Author: | Published: 3 Apr 2003
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In spite of the economic turmoil Turkey experienced in the course of 2001, the private sector has been prospering and there is perhaps an even stronger case for M&A than before. The records of the Competition Board, established in November 1997, contain valuable data on a number of 'examined' M&A transactions, (that is, those over the threshold that must be notified to the Competition Board for approval). Accordingly, 90 M&A applications were submitted to the Competition Board for approval in 2002 and 422 between November 1997 and October 2002. The past decade has seen many leading international companies enter the Turkish market through acquisitions although mergers have not been very common in the Turkish market.

Historically, most M&A transactions in Turkey have been structured as straightforward stock purchases between private parties. However, securities laws are becoming increasingly relevant as more and more listed companies are getting involved in M&A activities. There have been virtually no hostile take-overs in Turkey to date, mainly because most companies have floated less than a majority of their shares, but mandatory tender offers following changes of control in listed companies have become quite common.

Regulatory framework

M&As in Turkey are mainly governed by the Turkish Commercial Code (TCC) and the Turkish Code of Obligations (TCO). However, these codes, dating back to 1957 and 1926 respectively, were not specifically enacted to regulate M&A activity and do not provide detailed regulations. Therefore, as in most countries, an M&A transaction in Turkey requires the knowledge and evaluation of several legal disciplines, including banking law, competition law, tax law and labour law. Furthermore, certain sectors are subject to special provisions with respect to mergers or acquisitions. For instance, the Banks Law sets limits with regard to the transfer of a bank's shares.

Although no regulatory structure exists as such, the Capital Market Board (CMB) is making a great deal of effort to ensure a transparent environment that enables investors and publicly-held companies to become part of a sound and prosperous market and, in furtherance of these efforts, the CMB regularly promulgates new communiqués. The CMB is thus expected to issue a new communiqué specifically on mergers in the near future which will apply if any of the parties to a merger is a publicly held company.

Recent legislative changes

Tax laws were recently amended to expand the rules to allow significant tax benefits for mergers, de-mergers and spin-offs. Similarly, foreign investment laws now expressly envisage share swaps as a means of payment by foreign investors. The reform of the banking and financial sector is now firmly under way and is leading not only to consolidation, albeit at a slower-than-expected pace, in the banking sector, but also to the reorganization of banks' non-financial holdings.

Further changes to legislation are being contemplated, such as the restatement of out-dated basic codes (namely, the TCO and the TCC), the simplification of foreign investment legislation and efforts to reduce bureaucratic red tape, which are likely to improve the situation. The further alignment of laws in the context of Turkey's efforts to harmonize its legislation with that of the EU should also help to reduce transaction costs resulting from differences in laws and thus allow more creativity.

Foreign involvement in M&A transactions

Foreign investors can freely invest in virtually all sectors open to Turkish investors. However, there are certain legislative restrictions relating to the rights and obligations of foreign investors. These legislative arrangements regulate specific sectors, most notably broadcasting, aviation, maritime transportation, petroleum and mining. Accordingly, foreign investors are restricted to a maximum equity participation in the broadcasting sector of 20%, and, in aviation, maritime transportation, port services and value-added telecommunications services, to a maximum of 49%, respectively.

Foreign investors can invest in Turkey either by incorporating a new company, purchasing the shares of an already existing Turkish company or establishing a branch office or a liaison office. Permission from the Foreign Capital General Directorate of the Undersecretariat of Treasury (FCGD), is required for the foreign investment alternatives mentioned above.

A non-resident investor can freely purchase and sell all types of securities and other capital market instruments in Turkey through banks and intermediary institutions authorized by the Capital Markets Law under the relevant foreign exchange regulations without any need for permission from the FCGD. Nevertheless, a foreign investor wishing to purchase the shares of a listed company not traded on the stock exchange should obtain permission from the FCGD.

To set up a company or acquire shares in an existing Turkish company, the minimum foreign capital contribution to be brought into Turkey is $50,000 per foreign shareholder. Such capital contribution may be in the form of cash in convertible or effective foreign currency, machinery, equipment, assets, the receivables of foreign nationals under the Foreign Exchange legislation, and intellectual property such as patent and trademark rights.

