Corporate M&A 2020

Last Updated April 20, 2020

Turkey

Law and Practice

Authors



Yegin Çiftçi Attorney Partnership is a leading Turkish law firm that has been working in co-operation with Clifford Chance in Turkey since 2011. The firm holds a strong presence in the local M&A market, taking part in numerous ground-breaking deals. Advising international strategic and financial investors on M&A transactions in Turkey and assisting Turkish clients on their international acquisitions, Yegin Ciftci's corporate/M&A department is best known for its strong track record on complex and structured M&A transactions, and is singled out for its sector knowledge. Among other areas, the team focuses on cross-border acquisitions, public and private M&A, structured equity transactions, management/leveraged buyouts, asset/business transfers, restructurings and strategic alliances in corporate or other forms, enabling clients to achieve their investment strategies.

In 2019, the Turkish M&A activity saw a fall in line with the slowed down global activity due to economic uncertainties, trade tensions, geopolitical challenges and slower growth expectations. According to the market data, around 233 mergers and acquisitions were carried out in 2019, with a total volume of transactions reaching USD5.3 billion, representing the lowest annual deal volume in the last 10 years.

There were around 70 transactions undertaken by foreign investors, making a solid contribution to the annual deal volume with an investment volume of more than USD3 billion, while Turkish investors represented an annual deal volume of around USD2 billion. In 2019, the market saw a smaller number of big ticket transactions compared to the previous years followed by the lowest average deal size in the last decade.

European investors once again led the market in terms of deal numbers 43 while investors from Asia Pacific and Gulf Region also made reasonable number of deals 

In 2019, internet and mobile services and technology remained at the top of the list of sectors in relation to deal number. Energy, manufacturing, e-commerce, food and beverages sectors were among the most active sectors. Infrastructure was the biggest contributor to overall annual deal volume, followed by financial services, energy and retail, which significantly provided a major contribution to the total M&A deal volume.

Due to the rapid spread of COVID-19, the world economy is expected to shrink in 2020, while also impacting the economic growth forecast for Turkey. Although leading indicators suggest that the Turkish economy continued its recovery and the slowdown in European economies is likely to offset Turkey’s exports, global monetary conditions may not support a faster recovery. In light of these facts, investors are expected to focus their interest more on the strategic M&A opportunities in key sectors.

The most common technique for acquiring a company in Turkey is share acquisition. Asset transfers are also used for acquisitions but are not common.

In asset transfers, if an entire business is transferred – including "assets" and "liabilities" – and such transfer is notified to the creditors of the transferred business, and where the purchaser becomes responsible for the liabilities of the transferred business, then the seller continues to be jointly liable together with the purchaser for two years, starting from the date of the notice or announcement.

Thereafter, the entire liability is shifted to the purchaser. Such a prescribed regime for pre-closing liabilities often requires parties to develop specific indemnity regimes and structures in asset transfers, depending on the particulars of the transaction as well as the assets and liabilities in question. The tax efficiency of asset transfer transactions primarily discourages parties from following this route.

Depending on the sector and the investment, Turkish M&A transactions may trigger various filing and approval requirements before different public authorities, such as antitrust filings or filings before the Energy Market Regulatory Authority of Turkey (EMRA), the Banking Regulatory and Supervision Agency (BRSA), the Ministry of Treasury and Finance (the "Treasury") or the Capital Markets Board of Turkey (the CMB).

Major regulatory filing requirements in Turkey are, briefly, as follows:

  • mergers and acquisitions leading to a permanent change of control are subject to the approval of the Turkish Competition Authority if certain turnover thresholds are exceeded;
  • share transfers above 10% (5% for public companies) in Turkish companies holding licences to operate in the electricity and natural gas sector are subject to the prior approval of the EMRA;
  • financial institutions operating under a BRSA licence, such as banks, financial leasing companies and asset management companies, are subject to the BRSA regulations – direct and indirect share transfers exceeding certain thresholds in these financial institutions are subject to the prior approval of the BRSA;
  • certain entities, such as intermediary institutions and portfolio management companies, are subject to the CMB regulations, and the CMB's prior approval is required for direct and indirect share transfers exceeding certain thresholds; and
  • insurance, pension and reassurance companies operating under a Treasury licence are subject to the Treasury regulations, and prior approval from the Treasury is required for direct and indirect share transfers exceeding certain thresholds.

There are no general limits (statutory, de facto, or otherwise) on foreign ownership or control, and foreign investors are treated the same as domestic ones. However, certain limitations are applicable to certain sectors. For instance, under the broadcasting legislation, foreign shareholders cannot hold more than 50% of the paid-in share capital of a broadcasting company. In addition, special regulatory requirements apply to foreign-owned interests in the petroleum, mining, broadcasting, maritime transportation and aviation sectors.

Real estate acquisitions are also subject to certain screening and regulatory approvals, which vary depending on the acquirer, location and/or its proximity to security sensitive areas (eg, military zones or special security zones.)

