During 2007, Turkey continued to attract global investors with its large and dynamic market. Despite the negative conditions, such as the crises in the global financial markets in the second half of 2007, the Turkish economy showed that it had become more resilient to internal and external shocks.

2007 was another historical year for M&A activity in Turkey. The increasing economic stabilisation of the country gave rise to an M&A deal volume with 161 transactions worth more than $20 billion. According to a 2007 report announced by Deloitte Turkey, foreign investors assumed the biggest role with 81 transactions worth $14.8 billion. The most attractive industry was the banking and finance sector, as in previous years. The energy, real-estate, IT, food and beverage and media sectors were also among the most attractive for investors.

Significant deals of 2007

Banking and finance were the most active sectors in 2007, with 32 transactions having an approximate total volume of $6.5 billion. The largest acquisition of 2007 was ING's acquisition of Oyakbank's 100% shares for a value of $2.673 billion. Another noteworthy transaction was the sale of 60% shares of Türkiye Finans Kat¦l¦m Bankas¦ to National Commercial Bank of Saudi Arabia for $1.08 billion.

In media, Turkuaz – fully owned by unlisted energy-to-finance conglomerate Çal¦k Group – purchased ATV-Sabah, Turkey's second largest media company, for the minimum $1.1 billion after the other bidders dropped out of the auction process. In energy, remarkable acquisitions occurred, such as the acquisition of 50% of the shares in Enerjisa by Verbund, the acquisition of Birle_ik Oksijen Sanayi by Linde Group and the sale of 39.9% shares of Bursagaz to the German EWE. Moreover, a significant number of deals involved target companies which have electricity and natural gas distribution licences. We will see an increasing number of deals in energy in the coming years.

In logistics and transportation, Limak Group made the highest bid of €1.932 billion ($2.95 billion) for the operation of Istanbul Sabiha Gökçen Airport, for a 20-year period. Furthermore, Kohlberg Kravis Roberts purchased 97.6% shares of UN Ro-Ro for $1.251 billion. The acquisition of UN Ro-Ro represented the largest ever private equity deal in Turkey at that time (2007). In the first weeks of 2008, BC Partners has agreed to acquire 50.8% of Turkish supermarket chain Migros from Koç Group, the largest company in Turkey, at a price of TL21.85 ($18) a share, representing about a market capitalisation of $3.25 billion.

As for privatisation, in petrochemicals, the privatisation occurred of Petkim, Turkey's largest petrochemical company and only cracker operator; a consortium comprising Azerbaijani oil company Socar, Turkey's Turcas Enerji and Saudi-based Injaz Projects made the second highest bid ever of $2.04 billion for a 51% stake in the company. The consortium acquired the required approvals from the relevant authorities, but the courts have suspended the transaction. The case is still pending before the relevant courts. In infrastructure, Global-Hutchison-EIB Consortium made a bid of $1.275 in the privatisation of Izmir Alsancak Port.

In 2007, Turkish investors have been party to considerable deals in global markets. Çal¦k Group has acquired 76% shares of Albtelecom, the state-owned fixed-line communication company of Albania, for €120 million. In the last days of 2007, Ülker Group, the largest consumer goods company, agreed on the acquisition of 100% shares of Godiva Chocolates for $850 million. The acquisition of Godiva was the largest transaction ever by a Turkish company in the world market.

M&A packages

M&A deals are commony structured through the acquisition of a significant portion or all of the operational assets or shares of a company, or through subscription for a company's shares to be issued as a result of capital increase. The legislation applicable to M&A deals may comprise different codes and different fields of law. Basically, the Turkish Commercial Code and Turkish Code of Obligations cover the rules applicable to the companies. But practitioners must also look to the legislation on tax law, competition law, capital markets law, bank law and foreign direct investments law, where necessary.

