Acquisition finance in Turkey: overview
A Q&A guide to acquisition finance in Turkey.
This Q&A is part of the global guide to acquisition finance. Areas covered include market overview and methods of acquisition, structure and procedure, acquisition vehicles, equity finance, debt finance, restrictions, lender liability, debt buy-backs, post-acquisition restructurings and proposals for reform.
Market overview and methods of acquisition
Acquisition finance market
While 2015 was a challenging year for the Turkish M&A market due to elections and the geopolitical risks in the region, the market remained stable and the interest of investors in M&A projects continued with an estimated total volume of US$16.4 billion through 245 transactions.
However, the prohibition on financial assistance introduced in the Turkish Commercial Code (TCC), which entered into force on 1 July 2012, had a negative impact on private equity firms, as well as banks and financial institutions providing financial assistance (see Question 10). This led to a reduction in both the number and value of acquisition finance transactions. However, a considerable number of acquisitions still took place in 2015.
The major entities in the market included:
International banks, which have traditionally shown strong interest in Turkey (for example, HSBC, Citibank, ING Bank and Standardbank, among others).
Local banks that have sufficient liquidity to finance acquisitions in Turkey (for example, Garantibank, İşBankası, Akbank, and YapıKredi, among others).
Methods of acquisition
The main methods of acquiring business entities in Turkey are:
In an asset transfer, the ownership of the movable and immovable assets passes to the buyer, together with any associated benefits. An asset transfer transaction may be a preferable structure to avoid unwanted liabilities, in particular when the target is not in good financial standing and is subject to legal risks (that is, not subject to general legal liabilities and possible litigation risks of the target). However, asset transfer transactions carry the risk of being considered business transfer transactions, which can result in the transfer of the rights and liabilities relating to the transferred asset, from the transferor to the transferee.
This method may be advantageous compared to a share acquisition (for acquisition finance purposes), as the assets of the target can be used as security for the financing, which is not the case for a share acquisition due to the financial assistance prohibition (see Question 10).
Share transfers are the most commonly used forms of acquisition. In joint stock companies (anonim şirket/ anonim ortaklık), the share transfer method depends on the type of shares, for example:
Bearer shares. These can be transferred by delivery of the share certificates.
Registered shares. These can be transferred by an endorsement and transfer of shares by the seller to the buyer.
If no printed share certificates or temporary share certificates exist, bearer or registered shares can be transferred with a written transfer and assignment agreement. The transfer of registered shares is perfected on registration of the buyer as a shareholder in the share ledger of the company. A simple share transfer does not need to be notified to a regulatory authority. However, prior approval from the Competition Authority or other regulatory authorities may be required (depending on the sector of the target). This is determined on a case-by-case basis.
Additionally, any acquisition of a company's shares exceeding the thresholds of 5%, 10%, 20%, 25%, 33%, 50%, 67% or 100% must be notified to the company and the company must notify the relevant Trade Registry within ten days following the completion of the share transfer. Otherwise, the rights attached to the shares will be suspended until completion of the notification and registration (including voting rights).
For the acquisition of shares in limited liability companies (limited şirket/limited ortaklık), the Turkish law requires a written and notarised share transfer agreement. The parties must also consider amending the articles of association of the target company if there is a restriction regarding the share transfer (this can be made a condition precedent in the share purchase agreement, if required).
Mergers can involve:
Two or more companies merging under a newly established company.
One or more companies merging into another existing company.
As a result, all of the assets and liabilities of the target company are automatically and legally transferred to the acquirer under the general succession principle.
A merger may be disadvantageous compared to an asset acquisition, as the assets of the target cannot be used as security for the financing (with few exceptions), due to financial assistance prohibition (see Question 10). The typical exception is the pledge of shares of the target in an acquisition financing, but the shares are not the assets of the target (see Question 8, Types of security).
Structure and procedure
Generally, financing for an acquisition is based on full documentation rather than a commitment letter and security is also required (See Question 8, Secured lending). Whether the parties are private entities or public companies, a full set of finance documents are drafted by the lenders' counsel based on a term sheet agreed by the parties.
For international bank-backed financing, the facility agreement is generally drafted in the Loan Market Association (LMA) format, which Turkish borrowers have become familiar with in the past few years. There is no official standard format for documentation for Turkish law governed loan agreements. However, the facility documents generally used have become standardised by market practice.
