Despite global and local market conditions that impose challenging and high-cost financing to any large M&A deal in 2009 in Turkey, 2008 was quite the opposite for the Turkish energy market. On account of large privatisations completed in electricity and gas distribution areas and private deals concluded in power generation segment in 2008, the total value of M&A deals in the Turkish energy market reached $6.6 billion across 19 deals [Energy Deals 2008 Annual Review, PricewaterhouseCoopers, at www.pwc.com/images/tr/tur/ins-sol/publ/energydeals.pdf].
Of these 19 deals, 16 were related to utilities, including significant privatisation deals for electricity and gas distribution companies. It is expected that the next few years will be busy for the electricity distribution market, due to the complete privatisation of 18 state-owned electricity distribution companies that are still in the portfolio of the Privatisation Administration.
The regulatory environment relating to energy market in Turkey has been administered by the Energy Market Regulatory Authority (the Authority) since 2001. The Authority acts as the autonomous regulatory and supervisory public institution, related to the Ministry of Energy and Natural Resources, in the electricity, natural gas, petroleum and liquefied petroleum gas (LPG) markets. The legislation relating to the petroleum and LPG markets is silent as to the M&A of companies active in the respective markets, thus this article mainly discusses the applicable legislation for electricity and natural gas areas.
To begin with, all M&A activity (as well as certain other transactions including consolidations or transfer of material assets) in Turkish electricity and natural gas segments are subject to prior approval of the Energy Market Regulatory Board (the Board), the decision-making body of the Authority. They must also comply with the general rules of the Turkish Commercial Code and other relevant legislation including tax legislation.
The approval process before the Authority is a lengthy one for most of the investors, as described in detail below. Depending on the market share and size of the respective companies, the prospective deal may also be subject to the approval of the Turkish Competition Authority. To add more complexity to the deal, if one of the companies subject to a merger in the energy sector is a publicly held company, the provisions of the Capital Markets Law and the relevant legislation will become applicable and the permission of the Capital Markets Board will also be required.
General rules
Under the Electricity Market Law No. 4628 (the EML), except for the activities of Turkiye Elektrik Iletim AS (the state-owned electric transmission company), private sector entities may be engaged in generation, distribution, wholesale, retail sale, retail sale services, trade, import and export activities in the market once they obtain the particular licence from the Authority. Each licence holder should comply with the requirements of the legislation and its own licence while performing its activities. Under the EML, there are certain provisions that limit the licence holders to act liberally in terms of market share thus disabling them from acquiring or merging with other licence holders.
For instance, total market share of generation facilities controlled by a private sector generation company or a real person should not exceed 20% of total installed electricity energy capacity in Turkey as published for the preceding year. In the wholesale market, total electricity energy to be sold by a wholesale company, controlled by a real person or a private legal entity, should not exceed 10% of the total electricity consumption in the market in the previous year.
There are other restrictions that may mean that the threshold is applicable to an acquisition, such as the limitation on generation companies to have subsidiaries in the energy distribution sector only if they have no controlling power over them.
In addition, as per the Electricity Market Licensing Regulation (the Electricity Regulation), if a licence-holding company has obtained irrevocable project financing and the financing institutions have obtained control or a participation in the company as a result of the provisions of the loan agreement (such as default in payments) and the respective market share limitations are violated, the Board shall grant a grace period up to one year to bank or financial institution to correct such violation.
As per the provisions of the Natural Gas Market Law No. 4646 (the NGL), natural gas market activities include import, generation, transmission, storage of natural gas, wholesale, export, distribution of natural gas in cities and distribution and transmission of compressed natural gas. All of such activities are subject to licences to be obtained from the Authority.
The NGL also provides for general principles applicable to mergers and acquisitions. To protect competition, the NGL allows a legal entity licence holder to participate in only one company, which does not operate in the same field. Formation of such a subsidiary is also prohibited. Even in an affiliate relationship, the licence holder cannot, directly or indirectly, have more than 50% of the share capital, commercial assets or voting rights, or have the right to appoint more than half of the members in the board of directors, board of auditors or any other representative board.
A licence holder in the natural gas market also cannot participate in any legal entity that is active in its field, or establish another company with the same purpose.
All licence-holder companies subject to both the EML and the NGL must comply with the market share limitations indicated in the respective legislation or they will face sanctions included in the EML or the NGL. The Electricity Regulation and the Natural Gas Market Licensing Regulation (the NG Regulation) sets forth detailed provisions for the merger and acquisition procedures in the relevant markets.
Electricity market mergers
The Electricity Regulation enables mergers of several licence-holder companies in one of these companies. It also enables mergers of one licence-holder company with another that does not hold any licences in the licence-holder company, while transferring all assets and liabilities, if the approval of the Board is obtained in advance. Under the general-succession principle, it is possible for one of the parties (in any case the licence holder party) to survive where the other transfers to it all its assets and liabilities, and loses its legal entity and the shareholders of the dissolving company to receive shares of the surviving one.
The application to the Board is made by submitting documents listed in the Electricity Regulation and while granting the approval, the Board examines such documents and takes the limitations embedded in the EML into consideration. Should the Board grant its approval, the parties are obliged to complete the merger within 180 days following the date of the approval; otherwise the approval becomes null and void and a new permission would need to be obtained from the Board to continue with the process.
The Electricity Regulation requires execution of a merger agreement which must be submitted to the Board, along with other necessary documents. The parties to the merger agreement must ensure that the merger agreement does not include any provisions violating the rights and receivables of consumers or eliminating the obligations of the licence-holder legal entity.