Under Turkish law, mergers and acquisitions leading to a permanent change of control require antitrust filing to the Turkish Competition Authority if the following thresholds are exceeded:

  • the total turnovers of the transaction parties in Turkey exceed TRY100 million and the turnovers of at least two of the transaction parties in Turkey each exceed TRY30 million; or
  • the turnover in Turkey for at least one of the transaction parties in the merger transactions and the target in acquisition transactions exceeds TRY30 million, and at least one of the other transaction parties has a global turnover exceeding TRY500 million.

For the purposes of calculating the relevant turnover thresholds, a company will be deemed to "control" another company if it:

  • holds more than 50% of the share capital or financial assets of such company;
  • holds more than 50% of the voting rights of such company;
  • has the right to appoint more than 50% of the members of such company's board of directors or other representative bodies; or
  • has the right to manage the business of such company.

There are special rules for calculating the threshold in certain sectors (eg, banking).

In Turkey, the Turkish Labour Code (Law No 4857) (the "Labour Code") regulates the relationship between an employee and an employer. Although the Labour Code regulates employment matters in the transfer of a workplace, special provisions of the Turkish Commercial Code (Law No 6102) (TCC) are applicable under certain circumstances.

In the case of business transfer, employees are entitled to object to the transfer of their existing employment relationships. In such cases, the relevant employment relationship will terminate and the employee will be entitled to the benefits set forth under the Labour Code (eg, severance payment).

Furthermore, if the employment relationship terminates, the purchaser and the seller will be jointly and severally liable for the unpaid receivables of the employee that had arisen prior to the transaction, and the receivables that will become due upon termination. Employees can claim all rights and receivables accrued but unpaid at the date of termination (such as unused annual leave, unpaid salary, bonuses and other side benefits and rights). Similar principles are also applicable in merger transactions.

The purchasers should pay particular attention to employment matters in M&A transactions if the employees of the target are unionised and have collective bargaining agreements in place.

There is no national security review of acquisition transactions in Turkey.

The most significant legal developments in Turkey in the last three years related to M&A include the following.

On 13 September 2018, Executive Order No 85 (the "Executive Order") was published amending Decree No 32 on the Protection of the Value of the Turkish Currency (the "Decree"). With the Executive Order, Turkey has restricted the ability to select a foreign currency in certain contracts between Turkish residents (as described under the Decree). The authorities have adopted a comprehensive approach by giving these restrictions (the "FX Restrictions") a retroactive effect for amending existing contracts.

The Executive Order also indicated that exemptions would be issued by the Treasury in respect of the restrictions. The Treasury has restructured the FX Restrictions and announced the exemptions with the Communiqué on the Amendment to the Communiqué (numbered 2008-32/34) on the Decree (the "Communiqué"), which also includes repricing rules for contracts that fall outside the scope of exemptions.

The Communiqué introduced various exemptions for foreigners, companies in Turkey that are controlled by foreigners, and specific types of transactions. In general, M&A deals or share purchase agreements are not directly captured by the FX Restrictions, but investors should be mindful about these critical rules as they may affect the target's business since the target's main counterparties (customers/vendors) can be subject to these restrictions.

Other than the developments outlined above, there were no significant changes to takeover legislation in 2018 or 2019, and no upcoming developments that could result in significant changes in the coming 12 months are expected.

See 4.2 Material Shareholding Disclosure Threshold to 4.6 Transparency for relevant information.

Disclosure of material events for publicly listed companies is primarily regulated by the CMB Disclosure Communiqué (II-15.1) (the "Disclosure Communiqué"), under which the CMB makes a distinction between "insider information" and "continuous information". Rather than identifying each material event requiring disclosure in the Disclosure Communiqué, the CMB leaves specific disclosure decisions regarding insider information to the companies' individual discretion, on a case-by-case basis.

The Disclosure Communiqué defines "insider information" as information or any event that is not disclosed to the public that may affect investors' investment decisions, or is likely to affect the value and price of the shares or relevant capital markets instruments of the issuer.

If any inside information comes to the attention of any persons subject to certain criteria set forth under the Disclosure Communiqué, public disclosure is required regarding such information. Publicly listed companies may suspend the disclosure of inside information by taking full responsibility for any non-disclosure in order to protect their legitimate interests, provided that:

  • such suspension does not mislead investors;
  • the company is able to keep any related inside information confidential; and
  • the board of directors resolves on the necessary precautions in order to protect the interests of the issuers and not to mislead investors.

Once the suspension conditions are eliminated, the issuer company must disclose the inside information on the Public Disclosure Platform (see 7.2 Type of Disclosure Required).

Information with respect to certain changes in the share ownership or management control in a company is considered as "continuous information". Accordingly, a person or persons acting together to become direct or indirect holders of 5%, 10%, 15%, 20%, 25%, 33%, 50%, 67% or 95% of the issued share capital or voting rights of a publicly held company are required to disclose such acquisitions on the Public Disclosure Platform.

Furthermore, persons with managerial responsibility in a publicly listed company or persons with close relations to any such persons must publicly disclose their transactions relating to the shares of such company as of the date when the aggregate value of the transactions performed by such persons reaches TRY400,000 in one calendar year, and disclose their transactions relating to capital market instruments other than publicly offered shares of such company as of the date when the aggregate value of the transactions performed by such persons exceeds TRY400,000 in one calendar year.

