Fuelled by the pandemic and shift to online mediums in all areas of social and professional life, the last 12 months have been remarkable for the Turkish technology venture ecosystem. The technology market remained resilient to the high volatility and instability of the Turkish economy amid the pandemic; start-up investments peaked and homegrown companies in the fast-growing e-commerce, gaming and rapid delivery sector have attracted more international investments compared to previous years, which pushed the valuations of the relevant companies even higher.
In 2020, around 50% of the deals concluded in Turkey concerned internet & mobile services sectors. 2020 has also marked the year in which Turkey experienced its first homegrown unicorn company with US mobile gaming giant Zynga acquired the Turkish mobile game developer Peak Games with a value of USD1.8 billion. The first half of 2021 has outnumbered the 2020 tech deal performance (based on deal value) with Getir and Dream Games successfully reaching unicorn status and Trendyol becoming the first decacorn in Turkey in 2021.
Currently, the companies valued over USD1 billion by the end of the second quarter of 2021 are Peak Games (online gaming), Getir (online groceries in minutes), Trendyol (e-commerce), Hepsiburada (e-commerce) and Dream Games (online gaming).
The technology market in Turkey has witnessed significant expansion thanks to the capital raised by homegrown companies through various investment rounds. For instance, in the first half of 2021, Getir, a Turkish delivery start-up (now a unicorn with a valuation of USD2.6 billion) that offers fast grocery deliveries, attracted the biggest investment in 2021 with two consecutive investment rounds in early 2021. Getir has received USD428 million from foreign investors such as Cranckstart Foundation, Sequoia Capital and Tiger Global Management. With this investments, Getir is currently expanding into the UK, EU and USA.
Public offerings (both domestic and international) are also rising in the technology M&A market. For example, a Turkish online marketplace, hepsiburada.com, has publicly offered 56,740,000 shares on Nasdaq and was valued at USD3.9 billion with its price per share increasing from USD12 to USD13.43 on the first day of listing. Hepsiburada has noted that it sold shares worth USD738 million, or 20% of the total shares, in the offering. Another Turkish online marketplace, n11.com, is also preparing for a public offering in Turkey. The company has issued its prospectus recently and intends to publicly offer 33 million shares on Borsa İstanbul.
New start-up companies primarily targeting the domestic market are typically incorporated in Turkey. Nevertheless, shareholders seeking to attract foreign investment may also prefer setting up holding companies in certain countries with flexible taxing regimes and positioning the main operating company under such holding structure. In Turkey, the incorporation procedure is fairly simple, with negligible incorporation costs and advisory fees. Initial capital requirements differ for different types of companies; for joint stock companies the minimum capital requirement is TRY50,000 whereas for limited liability companies it is TRY10,000.
The most common company structures, usually preferred by foreign investors, are joint stock corporations (JSCs) and limited liability companies (LLCs). They are more advantageous in terms of limitation of shareholders' liability with their independent legal identity for doing business in Turkey. JSCs and LLCs are also the typical company types used for tech M&A transactions.
Early-stage financing (seed investment) for a start-up is typically provided by local investors. Depending on the maturity level of the start-up company, these investments are usually made by accelerator programmes/incubation centres, venture capital funds and angel investors. In rare cases, corporate venture capital funds also invest in early-stage start-ups. These investments are documented through share purchase and subscription agreements which are usually accompanied by shareholders' agreements that customarily set forth shareholders' rights as well as certain exit scenarios.
Domestic venture capital is easily available to start-ups and Turkey is also increasingly becoming popular amongst foreign venture capital firms. In fact, the most remarkable technology deals in the last twelve months have been led by foreign venture capitals. According to the Presidency of the Republic of Turkey (Investment Office)'s report, as a result of the growth of the Turkish start-up ecosystem and a series of successful exits, Turkey has witnessed an increase in venture funds raised. The report also notes that there is USD680 million in “dry powder” available for investment in Turkish start-ups.
Governmental support and funding for start-up investing also increased in the recent years. TÜBİTAK (Scientific and Technological Research Council Of Turkey) and Turkish Treasury has signed a cooperation scheme in 2018, Tech-InvesTR Venture Capital Support Fund. Under this scheme, ten venture capital funds were established in Turkey for the specific purpose of investing in start-ups in Turkey and the government provided matching funding to venture funds, leading to an increase in the number of limited partners in such funds.
