said transaction. Even if allowed, the board of directors shall be bound to inform the inspector(s) immediately of the transactions permitted by them and, simultaneously, submit a report to the next ordinary general meeting. The inspector(s) shall also be bound to refect the details of such transactions in a special report which must be submitted to the same general meeting. Management of a target company that has an interest in such transactions shall not be allowed to vote at meetings of the board of directors and general meeting when voting for such transactions.

Suppose a target’s board of directors chooses to permit negotiations to be held regarding management’s post-closing equity participation and compensation. In that case, these discussions generally should not be commenced until after the economic terms of the overall acquisition have been frmly agreed on by the acquiring entity and the target’s board of directors to minimise claims of management self-dealing and other breaches of fduciary duty in any deal litigation.

In some cases, a target’s shareholders are given the opportunity to retain a minority equity stake in the newly formed acquiring parent company acquisition vehicle after the going-private transaction

Tax issues

What are some of the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of fnancing and tax issues related to executive compensation. Can share acquisitions be classifed as asset acquisitions for tax purposes?

Several important factors must be considered when structuring a PE investment to attract minimum tax issues. Among the most important are:

the choice of investment vehicle;
the remuneration of investment managers; and
tax considerations at the investment level.

PE frms are subject to corporate tax if established as LLCs. Corporate tax, based on the Iranian Tax Code, is 25 per cent. LLCs’ activities are not usually subject to VAT if cash is exchanged for a unit or interest (ie, an investment into the fund).

In addition, anyone who acquires shares in the PE company (ie, employees, directors, or management team of the company) are subject to the income tax, which is 10–20 per cent.

As regards the target company, based on the Direct Taxation Act, each transfer of stocks, partnership shares, priority right of shares, and partnership shares of partners in other companies shall be subject to tax at a fat rate of 4 per cent applicable to the face value. No additional taxes will be charged as income tax on such transfers. Shareholders that conduct the transfer of such stocks, partnership shares, and priority rights of shares should remit the applicable taxes to the State Organization of Tax Affairs account before the transfer occurs. The registration departments or notaries public should receive, at the time of registration of changes or drawing up the transfer deeds, as the case may be, the certifcate of payment of the applicable tax and enclose it to the fle of registration or transfer.

The profts from such transfer will not be subject to tax, so as to avoid double taxation.

In addition, according to the Circular on the Tax Regulation of Principle 44 of the Constitution Law, each transfer of stocks, partnership shares, and priority rights of stocks in the state-owned public companies in the going-private procedure will be exempt from corporate tax during the transfer operation and before becoming wholly private. Furthermore, transferring shares to investment companies in such transactions is not liable to tax. Further, PE companies are not liable to pay tax on capital gains.

DEBT FINANCING

Debt fnancing structures

What types of debt fnancing are typically used to fund going-private or other private equity transactions? What issues are raised by existing indebtedness of a potential target of a private equity transaction? Are there any fnancial assistance, margin loan or other restrictions in your

jurisdiction on the use of debt fnancing or granting of security interests?

In a buyout by the company’s management, the management team may raise funds necessary for a buyout through a private equity company, which would take a minority share in the company in exchange for funding.

In leverage buyout transactions, the target company and the PE may use their assets to fnance the structure. The type of fnance used can be a combination of debt and equity. The most common loan structure is a secured loan from a commercial bank. In addition, mezzanine debt, secondary debt and other types of fnance can be used for a private equity transaction.

Debt and equity fnancing provisions

What provisions relating to debt and equity fnancing are typically found in going-private
transaction purchase agreements for private equity transactions? What other documents
typically set out the fnancing arrangements?

The private equity company will be asked to make certain representations to the target company regarding its fnancing commitment letters, including one or more of the equity and debt commitment letters, the fee letter relating to the debt commitment, and (if applicable), any engagement letter concerning potential debt securities to be included in the debt fnancing.

In addition, the potential private equity investor will usually require prerequisites and due diligence about the target company’s fnancial status before obtaining bank fnancing.