Companies must make necessary updates within two business days in respect of any changes relating to the general information on the company disclosed on the Public Disclosure Platform. The Central Registry Agency is responsible for updating the shareholding chart indicating a publicly listed company’s real person and legal entity shareholders who hold directly 5% or more of the shares or voting rights of that publicly listed company, in case of any changes. Accordingly, acquirer information is publicly disclosed if the shareholding/acquisition percentage is exceeded.

Dealings in derivatives are allowed in Turkey and regulated under the Communiqué on Principles Regarding Investment Services, Activities and Ancillary Services (III-37.1). Regardless of their market place, dealings in derivatives must be mediated by authorised investment firms since derivatives are capital markets instruments, and their transactions fall under capital markets services that can be undertaken only by authorised investment institutions pursuant to the Capital Markets Law.

Communiqué No III-37.1 provides an exemption to this requirement, stating that if a derivative trading is performed by and between real and/or legal persons in such a manner that it cannot be considered as commercial or professional activity, then it can be undertaken without the intermediation of an investment firm.

There are no specific disclosure obligations for derivative transactions, except the ones regulated under Article 11 of the Disclosure Communiqué. Accordingly, persons with managerial responsibility and the principal shareholders of an issuing company must disclose the following transactions:

  • all transactions regarding the issuer's securities (other than its shares offered to the public), provided that the total value of the transactions executed within a calendar year exceeds TRY400,000; and
  • all transactions relating to shares and other securities, provided that the total value of the transactions executed within a calendar year is TRY400,000 or higher.

There is no regulation that obliges the shareholders to disclose the purpose of their acquisition or their intention regarding control of the company.

However, the CMB's Tender Offer Communiqué (II.26.1) (the "Tender Offer Communiqué") requires the offeror to make a disclosure of material actions planned for the company after the mandatory (or voluntary) tender offer is completed.

Under Turkish law, there is no regulation imposing disclosure for deals in privately held companies. However, the Disclosure Communiqué should be observed for publicly held companies. It does not specifically set forth at what stage a target is required to disclose a deal. In principle, any information or event that may affect investors' investment decisions or the value of the shares must be disclosed. 

In practice, the deals are disclosed when the likelihood of reaching a definitive agreement reaches a level that might affect the investors' decisions or the value of the shares.

Generally, publicly held companies in Turkey follow the legal disclosure requirements set forth under the Disclosure Communiqué.

The scope of due diligence for a deal varies according to the scope of activity of the target company. Certain aspects are common for every company, such as its corporate status (constitutional documents, shareholder records, general assembly and board resolutions, etc), commercial and financial arrangements/agreements, employee relationships, intellectual property, real estate and litigation.

However, depending on the target company's sector and commercial activities, the scope of legal due diligence may be expanded significantly in relation to licences, authorisations and permits. Apart from legal due diligence, it is also common for a purchaser to seek due diligence in relation to the target company's financial, tax, technical/operational, and environmental status. 

In Turkish markets, it is common practice for the majority of shares to be owned or controlled by a single principal shareholder. Therefore, deal negotiations are often conducted with a principal controlling shareholder, and it is not a general practice in Turkey to begin with or to have a standstill agreement.

Although exclusivity is often agreed at the outset of the negotiations, the use of standstill agreements is not common practice in the Turkish market.

The definitive agreement executed with the controlling shareholder is not the instrument to document the tender offer terms.

The Tender Offer Communiqué requires both voluntary and mandatory tender offer terms and conditions to be fully disclosed by using a standard tender offer form, which must be filled out in line with the Tender Offer Communique and contain all terms and conditions in relation to the offer (including price, timing, the undertaking's existence of funds, ancillary disclosures).

The offeror must seek the CMB's prior approval on the standard offer form and its contents before kick-starting the offer process.

The closing of an acquisition transaction may vary according to factors such as the size and nature of the target (eg, privately or publicly held), assets, percentage of shareholding sold, number of parties involved, existing/remaining shareholders, antitrust and other regulatory approvals, third-party consents, and ancillary commercial arrangements (eg, transition services or off-take-related arrangements).

Taking these factors into account, the closing of an acquisition usually requires between three and six months.

The purchaser of shares in a publicly held company will be required to conduct a mandatory tender offer if a change of control occurs. The method for calculating the offer price differs depending on whether or not the company is listed, whether the change of control has occurred in a direct or indirect manner, and whether there are different share groups.

The Tender Offer Communiqué imposes a mandatory tender offer threshold for publicly held companies. Under the Tender Offer Communiqué, if any party or parties acting together acquire management control of a publicly held company, such party or parties are required to make an offer to the other shareholders to buy their shares, and to apply to the CMB for the approval of the tender offer within six business days following the acquisition of the shares and voting rights granting management control, and to commence the offer transactions within two months following the acquisition.

The acquisition of management control occurs when a person – individually or acting together with others – owns, directly or indirectly, at least 50% of the voting rights, or, regardless of any voting rights owned directly or indirectly, acquires privileged shares that grant the power to elect directors constituting the majority of the board of directors or to nominate that number of directors for election at the general assembly of shareholders.

