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Itır Sevim-Çiftçi and Kemal Aksel of Yegin Ciftci Attorney Partnership explore the main principles governing acquisitions in Turkey

Itır Sevim-Çiftçi and Kemal Aksel of Yegin Ciftci Attorney Partnership explore the main principles governing acquisitions in Turkey

In light of local and international political and economic events, M&A activity in Turkey was rather stable in 2016. According to data released by the Turkish Competition Authority (TCA), the regulator has examined 209 mergers and acquisitions in Turkey carried out in the past year with total volume of transactions of Turkish targets and joint ventures reaching $7.3 billion. There were 47 transactions undertaken by foreign investors with an investment volume of $5.11 billion.

According to the same TCA report, the main areas of investment in 2016 were financial intermediary institutions with a transaction value of $2.2 billion, the production, transmission and delivery of electric power worth $1.5 billion, followed by processing machines and machine tool production with $731 million , cinema, video and TV programmes at $541 million, and trade in agricultural staples and livestock at $433 million. The main foreign investors in Turkish companies were from the Netherlands, Germany, the UK, Japan, South Korea and the USA. Asian and European investors invested the most with Asia's share reaching its highest level in 2016, in line with South Korean and Japanese investments in 2016.

For 2017, market experts expect a growing interest from Asian investors mainly in South Korea, Japan and China. Financial investors activity is also expected to pick up and privatisations are expected to play an important role in 2017. Strategic investors with existing investments in Turkey are expected to be more eager to further invest in the country, attractive sectors being technology, manufacturing, retail and energy.

The following is a general overview of factors that should be considered before embarking on M&A transactions in Turkey.

Financial assistance rules

Financial assistance restrictions introduced under the Turkish Commercial Code (TCC) present significant issues that must be addressed by the transaction parties in almost every M&A transaction that includes acquisition financing.

According to the current financial assistance restrictions, a target company cannot advance funds, provide loans or grant security or guarantees to third parties to facilitate the acquisition of its own shares. Types of assistance and/or support are not exhaustively listed under the TCC, and any direct or indirect action to facilitate the acquisition of the shares might fall within the scope of this prohibition.

The purpose of the financial assistance restrictions is to protect the stakeholders of a target company (creditors and minority shareholders) by prohibiting a buyer from using the assets or resources of the target to support its acquisition to the detriment of its stakeholders.

Unlike English law, there is no whitewash regime applicable to the financial assistances restrictions under the TCC.

If a target company assists in the acquisition of its own share in breach of the financial assistance restrictions, any transaction supporting such acquisition (eg advancing funds, providing loans, granting security or guarantees) will be deemed null and void. Whilst the TCC does not explicitly render underlying share purchase transactions null and void, the official commentary alongside the relevant provision in the TCC states that future court precedents and scholarly opinion will determine the validity of share purchase transactions carried out in breach of the financial assistance restrictions. Although this matter is yet to be brought before the Turkish courts, the common view is that such breach would only affect transactions supporting the acquisition but not the acquisition itself.

Share buybacks

Particular care should be taken in respect of structuring share buybacks, regulated under the TCC. Additional regulations are set out by the Capital Markets Board of Turkey (CMB).

Under the TCC, save certain exceptional cases, share buybacks or pledges of a company's own shares are only permitted subject to certain conditions being satisfied, including the shares subject to the acquisition or the pledge not exceeding 10% of the company's authorised or issued share capital.

An authorisation issued at a shareholders' meeting and granting the board of directors the requisite powers to complete share buybacks is required if a company is to buy back its own shares. This authorisation may be granted for a maximum of term of five years and can be deferred until the first shareholders' meeting following the buyback if the buyback is necessary to prevent an imminent and material loss to the company.

These principles set forth under the TCC also apply to the acquisition of the company's shares by one of its affiliates in which the company holds the majority of the shares as well as a company's acquisition of its own shares.

The TCC stipulates that shares acquired or accepted as security in a way that is contrary to the principles set forth above must be disposed of (or security over them must be released) within six months from the date of their acquisition or the perfection of the security (as the case may be). In the case of limited liability companies (limited sirket), the shares should be disposed of or redeemed through a capital reduction within a maximum period of two years following their acquisition.