The facility agreement is generally governed by foreign law. Generally, English law is the most popular foreign law governing finance documents, with the exception of documents establishing security interest over assets in Turkey, which are governed by Turkish law (for example, liens over property are subject to the principle of lex rei sitae (that is, the law governing the transfer of title to property is dependent upon, and varies with, the law where the property is situated)).
For international bank-backed financing, the finance documents are generally drafted in English. Due to certain notarisation and registration requirements, some security documents must be drafted in Turkish. The security documents must be drafted in Turkish if they are submitted to an official authority. The documents will typically include a:
Commercial enterprise pledge to be submitted to the trade registry.
Mortgage to be submitted to the land registry.
Additionally, if the parties of the security agreement of the security agreement are Turkish (that is, the lenders and borrowers are Turkish entities or individuals), all agreements between those parties must be executed in Turkish. For international bank-backed financing, it will be in the discretion of the parties to draft or translate the security documents into English.
However, in domestic bank-backed financing, the agreement is drafted in Turkish and governed by Turkish law.
Pre-acquisition financing is rare in Turkey. However, for the financing of auction sales, the Privatisation Administration (Özelleştirme İdaresi Başkanlığı) may agree to an amortised payment schedule, which is then refinanced by the buyer from other available sources.
Local investors typically acquire shares or business assets on a direct basis. However, foreign investors may invest through a special purpose vehicle (SPV) in any other jurisdiction for tax optimisation purposes (for example, if the SPV is established in an offshore jurisdiction or a jurisdiction that provides specific tax advantages for the investors). SPVs are also commonly used in the acquisition of companies or business assets that are tendered by the public agencies (for example, the Privatisation Administration or the Savings Deposit Insurance Fund (Tasarruf Mevduatı Sigorta Fonu)). Private equity funds may also invest using several layers of SPVs.
Due to the restrictive nature of the financial assistance rules in Turkey (see Question 10), most of the acquisitions that are structured as share sales are based on equity financing and are in the form of straight equity. Additionally, if there are shareholder loans or shareholder guarantees at the target company, the acquirer must also refinance these shareholder loans or parent guarantees with subordinated loans.
Structures and documentation
Debt financing structures
As a result of the restrictive nature of the financial assistance rules, debt financing is used on a very limited basis for share sales (see Question 10). However, these rules do not apply to asset sales and these transactions often use debt financing structures in the form of senior secured debt. In a typical debt financing, the senior secured debt will be in the form of a term loan. Increasingly, this senior secured debt is bundled with a mezzanine facility, which is a relatively new structure in Turkish financings. However, mezzanine debt is expected to be more commonly used in the future. Additionally, payment-in-kind debt is only used in Islamic finance transactions.
For international bank-backed financing, the facility agreement is generally drafted in the Loan Market Association (LMA) format, which Turkish borrowers have become familiar with in the past few years. There is no official standard format for documentation for Turkish law-governed loan agreements. However, the facility documents generally used have become standardised by market practice. Such facility documents are not model forms but have similarities with LMA provisions. They are not produced by organisations but are formats established by market practice.
Inter-creditor agreements are commonly used and are entered into in practice, mainly in order to determine the repayment mechanisms including cash waterfall and sharing arrangements among the lenders.
Contractual subordination is commonly used in Turkey. However, contractual subordination is not regulated by Turkish law and may not be enforced by the bankruptcy administrator or the Turkish courts in cases of insolvency, unless the subordination is in accordance with statutory subordination. The impact of bankruptcy under Turkish law is compulsory and is applicable regardless of a contract between the parties to the contrary. The requirements of statutory subordination are set by the order of priority for creditors in bankruptcy proceedings. The order of priority is as follows:
First rank. Receivables of the employees including notice and severance pay accrued within a year prior to the bankruptcy and notice and severance pay that accrue due to the termination of the employment following the bankruptcy of the company. Debts of the employer related to incorporation or maintenance of the employee retirement plans or funds. Any and all alimony receivables arising from family law accrued within a year prior to the bankruptcy.
Second rank. Receivables of persons whose assets have been left to the administration of the bankrupt as a guardian/administrator.
Third rank. Receivables that are privileged pursuant to the provisions of special laws (which also include tax claims).
Fourth rank. All other receivables of the creditors.