There is no established practice for using standardised transaction agreements or documents for venture capital investments. However, local venture capital funds have become more experienced in the last couple of years having made considerable amount of investments and increasing amount of exists.
The most commonly used corporate form is a JSC due to a number of reasons. For example, shareholders' liability in JSCs is strictly limited to their capital undertakings whilst shareholders of a limited liability company could be personally liable for public debts of the company. Additionally, JSCs have a better established corporate governance structure compared to LLCs and finally, JSCs can be publicly held while it is not possible for LLCs. As such, early-stage start-ups are usually advised to be incorporated as a JSC before seed-investments and mostly tend to remain in the same corporate form.
As also noted in 2.1 Establishing a New Company, shareholders seeking to attract foreign investment may also prefer setting up holding companies in certain countries with flexible taxing regimes and moving the shares of the main operating company under such holding structure.
The most typical form of exit for venture capital investments is the private sale method. Although, there have been a few IPOs regarding start-ups in previous years, IPOs are not very suitable for such companies before they reach a certain maturity level in terms of size and operations to become fit for an IPO process. In this regard, the primary source of exit in start-up companies remains private sale transactions.
For a potential IPO of a start-up company, it would be more likely to pursue a listing in Turkey rather than a foreign stock exchange. That being said, there may also be certain exceptions if the relevant company is large and prominent enough with ability to carry out public offering in a foreign stock exchange. For instance, the listing of hepsiburada.com (a Turkish online marketplace) has publicly offered 56,740,000 shares on Nasdaq.
In principle, in case the total number of shareholders of a company (in Turkey and abroad) exceeds 500, the company will automatically become a public company and will be required to be listed in Turkey. Therefore, becoming public in a foreign stock exchange without also being listed on Borsa Istanbul may create certain complications. Also, if the company is only listed on a foreign stock exchange and not on Borsa Istanbul, this may also affect the scope of the capital market rules applicable to the company such as mandatory tender offer requirements, squeeze-out, etc, since the capital market rules applicable in each jurisdiction would vary.
If the sale of the company is chosen as a liquidity event and unless there is a specific prospective buyer, the sale would be typically run as a mixture of auction and bilateral negotiation, whereby the sale process is initiated through auction and the final negotiations would be made with a chosen buyer through the auction process.
For sale of privately held technology companies that have a number of VC investors, it is generally preferred to sell the entire share capital of the company or at least controlling stake in the company. For example, the landmark deals of iyzico (payment solutions provider), Foriba (e-accounting services) and Peak Games (online games) were structured as full exists. However, there were also cases where some of the VCs (fully/partially) exited and some stayed in the company. Exit decisions and transaction structures would ultimately depend on the investors' potential return expectations.
The main practice in Turkey is to use cash consideration. Although less frequently used, non-cash considerations (eg, shares and securities) are preferred from time to time, depending on the transaction and commercial mechanics.
In principle, selling shareholders are expected to provide representation and warranty protection on certain matters to incoming shareholders/buyers. Such matters include typical operational matters such as compliance with laws, permits, employment issues as well as title and ownership matters such as due issuance of shares, no encumbrance undertaking, etc. While liability arising from breach of warranties subject to certain limitations are typical market standard in terms of post-completion liability, buyers may sometimes request specific indemnity protection if there are specific risk items identified during due diligence reviews.
When buyers have the upper-hand in negotiations, escrow/holdback mechanisms are also utilised, although not favoured by sellers due to an increased uncertainty in return/consideration. R&W insurance is a relatively new concept in the Turkish market and is becoming more popular, especially in deals involving financial investors who are less-eager in standing behind representations and liabilities.
Depending on the structure of the business as well as operational aspects of targets, spin-offs are sometimes utilised in M&A transactions in the technology sector. Particularly in start-up businesses comprising several different but interrelated operation lines, it is sometimes considered more feasible to split some business lines and sell those lines separately. This kind of method is primarily driven by tax considerations as well as buyers preference for risk insulation by way of splitting less and more risky businesses prior to completion.
Partial spin-offs can be structured as a tax-free transactions subject to certain conditions set forth under Corporate Tax Law, such as conducting the transfer on the basis of the book value of the assets, transferring a standalone business unit with the ability to operate separately etc. In case these conditions are not satisfied, tax authorities may treat the spin-off of transaction as an asset sale and apply taxes accordingly. Therefore, inputs from tax and financial advisors in the planning phase of a spin off are crucial.
