This content is from: Local Insights

Turkish restrictions on security for project financing

Muharrem KüçükMustafa Yigit Örnek
When international banks and financial institutions finance a project or provide acquisition financing, they need to acknowledge certain restrictions under the Turkish Commercial Code No 6102 (TCC) in respect of security granted to secure such financing.

For any project or acquisition financing, the borrower itself is able to provide a corporate guarantee to the lenders. But there is a concern if a subsidiary company is required to provide a corporate guarantee in respect of the obligations of its parent company. According to article 202 of the TCC, a parent company cannot cause any loss to its subsidiary. Although abuse of control by the parent company does not render the relevant transaction void, the parent company is obliged to compensate the losses of the subsidiary within the same financial year or provide a method for compensation within the same financial year. If the parent company fails to compensate, the other shareholders or creditors of the subsidiary are entitled to commence proceedings against the parent company and the directors of the parent company for compensation of losses. Article 202 also applies if either the parent or the subsidiary is incorporated in Turkey.

Acquisition finance deals are structured so that a special purpose vehicle is incorporated to acquire the shares of a target company (and if applicable, its group) whereas all cash is generated and assets held at the level of the target company (or its subsidiaries). Article 380 of the TCC stipulates financial assistance prohibitions. Transactions which require a target company to advance funds, make loans or provide security or guarantees to a third party (lenders) in relation to the acquisition of its shares are void. Alternative methods can be adopted to overcome the consequences of financial assistance rules. For example, the target company and SPV (if both incorporated in Turkey) may be merged into one company to grant security or guarantees in favour of the lenders. In addition, as the TCC financial assistance restrictions relate solely to joint stock companies under TCC, it can be concluded that such restrictions would not apply to limited liability companies. Hence conversion to limited liability companies may enable lenders to benefit from target security.

Muharrem Küçük and Mustafa Yigit Örnek

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