Due diligence

It is common practice for the interested party, when conducting financial and legal due diligence work, to have a clear picture of the target company. Depending on the agreement between the parties, and subject to confidentiality agreements, the scope of due diligence work can either be extensive or limited. The conduct of the parties during the due diligence period can be important in the context of pre-contractual liability should a final agreement not be reached.

Parties to an M&A transaction may find it useful to examine the public records such as the trade registries or the land registries to verify independently that the target is in good standing and to learn of any restrictions on the immovable assets of the target.

CMB regulations have adopted a disclosure-based approach with respect to changes in the capital structure and management control of public companies. According to the CMB Communiqué on the Public Disclosure of Material Events, changes in the capital structure and management control of publicly-held companies must be disclosed within the time periods set out in the Communiqué. Among others, these changes are:

changes in capital structure, voting rights of shares or direct or indirect control due to the reasons set out in the Communiqué;

if a person/entity or persons/entities acting together with another person/entity owns 10% or more of the total voting rights or capital of a public company or if the total voting rights or shares of such person/entity falls below 10%;

the sale and purchase of fixed assets of at least 25% of the total net value of fixed assets or at least 10% of the total assets in the latest balance sheet disclosed to the public according to the relevant communiqué of the CMB; and

without being subject to the ratios mentioned above, the significant purchase of fixed assets affecting the goods and services of the company.


Acquisition targets

Companies under Turkish law can be classified into two main groups, namely, capital companies and personal companies. The most common forms of capital company are joint stock corporations and limited liability partnerships, both of which are limited liability business forms that limit the shareholders' liability to the share capital. In both joint stock corporations and limited liability partnerships, the fields of activity, operations and other corporate matters of the company are governed by the company's articles of association and the framework set out in the TCC.

Publicly-held companies are joint stock corporations whose shares have been or are deemed to have been offered to the public. As with all securities laws, Turkish capital market regulations aim to protect investments in publicly-held companies by ensuring proper disclosure and by regulating the markets and participants extensively in respect of their operations and activities. Among others, the acquisition of the shares of a publicly-held company, or a company that is deemed a public company, is regulated in detail under Turkish securities regulations.

The acquisition of a company's shares, would be, among other things, subject to the articles of association of the company to be acquired or merged with, the relevant legislation, in particular the provisions of the TCC, and the agreement entered into by the parties involved in the transaction. Matters not regulated under a company's articles of association and not governed by the mandatory provisions of the TCC can be freely resolved through an agreement of the transacting parties.

Methods of acquisition

Private agreements

Most of the terms and conditions in acquisition transactions tend to be governed by the actual contractual arrangements in the sale and purchase agreement among the parties. Therefore, such agreements tend to follow in many respects the complex UK/US format. Most often, the parties do not have trouble implementing these forms and associating them with Turkish law. Under Turkish law, all warranties of the parties may be, with few exceptions, excluded or extended through contractual provisions.

Voluntary public offers

To initiate a tender offer, the offeror must file an "information form" attached to Communiqué Serial IV, No 8 with the CMB, together with a brokerage agreement. The information form must contain fair, sufficient and unambiguous information, that is, details of the target company, tender offer price per share, and so on. Before the publication of any notice related to the tender offer, the approval of the CMB must be obtained. The offeror should also enter into a brokerage agreement with a bank or an intermediary institution that will organize the tender. The information form and the brokerage agreement must be submitted to the CMB 30 days before the initiation of the planned tender offer. On receipt of the CMB's approval, the information form must be published in at least two nationally distributed newspapers. The period during which the tender offer can remain open is a maximum of 30 days and a minimum of 15 days. Notice of acceptance by the offeree shareholders must be made to the bank or intermediary institution organizing the tender offer within the determined period.

Mandatory public offers

If any party or parties acting together, directly or indirectly, through a block sale or series of sales, or by any other means, acquires 25% or more of the share capital and voting rights or control of the management of a publicly-owned company, regardless of the specific amount of share capital, then the acquiring party is obliged to make a tender offer to the remaining shareholders to purchase 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 is required to make a tender offer to the other shareholders to purchase their shares. It should be noted that on application, the CMB can grant an exemption from the obligation to make a tender offer.

