Before 2003, foreign investment in the Turkish market was shackled by a series of severe impediments that functioned, in the aggregate, as a set of chains. Those chains were broken, however, with the enactment and entering into force of the Foreign Direct Investments Law of 2003. The government (which has been in power continuously since 2002) had and continues to have a programme to ease, incentivise and develop foreign investment in the country, and that programme was embedded in the 2003 Law. Consequently, in 2004, Turkey appeared on the radar screens of many foreign investors and the country thereby became (and today continues to be) a significant centre of interest to such investors. As a result, the Turkish market has seen enormous increases in mergers and acquisitions transactions, in terms of the number, total value and average size of deals.
2010 was a year of gradual recovery in the financial markets. Energy, privatisation, healthcare and consumer products were the most M&A-active sectors. This gradual recovery continued and has been accelerating in 2011, which was also marked by elections in June. Privatisation has been, as usual, the leading M&A sector while healthcare investments remain very hot. For example, Istanbul City Ferries and electricity generation assets privatisations dominated the first quarter while Istanbul Natural Gas Distribution, National Lottery, as well as the Galata Cruise Port privatisations are in the pipeline.
While the Turkish market became familiar with M&A activity over the last seven years and learnt how to deal with foreign investment, the Turkish parliament also decided to overhaul many of the country's most M&A-relevant laws and rules to make them more compatible with and similar to those applied in the United States and Europe. To this end, the new Turkish Commercial Code and the Code of Obligations were enacted at the beginning of 2011 and will enter into force by July 2012. Additionally, Turkey enacted a new Civil Procedure Code which will enter into force by October 2011. All three of these overhauled laws will have significant positive impacts on M&A transactions in Turkey.
In practice, private equity capital is sought in the Turkish market primarily by companies which are financially distressed, but operationally viable, and unable to achieve profitability, most often due to a lack of adequate financial resources, as well as by non-distressed companies aiming to expand their existing businesses and also by entrepreneurs who wish to exit from the companies they have created and built. Typically, investors restructure and manage the companies they acquire for between two and five years. For them, the payoff comes by selling their acquired companies to a strategic buyer or taking them public, often with high returns. In some cases, private equity investors sell their acquisitions to yet another private equity firm.
Although Turkish shareholders have traditionally held sceptical opinions towards private equity firms, Turkish companies today are more open to the idea of private equity. The concept is sometimes misunderstood, with one common belief being that an investor's motive is always to gain control of the firm through minority shareholding. This belief frequently sets up a perceived (but not always factual) mismatch between the interests and objectives of the shareholders of the target on the one hand and those of the private equity firms on the other. In fact, private equity investors typically do aim to gain significant control of a target (which is usually a private company) in the hopes of earning a high return, but they do not always seek to achieve this aim through minority shareholding. Instead, this control is sometimes achieved through the acquisition of a majority stake in the company, or the creation of certain veto rights granted to the investor which has acquired a minority interest in the target. The returns for private equity providers come, of course, from their exits. Their exit routes include selling the acquired shares back to other shareholders, and, as previously discussed, selling to a strategic buyer or other private equity investors as well as the company achieving a public stock market listing.
A review of the background and history of private equity acquisitions in Turkey reveals that no specific industry or type of company has typically been the target of such transactions. These investments have varied widely and involved food and beverages (Mey Içki and Yudum), the health sector (Acibadem, Medical Park, Memorial Hospitals and Universal Hospital Group), retail (Beymen, For You and Migros), transportation (UN Ro-Ro), media (Digiturk), pharmaceuticals, IT and real estate. There appears to have been a lack of interest or suitable targets, however, in two main industries: textiles and tourism.
As mentioned above, the Turkish investment market offers a wide choice of sectors with great appeal, comparatively suitable prices as well as potentially high rates of return. All of this has positioned the Turkish market as a very attractive emerging market for private equity buyouts.