Quasi-equity financing is based on contractual subordination, with the exception of regulatory capital of banks. This is in the form of additional Tier 1 and Tier 2 capital, the subordination of which is regulated by regulations issued by the Banking Regulation and Supervision Agency (Bankacılık Düzenleme ve Denetleme Kurumu) (BDDK).
Turkish law does not provide for structural subordination.
Payment of principal
Payment of principal is generally determined as part of the finance documents, rather than in the inter-creditor agreements.
Interest provisions are determined as part of the finance documents, rather than in the inter-creditor agreements.
Fees are determined under separate fee letters, rather than in the inter-creditor agreements.
Security is typically held by the security agent in favour and on behalf of the loan participants and the proceeds of a security are distributed in accordance with the payment waterfall.
If there are senior creditors and junior creditors, the security sharing arrangements are regulated under the inter-creditor agreements. The sharing arrangements for mortgages are uncomplicated, as a mortgage under Turkish law is divided into degrees (for example, first degree, second degree and so on), which reflects the subordination of a loan. A similar rule applies to pledge of movables that are not divided by degrees but which are classified as first rank pledge and second rank pledge (art rehin) based on the date of establishment of the pledge. However, it is difficult to create a subordinated sharing arrangement for the revenue stream of the borrower that is typically assigned to lenders.
Subordination of equity/quasi-equity
Extent of security
While security can be taken in different forms, they share a main underlying purpose, that is, a defence mechanism to prevent other (possibly unsecured) creditors or lenders:
Taking security over the assets that they have financed.
Trying to attach those assets.
Taking other enforcement action for the assets.
Generally, the lenders prefer to obtain a full security package over the entire assets of the borrower to provide sufficient security. Depending on the availability of other assets, the lender may seek to obtain security interests from the available assets of the borrower's other group companies. The following types of security interests are available in the context of acquisition financing.
Types of security
Shares. A pledge can be created over the shares of the target company. For the pledge over shares to be effective, the pledgor (the target company) must:
Execute a written pledge agreement.
Endorse the pledge on the share certificate(s).
Deliver the share certificate(s) to the pledgee (the lender).
The pledge endorsement is a condition for the creation of the security, while the annotation of the pledge in the share ledger of the company serves as the acceptance of the share pledge by the target company.
A pledge over the shares does not, by the provision of law, provide the pledgee with the right to use the voting rights of the pledgor. This may be contractually provided for in the share pledge agreement, however, the pledgor, in a default situation may try to avoid the exercise of such right in favour of the pledgee. This is because, in practice, the exercise of voting rights by the pledgee may require the issuance of a power of attorney by the pledgor, which may be difficult to obtain in a default situation.
The pledge over shares does not provide the pledgee with the voting rights attached to the shares. This can be provided for in the pledge agreement, if required. However, in the event of default the pledgor may try to avoid the exercise of the voting rights in favour of the pledge. In practice, the exercise of voting rights by the pledge may require a power of attorney from the pledgor, which may be difficult to obtain in the event of default.
Additionally, a pledge over shares does not automatically entitle the pledgee to receive the dividends of those shares. However, ancillary payments that are not due can be pledged (for example, dividend, interests and other periodical payments) and the parties may decide to cover these under the pledge agreement (Article 959, Turkish Civil Code (TCC)). Some shareholder rights can only be exercised by the shareholder of the company (for example, in case of a capital increase by issuing new shares, the right to subscribe for the new shares or the right to acquire bonus/gratis shares). Therefore, necessary contractual protection clauses are usually inserted into the share pledge agreements. Necessary contractual protection clauses typically include a "consent" requirement, in which the lender's consent is required to exercise the borrower's/pledgor's rights in the company.
The creation of a pledge over the target shares does not fall under the financial assistance restriction of the TCC (see Question 10).
Inventory. Under Turkish law, a pledge over movable assets requires delivery of the assets to the pledgee. However, this requirement is not applicable to movable assets that can be registered with a relevant registry office. For example, a commercial enterprise pledge (CEP) is a type of movable pledge that is created through registration in the trade registry and does not require the transfer of possession of the pledged collateral to the pledgee. This serves to ensure the continuation of the pledgor's business and the borrower can continue to hold possession of the machinery and material covered by the CEP.
A CEP can cover:
The commercial title and trade name of the commercial enterprise.
All machinery, tools, equipment and motor vehicles allocated to the activities of the commercial enterprise.
The commercial enterprise's intellectual property rights that exist at the time of the execution of the CEP agreement.
