Following the recent developments in the Turkish economy, the number and level of mergers and acquisitions increased in 2005. After a long and drawn-out process, the sale of Turkish state-owned entities such as Turk Telekom, Tupras (the leading state-owned oil refineries), and Erdemir (the state-owned iron-steel monopoly) were finally completed.

Fifty-five percent of Turk Telekom shares were sold for $6.5 billion to Oger Telekom (Saudi and Italian joint venture); 51% Tupras shares for $4.14 billion to Koc-Shell joint venture, and 46% Erdemir shares for $2.8 billion to Oyak Group. The private sector mergers and acquisitions were also notable, where, for example, Italian Unicredito and its Turkish partner Koç Holding acquired Yapi Kredi Bank, the fourth largest bank in Turkey. Disbank, owned by Dogan Group, was sold to Dutch Fortis Bank for $1.3 billion. Turkey also witnessed the acquisition of Garanti Bank shares by General Electric and tender of Telsim, the second biggest Turkish GSM operator, by the Savings Deposit Insurance Fund of the Republic of Turkey to Vodafone.

Legal background

There is no specific legislation that regulates mergers and acquisitions in Turkey. However, there are certain provisions within a number of laws that are applicable to merger and acquisition transactions. In addition to the Turkish Commercial Code (TCC), which is the main piece of legislation regulating mergers and acquisitions, the Capital Markets Law (CML) and relevant communiqués of the Capital Markets Board, the Turkish Code of Obligations (TCO), Law on the Protection of Competition and its secondary legislation, the Labour Code, Banking Law, and tax laws also contain provisions governing mergers and acquisitions.

Generally speaking, there are no restrictions regarding foreigners' shareholding in Turkey. But there is the exception of certain sectors such as broadcasting companies (up to 25% foreign participation is permitted) and maritime companies (up to 49% foreign participation is permitted). In addition, there are no restrictions for the repatriation of profits or foreign exchange controls.

Applicable structures

Acquisition: Acquisition broadly means acquiring control of a company, by way of share transfer, asset sale or business transfer method.

Asset sale

When the target is not in good financial standing and possesses certain legal risks, asset transfer transaction may be the proper option to avoid unwanted liabilities. In general when a company sells or transfers of its assets to another company, the buyer is not liable for the debts and legal liabilities of the seller, unless they are assumed expressly. Therefore, due diligence exercise should not include the review of debts and legal liabilities of the seller in standard asset sale. The asset types play an important role in determining the structure of the legal documentation. In addition to asset transfer agreements, there may be certain steps such as assignment of receivables, transfer of permits, licences, and incentives as well as perfection of sale of immovable property at the relevant title deed registries and transfer of patents and/or trademarks before the Turkish Patent Institute.

Business transfer

The seller and the buyer may also opt for the acquisition of a business of the seller as set forth in Article 179 of the TCO. In the case of a business transfer, the rights and obligations related to that business automatically passes to the buyer. However, both the buyer and the seller will continue to be jointly liable against the creditors for the debts of such businesses for two years from the date of transfer.

Share transfer

Share transfers are one of the commonly used forms of an acquisition. In joint stock companies, the method of share transfer depends on the type of shares. Bearer shares are transferred by delivery of the share certificates. Transfer of registered shares, on the other hand, requires endorsement and delivery of shares (the physical possession) by the seller to the buyer. If there are no printed share certificates or temporary share certificates, then the bearer or registered shares may be transferred by a transfer and assignment agreement. The transfer of registered shares need to be registered in the share ledger of the company. The parties should also consider the articles of association of the target company to be amended for possible restrictions with regard to the share transfer.

For the acquisition of shares in limited liability companies, the TCC requires a written and notarized share transfer agreement together with a shareholders' resolution approving share transfer.

Merger: Mergers may be realized through two or more companies merging under a newly established company (consolidation) or one or more companies merging into another existing company (absorption).