Consequently, more and more private equity investors are pursuing investment opportunities here. For example, significant private equity firms such as PineBridge Investments, NBK, NBGI, Global Investment House, Bancroft Group, Qatar First Investment Bank, Bridgepoint and Carlyle Group have demonstrated their interest in the Turkish market by establishing liaison offices here. Moreover, Turkey-based funds (such as Turkven Private Equity) are growing their fund sizes.
General legal structuring
In general, the legal environment for private equity investments in Turkey is relatively unregulated and free. For example, under Turkish law, private equity investors are not legally obliged to satisfy any conditions specific to such investments. Undoubtedly, this environment has been and will continue to be a significant factor in the growth of private equity investments in the country.
Such investments can be made by acquiring the target company's shares, and such an acquisition can be realised through formation of a new company, participating in a capital increase, purchase of shares, a spin-off or privatisation, all of which would be subject to the provisions of the Turkish Commercial Code and the Turkish Code of Obligations.
Although unregulated by specific legislation, such private equity investments are governed by the agreements related to the transaction that are entered into by the parties. Here, it is absolutely essential that all such agreements must be carefully and comprehensively drafted and negotiated by the parties and their legal counsel. Since private equity investments in Turkey are generally effected by acquiring the target company's shares, and such acquisition is realised through participating in a capital increase and/or a purchase of shares, the principal documents that are used for such acquisitions are share purchase agreements or share subscription agreements.
The parties to such agreements may agree to govern them by substantive law other than Turkish law. As one would expect, in Turkish practice, local parties and their legal counsel typically prefer, however, to govern these agreements by Turkish law. In fact, Turkish law is a modern, solution-based and flexible legal system. On the other hand, the flexibility provided under Turkish law is not unlimited. Consequently, certain provisions in such agreements must be drafted with great care in order to ensure their enforceability. In such agreements, Swiss law is also often selected as the governing law because the legal fundamentals of Turkish law are derived from Swiss law and the parties, therefore, feel quite comfortable and familiar with the provisions of Swiss law.
While the choice of governing law is significant, the representation and warranty provisions in such agreements (from the seller to the buyer) are of central importance because they constitute the framework of the potential liability of the seller towards the private equity investor.
Under Turkish law, a transfer of shares is considered to be a sale of shares (rights) exclusively, and is not considered to be the sale and transfer of the enterprise in general. Therefore, the liability of the seller is typically limited to the seller's representations and warranties pertaining to the shares transferred and sold, and cannot be extended automatically to conditions or issues relating to the enterprise. In order to extend this liability, representations and warranties from the seller relating to the enterprise must also be provided for in such agreements. Such representations and warranties alone, however, are not sufficient to create this extension of liability for the seller. In Turkish legal practice, the legal character of such representations and warranties is, unfortunately, too often not defined. In order to protect private equity investors against the breach of any representation or warranty from the seller regarding the enterprise, the legal character of such representations and warranties must be carefully determined and defined in the relevant agreements. There are several ways to structure and define the legal character of such representation and warranty items.
In the author's opinion, such representations and warranties provided by the seller should be structured and defined in such agreements as main obligations of the seller. Under Turkish law, the general rule is that, in order for the breach of a main obligation of a debtor to create liability for that debtor, such debtor must be at fault. The parties, however, may agree otherwise. Thus, they must also agree that the liability of the seller on account of his representations and warranties will be independent from the seller's fault.
Furthermore, in order to overcome challenges that may arise from the provisions of Turkish law regulating the sale of goods, the seller should also guarantee against the negative actions of a governmental authority or other third parties with respect to certain representation and warranty items. For example, the seller should guarantee that no tax authority will make any legal or criminal complaint against the company on account of anything the company has done or failed to do before the closing date, and that, if such a complaint is made, the seller will fully indemnify and hold harmless the buyer, the company and its shareholders. Moreover, to strengthen the protection of the private equity investor, it can be agreed by the parties that the conduct of due diligence by the investor does not limit the liability of the seller.
