This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in the Turkey.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The Turkish Commercial Code (the “TCC”) contains the key set of rules applicable to all companies as the main source of Turkish company and commercial enterprise law, the Turkish Code of Obligations sets the fundamental principles for Turkish contract law, and the Capital Markets Code (the “CMC”) and secondary regulations (i.e., communiqués) issued by the Capital Markets Board of Turkey (the “CMB”) are applicable only to publicly held companies and the exceptional category of companies that are deemed public by operation of the law (i.e., without having offered its shares to the public in an IPO).
M&A transactions that exceed certain turnover and/or market share thresholds are also subject to the approval of the Turkish Competition Authority as per the Code on the Protection of Competition.
In addition, further regulatory scrutiny may kick in depending on whether the acquirer or the target is publicly held or participates in a regulated sector such as banking, energy, civil aviation, telecommunications, etc. For publicly held companies in particular, the CMB has broad supervisory and regulatory powers. Other regulatory authorities, such as the Energy Market Regulatory Authority for energy companies, the Banking Regulatory and Supervisory Authority for banks and financial institutions, or the Undersecreteriat of Treasury for insurance companies are the key regulatory authorities for regulated actors.
What is the current state of the market?
While 2016 was an unfortunate year for M&A activity in Turkey, it looks like transactional activities started to pick up in 2017 with increases in both deal numbers and deal volume. The cautious attitude of investors is understandable considering political developments, including the coup attempt followed by a state of emergency declared in the second half of 2016 and the referendum in April 2017 for switching to a presidential regime from a parliamentary one. However, prospects for the upcoming year seem quite positive based on the improving M&A trend in 2017.
Which market sectors have been particularly active recently?
The most active sectors have been energy, financial services, transportation, internet, and real estate. While foreign investor interest was largely focused on the internet and financial services, primarily domestic investors fueled investments in energy and real estate. Due to increasing energy demand in Turkey, there were sizeable acquisitions and privatizations in the energy sector, the most significant of which was the Vitol Investment acquisition of OMV Petrol Ofisi A.Ş.. The IFM Investors acquisition of Mersin Port, and the BBVA acquisition of Garanti Bank were also notable deals of the year.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Increasing demand from both foreign and domestic investors over the next two years would first and foremost depend on the perceived political, judicial and economic stability of Turkey. 2016 and to some degree 2017 were difficult years in that sense which caused investors to refrain from any aggressive moves. Ending the state of emergency and a smooth transition to the presidential system could contribute to more M&A activity.
Interest rate hikes by the FED, as well as turmoil in the Euro zone including Brexit, the independence referendum in Spain, and financial difficulties in various countries have all had an undeniable impact on the M&A market in general over the last couple of years. For Turkey specifically, foreign investor appeal had a significant influence on the M&A market during the golden era of the mid-2000s. Therefore, global developments are expected to continue to be an important factor on the Turkish M&A market over the next two years.
What are the key means of effecting the acquisition of a publicly traded company?
For a publicly traded target, the primary means of acquisition would be a share transfer.
Share transfers are commonly preferred over mergers due to the complicated merger process overseen by the CMB; and over asset transfers due to the fact that under Turkish law, the transferee and the transferor remain exposed to joint liability for obligations in relation to the transferred business for a period of two years following the closing of an asset transfer transaction.
Share transfers exceeding certain shareholding thresholds may trigger a mandatory tender offer requirement for the purchase of the remaining shares (detailed under question 25 below) and may also be subject to strict disclosure requirements (detailed under question 15 below).
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Publicly held companies are subject to strict disclosure requirements. They are required to disclose on their websites their trade registry information, current shareholding structure, information on privileged shares, an up-to-date consolidated copy of the articles of association, financial statements, annual activity reports, general assembly meeting agendas, past disclosures to the stock exchange, remuneration and dividend distribution policies, and information on related-party transactions. Any information displayed on company websites must be continually updated. In addition, they are expected to use the Public Disclosure Platform (known as KAP) for other mandatory disclosures such as any “inside information” that relates to transactions or events that may influence the value of a company’s securities or the investment decisions of investors (KAP is a web-based platform that allows publicly held companies to electronically post disclosures in a timely, complete, and accurate manner and serves as an up-to-date database that is readily accessible by all stakeholders of a publicly held company.)