The CMB applies a similar approach to the buyback regime for listed companies as the TCC does for private companies, although there are certain additional rules and requirements that listed companies must comply with.

Shares bought back without complying with the CMB regulations are required to be disposed of within one year following the date of the buyback. Shares that cannot be disposed of within this period must be cancelled through a capital decrease.

Transfer of enterprise/undertaking

The TCC must be considered in respect of any business/enterprise transfer connected with Turkey. Pursuant to the code, transfer agreements regulating transfer of an entire business/enterprise together with its all assets and liabilities must be carried out in writing, and registered and published at the relevant trade registry.

The TCC and the relevant secondary legislation provide that an enterprise may be transferred entirely under a single agreement, without a requirement to conclude separate transfers for each individual asset (including transfers of title deeds for properties and transfers of trademarks at the trademark registry). Under the relevant legislation, the relevant trade registry is required to notify the related registries (such as the land registry, the Turkish Patent and Trademark Institute or the ship registry) on behalf of the transferee simultaneously with the registration of the transfer of enterprise to ensure the prompt registration of the transfer of the assets (although in practice certain trade registries do not yet notify every related registry and separate applications are still required).

Antitrust approval

Where a change of control is foreseen as a consequence of an M&A transaction and certain turnover thresholds under Turkish antitrust legislation are exceeded, TCA approval will be required (even if there is no affected market in Turkey).

Obtaining antitrust approval generally takes between three to five weeks (unless there are antitrust concerns arising from the proposed transaction, in which case the process will be longer) after submitting the notification form. Any transaction should be structured to take this period into account.

The antitrust approval process can potentially give rise to a host of legal and commercial issues that must be considered carefully, in particular in respect of extended time periods providing buyers circumstances in which can withdraw from an acquisition.

Minority shareholder protection

Generally, all shareholders of a joint stock company have certain shareholder rights, such as the right to participate in shareholders' meetings, obtain certain information about the company and its subsidiaries (such as annual reports, financial statements, dividend distribution proposals etc), seek clarifications on the company's accounts and bring legal actions against the company under certain circumstances.

Minority shareholders are defined as shareholders controlling (solely or jointly) at least 10% of a company's capital in private companies and five percent of a company's capital in publicly-held companies. In addition to general shareholder rights, minority shareholders enjoy a certain degree of protection through the rights granted to them under the TCC, such as the right to request liquidation or a special audit. The rights granted to minority shareholders cannot be restricted or removed but may be enhanced by including additional rights in the articles of the company. Accordingly, any minority investor in a Turkish M&A transaction should consider introducing such additional rights not provided under the TCC into the articles of the company to ensure that its interests are sufficiently protected.

Restriction on foreign ownership of real estate

Another key issue to consider before committing to a transaction is the extent to which foreign ownership restrictions may affect the transaction. Under the Turkish real estate regulations, if a foreign entity acquires a shareholding equal to or exceeding 50% in a private Turkish company which owns real estate, then the governorship where the real estate is located will carry out a clearance check following such company's notice to the relevant authorities that its shares have been acquired by a foreigner. This clearance process cannot be a condition precedent to the acquisition of the target company, as it is only triggered once the purchase of the target company by the foreign investor has closed. It should also be noted that the criteria and percentages to trigger the clearance check are different for publicly held companies.

The relevant authorities will assess whether the real estate is in a military forbidden zone, military security or strategic zone, or a private security zone, and whether there are any risks to state security as a result of a foreign shareholding in the target company.

If the authorities do not clear the new ownership of the relevant real estate, the company has 45 days to remedy the situation (for instance by selling the real estate in question). This term can be extended up to one year in total for remedy, upon the reasonable request of the company. If not sold at the end of such period, then a forced sale may be conducted.

After the acquisition of a target company by foreign investors with the requisite shareholding, each time the target company wishes to acquire further real estate, the acquisition will be subject to the prior approval of the relevant authority and the target company must comply with the necessary pre-approval process.