One of the prerequisites of mergers is that the legal status of the merging companies must be the same (that is, joint-stock corporations or limited liability companies). If this is not the case, then one of the companies must be converted so that the legal forms of the merging companies are identical. The authorized bodies of each company must adopt a resolution authorizing its representatives to enter into a merger agreement and approve the merger. The representatives of the merging companies must then apply to the competent court to obtain an expert report determining the value of the company and decide that there is no obstacle to merger. The merging companies must then execute the merger agreement, which needs to be approved by the shareholders of the said companies. The shareholders of the acquirer must also amend the share capital provision of its articles of association in which there will be a capital increase as a result of acquisition. Following the shareholders' resolution approving the merger, such resolutions need to be registered with the relevant trade registry. The creditors of each company are entitled to object to merger before the competent courts within three months following the publication of the merger decision. Otherwise, the merger decision becomes effective three months after its publication.

As a result, all of the rights (assets) and obligations (liabilities) of the acquired (target) company are automatically (ipso iure) and legally transferred to the acquirer in accordance with the general succession principle.

Getting started

Letter of intent

The parties generally sign a letter of intent or a similar pre-agreement (that is, a memorandum of understanding, heads of agreement, confidentiality agreement, exclusivity agreement or a non-disclosure agreement) in which they set out their intentions with regard to the transaction.

Due diligence

In order to have a clear picture of the target to be acquired, the purchasers carry out a legal and financial due diligence review on the target company. In the due diligence phase, extensive or limited review of information and documents in the physical or electronic data room, as well as management presentations and site visits are common. In addition, it may also be helpful for the buyer to make an independent search of the publicly available records of the company. For example trade registries, title deed registries and publicly available information (articles of association; details of directors and auditors; information on the material purchases, sales, lease of company assets; annual audited accounts and half-yearly accounts prepared by independent financial auditors; annual reports; as well as public disclosures) are available for public companies listed on the stock exchange.

Negotiations

Depending on the structure of the deal, the transaction agreements may be in the form of a share purchase (transfer or sale) agreement, share subscription (participation) agreement, asset transfer/sale agreement, business transfer agreement, merger and/or acquisition agreement as well as shareholders agreement, joint venture agreement, security agreements (that is, share pledge agreement) and other ancillary documents such as escrow agreement, option agreement, know-how, licensing and/or patent agreements.

Provided that the parties comply with the mandatory provisions of Turkish law, the seller and the buyer may freely determine their respective rights and obligations in their contract. Extensive representations and warranties may be obtained under the transaction agreements, and subject to the mandatory provisions of Turkish law, the parties may freely choose a foreign law as the governing law of their agreements.

Conditions precedent

Following the signing, certain regulatory approvals and/or satisfaction of certain contractual obligations may need to be completed. There will be a period between the signing of the transaction agreement and the closing (transfer of ownership). The possible regulatory permits/licences are listed below. Other special conditions can be included in the document depending on the commercial agreement between the parties.

Closing

Once all the regulatory and contractual conditions are satisfied, the parties agree on a specific date to close the deal and transfer the ownership of shares, assets or business of the target company.

Authorizations

Competition Board permit

Under the Merger Communiqué a merger or acquisition that causes a change of control and fits the legally prescribed criteria must be filed to obtain permission from the Competition Board. The merger or acquisition must fall within the scope of the Communiqué by definition, and the total market shares of the undertakings that are parties to the merger or acquisition exceeds 25% of the market share or (even if this rate is not exceeded) the total turnovers of the undertakings exceed 25 million New Turkish Lira (about €15 million) in the relevant product market within the territory of Turkey or a part of it.

Others

If a bank, whether listed, or not, is involved in a merger or acquisition process, approval of the Banking Regulatory and Supervisory Authority is required under the relevant regulation. The consent of the governmental authorities, such as the Telecommunications Authority, the Energy Market Regulatory Authority or the Undersecretariat of Treasury may also be required in the case of a transaction involving a company performing in a specifically regulated sector.

Listed companies

Capital Markets Board approval

When mergers involve at least one listed company, the approval of the CMB has to be obtained prior to the merger agreement being approved by the listed company's general assembly. Also, the shares to be issued due to merger have to be registered with the CMB. The CMB Communiqué Serial No:1/31 regulates the principles of the merger of legal entities where at least one of the merging companies is a listed company. According to this Communiqué, adaptation of resolutions by the board of directors is enough to commence merger procedures. However, if deemed necessary by the company, the general assembly meeting of shareholders can resolve to authorize the board to carry out the transactions for merger. The Communiqué includes details with respect to calculation methods of assets, the share capital of the merging companies and the post-merger notifications to the CMB.

