Turkey has been a centre of interest to foreign investors
since 2004. With the government's programme to ease,
incentivise and develop foreign investment in the country,
which was embedded in the Foreign Direct Investments Law of
2003, the chains surrounding foreign investment were broken and
the Turkish market has seen an enormous increase in both volume
and deal size in respect of mergers and acquisitions.
A glittering era (2004-2008)
Between 2004 and 2008, almost all of the prominent Turkish
banks were acquired by foreign investors from overseas.
Privatisation of strategic government investments, such as
ports, steel and cement factories and telecoms companies, also
paved the way for the foreign investor into Turkey. Each
foreign investor dragged another to this attractive market and
there was a significant evolution in almost all sectors, from
oil and energy to foods and beverages.
Boosted by the privatisations in important sectors, and
transactions concerning the largest players of the Turkish
market, such as banks and other conglomerates, this upward
trend continued until the third quarter of 2008 when the credit
crunch hit the worldwide markets.
Pause and downfall (2008-2009)
2008 started well and Turkey witnessed a noteworthy deal
volume. However, as in the other large markets, the financial
crisis started to hit the Turkish economy and Turkish M&A
activity suddenly dropped with the start of the third
Mostly because of the experience Turkey had gained from its
domestic financial crisis in 2001 and also due to the strong
legal and financial system created afterwards, the global
financial crisis did not affect the financial markets in Turkey
as it did in the rest of the world. Nevertheless, Turkey, which
was once an investors' heaven with its economic and political
stability, as well as charming growth rates, had a hard time
attracting foreign investors in 2009. M&A activity was
practically insensible due to the financial crisis, which
spread rapidly, knocking global markets off balance. Certain
multinational companies divested their businesses in Turkey in
order to focus on their core markets. As a result, 2009 was the
most quiet of the last seven years.
Markets recovering (2010-2011)
After a silent period for M&A in 2009, the M&A buzz
of 2010 was redolent of the good old times. Consequently, 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 is progressing in 2011, which is
marked by the elections. Privatisation is, as usual, on top of
the trending topics whereas healthcare investments are still
hot. The privatisations of Istanbul City Ferries and
electricity generation assets tagged the first quarter, and
Istanbul Natural Gas Distribution (IGDAS), National Lottery
(Milli Piyango), Galata Cruise Port (Galataport) privatisations
are in the pipeline.
While the Turkish market got used to M&A activity over
the last seven years and learnt how to deal with foreign
investment, the Turkish parliament also decided to overhaul its
laws to enable a harmony between Turkish rules and those
applied in the United States and Europe.
In light of this effort, the new Turkish Commercial Code and
the Code of Obligations were enacted at the beginning of 2011
to enter into force by July 2012, together with the Civil
Procedure Code which will enter into force by October 2011. All
these three laws will have great impact on M&A
Dos and don'ts in Turkish M&A
Due to the lack of specific legislation regulating M&A
transactions as in many jurisdictions, investments are governed
by agreements which are comprehensively negotiated by the
parties. Since M&A deals in Turkey are generally realised
by acquiring the target company's shareholding, and such
acquisition is carried out through participating into a capital
increase and/or a sale of shares; the main instrument that is
used for such acquisitions are share purchase agreements and
share subscription agreements.
The second important instrument used in M&A deals is
shareholders' agreements. This particular agreement becomes a
must when it comes to an acquisition where the investor does
not end up as the one and only shareholder of the target.
Standard provisions of a shareholders' agreement such as
transfer restrictions, board compositions and veto rights are
common features in Turkey.
Furthermore, as private equity investors stay with the
company for a short period of time and then get out, exit
mechanisms such as tag-along, drag-along rights or initiation
of a public offering, which can be the big deal breaker issues,
are also encountered.
A third instrument that is often used in these deals is
employment agreements. Most private equity investors enter into
solid agreements with successful senior management and/or
former shareholders of the target to keep the business going
Although negotiated from a commercial perspective for
hundreds of hours, it can be that these agreements are not
given enough thought from a legal point of view and this is the
main reason why certain legal necessities are sometimes omitted
or overlooked. Such insufficient care from legal counsel is
causing more and more disputes and other difficulties which pop
up within a couple of years from closing. Some common failures
and omissions are described below.