The CMB may grant an exemption from the mandatory offer obligation under certain circumstances, such as the acquisition of management control as a consequence of a mandatory shareholding structure change in order to reinforce the financial standing of the company, the acquisition of management control in the controlling shareholder of the company without the intent to acquire management control in the company, and the acquisition of shares in the controlling shareholder of the company, provided that the voting rights of the controlling shareholder in the company do not exceed 50%, by executing an agreement between the controlling shareholder and the acquirer for the purpose of sharing the management control of the company.

The Tender Offer Communique provides certain exemptions to the tender offer obligation, including:

  • if management control is acquired upon a voluntary tender offer for 100% of the shares of all shareholders;
  • without an acquisition of shares, if management control is acquired by a written agreement that is approved by the general assembly, and the shareholders who cast and register their dissenting votes are granted exit rights in accordance with the relevant CMB legislation;
  • if shares are transferred within a group of companies controlled by the same person;
  • if a shareholder with management control loses but then re-acquires that control before the acquisition of management control by a third party;
  • if there is a transfer of a portion of shares by parties with management control to third parties in a manner to grant the acquiring party joint control or a lesser control under a written agreement;
  • if a bank acquires the shares as a result of the enforcement of security over shares;
  • if the change of control occurs as a result of the existing shareholders acquiring shares via a capital increase where their respective pre-emption rights have not been restricted;
  • if the transfer of shares is for the purposes of complying with legislation regulating the nature of the shareholding; or
  • if the change of management control is a result of existing shareholders' acquisition of shares in the case of share capital increases (with no pre-emption restriction imposed).

The main practice in Turkey is to use cash consideration. In private transactions, non-cash considerations (eg, shares and securities) are preferred from time to time, depending on the transaction and commercial mechanics.

In the case of mandatory tender offers, cash is the common method for consideration, although, subject to certain conditions, non-cash consideration in the form of shares or certain securities may be used if the selling shareholders agree. There are various formalities and requirements that need to be satisfied in order to pay out the offer price through non-cash considerations.

The Tender Offer Communiqué imposes various rules on the tender offer process. For instance, the mandatory tender offer price cannot be less than the arithmetical average of the daily adjusted weighted average share price of the last six months prior to the public disclosure of the agreement regarding the sale of shares, or the highest price paid for the same group of shares of the target company within the last six months before the tender offer.

The Communiqué also specifies how the tender offer price will be determined in the case of an indirect change in the management control of the target company and, if there are multiple share groups, how the tender offer price will be determined for shares other than the ones whose transfer creates the tender offer requirement.

Furthermore, in the case of a mandatory tender offer, the Tender Offer Communiqué requires the offeror to apply to the CMB within six business days of the acquisition of the shares and voting rights granting management control, and to commence the offer transactions within two months of the acquisition.

If the mandatory tender offer process is not initiated within two months (or if it is extended until the end of the requested extension), then the voting rights of those who are in violation of their mandatory offer obligations will automatically be suspended and those shareholders will be prevented from voting at the general assembly until the completion of the tender offer process, unless the CMB determines otherwise. Furthermore, such shareholders will be subject to an administrative fine.

The Tender Offer Communiqué also provides detailed rules in relation to the voluntary tender offer process. For instance, voluntary tender offers may be made for a limited number of shares in a specific class of shares. The offer price in voluntary tender offers may be increased until the day before the expiry of the offer period, subject to certain conditions.

While the offer must be made for all the shares of the remaining other shareholders in mandatory tender offers, the amount of target shares and certain conditions of the offer are left to the discretion of the offeror in voluntary tender offers.

The Tender Offer Communiqué requires funding to be available and ready for payment at the outset of the offer, and even requires disclosure of the source of funding in the standard tender form. Accordingly, making the offer conditional to obtaining financing is not possible as per the Tender Offer Communiqué.

For private deals, the parties have full flexibility and discretion to agree on whether to have the availability of acquisition financing as a condition precedent.

Recent practice shows that down-payments and break-up fees are becoming more common in order to secure the deal. Non-solicitation/no-shop clauses are also customary.

The TCC provides minority protection rules. However, such minority rights are not sufficient to grant notable governance rights and benefits to minority shareholders. There are various methods to grant governance rights to minority shareholders, at either board or shareholder level.

Regardless of the method chosen, it is common practice to have such governance rights incorporated into the articles of association of the company, to support the enforceability of such rights.

The creation of share classes (alphabet stock), the granting of board nomination rights or veto or approval rights at board and/or shareholder level, and increasing the number of votes per a specific class of share are common methods to assert rights in the governance of the company.

Special care and diligence are needed in the creating and implementing of an effective governance structure in publicly held companies in order to comply with the requirements and restrictions of the CMB legislation.

According to the provisions of the TCC, voting by proxy options in general assembly can be separated into two groups: collective representation and individual representation.

Under collective representation, a shareholder generally has the following three options to choose from:

  • a board-nominated representative is nominated by the board of directors from directors or any other manager, and is not mandatory;
  • an independent representative is mandatory only if the board nominates a board-nominated representative, and has no relation to the company; and
  • a corporate representative is a shareholder initiative and aims to represent a shareholder through another shareholder – a corporate representative cannot be applied to public companies.