From a legal perspective, it is possible to conduct a transaction comprising a spin-off immediately followed by a business combination. However, tax considerations and implications are crucial in determining the transaction structure as well as for identifying valuation aspects. Depending on the legal structure of the business combination (eg, corporate merger, asset sale or positioning the new business as a subsidiary) would be different but key consideration such as treatment of employment arrangements, transfer of contracts, combining business functions, etc, remain the same.
A private spin-off transaction can be realised following a specific procedure set forth under Turkish Commercial Code which usually takes around a couple of months to prepare (eg, identifying assets to be transferred, drafting spin-off documentation such as spin-off report, organising board meetings and preparing for general assembly meeting) and implement the transaction. Although a ruling from a tax authority prior to completing a spin-off is not required, in certain cases which includes complexities or which are prone to vague interpretations under tax laws, tax advisors may suggest obtaining advance rulings from the tax authority before completing the transaction.
It is not customary to acquire a stake in a public company in Turkey prior to making an offer.
Disclosure of material events for publicly listed companies is primarily regulated by the Capital Markets Board's (CMB) Disclosure Communiqué (II-15.1) (the "Disclosure Communiqué").
The Disclosure Communiqué leaves specific disclosure decisions regarding insider information to the companies' individual discretion whereas it includes statutory disclosure thresholds for certain material events including change of shareholders of the listed company. Within this context, "insider information" refers to information or any event that is not disclosed to the public that may affect investors' investment decisions, or is likely to affect the value or price of the shares or relevant capital markets instruments of the issuer.
In light of the above, stakebuilding in a public company may be treated as an insider information and may trigger disclosure obligations under the Disclosure Communiqué. However, publicly listed companies may suspend the disclosure of inside information in order to protect their legitimate interests, provided that:
Public Discolsure Platform
If these conditions are not satisfied cumulatively, the company must disclose the stakebuilding activities on the Public Disclosure Platform.
Additionally, a person or persons acting together directly or indirectly acquire or transfer 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. The disclosure is made automatically by the Central Securities Depository of Turkey for direct share transfers, whereas the indirect transfers must be disclosed by the relevant real persons and legal entities and persons acting together with them.
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 approx. TRY450,000 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 approx. TRY450,000 in one calendar year.
Share Sale Information
In addition to the above disclosure obligations under the Disclosure Communiqué, pursuant to article 27 of the Share Communiqué (VII-128.1), it is necessary to submit a share sale information form to the CMB's prior approval and publicly disclose such form, if shareholders who directly hold more than 20% of the shares in the listed company, either alone or together with the persons acting together with it, or who hold privileged shares allowing them to appoint or nominate at least one of the company directors, sell shares exceeding 10% of the share capital of a listed company within any 12-month period. Moreover, the total nominal value of the shares that will be sold per day under the share sale information form cannot exceed 10% of the total nominal value of the shares that are within the scope of the share sale information form.
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 disclose strategic actions planned for the company after the mandatory (or voluntary) tender offer is completed.
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 Tender Offer Communiqué sets forth the mandatory tender offer threshold for publicly held companies. Accordingly, if any party or parties acting together acquires the 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/or voting rights granting management control, and to commence the purchase of the shares within two months following the acquisition. The participation to the tender offer process is only applicable for the other shareholders who were holding shares in the company on the disclosure date of the acquisition of the management control.
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, including:
The Tender Offer Communique also sets forth specific circumstances under which an obligation to make a mandatory tender offer is not triggered, such as:
For both public and private acquisitions, the most typical transaction type is straightforward share sale although other transaction structures such as corporate mergers or asset transfers are also available and sometimes used for public companies. Nevertheless, due to lengthy shareholder approval procedures, the CMB approval requirements and certain tax implications, corporate merger or asset sale transaction are not used as commonly as straightforward share sale method in public companies.
Regardless of the sector, in both public and private M&A transactions in Turkey, the consideration is mostly paid in cash, and is rarely combined with debt assumption/stock exchange methods. Buyers usually use their own financial resources or they may seek acquisition financing if the target company and the method of acquisition are suitable for third-party financing.
Under the Tender Offer Communiqué the consideration for voluntary and mandatory bids should be, in principle, paid in cash. However, the bidder can also offer exchange of securities/stocks, provided that such alternative method is accepted by the selling shareholder expressly in writing, and such securities/stocks are tradable on the stock market.
