How to Conduct Due Diligence on an Iranian Company
The untapped Iranian market has always been a desirable destination for foreign traders and investors. Located in the heart of the Middle East, and as the Asia’s main pathway to Europe, Iran is the second largest economy in the Middle East and North Africa. In addition, a great part of Iran population is comprised of young and educated people which provide a resourceful workforce.
However, as it might be the case in respect of any country for a foreign investor, there are some risks involved in conducting business in Iran. Unfortunately, the current financial sanctions imposed on Iran has increased these risks. At the moment more than seven hundred Iranian legal entities and individuals are listed by OFAC as SDN transaction or conducting business with who is prohibited. There are, also, some restrictive measures against Iran in place by the European Union, which European companies interested in engaging with Iran must take into consideration. Moreover, several Iranian individuals and legal entities are included in the United Nations Security Council sanctions lists.
These sanctions, together with other considerations, make an evaluation of the Iranian partner from all aspects, before conducting any transaction, especially vital. Such an evaluation is commonly known as Due Diligence.
Due diligence is one of those words that usually get to be used a lot in business settings, most of the times even without knowing what exactly does it means or concerns. In literal meaning, Due Diligence is defined as “the care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property”. However, in the business world, Due Diligence entails research and analysis of a company or organization done in preparation for a business transaction, for example, merger or acquisition of companies or assets. in other words, Due Diligence is a precaution for the purpose of leading the investments in a gainful direction.
Although, it could be argued that Due Diligence safeguards both parties to a transaction, however, by uncovering potential risk or making sure that no critical issue is omitted, it mainly protects the interests of the investor or purchaser.
It must be noted that Due Diligence shall not be considered as a universal investigation; instead, in conducting Due Diligence specific factors must be taken into account. Although, depending on the nature of the business subject to purchase or investment, these factors may vary. For example, when purchasing an Iranian company in whole or part, the investigative measures to conduct proper Due Diligence may include the following:
- A brief history of the company since setting up;
- Identity of the shareholders and the number of shares held by each (Shareholder structure);
- Description of the company managerial chart and identity of the directors;
- Assessing the company physical assets and intellectual properties;
- List of any subsidiary or affiliated company;
- Examining the company documents including articles of association, bylaws, minutes of meetings and other formation documents before the Corporate Registration Bureau (“CRB”);
- List of contracts or agreements that bind the company;
- List of the pending litigations which the company is a party thereto, any pending case before the regulatory bodies, or pending arbitration case;
- Review of company’s financial records;
- Reputation of the Company in media;
- List of the company’s employees and relevant information including employment term, salary and benefits.
While each of these factors could be essential for making a decision, it must be noted that not all the above information is publicly accessible. For example, Iranian companies are required by the law to publicly publish only the below information:
- Appointment of directors and inspector(s);
- Appointment of the managing director and his scope of authorities;
- Approval of the balance sheet by the general assembly;
- Any decrease or increase of company’s capital;
- Any change in the company’s articles of association;
- Any decision concerning winding up and liquidation of the company together with the name and address of the liquidator.
In fact, any decision that includes the aforementioned changes in the company shall be notified to CRB. According to the law, CRB holds a book for each registered company where all the company information and changes from the date of its establishment is recorded in chronological order. Any person may refer to CRB and by filling up the relevant form request to review any particular company’s book.
Moreover, a copy of the company’s minutes containing any of the above resolutions will be published in Iranian Official Gazette; these notices are also digitally accessible to all people via its website. Although, it must be noted that the only notices from 2003 onward are stored in the online database and reviewing any notice published before 2003 requires personal referral to the Gazette’s office in Tehran where all the notices are kept in hard copy.
In finding information on a particular company, the registration notice which is also published in the Official Gazette could be greatly informative. The registration notice, in addition to the company’s registration date, registration no. and national ID. no. includes the following information:
- The subject of the company;
- The official address of the company;
- Registered capital;
- Duration of the company;
- Name of the partners and their shares in the Company (for LLC);
- First directors;
- Authorized signatories of the company;
- Name of the inspector(s).
Of course, the published notices, as the main source available to the public, only provide part of the required information to conduct a proper Due Diligence; For example, the whole content of a particular company’s articles of association or its formation forms are not publicly available; since merely a shareholder of the company, regardless of the number of his shares, enjoys a proprietary right to have access to all the company’s information.
Furthermore, in case the company subject to Due Diligence is listed on the Tehran Stock Exchange (“TSE”), there is more information about such a company available to the public. In accordance with the Securities Market Act of Iran and the relevant regulations, the companies registered before the Securities and Exchange Organization (“SEO”) of Iran must, among others, enclose the following information:
- Audited annual financial statements and mid‐year financial statements including the audited semi-annual and quarter financials;
- Board of directors’ report to the general meetings and the opinion expressed by the auditor;
- Any information having a material effect on the securities price and the investors’ decision‐making;
- Time, date, location and agenda of general meetings and the respective resolutions;
- Conclusion, termination or any material change in major contracts;
- Acquisition or disposal of other companies shares, directly or indirectly;
- Major pending claims for or against the company, entry into major claims or impleading major claims or recourse of major disputes to arbitration and publishing the outcome of final judgments of courts and other legal authorities, as well as important legal actions and events that affect the company’s stock price;
- Approval, suspension or revocation of the permit or concession for business activities as well as assignment, acquisition, change or cancellation of name or trademark;
- Decisions are taken by the company’s general meetings.
This information is available to the public via the website of TSE and its relevant online platforms. Also, the SEO provides the name of each listed company’s shareholders, as long as they hold at least %1 of stocks. Hence, since there is more resource accessible to the public, conducting Due Diligence on a company listed on TSE will produce further information.
Mindful of the above, it must be noted since not all the needed documents and information to conduct a proper Due Diligence are publicly available, the cooperation of the Iranian company in question plays an important role in this regard, as, using the expertise of an experienced legal advisor in order to make sure about the authenticity of the provided documents and information.
Office of Foreign Assets Control.
Specially Designated Nationals.