In the event that a merger and acquisition takes place in the form of an allocated sale of shares in a listed company, the sale has to be realized in the wholesale market of the Istanbul Stock Exchange (ISE), and therefore, the requirements of the ISE also have to be fulfilled by the parties involved, including disclosures to the ISE.

Mandatory tender offer

Under CMB regulations, if any party or parties acting together acquires, directly or indirectly, 25% or more of the capital and voting rights or takeover management control of a listed company, through block sale or series of sales, or by any other means, such party or parties are obliged to make an offer to the other shareholders to buy their shares. Furthermore, if any party or parties acting together owns between 25% and 50% of the capital and voting rights of the company and increases this percentage by 10% or more in any given 12 month period, such party or parties are required to make a tender offer to the other shareholders to purchase their shares. However, under certain conditions set forth in the Communiqué, the CMB may grant exemption from the mandatory tender offer requirement.

For tender offer, an application must be filed with the CMB within five days of the acquisition in order to ask for an exemption from the mandatory tender offer. Otherwise, if the acquiring party does not ask for an exemption and applies for a tender offer, a filing must be made to the CMB within 15 days of acquisition of shares. The tender period is a minimum of 15 days. Following the CMB approval of the tender offer application, the offer is published in at least two national newspapers. The funding for the tender offer needs to be disclosed to the CMB.

Disclosure requirements

Principles of disclosure and transparency are of utmost importance in the protection of shareholders' interests in publicly held companies in Turkey. Accordingly, the CMB requires publicly held companies to disclose any changes that may affect investor's decisions, market value of the underlying shares, and all material issues regarding the company, its operations, subsidiaries, and managers.

More specifically, changes in financial matters and assets of the company, its shareholding structure and management, voting rights or other rights indicated in articles of association of the company also need to be disclosed. For example, in relation to share capital structure, any direct or indirect acquisition of 5%, 10%, 15%, 20%, 25%, one-third, 50%, two-thirds and 75% of share capital or voting rights of a publicly held company, or any such activity that results in the shareholding ratio to fall below these thresholds needs to be disclosed to public. Publicly held companies in Turkey that are listed on foreign stock exchanges are also required to disclose to Turkish investors the same information they provide to foreign investors under the rules of such foreign stock exchanges.

Delisting

Detailed rules for delisting non-complying companies are set forth under the regulations of the ISE. However, voluntary delisting is not regulated in detail under the regulations. Listed companies may wish to voluntarily delist through an application. There are few precedents for voluntary delisting, and therefore there is not enough information to identify the criteria required by the ISE. The CMB's approach on voluntary delisting is also not clear, so there is uncertainty for those companies who may wish to delist.

Other issues of mergers and acquisitions in Turkey

Spin-offs

Pursuant to the split proceedings, only part of the assets of a joint stock or limited liability companies are allowed to be transferred to an existing or a new capital company, and the parent company or its shareholders acquires the shares of the spin-off in return.

During the process, the spin-off company will inevitably resort to raising its capital, while at the same time, the parent may go through a capital decrease if its share capital falls below the minimum share capital limit as a result of the transfer of shares.

Following the spin-off agreements, the parent company's shareholder meeting is held to approve the transaction, and the assets are transferred directly to the spin-off by registration of shareholders resolution with the trade registry. As such, when the spin-off company's shareholders pass a resolution to raise capital, the shares are automatically transferred to the parent company or its shareholders after registration with the trade registry.

Labour Law aspects

The Labour Law contains specific regulations concerning mergers and acquisitions. Accordingly, in case of the transfer of a business in whole or in part, the employment contracts will be transferred in their entirety to the buyer. This means that both the rights and obligations of the employees arising out of the employment contracts will be preserved, and they will be borne by the new employer with effect from the date of business transfer. In such cases, the former employer will be jointly liable with the new employer for the employees' rights which have arisen prior to or at the time of the business transfer. However, the former employer's liability will be limited to two years following the business transfer. Unless otherwise agreed by the parties, the joint liability principle will not apply in the case of mergers, asset sale and share transfers where the identity of the employer remains unchanged.