If the target is not publicly traded, then the amount of publicly available information will be less. Among privately held companies, only those that are subject to independent audit are required to put up company websites. For both publicly traded and privately held companies alike, any changes in the board or capital structure or amendments to the articles of association must be published in the trade registry gazette.
In a typical M&A deal, a target company usually provides all diligence related information to a potential acquirer subject to a confidentiality agreement between the two. Depending on the terms of the share purchase agreement, detailed disclosure from the target company may release the seller from liability claiming that the acquirer was already aware of all facets of the company. The only limitation on disclosure to a potential acquirer is any confidentiality agreements between the target company or seller and third parties, if the confidential contractual terms include trade secrets of the third party.
To what level of detail is due diligence customarily undertaken?
Due diligence in an acquisition has commercial, legal, financial, tax, and, in certain cases, technical or environmental aspects, depending on the type of activities conducted by the particular target company.
Legal due diligence typically covers a review of the target company’s legal documentation, agreements material to the target company’s business, compliance with any regulatory requirements, assets, legal disputes, and any potential red flag issues that may be of importance to the acquirer.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
There are two main types of companies in Turkey: (i) joint stock corporations (anonim şirket) and (ii) limited liability partnerships (limited şirket).
The key decision-making organs of a target joint stock corporation are the general assembly of shareholders and the board of directors. In a share transfer deal, approval from the target joint stock corporation’s shareholders is not sought. Also, in joint stock corporations, contractual arrangements that restrict transfer of shares such as call/put options, rights of first refusal, etc. are not enforceable at the company level, and are only contractually binding between the parties but not vis-à-vis third parties. However, depending on the content of the target company’s articles of association, approval from the board of directors may be denied.
The TCC gives the board of directors the right to withhold approval in the existence of certain just causes (e.g., economic independence of the company) which are specified under the company’s articles of association. In this context, the company may offer to purchase shares on the account of other shareholders, third persons, or the company itself.
In targets which are limited liability partnerships, M&A deals, including transfer of shares as well as assets, require the approval of shareholders.
What are the duties of the directors and controlling shareholders of a target company?
Directors owe a duty of care and a duty of loyalty to their company under the TCC. The duty of loyalty requires directors to refrain from concluding transactions with the company or competing with the company and the duty of care requires directors to protect the company’s interests in compliance with the principles of good faith.
The duty of care standard introduced by the TCC echoes the business judgment rule that is common in a number of jurisdictions. The TCC requires board members to act as prudent executives and protect the interests of the company while performing their duties in good faith. Accordingly, any decision that is made in good faith, is based on reasonable cause, and that falls within the board member’s scope of authority designated by the articles of association does not give rise to liability.
In groups of companies, controlling shareholders are expected to refrain from taking any action that would cause detriment to the company under their control. For instance, if a controlling shareholder leads its subsidiary to enter into transactions where the subsidiary has to transfer assets, funds, employees, or receivables, or reduce the subsidiary’s profits or create security interests on its assets, then the controlling shareholder may be subject to liability for losses suffered within the same financial year.
Do employees/other stakeholders have any specific approval, consultation or other rights?
In Turkish companies, it is not typical for employees or other stakeholders to have any approval or consultation rights over share acquisitions. However, mergers and demergers are subject to shareholder approval. Also, for limited liability partnerships, share transfers would require shareholder approval.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is an accepted market feature on acquisitions. Conditions typically include prior approval from regulatory authorities in order for the deal to conclude, or that certain risks are eliminated or specific actions are taken by the parties prior to the ultimate transfer of ownership. These generally come up in the form of conditions precedent in a share purchase agreement.
What steps can an acquirer of a target company take to secure deal exclusivity?
At the onset, potential acquirers typically demand an exclusivity clause to be included in the letter of intent or the memorandum of understanding that designates a certain period for exploratory negotiations.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Break-up fees are used (though not very common) but arrangements such as poison pills are not available in the Turkish market.
For cost coverage, share purchase agreements almost always include a compensation clause where the seller undertakes to compensate the acquirer for any damages arising from a breach of contract, including any misstatements in representations or warranties under the agreement. Specific indemnity clauses are also commonly used when the seller undertakes to compensate the acquirer for any damages resulting from a specific condition following the transfer of ownership.
Which forms of consideration are most commonly used?
Cash consideration is most commonly used in Turkey.