Acquisition in energy market
In the electricity market the following type of deals are subject to the approval of the Board.
- any direct or indirect acquisition of shares representing over 10% of share capital in a licence-holder company (or more than 5% if the licence-holder company is publicly held) by a real person or legal entity;
- share purchases resulting in a shareholder of a licence-holder company to exceed 10% of the share capital; and
- share transfers which result in the shareholding ratio of a shareholder to decrease below the above-mentioned ratios.
This provision extends to the acquisition of voting rights and pledges over shares. Furthermore, granting any privileges over existing shares, removal of such privileges or issuance of dividend right certificates are also subject to the Board approval, without being subject to any share ratio limitation. Any acquisition in the electricity market, including those companies within the scope of privatisation programme of the Government, is subject to such approval process.
The Board approval shall only be granted if the transferee of the shares meets the criteria required for shareholders of a company filing for a licence application. As direct or indirect ownership is considered, the criteria need to be fulfilled even by the ultimate real-person shareholders that purchase the shares. There are several documents that must be submitted to the Board in relation to such transferees to ensure they conform to the legislation's requirements.
Among others, real-person shareholders exceeding the above-mentioned ratio requirements should prove that they were not sentenced for any infamous crime. Within the scope of the documents to be submitted to the Board, the prospective shareholders must verify their financial status; thus legal-entity shareholders submit independently audited balance sheets and income statements for the last three years as well as quarterly financial tables for the year in which the application is made. Real-person shareholders are to submit their income tax returns for the last three years, title deeds for the immovable property they own and the information on bank accounts and intermediary institution accounts.
Any real person or legal entity holding directly or indirectly a minimum of 10% (5% for publicly held companies) of share capital of a licence-holder company or holding the privileged shares (or any usufruct rights thereon) that allow them to appoint members to the Board of Directors or Board of Auditors without being subject to such ratio limitation are obliged to meet the criteria required for shareholders of the licence-holder while applying for a licence.
The Electricity Regulation also provides the principles for calculating certain thresholds while determining the ownership ratios. In both of the following, shares will be considered to be owned by a single person.
- where the shares owned by a real person, his or her spouse, their minor children and the companies in which these persons hold a position in the management and audit organs or the companies in which they are shareholders with unlimited liability; and
- where the shares and rights held by companies, minimum 25% stake of which belongs to directly or indirectly a legal entity (except for public legal entities) or any person mentioned in (i) above.
The Electricity Regulation also sets forth the rules applicable to determination of indirect ownership in details.
Natural gas mergers
The NG Regulation speaks of mergers of one or more licence-holder companies in another licence holder company, where the merging entities transfer all their assets and liabilities to the surviving company, subject to the Board's prior approval. Unlike the Electricity Regulation, the NG Regulation does not allow companies without a licence to be a party to a merger. In that case, one of the licence-holder companies subject to merger survives whereas the other transfers all the assets and liabilities as a whole to such surviving legal entity and then automatically dissolves.
The application to the Board for approval of the merger is made by submitting the merger agreement, the resolutions adopted by the authorised organs of the parties, the proposed amendments to the articles of association of the surviving legal entity and a report including the evaluation of prospects of the merger. If the Board approves the merger, the parties are obliged to complete the transaction within 100 days of the Board's respective decision. Otherwise, the decision becomes null and void and another approval needs to be sought before the Board to contemplate the transaction.
As in the Electricity Regulation, the merger agreement cannot include any provision violating the rights and receivables of consumers or eliminating the obligations of the licence-holder legal entity.
The gas acquisition market
The provisions relating to acquisition under the NG Regulation are similar to those of the Electricity Regulation. Any direct or indirect acquisition of shares representing over 10% of share capital in a licence-holder company (or more than 5% if the licence-holder company is publicly held) by a real person or legal entity or share purchases resulting in a shareholder of a licence-holder company to exceed 10% of the share capital and share transfers which result in the shareholding ratio of a shareholder to decrease below above-mentioned ratios are subject to approval of the Board. This provision applies to acquisition of voting rights or pledge over shares whereas granting any privileges over existing shares, removal of such privileges or issuance of dividend right certificates are also subject to the Board approval, without being subject to any share-ratio limitation.
The application to obtain the Board's approval is made by submitting the documents listed in the NG Regulation. Similar to the Electricity Regulation, the Board approval will only be granted if the transferee of the shares meets the criteria required for shareholders of a company filing for a licence application. The applicable criteria are also parallel to the Electricity Regulation requirements.
Time-consuming procedures
The procedure laid down by the Authority for mergers and acquisitions in the electricity and natural gas markets are time consuming and usually lengthy, mainly because of the extent of the information and the documents required from the potential shareholders. The provisions applicable to foreign shareholders provide no exceptions to such requirements and the documents or information to be requested are determined by way of analogy. As the requested information extends to the ultimate shareholders (and their families or their companies), the collection of such extensive information may become burdensome especially for the foreign investors willing to participate in a company engaged in the energy sector. But promising deals may arise in Turkey in the near future, considering the remaining privatisation tenders for electricity and gas distribution companies.
| Author biography |
Burcu Sener Sözer
Taboglu & Demirhan
Burcu Sener Sözer graduated from Ankara University, School of Law in 1997 and received her LLM degree from The George Washington University in Washington DC in 2001. She was admitted to the Istanbul Bar Association in 1998. She is also a member of the Istanbul Bar Association and the George Washington University Alumni Club (Istanbul). |