All of these representatives prepare and publish a declaration prior to the general assembly regarding their opinions on the agenda items. However, any vote contrary to this declaration is still valid.

As for individual representation, an ordinary representative is defined as either a shareholder or a third person; a depositor representative is a person with the delegated power to vote on general assemblies, and who receives instruction on how to vote on agenda items.

The TCC grants the majority shareholder holding at least 90% (directly or indirectly) of the shares of a company a right to squeeze out the minority shareholders in the event that those shareholders obstruct the company's operations, act in bad faith, create apparent distress on the company's operations, or act recklessly.

Actions of minority shareholders that could lead to the aforementioned conditions are not specifically listed under the TCC. Therefore, the courts will determine whether or not such conditions have occurred, according to the circumstances of each case. In addition, the TCC elaborates on the details of the consideration to be paid to these minority shareholders in the event of a squeeze-out.

The TCC also allows the squeeze-out of the minority shareholder in a merger of two or more companies. Accordingly, the merger agreement to be signed between the merging companies can provide an option for the minority shareholders to exit the company with cash consideration instead of holding shares in the surviving entity. Such a merger agreement must be approved by the shareholders holding at least 90% (directly or indirectly) of the share capital of the company that will cease to exist.

In respect of public companies, a squeeze-out mechanism is regulated under the Squeeze-Out and Put Option Rights Communiqué (II-27.2) (the "Squeeze-Out Communiqué"). Accordingly, if a purchaser or persons acting in concert with the purchaser obtain 98% or more of the voting rights of a listed company, directly or indirectly, or acquire additional shares after reaching a 98% shareholding level, the minority shareholders of the listed target company will be entitled to sell-out rights against the controlling shareholder, and that controlling shareholder will be entitled to squeeze-out rights against the minority shareholders.

The minimum squeeze-out and sell-out price will be calculated in accordance with the principles set forth under the relevant CMB communiqués.

The majority of Turkish companies do not have dispersed ownership structure, and shares are concentrated and owned by a principal selling shareholder or group of shareholders acting together, who also control the management of the target company.

Accordingly, in practice, even in the case of publicly held companies, instead of initially launching voluntary tender offers and building stakes, bidders primarily prefer to initiate acquisition negotiations directly with the principal shareholder and then follow up the mandatory tender process to complete its acquisition process.

In bilateral deals, soft commitments are often given at the early stages of the transaction through MoUs or letters of intent, which are backed up by concrete exclusivity obligations. Different methods are followed in the case of auction sales, the process of which is mandated and imposed by the principal selling shareholder and administered by its financial advisers.

In any event, if the target is a publicly held company, the mandatory disclosure requirements should be observed.

The Disclosure Communiqué requires that any information or event which may, if not disclosed to the public, affect investors' investment decisions or is likely to affect the value and price of the shares or relevant capital markets instruments of the issuer must be immediately disclosed (see 4.2 Material Shareholding Disclosure Threshold).

If a person directly or indirectly acquires 5%, 10%, 15%, 20%, 25%, 33%, 50%, 67% or 95% of the issued share capital or voting rights of a publicly held company, such transaction must be disclosed on the Public Disclosure Platform (see 7.2 Type of Disclosure Required).

The Tender Offer Communiqué regulates the disclosure requirements for voluntary and mandatory tender offers. All major stages of the offer process are disclosed via the Public Disclosure Platform. These stages include any event triggering the mandatory tender obligation, an application to the CMB for a tender process (either for exemption or to kick-start it), a decision of the CMB in relation to such an application, the announcement of a tender offer form approved by the CMB and the final shareholding structure upon completion of the offer process.

The details of the offer are disclosed using the standard offer form enclosed with the Tender Offer Communiqué, following the CMB's approval of its content (eg, price, timing and other conditions).

The disclosures for tender offers are made at various stages of the offer process. See 7.1 Making a Bid Public.

All publicly held companies are required to disclose their financial statements, explanatory notes, material events and all other disclosures through the Public Disclosure Platform, an electronic system that uses internet and electronic signature technologies. The system is operated and managed by Borsa Istanbul and enables all users to access both current and past notifications of a listed company, to obtain current announcements and up-to-date general information about listed companies in an open and timely manner, and to make basic comparisons among analyses of listed companies.

Disclosures regarding changes related to shareholding structure and management control, securities attached to shares and a company’s acquisition of its own shares must be made no later than 9.00am on the third business day following the occurrence of the event triggering the disclosure requirement. Disclosures regarding other events (including the disclosure of insider information) must be made immediately upon the occurrence or discovery of the relevant event.

The bidders in a tender offer process are not required to produce or disclose financial statements during the offer process. However, the CMB is entitled to request any additional information from bidders during the offer process.

In any event, the CMB requires publicly held companies to disclose their financial information regularly, in accordance with the CMB standards.