Fraudulent conveyance and other bankruptcy issues

Do private equity transactions involving debt fnancing raise ‘fraudulent conveyance’ or other bankruptcy issues? How are these issues typically handled in a going-private transaction?

According to the Commercial Code of Iran, if it is proved in the court that the transaction was prompted by a desire to defraud or has been due to collusion, the private equity transaction becomes automatically null and void. The buyer will return the target company’s shares, and the court recognises the private equity company as an ordinary creditor.

Investors in private equity companies should consider at least the following when planning and structuring their private equity investment:

independent due diligence of the contemplated post-leverage buyout;
the structure of the target entity to evaluate the solvency of the target post-closing the transaction and the ability of the target to service its debt obligations;
the pre-closing liabilities that will be rolled over as part of the transaction; and requesting solvency
representations, certifcates, and opinions.

SHAREHOLDERS’ AGREEMENTS

Shareholders’ agreements and shareholder rights

What are the key provisions in shareholders’ agreements entered into in connection with minority investments or investments made by two or more private equity frms or other equity coinvestors? Are there any statutory or other legal protections for minority shareholders?

A shareholders’ agreement can protect minority shareholders, in particular, the provisions that require unanimous approval for certain decisions. As long as one shareholder disagrees, the decision will not be approved, regardless of how much that shareholder owns in the company.

Another standard provision inserted in shareholders’ agreements to protect the interests of minority shareholders is a tag-along right, which is the right of a minority shareholder to block the sale of a 50.1 per cent interest unless a like offer has frst been made for the 49.9 per cent interest.

Further, the shareholders’ agreement can grant the right to minority shareholders to approve critical actions, including issuing stocks, incurring debt, and acquiring and selling signifcant assets.

According to the Commercial Code of Iran, the board of directors can only enter transactions with the company if approved by the shareholders’ general meeting. If the shareholders do not authorise them, the board and managers are liable for any damages resulting from such transaction. In limited liability companies, alteration to the share structure should be approved by all the shareholders.

ACQUISITION AND EXIT

Acquisitions of controlling stakes

Are there any legal requirements that may impact the ability of a private equity frm to acquire control of a public or private company?

Transactions involving private equity frms are often subject to merger control requirements because their turnover exceeds the relevant thresholds and typically results in a change of control over a target. Therefore, competition law and regulations may apply to such a transaction.

Further, foreign investment in some industries, such as banking or upstream oil and gas, is limited.

Acquiring the control of a state-owned company and privatisation of the same should be through a tender procedure

Exit strategies

What are the key limitations on the ability of a private equity frm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity frms typically address any post-closing recourse for the beneft of a strategic or private equity acquirer?

In general, private equity frms should prepare exit strategies at the beginning of the investment. The process may involve amending the target company’s existing articles of association or drafting a new shareholders’ agreement.

Private equity frms can negotiate common rights (eg, drag-along and tag-along rights, clauses, board control or veto rights, registration rights and redemption rights). The procedure will able them to sell their stakes or conduct an IPO of the company without restriction.

An IPO should be approved in the extraordinary general meeting by 75 per cent of the shareholders.

Private equity frms may negotiate the following in purchase agreements:

survival period: a private equity frm may wish for some representations and warranties to survive for some time;
indemnifcation: a private equity company should structure the agreement to limit its exposure for breaches of representations and warranties to a percentage of the purchase price and for all other matters to no more than the purchase price;
escrow: a private equity frm should make any escrow period as short as possible because it can only distribute the amount in escrow once it has been released; and
consideration: a private equity frm should avoid earn-outs and other deferred and illiquid forms.

Portfolio company IPOs

What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO

Corporate governance, articles of association and shareholders’ agreement differ in a public company from a private company. The transfer of the stocks cannot be restricted in an IPO. The company governance should be in line with the Stock Exchange Regulations. Private equity sponsors can dispose of their stock in the portfolio company; however, the board appointment rights and veto rights will not exit in the IPO company.