Taxes

Any and all agreements concluded in Turkey are subject to a 0.75% stamp tax based on the highest montary amount in the relevant document. Any agreement or document executed outside Turkey is not subject to a Turkish stamp tax unless it is presented as evidence before a Turkish Court or a government authority or its provisions are performed in Turkey.

Minority squeeze-out

Following acquisition of a controlling majority, the acquirers in practice will often want to have control over the company to use its assets to secure takeover debts. However, unlike certain jurisdictions, Turkey does not provide for squeeze-out provisions that would enable elimination of minority interests. However, the new draft TCC foresees squeeze-out provision in line with EU regulations, which is a big relief for the companies that encounters minority disturbance. The draft law entitles the major shareholder to resort to the court if it has at least 90% of the shares to buy out the shares of minority shareholders who prevent the company from performing efficiently, and thus damaging the operations. In practice, to protect majority shareholders, drag-along provisions are now commonly inserted in the agreements in merger and acquisition transactions under the freedom of contract principle.

Hostile takeovers

There have been almost no hostile takeovers in Turkey, mainly because most companies have floated less than majority shares, or controlling shares have been privately held. The TCC does not foresee specific provisions regarding the hostile takeovers. In privately owned companies, certain share transfer restrictions may be agreed upon in the articles of association and/or shareholders' agreement in order to prevent alienation and hostile takeovers. For publicly held companies, although mandatory and voluntary tender offers are regulated, there is no provision that enables the offerers to forcefully takeover the control. Apart from hostile takeovers, contractually legitimate takeovers, such as the ones resulting from a call option under a shareholders' agreement, may not always be enforced, unless they are delicately structured.

Proposed new Turkish commercial code

A new draft law is expected to come into effect this year. This draft law has been drafted in line with the EU directives and intends to harmonize Turkish law with EU legislatoin. Some of the remarkable amendments of the draft law include removal of the ultra vires rule, introduction of possibility of a one-man joint-stock company along with single-member boards of directors, improvement in the minority rights, and introduction of minority squeeze-out and treasury shares. In addition, group companies are regulated for the first time in Turkish law under the draft law. The draft encourages use of technology in corporate life. For example, it introduces the possibility of online general assembly meetings and imposes, among others, a duty for corporations to make all compulsory and relevant announcements on their websites. The corporate governance rules are also improved under the draft through a new business reporting, monitoring and auditing system.

Author biographies

M Togan Turan Paksoy & Co M Togan Turan specializes in mergers and acquisitions, competition, privatization, corporate, banking and finance projects. His extensive mergers and acquisitions experience includes drafting share purchase agreements, advising on structural issues, and counselling with respect to all legal aspects of the transactions. Turan has represented clients in banking, telecommunications, IT, energy, chemicals, textile and iron-steel industries. He advised in major privatization projects in Turkey. Turan acted in the acquisition of one of the leading banks in Turkey and advised a well-known athletic footwear company with regard to acquisition of a local company, and also involved in the sale of Turkey's second largest GSM operator by the Savings Deposit Insurance Fund of the Republic of Turkey. Turan is a member of Istanbul Bar. He is a graduate of Istanbul University School of Law and holds an LLM degree in International Banking and Finance from the University of London (QM), London. Omer Collak Paksoy & Co Omer Collak specializes in mergers and acquisitions, privatizations, capital markets, and project finance transactions. His mergers and acquisitions experience includes drafting and negotiating share-purchase agreements and counselling on structural issues. Collak has also advised banks, companies and investment banks in major public offerings in Turkey. His capital markets transactions involve advising corporations and investment banks in transactions such as bond issues, call options and securities lending transactions. Collak was actively engaged in the Eurobond issue of the largest petroleum distribution company in Turkey. Collak is a member of the Istanbul Bar. He is a graduate of Marmara University School of Law, and holds an LLM degree from Golden Gate University School of Law, San Francisco, California.