In general, transaction parties can freely determine the purchase price. However, with regards to certain specific share acquisitions such as mandatory tender offers, exercise of exit rights triggered by material transactions, or exercise of squeeze-out and sell-out rights, the CMB rules require that the shares cannot be purchased at a price lower than the price calculated according to a certain formula (eg, the arithmetical average of the daily adjusted weighted average share price vs transaction price, etc). Conversely, subject to certain circumstances, a voluntary tender offer price can be freely set by the bidder.
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 by the same acquirer, 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 triggers the tender offer requirement.
Furthermore, in the event 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 management control, and to commence the purchase of the shares within two months of the acquisition.
If the mandatory tender offer process is not initiated within two, 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 would 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.
Takeover offers or business combination transactions are typically conducted by way of private negotiations rather than on-stock exchange dealings. In this regard, such transactions are almost always governed by transaction agreements such as share purchase agreements or business transfer agreements.
However, it is not usual for the target company to undertake any primary obligation or to give representations and warranties given that selling shareholder(s) are deemed primary liable parties in market practice. Also, any commitment by the target company in a transaction related to acquisition of its shares can be interpreted against financial assistance rules – hence may not be legally possible.
For mandatory tender offers, the offer must be made for all the shares of the remaining other shareholders as of the date on which the acquisition of management control is publicly disclosed. The shareholders of a publicly listed company who could benefit from the mandatory offer will be determined based on the information available at the Central Securities Depository of Turkey. Conversely, for voluntary tender offers, the amount of target shares and certain conditions of the offer are at the discretion of the offeror.
In respect of public companies, a squeeze-out mechanism is regulated under the Squeeze-Out Communiqué (II-27.3). Accordingly, if a purchaser or persons acting in concert with the purchaser acquire 98% or more of the voting rights of a public company, directly or indirectly, or acquire additional shares after reaching the 98% shareholding level, the minority shareholders of the target company will be entitled to exercise sell-out rights against the controlling shareholder, and subsequently the controlling shareholder will be entitled to squeeze-out the shareholders who has not exercised their sell-out rights.
The squeeze-out and sell-out price shall be determined as follows:
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.
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.
In this regard, even if the bidder cannot obtain 100% ownership of a target company, as long as it holds the majority of the shares in the target company, it would be entitled to almost full control of the strategic management of the company, save for certain few matters that require super/qualified majority.
Accordingly, unless the minority shareholders are granted with specific governance rights (such as creation of share classes (alphabet stock), granting of board nomination rights or veto or approval rights at board and/or shareholder level, or increased number of votes per a specific class of share), the ability of the bidder to exert management powers in the company would not be significantly compromised.
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 CMB oversees the tender offer (both mandatory and voluntary) process.
For mandatory tender offers, an application to the CMB must be made (together with an information memorandum) within six business days following the acquisition of the shares providing "management control". The information memorandum is a standard form document requiring the offeror to disclose various information: details and shareholding structure of the offeror, source of funds for tender offer, calculation of the offer price and description plans for target, etc.
The tender offer documentation (ie, information memorandum and any other documents requested by the CMB for its review) must be reviewed by the CMB which reviews and approves the tender offer documentation. The approved information memorandum is then publicly disclosed within three business days.
Upon approval of the CMB, the mandatory tender offer must begin within six business following such approval and in any event within two months of the date on which the tender offer obligation is triggered. The offeror may request the CMB to grant an extension. The tender offer period must be a minimum of 10 business days and a maximum of 20 business days.
For voluntary tender offers, an application to the CMB must be made (together with an information memorandum) and the tender offer must begin within six business days following the CMB's approval. The target company's board may request 30 days extension of the tender offer process to enable a general assembly meeting to discuss the voluntary tender offer. The target company's board must prepare a report laying out the offer terms, strategic plans of the offeror on the target and its anticipation on the effects of the offer. This report will need to be publicly disclosed at least one business day before the tender offer begins.
If during a voluntary tender offer, a competing offer is placed by a third party, the term of the initial tender offer can be extended until the end of the competing offer. Shareholders who have accepted the initial offer before the information memorandum on the competing offer is published have the right to withdraw their acceptance.
