Private Equity (Transactions)

• Published date: 10 July 2023
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Corporate Governance, Shareholders
• Law Firm: Asgari & Associates
• Author: Ms Anahita Asgari Fard

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 aexible 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 ave 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 certiacate 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...