The purpose of negotiation is to identify and understand the
attitude of the counterparty and prepare security nets for
transaction. Attitudes during the negotiation can clue one
party in as to how its counterparty will act after the
signatures are in place and if the investment will prove to be
Based on the impression during the negotiations, one can
first build up appropriate security nets for possible future
disputes depending on the insight that is gained from attitudes
during the negotiations. One can even walk away from the deal
if it is obvious that the counterparty does not win its
confidence even with the security net.
Turkish law allows the parties to freely choose the
governing law (save for provisions against Turkish public
policy) when there is a foreign element involved.
Although local parties prefer Turkish law, many foreign
investors tend to have the laws of their jurisdiction governing
the agreement. This may be very problematic when a dispute
arises in connection with either the target itself or its
shares. As the dispute is around the target, it is most
probably handled in Turkey. Application of foreign laws by a
Turkish court is cost and time inefficient.
Furthermore, aside from the liberty of choosing governing
law for contractual obligations, Turkish law sets forth that
rights in rem are subject to the laws of the
jurisdiction where the concerned property is located. This is
eventually Turkish law in respect of disputes arising in
relation to ownership rights on shares that are in Turkey. This
particular rule is important in asset deals which concern
transfer of ownership of movable and/or immovable assets. Even
if the asset transfer agreement is governed by laws of a
foreign jurisdiction, the transfer of the ownership of the
assets transferred thereunder, as well as all disputes arising
in connection with such transfer, would be subject to Turkish
law if the assets in question are located in Turkey at the time
Turkish law also imposes different governing law options
when it comes to intellectual property-related agreements and
employment agreements. Therefore, governing law should be
defined taking into account all aspects of the transaction and
possible future disputes.
Articles of association and shareholders' agreement are, in
some cases, two brothers raised by different nannies, with
articles of association being subject to Turkish law and
Turkish jurisdiction and shareholders' agreement being, in some
cases, subject to foreign law and arbitration.
Since articles of association cannot be subject to foreign
laws and disputes arising in connection therewith cannot be
arbitrated, parties must be careful when structuring the
relationship between these two legal instruments and avoid
having the same matters regulated in both documents. Otherwise,
one can end up with two different judgments ruled by the court
and the 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.
On the other hand, even if the arbitral award has been
rendered before the court ruling or it does not relate to a
matter regulated under the articles of association, it will not
be enforced or recognised in Turkey to the extent it is against
Turkish public policy.
Almost all share purchase agreements contain penalty
(cezai sart) provisions that trigger in the event of
the seller's breach of any of its obligations, representations
and warranties. These provisions are drafted as if they provide
for an independent obligation. To the contrary, the obligation
of the seller imposed under a penalty is dependent on the
seller's main obligation it is covering under the agreement. In
other words, if the seller's main obligation becomes null and
void, the penalty becomes null and void automatically.
Another misconception regarding penalty clauses is the
belief that the penalty is free from fault. Pursuant to Article
161 of the Turkish Code of Obligations, unless the agreement
otherwise stipulates, the penalty cannot be exercised in case
the seller breaches its obligation without fault. Therefore, if
the intention is that the penalty triggers even in case of
force majeure events, this should be explicitly provided for in
Representations and warranties
Representations and warranties of the seller are as
important as its obligation to sell and transfer the shares.
Under Turkish Law, a share transfer is considered as a sale of
shares exclusively and is not considered as the sale and
transfer of the enterprise in general. Therefore, the liability
of the seller is limited to the qualifications of the shares
and cannot be extended to the qualifications of the enterprise
automatically. In order to extend this liability,
representation and warranty provisions are used in
However, it is not the representation and warranty items
themselves that provide this extension. In order to have a
sound protection, the representations and warranties of the
seller should be shaped as main obligations.
The seller should explicitly represent and warrant that (i)
these are its main obligations; (ii) a breach of the
representation and warranty triggers its liability of the if
damages have occurred; and (iii) its liability is independent
from its fault. The agreement should contain an undertaking of
the seller that, if a breach of representation and warranty
occurs, the seller will be liable for the losses and damages
under Article 96 of the Turkish Code of Obligations even if it
has no fault with regards to being aware of such breach.
Furthermore, certain representations and warranties should
be structured as independent guarantees of the seller. These
representations and warranties are those relating to the
target's or third parties' acts.