The parties can limit the scope of the CEP. However, Turkish law does not allow the trade name and commercial title and the movable property allocated to the activities of the commercial enterprise to be excluded from the CEP. The CEP is drafted to include a special provision for industrial enterprises that provides for an exception to the general rule of covering and listing all the movable assets allocated to the operation of the company in an "encumbrance list", which is attached to the CEP agreement.
A CEP agreement must be drafted, ex officio, by a notary public located in the jurisdiction of the trade registry with which the pledgor is registered. The agreement must be drafted in Turkish and it is common practice to provide translations for international transactions. It must be executed before a notary and registered with the trade registry within ten days of its execution. The CEP can only be denominated in Turkish Lira and the resulting security may be reduced in time due to the depreciation of the Turkish Lira against hard currencies (for example, the US Dollar or Euro). To avoid this risk, the CEP value must be determined as a ceiling for the secured liabilities, with a cushion on top of the loan amount. The cushion enables the creditor to address possible depreciation risk of the Turkish Lira against the foreign denominated loans (for example, in US$ or EUR). For example, the loan amount is EUR100. The security amount in the CEPA must be determined in Turkish Lira. Although the Turkish Lira equivalent of EUR100 is currently around TRY320, the creditor may want to insert a higher amount (for example, TRY500) as the ceiling of the secured amount, so that the creditor/lender/pledgee will not be negatively affected due to fluctuations in the exchange rate.
An adjustment clause can be included in the CEP agreement, in which the parties agree to the adjustment of the pledge value on request of the pledgee. As property acquired after the pledge is not subject to an existing pledge agreement, supplemental pledge agreements must be executed to cover any new assets.
Although CEP is one of the most common types of security used in acquisition finance transactions, it is now subject to the financial assistance restriction of the TCC (see Question 10).
Bank accounts. The lender can also create a pledge over the bank accounts of the target company. The pledge agreement over bank accounts must be in writing. Notarisation or registration is not required to perfect the pledge. If the accounts are with the lender/pledgee's bank, a written bank account pledge agreement is sufficient for the bank to create pledge annotation over the account. If the accounts are with a third party bank, the third party bank's acknowledgement is needed in addition to execution of a bank account pledge agreement between the lender/pledgee and the borrower/pledgor, so that the third party bank can create pledge annotation over the account.
While not a perfection requirement, the bank in which the account is kept should be notified of the pledge agreement. If the bank is notified of the pledge agreement, it is not in principle authorised to make payment to the pledgor without the consent of the pledgee (Article 961, Turkish Civil Code). Following its receipt of notice of the pledge, the bank becomes liable to the pledgee for any non-compliance with the consent requirements (Article 961, Turkish Civil Code).
With the exception of the bank's statutory retention right over the account for amounts owed (for example operational fees and expenses), no other right prevails over the lender's interest, provided that there were no pre-existing encumbrances, attachments or rights over the account. The bank is able to waive its statutory right of retention. It may also waive this right before or after money is deposited in the account, at the request of the account holder.
The creation of pledge over the bank accounts is also subject to the financial assistance restriction of the TCC (see Question 10).
Receivables. Generally, a security interest over contracts is created through the assignment of contractual rights. This is created by a written agreement between the assignor and the assignee. The assets secured are the rights and receivables arising out of the contracts subject to assignment. While the consent of the counterparty of the contracts is not required for a valid and effective assignment, it is advisable to inform the counterparties. This is because the counterparty discharges his obligations if he pays the assignor before he is notified of the assignment. Generally, the assignor continues to retain the assigned rights if there is no event of default. If an event of default occurs, these rights are then directed to the assignee or to its order. Assignment of contractual rights by the target is also subject to the financial assistance restriction of the TCC (see Question 10).
Intellectual property rights (IPRs) . While IPRs can be covered by a CEP, a registered trade mark can also be pledged independently from the commercial enterprise. To perfect a pledge over a trade mark, the pledgor must:
Enter into written agreement.
Register the pledge in the Trademark Registry or Turkish Patent Institution.
Publish the pledge (on the application of either the pledgee or the pledgor).
During the term of the pledge, any change made to the trade mark requires the consent of the pledge (other than renewal or change of address). The provision of a pledge over IPRs by the target may be subject to the financial assistance restriction of the TCC (see Question 10).