M&A deals usually take between three and 12 months, with the pre-negotiation, negotiation and closing stages. Turkish lawyers advise on every stage of M&A deals. By working with international lawyers in large M&A deals, Turkish lawyers have gained considerable experience in every stage of M&A deals.

First stage: pre-negotiation and due diligence

In the first phase, the parties set out their intentions with respect to the transaction in the form of a letter of intent or a memorandum of understanding. These documents do not oblige the parties to conclude an agreement in future; but the parties may bear obligations due to a letter of intent or a memorandum of understanding. Therefore, the parties must diligently observe all clauses of the letter of intent or memorandum of understanding. In practice, confidentiality issues, duration, governing law and jurisdiction clauses must be observed and stipulated.

Upon the signing of the memorandum of understanding, the party wishing to acquire the assets or shares of the other party conducts legal, financial and operational due diligence to assess the actual and potential risks of the target company. The legal due diligence comprises an examination of the corporate structure of the company, its licences and permits, material contracts, credit and facility agreements, properties and employees. Depending on a company's scope of activity, the scope of the examination may be limited or extended. Due diligence reports play a significant role in conclusing the share purchase agreement and determining the representations and warranties of the parties.

Second stage: negotiating the agreements

The transfer of shares that gives the authority to control the target company is effectuated by a share purchase agreement. Conditions precedent are commonly foreseen in the share purchase agreements. The conditions precedent may be freely determined by the parties. Transfer of shares and payment of the purchase price obligations take place if the parties fulfil the conditions precedent. Upon the satisfaction of the conditions precedent, the parties perform their respective obligations arising from the contract at the closing date.

Representations and warranties of the transferor should be drafted with diligence, as they define the target company and the transferor's liabilities. Therefore all representations and warranties should be accurate and reasonable. In share purchase agreements the parties may agree on a contractual penalty, which is the payment of a certain amount of money if a transferor breaches its representations and warranties or if it fails to full or partially fulfils its obligations. In some cases, call or put options are stipulated in the share purchase agreements. Such options also aim to compensate the damage of the transferee due to a transferor's breach of its obligations.

Beside the share purchase agreement, the shareholders conclude a shareholders' agreement to define their obligations vis-à-vis each other. The shareholders' agreement is binding only among shareholders. In practice, the shareholders' agreement comprises parallel provisions with the articles of association of a company. The Articles of Association is the constitutional document of a company governing the company's activities and shareholder's obligations towards the company. It is a document binding on the shareholders as well as on the company. Moreover, the Articles of Association is a public document, published at the trade registry gazette. Therefore, it would not be possible to insert trade secrets of the parties in the Articles of Association. Nevertheless, it is advisable that the parties stipulate the same provisions as in the shareholders' agreement in the Articles of Association as far as possible, such as deadlock, share transfer restrictions or put and call options. In practice, we observe that more and more parties insert such clauses in the Articles of Association. Furthermore, the parties may agree that a shareholders' agreement including a foreign element is governed by the laws of a foreign state, or the disputes arising from such agreements are settled by arbitration instead of courts, whereas the Articles of Association of the company is governed by Turkish law. Commonly Turkish commercial courts have the jurisdiction to hear cases in relation to the Articles of Association. Therefore, inclusion of certain clauses regarding governing law and jurisdiction should be diligently observed.

Governing law

In the M&A deals that have a foreign element, the parties may determine the applicable law. If the parties have not chosen such law, the courts or arbitral tribunals can designate it. Under Turkish law, the substantive applicable law is determined pursuant to the Code on Private International Law and Procedure Law, which came into force at the end of 2007 and replaced the former Code on Private International Law and Procedure Law. The new Code provides that the governing law of a contract is determined in accordance with the will of the parties. The parties may designate explicitly or implicitly the law of a foreign country as the governing law of the contract. If the governing law cannot be determined from the will of the parties, the law of the country that is mostly connected to the subject matter of the contract will be designated as the governing law.