Shareholders' agreement within the meaning of a control agreement

Shareholders' agreements are key components in most of Turkish M&A transactions. Gernerally, a target company will be party to such agreements to ensure that corporate governance rules and the share transfer restrictions regulated under the agreement are known to the company. However, under Turkish law, an agreement between a company and its shareholders entitling any shareholder to instruct the management of the company with respect to key management issues of the company (e.g. the appointment of executive officers of the company or approval of the company's budget) might be regarded as a control agreement.

Control agreements are valid and enforceable only if the general assemblies of both the controlling enterprise and the controlled enterprise approve the relevant control agreement. Each general assembly resolution must be registered and announced at the trade registry together with the control agreement itself and thus confidentiality might be an issue for the transaction parties. A shareholder agreement to which the relevant company is not a party to is not regarded as a control agreement within the framework of the TCC, even if it includes certain veto rights in favour of a shareholder regarding the management of the company.

Compulsory squeeze out

Under the TCC, shareholders directly or indirectly holding at least 90% of a company's share capital have the right to squeeze out the remaining minority shareholders by buying their shares if such minority shareholders (i) disrupt the activities of the company, (ii) act dishonestly, (iii) cause major disturbances, or (iv) commit reckless acts.

The TCC further permits the squeeze out of minority shareholders in the case of a merger with another company. In this case, any merger agreement which provides merger proceeds in lieu of minority shares must be approved by shareholders holding at least 90% of the share capital of the transferor company.

The CMB has introduced a complementary regulation on the squeeze-out rights of controlling shareholders and put option rights of the remaining shareholders in a publicly held company. Squeeze out rights or sell out rights are triggered when a shareholder's shareholding ratio reaches or exceeds a certain percentage of the share capital of a company due to a tender offer or other acquisition of voting rights. Minority shareholders may exercise their sell out rights within a three-month period after the date on which a public disclosure is made regarding reaching to or exceeding the relevant shareholding percentages by the controlling shareholder. Then, the controlling shareholder may exercise its squeeze-out rights within three business days following the completion of the sell out right exercise period. Under the CMB system, the percentage threshold is 97% until December 31 2017 and 98% after. The CMB system also mandates strict timelines for the exercise of squeeze-out and sell out rights.

Mandatory tender offer

The mandatory tender offer (MTO) process is a key issue which should be addressed by the parties early in the transaction process. When a target in an M&A transaction is a listed company, the purchaser of that company's shares will be required to conduct an MTO process if a change of control occurs in the target company's management.

A change of control for these purposes is defined under the relevant CMB regulation as (i) the direct or indirect acquisition of 50% of the share capital of a company, (ii) the acquisition of privileged shares granting the right to elect the simple majority of the board of directors or to nominate the simple majority of nominees for the members of the board of directors of a company, or (iii) the acquisition of the management control in a company, individually or acting in concert.

The calculation method of an MTO price differs depending on various criteria.

As a general principle, in case of a direct change of control, the MTO price for a listed company cannot be lower than (i) the arithmetic average of the daily adjusted weighted share price for six months before the public disclosure regarding the execution of the relevant share transfer agreement; and (ii) the highest amount paid for the acquisition of the same class of shares by the purchaser launching the MTO during the six months period before the start of the MTO, including the share acquisition triggering the MTO. The CMB system provides different calculation methods for different scenarios (eg indirect change of control etc.).

Save for the exceptions, application for an MTO should be filed with the CMB within six business days following the acquisition of the relevant shares. The MTO process should be initiated within a two-month period after the date on which the MTO obligation arises. The CMB system also mandates strict procedure and timelines for each action to be taken during the mandatory tender offer procedure.

Disclosure of shareholding interest/registration obligation

Under normal circumstances, share transfers in joint stock corporations are not required to be registered with the trade registry. However, the TCC and its secondary implementing legislation provide that the share transfers in companies that are members of a group of companies must be registered and announced at the relevant trade registry if a company directly, or indirectly, acquires or disposes of shares so that its shareholding in the relevant group company exceeds or falls below five percent, 10%, 20%, 25%, 33%, 50%, 67% or 100%.