Transaction documents do not have to be disclosed in full. Nonetheless, the CMB requires the bidders to submit the share-purchase agreement triggering the mandatory tender offer obligation and the agreement executed with the intermediary institution underwriting the mandatory tender offer process while submitting the standard tender form for the CMB's review and approval.

In general, the directors have a duty of loyalty and a duty of care. Accordingly, directors are always expected to seek and prioritise the benefits and interests of the company exclusively over the benefits of share groups, shareholders and/or related parties of shareholders. Therefore, the directors must not allow their relationship with the shareholders who nominated them to interfere with their fiduciary duties to act in the way they consider most likely to promote the success of the company.

Turkish law does not provide any exception whereby the directors are allowed to represent or promote shareholders' interests over the company's interests. The TCC also provides a list of duties that cannot be delegated by the directors (eg, determining management organisation, the appointment of authorised signatories, supervision of acts of authorised signatories, managers and senior officers, etc).

It is not common for directors to establish special or ad hoc committees in business combinations, not even when directors have a conflict of interest, in which case they must refrain from voting on such matters of conflict.

Nonetheless, the CMB requires publicly held companies to establish certain mandatory committees (eg, audit committee, corporate governance committee, nomination committee and early risk-detection committee). Banks which are publicly held, however, are subject to a slightly different regime, due to the BRSA rules.

A business judgement rule is adopted under the TCC, whereby directors should not be held liable for the decisions they make in good faith and with due care within their scope of authority granted under the TCC and articles of association. However, in practice, there are no Turkish court precedents addressing the implementation of this rule.

Independent, outside advice given to directors in a business combination may include legal, business, accounting, financial and statistical advice.

Under the TCC, the directors are prohibited from participating in discussions of the issues concerning their external personal interests (ie, any interest that does not relate to the interests of the company) or external personal interests of their spouse, lineal heirs and descendants and relatives by blood and by marriage within the third degree which conflict with the interests of the company.

This prohibition would be applied whenever the duty of good faith requires a director not to participate in the discussions of the board (eg, cases where the interests of the nominating shareholder conflict with the interests of the company). Even if the conflict is not known by the directors, the director who has the conflict of interest must declare the conflict and not attend such discussions. Directors who breach the duty to avoid conflicts of interest are liable for damages, as are directors who know of the conflict but do not take the necessary precautions.

Although tried in the past, hostile tender offers are not common in Turkey, as the shareholding structures of publicly held companies are not dispersed and the majority of the shareholding and management are often controlled by a single shareholder (or a group of shareholders acting together) at the board and shareholder level.

Challenging such a dual-level controlling position by stakebuilding through the acquisition of minority shares in the market or reaching agreements with minority shareholders might be very difficult, or even impossible in practice. In addition, hostile tender offers are not regulated under any specific legislation in Turkey.

Considering that hostile takeovers are not common, defensive measures that are common in other jurisdictions (eg, poison pills, staggered board, golden parachute, etc) are not developed in practice in Turkey.

No response provided.

No response provided.

In the case of a mandatory tender offer, the directors cannot object to the business combination. Likewise, in the case of a voluntary tender offer, directors are not entitled to object to the sale of the shares, except under certain specific circumstances.

In publicly held companies, the directors' ability to "just say no" to share transfers depends on a variety of conditions. If the shares are bearer shares, the board cannot intervene or reject the transfer of the shares.

However, various rules apply in the case of registered shares. If the shares are non-listed registered shares and the articles of association of the target company condition the transfer of those registered shares on board approval, the board may reject the share transfer based on certain grounds specifically listed under the TCC and offer to purchase the relevant shares on behalf of the target, other shareholders or third persons.

If the shares are listed registered shares, the board may reject recognition of the shareholder status of the acquirer only if the articles of association impose a percentage limit per shareholder and the acquirer exceeds this limit through such an acquisition. The transfer of title and rights linked with the listed registered shares depends on whether the transaction is concluded at market (Borsa Istanbul) or off the market. Nonetheless, if the board does not reject the transfer of the listed registered shares within 20 days upon notice, the acquirer is automatically recognised as the shareholder of the target company.

In Turkey, arbitration is the common platform for dispute resolution in M&A deals rather than court litigation. Parties often prefer international platforms such as ICC and LCIA, but the Istanbul Arbitration Centre (ISTAC) has recently been promoted as an alternative platform for arbitration.

Depending on the survival periods agreed under the definitive agreements, warranty and indemnity claims are brought within two years, which is often regarded as sufficient time to observe and analyse the validity of warranties and undertakings given by the seller.

Given the limited power of statutory minority rights, shareholder activism is not an important force in Turkey, and there are no examples of the shareholder activism defence mechanisms.

See 11.1 Shareholder Activism.

See 11.1 Shareholder Activism.