As noted above, under certain circumstances an extension may be requested from the CMB. In practice, applications for antitrust and other necessary regulatory approvals are made in advance of the tender offer in order not to hinder the tender offer process. Nevertheless, there is a specific carve-out under Turkish law which allows an ex-post notification to the Competition Authority for acquisitions made through stock exchanges. This carve out applies for subsequent transactions that are made in a short period of time and that concern acquisition of shares from various sellers via stock exchanges (over securities), provided that:
Depending on the relevant field of activity of the target, certain government approvals may be required, as some of the technology industries, such as fintech, cryptocurrency, media and e-communications are under the scrutiny of the regulatory bodies and some of these activities are heavily regulated such as online payment services.
In case the technology company operates in a regulated industry, prior approvals from or post-transaction notifications to a governmental institution may be triggered by a deal or licenses may be required for starting a new company. For example, with a recent amendment in law, online media platform operators who provide online streaming services are required to be incorporated as a JSC and apply for a broadcasting licence from the Radio Television Supreme Council.
Additionally, any share transfer that occurs in the licence-holder broadcasters must be notified to the Radio Television Supreme Council and acquisition of a license holder company is subject to the council's prior approval. Similarly, online payment services providers and e-money institutions need to obtain a licence from the Banking Regulatory and Supervision Agency (BRSA) and deals concerning these entities may trigger prior approval requirements.
Depending on the field of activity of the targeted business, Turkish M&A transactions may trigger various filing and approval requirements before different public authorities, such as antitrust filings or filings before 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:
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.)
There is no national security review of acquisition transactions in Turkey.
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:
For the purposes of calculating the relevant turnover thresholds, a company will be deemed to "control" another company if it:
There are special rules for calculating the thresholds 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 such as corporate mergers and demergers.
In the case of business transfers, 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 statutory 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.
With the Executive Order No 85 (the "Executive Order") was published on 13 September 2018 amending Decree No 32 on the Protection of the Value of the Turkish Currency (the "Decree"), 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.
Other than the FX Restrictions and financial crime legislations that are applicable for banking transactions, there is no currency control regulation that applies to M&A transactions and a typical M&A transaction would not require central bank approval.
In Turkey, arbitration is the most common method for dispute resolution in M&A deals, including technology M&A deals, rather than court litigation. As such, the arbitral awards are not generally publicly available. Most significant recent court precedents in the technology industry, usually concern non-transactional data privacy issues. Additionally, technology companies are currently under the radar of the antitrust authority, who has recently investigated many online marketplaces such as Yemeksepeti and Sahibinden and other prominent players in the digital advertising sector. Most recently, the Competition Authority has announced that an investigation initiated against 32 undertakings to investigate alleged gentlemen's agreement between such undertakings not to solicit software developers from each other.
In October 2021, the CMB has amended the Tender Offer Communiqué to clarify certain matters such as entitled shareholders to benefit from the mandatory offer and has introduced new exceptions and exemptions from a mandatory offer requirement. Other than those, the most notable matter under the amendment concern the mandatory offer price and principles regarding calculation method and interest rates applicable to the offer price. Accordingly, the CMB has been granted with the power to the exclude certain periods from the minimum offer price calculation if it deems any extraordinary developments that have affected the Turkish economy or the relevant industry occurred. Accordingly, subject to discretion of the CMB, such extraordinary periods may not be taken into account when calculating the minimum offer price.
Finally, very recently the Communiqué on Equity-Based Crowdfunding III – 35/A.1 has been abolished by a new crowdfunding communiqué that also enables debt-based crowdfunding. This development is regarded as a positive contribution to the start-up ecosystem as it brings an alternative funding method for start-up companies seeking to navigate through the relatively strained financial markets. Fundraising campaigns that have been initiated prior to 27 October 2021 will continue to be governed under the abolished communiqué.
As noted earlier, most of the public companies in Turkey do not have dispersed ownership structure, and shares are owned by a principal shareholder or group of shareholders acting together, who also control the management of the target company. As such, to the extent the main/majority shareholder(s) is in favour of the transaction, the target company can agree on providing due diligence information provided that the bidder and the target sign a confidentiality agreement (extending to the bidder's external advisors who shall conduct the due diligence).
Under Turkish law, personal data cannot be processed and/or transferred to third parties within Turkey without the express consent of the individual subject to certain exceptions (eg, when data processing is necessary to process the data of the parties to a contract, provided that the processing is directly related to the execution or performance of the contract; or when it is imperative for the data controller to fulfil their legal obligations). Additionally, in principle, personal data may not be transferred outside Turkey without explicit consent of the data subject.