Dispute resolution

The parties may decide that disputes arising from the share purchase agreement or shareholders' agreement shall be settled by arbitrators instead of the courts. Domestic arbitration entered into the Turkish legal system in early 1920s, but had no considerable application for international deals. The International Private and Procedure Law in 1982 provided rules on the recognition and enforcement of foreign arbitral awards. Turkey became party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Finally, the International Arbitration Law was adopted on 2001.

The International Arbitration Law covers disputes including a foreign element as well as the disputes that the parties or arbitrators agreed to resolve before arbitration according to this Code. The Code is based on the Uncitral 1985 Model Laws and Swiss International Private Law. The intervention of the national judge is limited to cases listed in the Code – when the parties could not agree on the choice of the third arbitrator; when the arbitral tribunal did not make a decision within a year (unless this period was extended by the parties); or when the arbitral tribunal requested the assistance of the court. In principle, judges should not examine the case in merits, meaning that they should not check whether the arbitrators applied the law correctly or not. Nevertheless, a few cases have resulted in the contrary: the judge examined the substance of the case and checked whether the law was applied correctly.

The International Arbitration Law gave parties the right to choose arbitrators, to challenge them, and to determine the procedure to apply to arbitration provided that the mandatory provisions of International Arbitration Law are reserved. The rules applying to the arbitration procedure can be determined, again notwithstanding to mandatory regulations, in accordance with the law of a particular country, or with reference to particular arbitration rules. This means that arbitration in accordance with ICC rules can be exercised in Turkey. The parties can also determine the law of a foreign country as governing law of the substance of the case.

Closing

After the fulfillment of the conditions precedent determined in the Share Purchase Agreement, the seller transfers the shares or the assets to the transferee in consideration of the purchase price of the shares or assets. Regarding joint stock companies, the shares certificates or temporary share certificates (if they exist) should be physically transferred to the transferee. Therefore it is recommended that the share certificates or the temporary share certificates are issued before the closing date. If the company has not issued such certificates, a share transfer deed would be executed separately from the share purchase agreement. Furthermore, the transferee should determine the nominee shareholders to fulfil the minimum number of shareholder required by the Turkish Commercial Code. Determination of nominee shareholders is an important issue and should be diligently assessed by foreign investors because of tax saving possibilities. The new Board of Directors representing the new shareholders as well as the new auditors will also be appointed on the closing date. It should also be noted that stamp tax is accrued for each signed version of the agreement. The stamp tax applicable to the transactions is 0.75% of the amount stated in the contract. Nevertheless, it is possible to foresee tax minimising provisions in the contract.

2008 expectations

In 2008, energy, food, healthcare, insurance, real estate, retail and services will continue to attract the interest of foreign investors in terms of M&A activity. We expect that privatisations projects such as electricity distribution, Halkbank, highways and bridges, Baskent Dogalgaz, the natural gas distribution company in Ankara and the National Lottery will gain speed in 2008.

Author biographies

Zeynep Ergun Özeren YükselKarkinKüçük Zeynep Ergun Özeren is a partner in YükselKark¦nKüçük. She has extensive experience in the areas of M&A and competition law. She has also worked as in-house counsel for a leading cement company, and as a specialist in EU affairs and competition law at Sabanc¦ Holding. Özeren received her LLM degree in EU law from the Université Libre de Bruxelles Institute d'Etudes Européennes in 1996, and a Law Diploma from Ankara University School of Law in 1993. She was a recipient of the Jean Monnet Scholarship and a trainee at the Directorate General of Taxation and Customs Union of the EU. She speaks fluent English and French. Ayse Nur Sanli YükselKarkinKüçük Ayse Nur Sanli is an associate in YükselKarkinKüçük Law Firm. She focuses on M&A, energy and competition law, and project finance and arbitration. She received a Law Diploma from Galatasaray University School of Law. She also attended a legal studies course at the Boston University School of Law and Vrije University, Amsterdam. She speaks fluent English and French.