Real property. Land and other immovable assets can be secured through a mortgage agreement. A mortgage denominated in Turkish Lira, or any other applicable currency, can be created by registering the mortgage with the land title registry. A mortgage is created through a two-stage process:
First, the contractual terms agreed by the parties that form the mortgage agreement are typed by the land title registrar on printed official forms forming the official deed of mortgage. The deed of mortgage is signed by the parties before the land title registrar, who also signs and seals the deed. A copy of the deed is provided to the creditor.
Second, the deed of mortgage is registered by the registrar in a specific column in the records for the mortgaged real property, which is kept at the land title registry.
Under Turkish law, the mortgage must cover the fixtures and fittings that form part of the mortgaged real property. However, fittings can also be separately registered, creating a legal presumption that the registered items qualify as accessories of the mortgaged property and are therefore within the scope of the mortgage. The burden to prove otherwise lies with the mortgagor or any third party making a claim on those items. Additionally, separate registration of accessories publicises that these items are mortgaged to the mortgagee.
There are two types of mortgage available under Turkish law (that is, "definite amount mortgage" and "maximum amount mortgage"). A definite amount mortgage provides security for a definite amount of money debt and covers the:
Cost of realising the security and interest due for delay in payment.
Interest that has accrued during the three years preceding the institution of enforcement proceedings and the interest current from the last day of payment.
A definite amount mortgage, which secures an existing (and not a future) debt gives the secured party a strong position in enforcement proceedings, as it contains an unconditional acknowledgement by the debtor of the debt. A secured party who possesses a definite amount mortgage is in the same position as a judgment creditor who may initiate the debt collection proceedings with an execution order, against which the debtor can object under only a limited number of grounds. A maximum amount mortgage provides security for the claims arising from and/or expected to be arising from a certain contractual relationship between secured party and the debtor, up to a maximum limit prescribed in the security agreement.
Provision of a mortgage by the target may be subject to the financial assistance restriction of the TCC (see Question 10).
Movable assets. A movable pledge can be created without delivering physical possession of the secured movable, if the movable is registered with a relevant private registry (Article 940(2), Turkish Civil Code). A vehicle pledge benefits from this provision of the Turkish Civil Code, as all vehicle pledges must be registered with the Traffic Registry. As above, provision of movable pledge by the target may be subject to financial assistance restriction of the TCC (see Question 10).
As there is no specific legislation for guarantee agreements, these guarantees are subject to the general provisions of Turkish law regarding the "undertaking of performance of a third party", where the obligation of the guarantor is independent of the agreement it guarantees. That is, the guarantor secures not only the debtor's ability to pay, but also the existence and liability of its debt. As a result, the validity of the underlying contractual relationship does not affect the enforceability of the guarantee obligation.
A guarantee is not subject to specific creation requirements (for example, written agreement or requirement determining a cap for the guarantee), with the exception of a personal guarantee. However, according to the Turkish Code of Obligations, the suretyship conditions are applicable to create a personal guarantee. These conditions include a written agreement, and a cap for the guarantee. Although the suretyship appears to be similar to a guarantee agreement, the security obligation of the surety depends on the validity of the debtor's debt. That is, if the debtor's debt becomes invalid for any reason, the surety is entirely released of all its obligations (contrary to the guarantee agreement). Accordingly, the surety's liability is always ancillary in nature.
According to the Turkish Code of Obligations, a written agreement is required between the parties and a statement of the amount of maximum liability agreed in handwritten by the surety should be provided under such agreement.
In addition, the suretyship period for real persons and for the type of suretyship (for example, whether ordinary or several), must be specified in the agreement. If a married individual is the surety, the law requires the spouse of the surety to provide consent on or before the date of the surety agreement, except for certain cases.
If the surety is a real person, the suretyship automatically expires at the end of a ten-year period beginning from the execution of the surety agreement. However, the parties can extend the suretyship for an additional period of ten years on the consent of the surety, which can be obtained of one year before the expiration of the surety agreement at the earliest.
In acquisition finance, a parent company guarantee is generally required. There are no restrictions on providing a parent company guarantee, but this may be subject to the financial assistance restriction of the TCC (see Question 10).
There is no specific legislation regarding the concept of a security agent or security trustee. However, it is widely accepted that security agent provisions are enforceable under Turkish law. To date, there have been numerous foreign law-governed transactions accompanied by Turkish law security documents where the security is held by a security agent or trustee. However, as none of those transactions were tested before the courts in Turkey regarding the security agent provisions, there is no relevant court precedent on the subject.