For publicly traded companies, when a mandatory tender offer is triggered by an initial share acquisition exceeding certain thresholds, consideration may be either in the form of cash or shares unless the selling shareholder specifically requires the payment to be made in cash.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
As per the disclosure rules of the CMB, publicly traded companies are required to announce any changes in their share ownership (through direct or indirect acquisition of 5%, 10%, 15%, 20%, 25%, 33%, 50%, 67%, or 95% or more of the share capital or voting rights) or management control within three business days of the acquisition date. Both the target company and the acquirer are required to disclose the share transfer on the Public Disclosure Platform.
The CMB’s disclosure regulations allow disclosure to be delayed to protect the company’s legitimate interests, provided that: (i) the suspension is not misleading; (ii) the company is able to keep any related inside information confidential; and (iii) written approval is issued by the board of directors.
The TCC introduces a similar disclosure requirement (through trade registry gazette) for share acquisitions in privately held companies, designed to reveal group structures and to protect minority shareholders and creditors against potentially abusive exercises of control by the parent company.
At what stage of negotiation is public disclosure required or customary?
Public disclosure of deals is imposed on publicly traded companies but not privately held ones. While the CMB’s disclosure rules do not specifically spell out at what stage negotiations must be disclosed by publicly held companies and leaves specific disclosure decisions at the discretion of the parties involved on a case-by-case basis, it is generally accepted that the obligation of the parties to disclose negotiations escalates as possibility of meeting of minds becomes more imminent and coming to an agreement becomes more likely.
The CMB has also published guidelines listing certain exemplary cases where disclosure needs to take place. Being engaged in acquisition discussions needs to be disclosed if there is only one potential buyer and one target company, the intention to reach an agreement is evident, and if there is a meeting of the parties’ minds concrete enough to influence the value of shares and the investment decisions of investors.
Is there any maximum time period for negotiations or due diligence?
There is no maximum time period for negotiations or due diligence.
Typically, it is expected that a share acquisition deal together with the due diligence and negotiation phases would take from three to eight months.
Are there any circumstances where a minimum price may be set for the shares in a target company?
If the acquisition of a publicly traded company triggers the mandatory tender offer requirement, then the offer price cannot be freely determined by the transaction parties. The CMB legislation imposes certain restrictions on the lower limit of the offer price. Accordingly, the price to be offered to the remaining shareholders for the offer price cannot be less than:
a. the highest price paid for the same group of shares within the six months prior to the date that the mandatory tender offer obligation arose (including both purchases made through and outside of the stock exchange); and
b. the average weighted adjusted daily trading price for the six months preceding the announcement of the transaction.
If there is an increase in the purchase price of the transaction triggering the mandatory tender offer process through any price adjustments (e.g., an adjustment under the relevant share purchase agreement), additional payment options, or similar factors, then these increases should also be reflected in the offer price.
In a buy-out triggered by a merger (detailed under question 27 below), the buy-out price should be the adjusted weighted average trading price from the 30 days preceding the announcement of the transaction (excluding the announcement date).
Is it possible for target companies to provide financial assistance?
The TCC restricts certain companies (i.e. joint stock corporations) from entering into transactions that involve advancing funds, lending, or providing security for the purpose of facilitating the acquisition of their own shares by third parties. This provision makes it difficult to structure a leveraged buyout in instances where the acquisition finance scheme in place for sourcing share purchase payments is secured by the target company’s assets.
There are two exceptions in relation to this financial assistance restriction. The first exception is provided for transactions made in the ordinary course of business by banks and financial institutions. The second exception is applicable when the employees of the target company, or those of a subsidiary, use the target company’s resources in an otherwise restricted manner to support the leveraged buyout of their employer’s shares (e.g. a management buyout).
Which governing law is customarily used on acquisitions?
Parties usually prefer Turkish law for deals involving target companies incorporated in Turkey. In cases where international investors tend to choose English law in transaction documents such as the shareholders’ agreement, there is a risk that certain provisions conflict with the target company’s articles of association which is governed by Turkish law. Therefore it is advisable that Turkish law is the governing law for target companies incorporated in Turkey. An alternative could be Swiss or German law, which are both continental civil law jurisdictions like Turkey.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
If the share acquisition is subject to the approval of the Turkish Competition Authority, parties are required to provide a Turkish copy of the share purchase agreement to the authority.