Mergers and spin-offs

Under the TCC, there must be either a target company acquired by an acquiring company with its assets and debts in its entirety; or, two or more companies must be transferred into a new corporation along with all their assets and debts. The shareholders of the merged companies will obtain the shares of the acquiring company or the new company. A merger under Turkish law can only be affected between the same types of companies, that is, a joint stock corporation can only merge with another joint stock corporation and a limited liability partnership can only merge with another limited liability partnership.

Merger agreements can only become effective after the general assembly of shareholders of both parties approve such a merger.

Spin-offs are not clearly regulated under the TCC. The only legislation in which spin-offs are mentioned is the CMB and the Istanbul Stock Exchange (ISE) Communiqués that were specifically issued to cover particular aspects of the issues related to Turkish Capital Market legislation.

Joint ventures

Many international companies prefer to enter into a joint venture relationship with a local company in Turkey. For this purpose, the partners generally establish either a joint stock corporation or limited liability partnership in accordance with the provisions of the TCC.

Asset transactions

Investors also conduct asset purchase transactions, especially when the selling company is not in good financial standing or is faced with organizational problems. Asset transactions help the seller to eliminate unwanted liabilities, while, at the same time, obtaining the benefits from sale of the assets. In most cases, licences, permits and incentives related to the assets sold will not be transferred automatically to the buyer and the buyer will be required to reapply for them. However, with respect to the assignment and transfer of receivables, the debtor's consent is not required.

Under Turkish law, in the event of a transfer of an ongoing business, the seller and the buyer continue to be jointly liable to the creditors for the debts of the transferred business for two years from the date of the transfer. Therefore, both the transferor and the transferee will not be free from exposure during this two-year period.

Compulsory sales by minority shareholders (squeeze-outs)

Eliminating minority interests is of particular importance in takeovers. After acquiring a controlling majority, acquirers will often want to consolidate control in order to use a company's assets to repay their takeover debt. To do this, certain jurisdictions provide squeeze-out mechanisms where a controlling shareholder can force out minority shareholders and can acquire 100% control. However, this system is not provided for under either the TCC or the capital markets legislation.


Listed companies may wish to delist voluntarily. Although the relevant legislation sets out detailed rules for a stock market (Istanbul) to delist non-complying companies, the rules for voluntary delisting are not similarly detailed.

According to the ISE regulations, a company can apply to the board of directors of the ISE to delist voluntarily. The board of directors is entitled to decide whether to allow such delisting. Due to the relatively few voluntary delisting precedents, there is not sufficient information available to determine the criteria applied by the ISE board of directors to voluntary delistings. The CMB's position towards voluntary delisting has also not been publicly announced and substantial legal uncertainty exists for those choosing this path.

Competition law aspects

With a view to achieving the economic integration sought by the Customs Union, Turkey's legislation in the field of competition is being made compatible with that of the EU, which envisages a notification system for mergers and acquisitions. Nevertheless, the Competition Board has not yet issued any guidelines similar in substance to those issued by the Commission in the EU and Turkey has not yet adopted the latest amendments that took place in the EU regarding the separation of cooperative/concentrative joint ventures.

Notification requirements

A merger or an acquisition will be subject to the permission of the Competition Board if it exceeds certain thresholds based on the combined market share and overall turnover of the involved companies. While calculating the turnover, even if an undertaking does not have any corporate presence in Turkey, its sales to Turkey must also be taken into consideration with respect to the relevant product market. In its evaluation as to whether or not a merger or an acquisition is subject to its permission, the Competition Board further evaluates whether the acquisition creates or strengthens a dominant position in the relevant product market in Turkey.

The acquisition of a majority stake in the target company would fall within the scope of notification obligation if the thresholds are exceeded. However, the acquisition of a minority interest may also require the involved companies to obtain permission from the Competition Board to the extent the minority interest confers - directly or indirectly - the possibility of exercising decisive influence on the target company or on the composition or decisions of the governing bodies of the target company. Therefore, it is necessary to confirm in each case whether or not joint control currently exists in the target company; and a change in the joint control of the company will occur as a result of the acquisition of an interest in the target company.