It is possible that a security interest taken in relation to a debt can be validly granted to an indirect agent (that is, the security agent) acting on behalf of and for the benefit of the secured parties/lenders. If the security agent arrangement is recognised by foreign courts, it is likely that a Turkish court would also uphold it as being valid. There are also some Turkish court precedents that recognise the concept of an owner in trust (that is, fiduciary transactions (inançlı işlem)) of movable or immovable property and, in certain financing deals on the Turkish markets, a security agent or trustee is named and registered as the security right holder acting in the name and on behalf of the secured parties. There is no single registry in which the security agent's name is registered. The security agent's name must be registered where there is an official deed, such as a:
Land registry, the in case of a mortgage of a real property.
Trade registry, in the cased of a commercial enterprise pledge.
Otherwise, the name of the security agent is written in the agreements only.
In other continental law jurisdictions where this issue is also a matter of concern, the concept of "parallel debt" has been introduced to ensure that accessory security does not disappear as a result of a transfer by novation, enabling a changing class of beneficiaries to take benefit of security without a separate transfer arrangement. Under the parallel debt structure, the security agent has an independent right to demand payment of the parallel debt. The lenders are not entitled to recover twice, as any payment of the outstanding debt by the borrower to a lender reduces the amount owed to the security agent pro rata. The security documents secure the debt owed to the lenders and the parallel debt owed to the security agent. As a result, even if a loan (or any portion of the loan) is transferred to a new lender by way of novation, the security remains in place as it continues to secure the parallel debt. While this parallel debt structure is abstract in nature, it is possible that it would be recognised under Turkish law. However, enforceability issues may arise if the security agent is not one of the lenders.
Local thin-capitalisation rules are applicable only for debt financing obtained from a "related party", as defined in the Turkish Corporate Income Tax Law, and the rules are not applicable for debt financing obtained from parties who are not:
Direct shareholders of an entity in Turkey.
Entities/real persons related to direct shareholders/principal of an entity in Turkey.
The relation criterion for determining parties related to the direct shareholders/principal of the Turkish entity can be summarised as holding 10% interest in share capital or rights on voting/dividend.
If a Turkish entity receives debt financing from a related party and the debt-to-equity ratio of 3:1 is exceeded, the following will apply under the thin-capitalisation rules:
Interest accruals and foreign exchange costs (if any) corresponding to the exceeding portion of the acquisition financing will be non-deductible for corporate income tax purposes.
Interest payments, if any, will be deemed as dividends for withholding tax purposes.
VAT over the interest amount, if applicable, will not be recoverable at the level of the Turkish entity.
When the related party is a bank, the default debt-to-equity ratio changes to 6:1 (that is, in favour of the taxpayer). The equity figure used to calculate the debt-to-equity ratio is the closing balance of net equity at the latest fiscal year, or the initially paid-in capital contribution for a newly incorporated company. Therefore, when financing an acquisition vehicle, the initial contribution of capital must be calculated based on the envisioned amount of debt financing.
Legal transactions involving the grant of an advance, loan or security by the company to a third party for the acquisition of its shares are invalid (Article 380, Turkish Civil Code (TCC)). There are two exceptions to this prohibition:
Transactions performed within the scope of the field of activity of credit and finance institutions.
Transactions performed involving the grant of an advance, a loan or security to employees of a company or its subsidiaries for the purpose of acquiring the company's shares.
However, these exceptions are also invalid if they reduce the statutory legal reserves of the company. These exceptions are not applicable in acquisition finance transactions.
Article 380 of the TCC regulates the maintenance of share capital and aims to prevent the circumvention of the share buy-back restrictions set out Article 379 of TCC, in which share buy-backs that exceed 10% of the capital are prohibited. Article 380 applies when:
Shares are acquired by a third party.
Financial assistance is provided in favour of the buyer.
Financial assistance is provided for the acquisition of shares.
Article 380 is applicable to both public and private companies. As a consequence of non-compliance with Article 380, the advance, loan or security given by the target are invalid, while the share acquisition itself is still enforceable. Types of security that may fall within the scope of this provision are, among others, any in rem or other types of security over the target's assets (as well as guarantees, sureties and so on), excluding a share pledge that is provided by the shareholders of the target. Whether a grant of security by the target's group is subject to the financial assistance prohibition is uncertain, as the general view is that Article 380 is not applicable to group companies where the TCC provides for a different regime.