Transaction documents in a typical share acquisition deal do not have to be disclosed in full; however, if there is a publicly traded company involved, for mandatory tender offers, the CMB regulations require that, along with their application, bidders submit the share purchase agreement that triggered the mandatory tender offer requirement and the agreement executed with the intermediary institution engaged for the tender offer to the CMB.
In addition, acquirers must file standard forms which disclose information on the shareholding structure of the target, board structure, transaction triggering the mandatory tender, price of the shares to be acquired, method of payment, any envisaged changes to the business and financial structure of the target company by the acquirer, tender procedure, timing, etc. These forms are disclosed to shareholders and the public.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Under Turkish law, a share transfer would be effectuated once the share certificates are endorsed and delivered to the acquirer who, as the new shareholder, is recorded with the share ledger of the company. For publicly held companies, shares are kept in electronic form, and therefore share transfers are tracked through the Central Registry Agency (known as the MKK).
As of August 2016, share transfer agreements are no longer subject to a stamp tax which was previously 0.948% of the deal value and was usually borne equally by both parties.
Are hostile acquisitions a common feature?
Since most Turkish companies are controlled by a single majority shareholder, the hostile take-over concept is not as practicable in Turkey as it is in the U.S. In Turkey, most companies are family-owned or have shareholders with a clear controlling position that cannot be challenged through acquisition of shares on the market or by approaching minority shareholders. Therefore, hostile take-overs are not of practical significance in Turkey. There is no specific piece of legislation governing hostile tender offers.
What protections do directors of a target company have against a hostile approach?
Since hostile takeovers are not an issue in the Turkish corporate environment, U.S. style defensive measures (e.g. poison pills, etc.) have not emerged in Turkey.
Directors owe a duty of care and duty of loyalty to the company with respect to each transaction and must always observe the best interest of the company.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Turkey has a mandatory tender offer threshold for publicly traded companies. Under the CMB regulations, any direct or indirect acquisition of management control, either individually or by a group of individuals acting in concert, would trigger the mandatory tender offer requirement. In this respect, acquisition of 50% or more of a company’s share capital or voting rights would be deemed a change in management control. In addition, transfer of privileged shares granting the right to appoint or nominate a majority of the board of directors, regardless of the percentage acquired, will also be considered as a change in management control and would trigger the requirement to make an offer to the remaining shareholders.
In the event of a mandatory tender offer, the price payable for shares tendered must not be lower than the highest price paid by the acquirer for shares in the same class within the six-month period preceding the event triggering the mandatory tender offer. In cases where the six-month market price is not available, independent appraisal can be used to determine the price payable.
The application to the CMB regarding the mandatory tender offer must be made within six business days after the acquisition of shares or voting rights granting the acquirer control of the target company. Following this filing deadline, the actual tender process needs to be initiated within 45 business days of the triggering event and no later than six days following CMB approval of the mandatory tender offer filing.
The CMB regulations also provide limited cases where acquirers may be exempted from the mandatory tender offer requirement.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
A single shareholder or a group of shareholders holding a minimum of 10% of the share capital in privately held companies and 5% in publicly traded companies qualify as minority shareholders and are granted certain statutory instruments to monitor and question the governance of the company.
The minority rights granted under the TCC are, among others, the right to (i) convene an extraordinary general assembly of shareholders meeting, (ii) add an item to the agenda of the general assembly meeting, (iii) request the dissolution of the company, (iv) request replacement of the auditor, and (v) veto certain rights in the shareholders meeting regarding resolutions on the fulfillment of an obligation or a secondary obligation for the closing of balance sheet losses and the transfer of the company’s head office to another country.
Is a mechanism available to compulsorily acquire minority stakes?
Squeeze out mechanisms are available for controlling shareholders that are in control of the company, directly or indirectly holding no less than 90% of the shares and voting rights. A squeeze out of minority shareholders is not designed to be exercised at the controlling shareholder’s sole discretion. The TCC permits squeeze outs only where the minority acts in bad faith, adversely affects the functioning of the company, or acts recklessly.
The TCC also provides an exit opportunity for minority shareholders of publicly traded companies at the closing of “material transactions”, where a merger is defined as a material transaction. Shareholders objecting to material transactions at the shareholders meeting are allowed to exercise a buy-out right and exit the company. In other words, dissenting shareholder have the right to sell their shares to the company and the company is required to buy these shares accordingly. Shareholders who do not exercise these buy-out and exit rights are entitled to receive shares in the surviving company in proportion to their shares in the dissolving company.