Lack of dispute experience
Another established tradition of Turkish practice is to
draft very good-looking agreements without any dispute insight.
Drawn up by lawyers who have never been to a court or arbitral
tribunal, share purchase and shareholders' agreements look
perfect in theory but do not work in practice.
The very well-known example of this failure is the
inexistence of specific performance in respect of undertakings
to perform an act (yapma edimi) under Turkish law. In
other words, unless a party willingly performs the act, such as
voting in the agreed manner, it cannot be forced to do so. The
only option in such a case would be indemnification for damages
arising from breach of undertaking.
Many share purchase and shareholders' agreements contain
wonderful undertakings that, if complied with, would make the
counterparty's day. However, the agreement should also say what
would happen if these undertakings are not complied with. There
should be mechanisms that offer alternatives which have similar
benefits capable of replacing the specific performance.
For instance, voting arrangements are nothing without a
significant penalty. As the one who undertook to vote in a
certain way would not be forced to do so unless it willingly
votes so, the undertaking itself would not mean anything to the
beneficiary. In case of these arrangements, the beneficiary
should receive a significant penalty which might practically
(and psychologically) force the specific performance.
Similarly, put and call options may be used as instruments that
trigger in case of breach and to practically force the specific
Another very well-known example is the non-corporate
provisions of shareholders' agreements. These agreements
involve both corporate provisions and non-corporate provisions.
Corporate provisions relate to the relationship between the
target and its shareholders, for example composition of the
board of directors, super-majority resolutions, veto rights at
the general assembly level, and so on. On the other hand,
non-corporate provisions are those relating specifically to the
relationship among the shareholders, such as drag-alongs,
tag-alongs, or put and call options.
Although the non-corporate provisions can be placed in the
articles of association of the target, there is no benefit in
doing so as Turkish scholars and court precedents argue that
these provisions do not become corporate provisions, even if
they are placed in the articles of association, and thus are
not enforceable against the target or third parties. These
provisions remain as purely contractual provisions and are,
therefore, subject to the principle of relativity of contracts.
Nevertheless, much of the time spent for closing preparations
is wasted for negotiations on how much of the shareholders'
agreement must be transported into the articles of association,
which is unnecessarily spending the client's money and
However, keeping the non-corporate provisions in the
shareholders' agreement is advantageous as shareholders'
agreement could be brought to arbitration whereas the disputes
arising out of the articles of association will be settled
before the competent commercial courts.
It is hoped that the New Commercial Code will be the cure to
this disease of Turkish practice as it exhaustively enumerates
the items that can be included in the articles of
Many lawyers tend to have shareholders' agreements involving
a set of parties including the target itself. These agreements
should be structured with utmost diligence. In case of dispute,
the court answers the following question: who can claim what
from whom and on what legal basis? Therefore, it is crucial to
determine which party is responsible against whom.
If the responsible party is not accurately identified, the
whole agreement would turn into a piece of paper with all the
glamorous "joint and several" undertakings and obligations it
has, as the client would not have a specific counterparty it
Turkish law recognises lex commissoria, which means
that agreements allowing the seizure of the pledged asset by
the pledgee before a default occurs and in consideration of its
receivables are invalid. This famous restriction of the Roman
law orders that the pledgee can only gain ownership of the
pledged asset under a separate agreement that is concluded
following the occurrence of the default.
Although respected in most of the cases, one can see that
certain agreements have special mechanisms that are used to
discount the value of the pledged asset from the due
receivables. This is, of course, not legally enforceable.
The other common mistake regarding collaterals is parallel
debt. Existence of receivables is the prerequisite of the
existence of collateral under Turkish law. This is the renowned
principle that "collateral follows the receivables". In other
terms, no party can hold an asset as collateral unless it has
receivables secured by such asset. In certain acquisition
finance deals, the security agent is not among the lenders and
therefore does not have any receivables to be secured.
However, all the collaterals are delivered to the security
agent to be held in the name of the lenders, and to circumvent
the said requirement of Turkish law the security documents
include a parallel debt wording. This wording sets forth that
the borrower shall pay to the security agent, as creditor in
its own rights and not as representative of the lenders, a sum
equal to and in the currency of each amount payable by the
borrower to the lender as and when that amount falls due for
payment under the facility agreement.