A controlling shareholder must not exercise its dominance over a subsidiary in a manner that may cause the loss to the subsidiary, for example by providing a guarantee or transfer of funds (Article 202, TCC). There are two exceptions to this rule:
Actual equalisation of the loss in the relevant fiscal year. "Equalisation of loss" is a financial benefit to be given by the controlling shareholder to its subsidiary, to remedy the subsidiary's loss. For example, if the controlling shareholder cover the financial loss suffered by the subsidiary in the relevant fiscal year, the controlling shareholder cannot be held liable for its alleged abuse of its dominance over its subsidiary.
Granting the subsidiary a pari passu right of demand that can be exercised until the end of the relevant fiscal year (specifying how and when the loss will be subject to equalisation).
The financial assistance prohibitions of Article 380 were significantly influenced by Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards relating to formation of public limited liability companies and maintenance and alteration of their capital. However, taking into account the difficulties that the financial assistance prohibitions caused for leveraged buyouts (LBOs), the European Commission amended the Directive in 2006 and imposed a procedure to provide a more flexible approach to the financial assistance prohibitions.
While the TCC was adopted after the amended Directive, it did not take into account the reasonable approach imposed by it. As a result, the provision in its current form creates a material obstacle on leveraged acquisitions and directly affects the future of acquisition financings in the Turkish market. The application of Article 380 is untested in the Turkish courts and there is no secondary legislation for the application of this provision. Due to the lack of court precedents, it is difficult to predict how those structures will be implemented and how workable they are in practice. Additionally, the taxation consequences must be evaluated separately.
Despite these uncertainties, the lenders can seek alternative solutions by using the schemes used by EU member states before the adoption of amended Directive as a tool to facilitate LBOs.
It is generally accepted that financial assistance from the target prior to the completion of a merger will be subject the prohibition in Article 380. Post-acquisition upstream mergers, where the target merges into the special purpose vehicle as the surviving entity, are frequently used by European countries in order to finance acquisitions. Article 380 does not apply to post-acquisition mergers, which were more frequently used before the introduction of the financial assistance rules in 2012. It is questionable if the merger is intended to push the acquisition finance debt from the acquirer to the target will be subject to these rules. However, if the merger is between two independent companies, not intending to push debt into the target company, Article 380 is not applicable. There is no major difference on the implementation of the domestic or international bank back acquisitions in terms of post-acquisition mergers.
Conversion into a limited liability company
There are no provisions in the TCC relating to financial assistance restriction for limited liability companies. However, Article 380 can be applied to limited liability companies by way of analogy. (Financial assistance restrictions are regulated under the joint-stock companies section of the TCC and certain provisions on joint-stock companies are also applicable to limited liability companies. Therefore the courts may also apply Article 380 of the TCC to limited liability companies.)
Target being a party to the facility agreement
Another alternative is making the target a party to the facility agreement with the buyer, where the buyer is granted the acquisition facility whilst the target obtains capital expenditure facility. In this scenario, target acts as the joint and several debtor and guarantor in the facility agreement. In the event of the buyer's default, the lenders are entitled to foreclose the security granted by the target due to the cross default provisions (this provision should be drafted and inserted into the relevant facility agreement).
Regulated and listed targets
The main regulated industries subject to the regulation and supervision of independent regulatory authorities in Turkey are:
Financial institutions (including leasing, factoring and consumer financing).
Effect on transaction
The rules and regulations for each industry can be materially different from each other. However, regulatory consents may be required for material transactions and the acquiring entity and/or its shareholders may be subject to financial requirements that can directly or indirectly affect acquisition finance transactions.
Recently, common quasi-securities at the foreign lending markets have been introduced to the Turkish markets (particularly for energy and infrastructure project financing transactions). One of the most important features is the step-in provisions that give the lenders/banks a right to step in to the project company's rights and obligations under the project documents.
In principle, Turkish energy markets are strictly regulated by the Energy Market Regulatory Authority (Enerji Piyasası Düzenleme Kurumu) (EPDK) and restrict licence transfers. However, the banks and/or finance institutions that provide project financing to the licence holder as part of a loan agreement can apply to the EPDK to grant a new licence to a third party (provided that the party agrees to the obligations of the licence). If the lender is granted the step-in right in the financing or security agreements at the outset, the consent of the original licence holder is not required at the time of execution of the step-in right. The licence is granted to the third party on the condition it complies with the relevant licensing regulations (that is, the Electricity Licensing Regulation issued by the EPDK).