There are no regulations in Iran regarding the lock-up period after an IPO. However, a lock-up agreement can be prepared that prohibits the selling of shares by the company, its directors, executive ofcers and most shareholders. The investors can negotiate the lock-up period in the agreement.

In addition, to maintain management of the IPO, private equity companies may wish to negotiate the lock-up period for a longer time. They can also arrange the lock-up restriction until the private equity sponsors’ ownership falls below a certain threshold.?

Target companies and industries

What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in industry focus in recent years? Do industry-specifc regulatory schemes limit the potential targets of private equity frms?

Private equity entities can invest in public non-stock companies and public stock companies not accepted by the Stock Exchange Organization. Article 141 of the Commercial Code of Iran refers to companies with a loss of a minimum of half their capital: ‘In the case of the loss of a minimum of half the company’s capital, the Board of directors is bound to call an extraordinary general meeting immediately, to decide whether the company shall be wound up or shall continue its operations.’ A private equity entity can invest in such companies and assist the company’s growth by acquiring the controlling stakes. Private equity investment is primarily expected in the consumer, fnancial, technology and real estate sector.

In accordance with the Privatization Act, private entities cannot acquire the following companies:

the central telecommunication company;
the main post and courier companies;
defence companies;
the National Iranian Oil Company and the upstream oil and gas companies and oil and gas felds;
the Central Bank of Iran, Bank Melli;
the Central Insurance of Iran;
dams and water distribution companies; and
TV and radio broadcasting companies.

SPECIAL ISSUES

Cross-border transactions

What are the issues unique to structuring and fnancing a cross-border going-private or other private equity transaction?

Foreign investors can invest in most sectors that Iranian private entities can invest in. However, competition regulations apply to banking and insurance industry foreign investments. Additionally, foreign investors cannot invest in specifc industries mentioned in the Privatization Act, including the following:

the central telecommunication company;
the main post and courier companies;
defence companies;
the National Iranian Oil Company and the upstream oil and gas companies and oil and gas felds;
the Central Bank of Iran, Bank Melli;
the Central Insurance of Iran;
dams and water distribution companies; and
TV and radio broadcasting companies.

Club and group deals

What are some of the key considerations when more than one private equity frm, or one or more private equity frms and a strategic partner or other equity co-investor is participating in a deal?

Co-investment vehicles are often structured with similar governing documents to those of primary private equity frms. The co-investment structure, and the agreements that underlie the system, are essential. Co-investors should draft a contract that includes the relationship between co-investors, including allocation of expenses and payment of fees, apportionment of opportunities, voting, and management responsibilities.

Further, tax advice should always be sought when addressing particularities of structure, including relating to the provision of management services, auditing and reporting obligations. Co-investors can face regulatory issues, including reporting requirements and compliance with the Stock Exchange Act.

As a result, investors should carry out proper due diligence in co-investing with other private equity frms.

Issues related to certainty of closing

What are the key issues that arise between a seller and a private equity acquirer related to certainty of closing? How are these issues typically resolved?

There is no regulation in Iran regarding the certainty of closing. However, it is necessary to have the necessary documentation at the closing so that, at the required time, the available funds can be drawn down to pay the completion amounts to close the transaction.

The acquisition agreement can address some possible material adverse effects by including closing conditions, liquidated damages, and termination fee provisions. For instance, the buyer should pay a fee if the transaction does not close either as a result of a fnancing failure or a breach by the buyer of its obligations under the acquisition agreement

UPDATE AND TRENDS

Key developments of the past year

Have there been any recent developments or interesting trends relating to private equity transactions in your jurisdiction in the past year?

Private equity is a fairly new concept in Iran. In 2016, after the lifting of sanctions, some private equity frms were interested in investing in the Iranian market. However, the United States restated the sanctions in 2018, which led to private equity companies withdrawing from Iran. The industry has remained the same since 2018.

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