An application to the Competition Board for permission must be made by one of the parties involved on behalf of all parties, preferably 30 days before the execution of the transaction. The Competition Board will, within 15 days from the date of application, notify the parties of its decision to grant permission or to conduct a further investigation. In the event the Competition Board decides to conduct a further investigation, its notice will state that the merger is suspended until a decision has been reached and it will also state any other precautionary measures that the Competition Board deems necessary. If a reply is not obtained within 30 days from the date of the application for permission, the transaction executed for the merger or acquisition will become effective, and thus, may be implemented.

If there is a failure to apply to the Competition Board for permission for a merger and acquisition that fall within the thresholds, the parties to the merger or acquisition will be subject to a fine of TL2,311,302,000 ($1450).

The statute of limitation for the Competition Board's right to impose fines is three years starting from the date of the infringement of the notification obligation, that is, from the closing of the transaction.

If the Competition Board becomes aware of a merger or acquisition that meets the thresholds for which an application has not been made, it would automatically conduct an investigation of the merger or acquisition. As a result of the investigation, if the Competition Board determines that the merger or acquisition creates a dominant position in the relevant market in Turkey, it may, in addition to imposing fines, decide on the breakup of the transaction concerning the merger or acquisition; the restoration of all factual situations which occurred unlawfully; and, the return of all shares and assets, if possible, to the previous owners or to third parties.

Furthermore, if the acquisition creates or strengthens a dominant position in the market, a fine of up to 10% of the gross income incurred in the previous financial year as calculated by the Competition Board, and not less than TL9,247,613,000 ($5,780), may be imposed on the parties. In that case, if the parties do not comply with the Competition Board's decisions, the Board would be entitled to impose a daily fine of TL1,555,900,000 ($720).

The issue of abuse of dominant position

Turkish Competition Law does not contain a comprehensive definition of abuse but refers to a number of examples, namely:

  • the prevention, directly or indirectly, of other enterprises in its area of commercial activities or any practices which aim to impede the activities of competitors in the market;
  • the discrimination, directly or indirectly, by way of imposing dissimilar conditions for equivalent and similar rights and obligations on the purchasers who have equivalent positions;
  • the conclusion of contracts that are subject to the acceptance of restrictions concerning resale conditions such as the purchase of other goods and services or acceptance by the intermediary purchasers to display other goods and services or a minimum resale price;
  • practices which aim to distort competition in a market for goods and services by means of taking financial, technological and commercial advantages created by the dominant position in another market; and
  • the restriction of production, marketing or technical development to the detriment of consumers.

Because the reasoning of the decisions by the Competition Board is not very detailed, the key source for the interpretation of the abuse of dominance is derived from EC Competition Law.

Finally, it is worth noting that bank mergers and acquisitions are not subject to the relevant provisions of Competition Law provided the sum of the assets of the banks concerned do not exceed 20% of the banking sector.

Hergüner, Bilgen & Özeke

Founded in 1988, Hergüner, Bilgen & Özeke is one of Turkey's largest law firms, with 5 partners, 27 associates, 1 paralegal and over 20 support staff. Located in Istanbul, the firm represents and provides legal services to both foreign and Turkish national and multinational companies and financial institutions. It also provides government agencies and state-owned entities with legal representation and service on a variety of subjects.

The majority of the firm's clients are foreign companies doing business in Turkey or Turkish affiliates of multinational companies. Hergüner, Bilgen & Özeke advises clients in connection with local and cross-border deals and also assists Turkish companies doing business outside of Turkey. The firm has an extensive practice including the following areas: foreign investment, contracts, joint ventures, mergers and acquisitions, corporate law, telecommunications, oil and gas; energy, project finance, banking, securities and capital markets, privatization and government procurement, intellectual property, employment related issues, and litigation and arbitration.

Hergüner, Bilgen & Özeke
Süleyman Seba Cad No 55-57
Akaretler Siraevler
34330 Besiktas/Istanbul
Tel: +90 212 236 5707
Fax: +90 212 236 5706