Any amount due and payable by the borrower to the security
agent is decreased to the extent that the lenders have received
payment in full of the corresponding amount under the facility
agreement and any amount payable by the borrower to the lenders
is decreased to the extent that the security agent has received
(and is able to retain) payment in full.
This is obviously a circumvention of the aforementioned
requirement of Turkish law by creating a debt which actually
never existed, and to the best of the author's knowledge, has
not yet been tested before Turkish courts. There is a
significant risk that a competent Turkish court will invalidate
the parallel debt structure which would jeopardise all the
security packages established based on parallel debt.
Assignment of security interest
Another reflection of the principle that "collateral follows
the receivables" is that the security interest is automatically
assigned together with the assignment of the secured
To put this another way, the security interest cannot be
assigned or transferred independently from the secured
receivables. This is not legally possible. However, certain
Turkish lawyers have, in the past, had special assignment
clauses in security documents and negotiated for hours to keep
the beneficiary's right to assign its security interest. This,
again, seems to be an unnecessary expenditure of the client's
money and time.
Joint and several liability
Pursuant to Turkish law, a liability can be either joint or
several. There is no such concept of joint and several
liability. However, almost all agreements containing multiple
debtors set forth that their liability is joint and several.
What is meant here is that the liability is joint and the
creditor may request any of the debtors to perform the whole
The Turkish word that covers this situation is
müteselsil and this should not be used together
with müsterek which means that (i) the creditor
is not entitled to request any of the debtors to perform the
whole obligation and (ii) the creditor can only request from
such debtor to perform its own share. The ambiguity caused by
the mixed use of these two different terms may endanger this
particular joint character of the liability.
Escrow is necessary when part of the shares or the
consideration needs to be set aside for some time. The escrow
mechanism should be drawn in accordance with the qualifications
of Turkish law. Escrow is the representative of the parties
which holds these assets on their behalf. It is not the
security agent acting as a pledgee. But in certain cases, the
authorities attributed to the escrow elevate it to the level of
This is very dangerous as a valid and enforceable security
interest requires the existence of receivables to be secured.
However, the escrow does not hold the said assets to secure any
of its receivables. Therefore, structuring escrow as a pledgee
may result in the invalidation of the whole structure. In those
cases where the escrow mechanism serves to the purpose of
pledging certain assets, such structure should be clearly
reflected in both the agreement that is the legal basis of the
obligation and the pledge agreement supported by the escrow
Turkish law puts a strong emphasis on the protection of the
employee with respect to the employer. Many provisions that
would be perfectly enforceable if they were in a regular
agreement, become unenforceable against the employee when they
are positioned in employment agreements.
For instance clauses providing for serious penalties that
trigger in case of the employee's termination are not capable
of being enforced against the employee. This legal fact is
generally omitted when drafting employment agreement as part of
On the other hand, if the senior management to be locked in
is at the same time the seller, it is advisable that the terms
and conditions of the employment of the senior management be
kept in the shareholders' agreement and not transported into a
separate employment agreement. In doing so, the risk that the
relationship between the target and the management is
interpreted to be an employment may be mitigated to a certain
|About the author
Dr Ismail G Esin, partner
Esin Law Firm
Following his graduation from the Istanbul
University Law School in 1990, Dr Ismail G Esin
completed his LLM at the Tubingen University Law School
and wrote his thesis on "The Abuse of Cancellation
Lawsuit in Turkish and German Joint Stock Companies
Law" in 1991. He completed his PhD with his
dissertation on The Liability of the Seller in Mergers
and Acquisitions in 1997. He lectured between 1992 and
2004 at the Marmara University Law School and gave
graduate lectures at Galatasaray, Bilgi and Bahcesehir
In addition to his substantive experience in M&A,
real estate and corporate law, Esin is also recognised
as a leading commercial arbitration and litigation
expert, advising multinational clients and Turkish
companies. Aside from being a member of international
arbitration committees, Esin is also a member of the
International Bar Association, AHK German-Turkish
Chamber of Commerce and ABFT American Business Forum in
Esin has published several books and articles on
arbitration, M&A, private equity and dispute
resolution in locally and internationally recognised
legal journals. He co-authored the book Mergers and
Acquisitions under Turkish Law which has been published
in both Turkish and English.