Yegin Çiftçi Attorney Partnership

Kanyon Ofis Binası Kat 10
Büyükdere Cad. No. 185
Istanbul 34394
Turkey

+90 212 339 0002

+90 212 339 0097

info@yeginciftci.av.tr www.yeginciftci.av.tr
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Trends and Developments


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Hergüner Bilgen Özeke Attorney Partnership has been recrafting the Turkish law firm model along modern corporate standards since 1989. The firm's expertise makes it one of the few full-service independent Turkish law firms with a global reach, equally at home in the role of primary counsel in multinational transactions and local counsel to foreign and domestic clients. The 90-plus-strong legal team, including 14 partners, is equipped with a variety of educational and professional backgrounds and handles cases that require a full grasp of Turkish and cross-border jurisdictions, as well as different cultures and languages. The firm has considerable experience in all areas of M&A, including performing due diligence exercises, negotiating and drafting contracts, representing clients in the interim and closing phases, and providing post-closing advice for clients across a multitude of sectors, including energy, media, mining and telecom.

An Overview of M&A Activity in 2019

The year 2019 was a quiet year for the Turkish M&A market, which witnessed the lowest annual deal volume since 2009, the year of the most recent global financial crisis. According to the 2019 edition of Deloitte’s Annual Turkish M&A Review, while the number of M&A deals in 2019 did not differ significantly from the last few years, the total deal volume was only around USD5.3 billion, almost a 45% decrease from 2018. This was mainly a result of the absence of any mega-deals valued at over USD1 billion and the relatively low number of high-volume deals with only ten deals exceeding the USD100 million threshold. As a direct result, at USD23 million, the average deal size in 2019 was the lowest it has been in the last few years.

In terms of the sectoral breakdown of M&A deals in 2019, infrastructure, financial services, manufacturing, and retail were the highest grossing sectors. The aggregated volume of the deals in these sectors amounted to almost half of the total deal volume in 2019, which was mainly a consequence of seven of the top ten largest transactions falling within these four sectors.

In 2019, M&A activity in Turkey was once again affected by the political and economic uncertainties surrounding the country. The Turkish economy faced negative economic growth in the last quarter of 2018 and the first two quarters of 2019 and continued to struggle with exchange rate volatility throughout the year.

During the first half of the year, the municipal elections and the re-run of the elections in Istanbul created political uncertainty, slowing down investor appetite, while the main agenda item in the second half of 2019 was the military operations in Syria and the resulting tensions with both the United States and Russia. Still, the ratio of foreign investments to total volume of investments was 64%, the highest ratio since 2015, and eight of the top ten deals were made by foreign investors. This demonstrates Turkey continued to attract and to rely on foreign investment throughout 2019 despite political and economic adversities.

From a perspective focused on deal quantity, the leading sectors in 2019 were technology, followed by internet and mobile services, primarily driven by the rise of M&A activity concerning start-ups operating in these sectors.

Financial Investors

Despite the sharp decrease in total deal volume in 2019, at USD0.9 billion, the volume of deals involving financial investors (ie, private equity firms, venture capital firms, angel investors, and international financial institutions) was not significantly different from 2018 (USD1 billion). A major contributor to the deals in this sector was the acquisition of a 43.9% stake in Boyner Perakende ve Tekstil Yatırımları AŞ, a leading clothing retailer in Turkey, by Moyhoola Investments, a foreign private equity firm, for USD405 million, which was the second largest transaction of the year. Still, private equity activity was quite limited leaving aside the Boyner deal.

Venture capital firms and angel investors, on the other hand, were highly active in the Turkish market, particularly in the technology and internet and mobile services sectors, which made up around 30% of the total number of deals. Given that most of these investments were made for start-up companies, their impact on the total deal value was much lower. Still, it is undeniable that investments in start-ups have very much become a trend in Turkey in recent years. With more and more business accelerators and incubators arriving in the Turkish start-up scene, this trend is expected to continue to grow in the near future, which should increase both the number and volume of investments made by venture capital firms and angel investors.

Increased Chinese interest in Turkey

In 2019, Chinese investors made up 31% of the total deal value in the Turkish M&A market. A key factor in this was the acquisition of a 51% stake in the project company of the Third Bosphorus Bridge and Northern Marmara Motorway project by China Merchants Group, a Chinese state-owned corporation, for USD689 million, which ended up being the biggest deal of 2019.

The acquisition emphasised the importance attributed to the integration of China’s Belt and Road Initiative and Turkey’s Medium Corridor project. It was also another projection of the increasing Chinese interest in the Turkish M&A market, which first became evident in 2018 with the acquisition of shares in Trendyol, a leading Turkish e-commerce platform, by Alibaba Group for USD728 million.

Privatisations

Privatisations also played a considerable role in the Turkish M&A market in 2019. Even though Deloitte only reported two privatisation deals in 2019, they were quite significant as one of these deals involved the privatisation of the national lottery and the other concerned the privatisation of State-owned sports betting operations. No deal value was assigned to either transaction because the tenders were commission based; however, the economic impact of these deals should not be overlooked. To give an indication, the aggregated first year revenue commitment of these two deals was over TRY26 billion (approximately USD4.3 billion).

Warranty and Indemnity Insurance

Warranty and indemnity (W&I) insurance, which helps to maintain an equilibrium between the parties’ interests by shifting the transactional risk to an insurer in return for a one-off insurance premium, has recently become a steadily increasing tool in the Turkish M&A market. Even though this product is used in a great number of M&A deals throughout the world, the Turkish M&A market has only recently become familiar with it. This is mostly due to the lack of a specific legal framework surrounding W&I insurance under Turkish law. W&I insurance is not one of the insurance categories specified under the Turkish insurance regulations.