The second and the other important document used in private equity investments is a shareholders' agreement. This particular agreement becomes a "must" in connection with any acquisition where the investor does not end up as the one and only shareholder of the target. Standard provisions of a shareholders' agreement used in the United States and other parts of Europe (such as transfer restrictions, board representations, and veto rights of the investor) are also common features in such agreements in Turkey. Furthermore, because investors usually stay with their target companies for a relatively short period of time and then prefer to exit, mechanisms for their exits (such as tag-along, drag-along rights or initiation of a public offering, which can be the big deal-breaking issues) are also often provided for under shareholders' agreements. In practice, the four exit options are (i) public offering; (ii) strategic sale to another private equity investor or to another strategic acquirer; (iii) sale to the existing shareholders; and (iv) refunding of the invested amount by obtaining dividend payments. Moreover, due to the limited secondary buyout opportunities, private equity firms – investing in minority positions – usually insist that their shareholders' agreements also contain put option rights.
On the other hand, specific performance of certain provisions may be either too cumbersome or unavailable/unenforceable under some conventional structures. Moreover, certain provisions are often (but inadvisedly) set forth both in a company's articles of association and the shareholders' agreement. Part of the difficulty here arises from the fact that the articles of association of a Turkish company is subject to Turkish law and Turkish jurisdiction, whereas the shareholders' agreement is, in some cases, subject to foreign law and arbitration. Articles of association for a Turkish company cannot be subject to foreign laws and disputes arising in connection therewith cannot be arbitrated. Accordingly, the parties and their legal counsel must (i) be extremely careful when structuring the relationships between the articles of association and the shareholders' agreement; (ii) avoid having the same matters regulated in both documents; and (iii) carefully determine which matters will be provided for in which of those documents. One can otherwise end up with rights that are unenforceable and/or two different and conflicting judgments (one ruled by a court and the other issued by an arbitral tribunal) on the very same issue. In case a Turkish court decision is rendered on the basis of articles of association before the arbitral award, the arbitral award will be deprived of its ability to be enforced in Turkey.
Significant PE investments
Some significant private equity investments in Turkey are listed below.
- ADM Capital, PGGM and IFC acquired 26% of the share capital of Universal Hospitals Group from Azmi Ofluoglu and his nominee shareholders for $140 million;
- Turkven Private Equity acquired a 51% stake in Arkaz Saglik Iletmeleri AS for $8 million for cash out and $32 million has been invested in the company as a capital increase with emission premium;
- Global Buy-Out Fund acquired 75% of Yarg¦c¦ Konfeksiyon for $30.6 million;
- Global Buyout Fund acquired a 100% stake in Bicakcilar Group companies for $106 million;
- NBK Capital acquired a 20% stake in K¦l¦ç Deniz (the holding company of K¦l¦ç Aquaculture Group) for a value of $28 million;
- Finvus acquired 38% of the shares of Airties Kablosuz Iletisim Sanayi ve D¦s Ticaret Anonim Sirketi, the leading company in the wireless network sector in Turkey;
- Argus Capital acquired 20% of Memorial Hospital in 2010 together with Qatar First Investment Bank which also acquired a separate 20% stake in Memorial Hospital;
- Carlyle Group acquired 40% of Medical Park in 2009;
- Kerten Private Equity was involved in the sale of the new shares of House Apart;
- Ottoman Fund, a London-based real estate fund, invested $110 million in land of 1 million square metres in Riva, Istanbul for development;
- BC Partners, DeA Capital and Turkven Private Equity acquired a majority stake in Migros, a retail food chain in 2008;
- Turkven Private Equity and FMO acquired a stake in Pronet Guvenlik, a securities company, in 2006;