Any change in the shareholding structure of a company should be notified to that company and to the relevant trade registry, in writing, within 10 days following completion of the share transfer.

In practice, the target company generally makes the notification to the trade registry after being informed about the share transfer and in any case, within ten days following the share transfer. If such share transfer is not registered with the relevant trade registry within the required period, the rights vested to the transferred shares, including voting rights, are be deemed to be suspended until the registration is completed.

Since the failure to register results in the suspension of material shareholder rights, including voting rights, particular care should be taken to ensure that the notice to company and the filing in the trade registry are made in due time following the closing.

Disclosure requirements

Companies listed on Borsa İstanbul A.Ş. (BIST, formerly known as the Istanbul Stock Exchange) are under certain disclosure obligations. The relevant disclosures must be made through the public disclosure platform (Kamuyu Aydınlatma Platformu or PDP).

Certain actions which take place before the completion of an acquisition, and might have an effect on the value of the shares or investment decisions of the investors – such as, receiving a purchase offer, signing a letter of intent or a share purchase agreement – must be disclosed on the PDP as soon as possible after the conclusion of the relevant transaction. They must also be disclosed within three business days in case of any change in its direct or indirect shareholding structure exceeding or falling below certain thresholds unless the disclosure is duly deferred in accordance with the relevant legislation.

Listed companies must also disclose any material non-public information shared with third parties if a non-disclosure agreement does not exist between the listed company and the relevant third party.

Furthermore, public companies that are not listed on BIST also have certain disclosure obligations (eg in case of any change in its direct or indirect shareholding structure exceeding or falling below certain thresholds). The disclosures of public but not listed companies are notified to the Capital Markets Board within five business days following the occurrence of or having knowledge about the relevant event. The CMB would then announce those on its weekly bulletin.

Stamp tax

Stamp tax is applied to a wide range of legal documents in Turkey bearing a signature such as contracts, undertaking letters, agreements, financial statements, and tax returns. The tax base differs depending on the nature of the document. The general tax rate is 0.948% on the highest value stated or calculable from the taxable document.

For agreements signed in Turkey, the taxable event occurs when the documents are signed. If agreements are signed abroad, it may be argued that no stamp tax would arise until the agreement is submitted to the Turkish official departments or until the terms of the document are benefited from in Turkey, although this is interpreted broadly by Turkish tax authorities. Stamp tax is payable by the parties who sign the document. Parties are jointly liable vis-à-vis the tax authority for the payment of stamp tax. There is also a cap, adjusted annually, for the amount which can be levied as stamp tax. The current cap for 2017 is TRY1,865,946.80 ($520,705) per document.

As per the latest amendments to the Turkish tax codes, share transfer and share capital increase documents (eg share purchase and subscription agreements) are exempt from stamp tax. Nevertheless, specific case by case stamp tax analysis should be carried out in order to confirm that such transaction agreements are exempt from stamp tax.

Governing law

Under Turkish law, parties to an agreement which includes a foreign element can freely determine the governing law of the agreement. However, regardless of the parties' choice of governing law, under certain circumstances, Turkish law would be applied and override any alternative governing law that has been chosen by the parties (eg antitrust matters, mandatory governance rules under the TCC, title to assets/shares or transfer of assets/shares).

About the author



Itır Sevim-Çiftçi

Partner, Yegin Ciftci Attorney Partnership

Istanbul, Turkey

T: +90 (212) 339 00 77



Itır Sevim-Çiftçi, partner, is one of the prominent figures in the market and heads the corporate/M&A practice of the firm. During her 20 years in practice, she has advised key strategic and financial investors in numerous landmark transactions in various sectors, and major privatisations.

About the author



Kemal Aksel

Counsel, Yegin Ciftci Attorney Partnership

Istanbul, Turkey

T: +90 (212) 339 00 64



Kemal Aksel, counsel, specialises in domestic and cross-border M&A (including public M&A), private equity & venture capital, structured equity/quasi-equity transactions and joint ventures, representing both financial and strategic investors in various sectors including financial services, TMT, consumer goods & retail, energy & resources and real estate and defence industry.

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