As a result, currently, the only option for Turkish insurance companies is to obtain the approval of the Directorate General of Insurance in order to issue W&I insurance policies under the scope of one of the general categories specified in their operation licences (such as surety, general liability, or financial loss insurance). So far, very few Turkish insurance companies have officially initiated the necessary process to obtain such approval.

Still, W&I insurance has made its mark in the Turkish market through foreign investors taking the initiative of employing foreign insurance companies to take out W&I insurance. The number of Turkish M&A deals involving W&I insurance is still relatively low but is steadily increasing. It is expected that the use of W&I insurance will continue to increase in the years ahead, and Turkish investors and insurance companies will become more active in using and providing this helpful product.

Expectations for 2020

The Turkish economy rebounded with positive economic growth in the third and fourth quarters of 2019 and, based on the economic indicators of the first few months of the year, Turkey seemed to be continuing its stretch of positive economic growth in 2020

Notwithstanding the positive outlook within the first couple of months of 2020, Turkey will no doubt receive its share of the expected slowdown int he global economy arising from the COVID-19 outbreak. So far, Turkey has refrained from imposing a full lockdown, but has shut down schools and universities; imposed restrictions on inter-city travel; closed down theatres, gyms, bars, restaurants with music, etc; and has actively encouraged quarantine. Still, in addition to the effectiveness of these measures and the strength of the Turkish healthcare system (which has shown positive signs thus far), the impact the outbreak will have on the Turkish economy will also depend on its ramifications on the global economy. Considering that the European Union has, historically, been Turkey's largest trade partner, the situation in Europe will have a particularly important impact on the future of the Turkish economy.

If Turkey is able to quickly regain composure following the COVID-19 outbreak, the numbers from the second half of 2019 and early indicators from early 2020 may encourage foreign investors to seek investments opportunities in Turkey in 2020. Foreign investors may look at Turkey particularly as a viable alternative to China, especially in sectors such as clothing manufacturing. There have already been reports of foreign investors considering moving their production facilities from China to Turkey, which would result in a considerable increase in M&A activity.

The automotive industry is also expected to be a leading sector in M&A activity in Turkey in the near future, given Turkey’s ongoing efforts to develop its first domestically produced car as well as Volkswagen’s reported interest in choosing Turkey as the home to one of its new car plants. Both investments are expected to give rise to an increased need in the automotive spare parts and supply industry, which should have a refreshing effect on M&A deals in this sector. 

Following the footsteps of the Third Bosphorus Bridge and Northern Marmara Motorway deal, the next few years may also bring new M&A deals in the infrastructure sector. Over the last decade, Turkey has been home to various public private partnership and privatisation projects related to the development and operation of highways, bridges, hospitals, ports, and airports. Most of these projects are now in the operation phase and the passenger/patient guarantees, debt assumptions, termination undertakings, etc, that these projects benefit from may be appealing to many investors.

Finally, the privatisation of the national lottery and sports betting are not likely to be the last examples of their kind. For instance, it has long been rumoured that Turkey plans to privatise its horse racing operations. It was reported at the end of last year that the Turkey Wealth Fund, which currently holds the rights to horse racing operations in Turkey, has taken the first steps towards privatisation by retaining financial and legal advisors to work on the potential transaction. The privatisation process is expected to begin soon.

Hergüner Bilgen Özeke Attorney Partnership

Büyükdere Caddesi 199
Levent 34394
İstanbul
Turkey

+90 212 310 18 00

+90 212 310 18 99

info@herguner.av.tr www.herguner.av.tr
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Law and Practice

Authors



Yegin Çiftçi Attorney Partnership is a leading Turkish law firm that has been working in co-operation with Clifford Chance in Turkey since 2011. The firm holds a strong presence in the local M&A market, taking part in numerous ground-breaking deals. Advising international strategic and financial investors on M&A transactions in Turkey and assisting Turkish clients on their international acquisitions, Yegin Ciftci's corporate/M&A department is best known for its strong track record on complex and structured M&A transactions, and is singled out for its sector knowledge. Among other areas, the team focuses on cross-border acquisitions, public and private M&A, structured equity transactions, management/leveraged buyouts, asset/business transfers, restructurings and strategic alliances in corporate or other forms, enabling clients to achieve their investment strategies.

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Authors



Hergüner Bilgen Özeke Attorney Partnership has been recrafting the Turkish law firm model along modern corporate standards since 1989. The firm's expertise makes it one of the few full-service independent Turkish law firms with a global reach, equally at home in the role of primary counsel in multinational transactions and local counsel to foreign and domestic clients. The 90-plus-strong legal team, including 14 partners, is equipped with a variety of educational and professional backgrounds and handles cases that require a full grasp of Turkish and cross-border jurisdictions, as well as different cultures and languages. The firm has considerable experience in all areas of M&A, including performing due diligence exercises, negotiating and drafting contracts, representing clients in the interim and closing phases, and providing post-closing advice for clients across a multitude of sectors, including energy, media, mining and telecom.

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