- Turkven Private Equity and Advent International Corporation acquired a stake in Roma Plastik in 2006;
- CVCI invested in Boyner and Beymen in 2007;
- Actera Fund (raised by the Antika Partners) invested in Mey Icki as a co-investor with TPG;
- Eastpharma, the majority of whose shares are owned by Global Equities Management, took control of Deva Ilac, a publicly-listed pharmaceutical company;
- AIG Global Emerging Markets Fund invested in For You, a drug store;
- TPG acquired 90% of Mey Icki, a leading liqueur manufacturer, for $810 million in 2006;
- Providence Capital acquired 45% of Digiturk, a digital TV platform, for $150 million in 2006;
- Soros Investment Capital Management invested in Unikom Gida (the Yudum brand) in 2003. In May 2007, NBK Capital Equity Partners acquired 100% of the shares of Yudum Food. In November 2007, Afia International Company acquired the shares of Yudum Food from NBK Capital Equity Partners;
- Turkven Private Equity acquired 50% of the packaged bread producer, UNO, for approximately $13 million in 2003; invested in Intercity, the leading car rental company, to a value of approximately $15 million in 2004; invested approximately $25 million in the leading mobile value-added services provider, Trend Tech Group, in 2005; and acquired stakes in Provus Bilisim Hizmetleri, an IT company, in 2007; Next Generation Media in 2007; Mavi Jeans and Tekin Acar, a cosmetics company, in 2008;
- Is Girisim Sermayesi Yat¦r¦m Ortakligi made investments from 2003 to 2005 in Nevotek (a software developer) amounting to $3 million; Cinemars (a movie and theatre chain) amounting to $5 million; Step (a carpet retailer) amounting to $3 million; and TUYAP (a fair and exhibition company) amounting to $36 million. It also acquired the shares of Beyaz Filo Oto Kiralama (a fleet rental and management company) for approximately $10 million in 2006, and invested approximately $5 million in Ode Yatirim (a company active in the insulation sector) in 2007;
- Bank of America established Taurus Capital Partners in 2000 and invested in BIM as a co-investor with Merrill Lynch;
- AIG Blue Voyage's investment in Galatasaray Sportif (the sports equipment and accessories company of the football team Galatasaray) to the amount of $21 million was recorded as the first private equity investment in Turkey over $20 million. In 2002, the management of Galatasaray Sportif was changed, however, against the will of AIG Blue Voyage. Subsequently, and for the first time in Turkey, a private equity investor (AIG Blue Voyage) filed a lawsuit against the company in which it had invested. The lawsuit led the parties to an agreement as a result of which AIG Blue Voyage exited from Galatasaray Sportif. AIG Blue Voyage also invested in AFM, a movie theatre chain.
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About the author
Dr Ismail G Esin was admitted to the Istanbul Bar in 1998. Following his graduation from Istanbul University Law School in 1990, he completed his LLM at Tubingen University Law Faculty and wrote a thesis on ‘The Abuse of Cancellation Lawsuit in Turkish and German Joint Stock Companies Law’ in 1991. He completed his PhD with a dissertation on ‘The Liability of the Seller in Mergers and Acquisitions’ in 1997. He lectured on civil law and law of obligations between 1992 and 2004 at Marmara University Law Faculty and gave graduate lectures on mergers and acquisitions at Galatasaray University. Esin’s main practice areas include mergers and acquisitions, dispute resolution and real estate.
Esin has authored several publications, including Mergers & Acquisition Transactions under Turkish Law. He has also issued some German publications, including ‘Internationaler Rechtsverkehr in Zivil- und Handelssachen. Loseblatt-Handbuch mit Texten, Kommentierungen und Länderberichten, 31. Auflage, 2007’ is one of them. Esin is a member of the London Court of International Arbitration, German Arbitration Institute, ICC Turkish International Committee and German-Turkish Chamber of Industry and Commerce. He speaks Turkish, German and English. |
Contact information
Dr. Ismail G. Esin
Esin Law Firm
Levent Caddesi
Yeni Sülün Sokak No:1
34330 1. Levent Besiktas / Istanbul
T: +90 (212) 376 64 00
F: +90 (212) 376 64 64
E:ismail.esin@esin.av.tr
W: www.esin.av.tr |