Employee's personal data are also subject to the above mentioned data processing and transfer rules. As such, within the context of an M&A transaction, target's employees' personal data can only be shared with potential buyers based on the employees' explicit consent to such transfer or without the employees' consent in case such transfer falls into specific categories of exemptions laid down under the Data Protection Law. That is why, usually employee data is redacted when sharing information at pre-closing stage.
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 6.1 Stakebuilding). In practice, a transaction is disclosed on the Public Disclosure Platform when the likelihood of reaching a definitive agreement reaches a level that may have an impact on the value of shares or investment decisions of the investors.
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).
There is no prospectus required for a stock-for-stock offer however the procedure laid down under the Tender Offer Communiqué shall be followed. See 6.13 Securities Regulator's or Stock Exchange Process and 6.14 Timing of the Takeover Offer for more details on the tender offer procedure. Additionally, for stock-for-stock offers the buyer's shares need to be traded on the stock exchange and the selling shareholders need to agree on stock-for-stock consideration in writing.
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 acting at 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, 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. Also, when directors have a conflict of interest, they must refrain from voting on such matters of conflict.
On a separate but related note, the CMB requires publicly held companies to establish certain mandatory committees (eg, audit committee, corporate governance committee, nomination committee and early risk-detection committee) but these are not directly related to business combination processes.
The board is not expected to be actively involved in negotiations and it does not have a statutory role to recommend or advocate against a transaction. That being said, under certain circumstances as summarised below, the board has the power not to approve a share transfer.
Additionally, as noted under 6.13 Securities Regulator's or Stock Exchange Process, in voluntary tender offers, the board prepares a report on offer features and prospects of the offer for the benefit of the shareholders. This report could be used as a tool to advocate for or against a bid. However, hostile takeovers are not regulated under Turkish law and as noted above, typically the majority of shares in public companies are hold by the principal shareholders who usually have control over the management. As such, the board's report advocating against the bid, would be unlikely to affect the transaction in case the main/majority shareholder is in favour of the bid.
In publicly held companies, the directors' ability to reject 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 requires board approval as a condition to the transfer of those registered shares, the board may reject the share transfer based on certain grounds specifically listed under the TCC or 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.
Independent, outside advice given to directors in a business combination may include legal, business, accounting, financial and statistical advice.
The technology M&A market in Turkey is driven by venture capital investments in Turkish technology start-up companies. In early 2000s (until 2010), the start-up companies in Turkey had to rely on their assets and sources for access to funding. To aid start-up companies, the Turkish technology venture ecosystem has improved a lot since 2010, and angel investors and venture capital funds (VCs) have become more active in the sector. Today, with one decacorn and four unicorn technology companies, the Turkish start-up ecosystem is one of the most vibrant ones in the region. According to the Investment Office' start-up report (Presidency of the Republic of Turkey, Investment Office, The State of Turkish Startup Ecosystem 2021), as of June 2021, there is USD680 million dry powder (ie, an unspent cash reserve available for investment) of VCs in Turkey.
Whilst there is no legal distinction between VC and private equity investments in Turkey, in line with the European practice, VCs invest in private companies, monitor and accommodate the companies in their portfolio, focuses on internal growth of the companies and maximizes their own profits (ie, financial return) by exiting investments through private sales or initial public offerings (IPOs).
The most common technology M&A structure is a share acquisition, which is usually accompanied with capital injection through capital increase to raise internal funds for the start-up company. Unlike private equity deals or corporate purchases, VC investors are usually keen to keep the founders and existing management of the company on board. As such, venture capital firms prefer injecting capital into the target rather than simply acquiring shares from existing shareholders. That being said, the technology venture ecosystem in Turkey is also witnessing secondary buy-outs where an early investor VC exists and is replaced by a different VC.
As, more often than not, technology M&As in Turkey are structured as share sales and capital injections, the most relevant transaction documents are share purchase (and subscription) agreements (SPA) or which are usually accompanied by call and/or put option agreements and shareholders' agreements (SHA). Usually, VCs do not acquire all or substantially all shares of the target, therefore, drafting of the SHAs are essential as the statutory minority rights under Turkish Commercial Code usually fall short of adequate standard of governance rights as well as exit scenarios VCs would like to have when entering into investments.
Despite their popularity in the USA, use of convertibles for early-stage funding is not very common in Turkey due to legal complexities in designing enforcement mechanisms. Unfortunately, local law automatic conversion is not straight-forward and forced conversion mechanisms may require use of escrows and other supplemental contractual measures.
Typical SPA and SHA terms are briefly summarised below.
Typical SPA Terms
Consideration and payment
Cash consideration is generally preferred in technology M&A deals as most of these deals aim at providing sufficient funds to the target companies to enable economic growth and ultimately, high-return exit deals for the investors.
Depending on the nature of the transactions and the parties' agreement, all typical purchase price mechanisms such as fixed price (commonly in asset transfers and rarely in other types of technology deals), locked-box, completion accounts, deferred considerations (more common in minority share acquisitions) and earn-out mechanisms are used in technology M&A transactions.
Representations and warranties
Seller's (on behalf of the target) representations and warranties are commonly used in technology M&A transactions for IP, technology, cybersecurity and data privacy. These typically focus on ownership and licensing agreements concerning key IP rights, eg;
Conversely, VC investors' representations and warranties are usually quite limited, especially where the shareholder entity is a special purpose vehicle incorporated by fund structures for the sole purpose of investment.
Typically, indemnity provisions in technology M&A transactions cover breaches of representations and warranties in general, and specific indemnities are not very common in the Turkish technology M&A market. Nevertheless, specific indemnities may still be relevant in certain deals, especially if there is a risk that the target may face regulatory sanctions such as due to breach of data protection rules.
Conditions precedent and condition subsequent
Typical pre or post-closing conditions or covenants in technology M&As are:
Material adverse change
Material adverse change clauses are also common in technology M&A transactions and are sometimes drafted broadly in a manner to enable the acquirer to walk-away in case a material adverse change occurs. Given most of the hot topic technologic developments (eg, autonomous cars, AI based pricing algorithms, block-chain technology, crowd-sourced logistics) are yet be regulated and/or tested before the courts of Turkey, enactment of laws and regulations should also be included in MAC clauses if the invested business operates in an area that is expected to be regulated.
Typical SHA Terms
VC investors usually separately negotiate an SHA to govern their long-term relationship with the seller as well as their exit rights. When there are already other investors in the target, the SHA negotiations also require their involvement. In such cases, there is usually an existing SHA and the negotiations may include terminating or amending that SHA.
In general, lock-in provisions for key employees/founders, non-compete and non-solicit covenants, tag and drag along rights, put and call options as well as right of first refusal are heavily negotiated. Most of these provisions require cautious drafting. Therefore, engaging with a legal advisor having relevant expertise is a must to ensure enforceability of these exit mechanisms.
Veto rights over strategic management decisions of the target such as annual budget and business plan decisions as well as privileges to nominate/appoint board members are most amongst most commonly negotiated governance rights. Under Turkish law, shareholder privileges may be implemented through different share groups/classes and aggravated meeting or decision quorums at board/general assembly level. In case the SHA envisages such governance rights, the articles of association of the company shall be amended to create different share classes.
Share transfer restrictions and exit
Call/put options, lock-up periods, and tag/drag along rights are commonly used share transfer restrictions. Since the incorporation of such restrictions in the company's articles of association is rather controversial under Turkish law, in practice, such restrictions often remain as a contractual obligations under the SHA.
Put options should be negotiated and drafted carefully as it could serve as an exit plan for VCs if the investment fail to generate expected revenues. For successful investments (ie, where the target generates the expected revenues), VCs usually exit through private sale transactions. However, secondary buy-outs are also common in the Turkish technology venture ecosystem. A new trend for the VCs investing in Turkey is exit through IPOs. With hepsiburada's IPO on Nasdaq at the valuation of USD3.8 billion and the current IPO trend in Turkey in general, the market expects to witness more IPO exits in the coming days.
Overall, the Turkish technology venture ecosystem is growing and is expected to grow further due to successful exit stories of VCs. Recently, local VCs such as 212, 500 Istanbul, DCP, Collective Spark, Revo Capital and Earlybird Digital East Fund have raised their second VC funds and received a significant amount of fund contribution including support from other corporate venture capitals (CVCs). Most notably, some of the entrepreneurs who have raised funds for their start-up companies through investments initiated by these VCs have also made contributions to the VC's second funds, which is cherished within the ecosystem.