Specific regulatory rules
If the target company is listed, the transaction can be subject to the specific rules and regulations of the Capital Markets Board of Turkey (Sermaye Piyasası Kurulu) (CMB). Based on the method of acquisition, the following regulations may apply:
CMB Communiqué on Merger and Spin-Off.
CMB Communiqué on Tender Offers.
CMB Communiqué on Squeeze-out and Sell-out Rights.
CMB Communiqué on Material Transactions.
Methods of acquisition
The following methods of acquisition can be used if the target company is listed.
Merger. This can be a merger through acquisition or merger through incorporating a new company. The merger must comply with the CMB Communiqué on Merger and Spin-Off.
Spin-off. This can be a spin-off in whole, a partial spin-off through becoming a subsidiary of the acquiring company or a partial demerger through a share transfer to the shareholders. The spin-off must comply with the CMB Communiqué on Merger and Spin-Off.
Tender offer. To acquire the management control of listed target, it may be required to make a tender offer. The tender offer must comply with the CMB Communiqué on Tender Offers.
Merger scenario. The share of the acquiring company is the main consideration, as up to 10% of the merger consideration can be paid in cash.
The parties may decide to pay an appraisal fund in the merger agreement. In this case, the appraisal fund may consist of Turkish Lira denominated cash, securities or a combination of cash and securities. However, if requested by the shareholders, appraisal fund must be paid in cash. If the appraisal fund consists, either wholly or partially, of securities, the securities must be admitted to the trading on the exchange (in this case, Borsa İstanbul).
Spin-off scenario. The consideration is generally shares in the subsidiary.
Tender offer scenario. Tender offers can be freely launched by the shareholders or third parties for all or part of the shares of a public company. Tender offers can be freely launched by third parties that do not hold shares in the company beforehand.
The offerors are free to launch a partial voluntary tender offer for a specific class of shares and/or certain number of shares within a class. If the offeror exceeds the 50% threshold or acquires control of the target through the acquisition of a specific class of shares, the mandatory tender offer must be launched to the shareholders of other classes.
Offerors who have made a voluntary tender offer can withdraw their offer up until the actual launch date of the offer. Voluntary tender offer must be launched within six business days on the CMB's approval and the tender offer period must be between ten to 20 business days.
The third parties are free to make competitive tender offer during the term of a voluntary offer. The CMB Communiqué on Tender Offers enables the term of initial voluntary tender offer to be extended until the expiry of the competitive voluntary offer's period.
Appraisal right. Merger and spin-off transactions are considered to be material transactions. An appraisal right is granted to the shareholders when there is a material transaction to be discussed on the agenda of a shareholders meeting. In such cases, the public company must purchase these shares of the dissenting shareholders within 30 days preceding the public disclosure date of the material transaction. The shares are valued based on the average of the daily weighted average of market price of the share. The company must pay this appraisal price in full and in cash.
If voting rights attached to the shares that were acquired as a result of tender offers (or in any other manner) reach 97% of the voting rights of the public company, the controlling shareholder can squeeze out the other shareholders. This applies if additional shares are acquired, regardless of whether the shares held by the other shareholders are privileged. The other shareholders are entitled to sell-out their shares to the controlling shareholder.
To exercise the squeeze-out and sell-out rights, the relevant consideration must paid in Turkish Lira, in full and in cash.
In contractual subordination, there are two major concerns for lenders.
First, it may not be possible to obtain specific performance under Turkish law since there are very limited cases under Turkish law in which courts issue specific performance decisions. For example, it is not possible to request the court to order a subordinated creditor to comply with the requirements of the subordination agreement. Second, in case of bankruptcy, all creditors of the bankrupt are ranked according to with the provisions of the Turkish Execution and Bankruptcy Law No. 2004 (TCEB).
To overcome these disadvantages, the lenders can request that the subordinated creditors assign all their subordinated loans to the lenders through an assignment of receivables agreement. Additionally, new assignment agreements must be signed for any future subordinated loans, as the assigned rights must be ascertainable to valid under Turkish law.
The lenders may also face clawback risk specifically provided by the TCEB, which specifies the following:
The following transactions are voidable if they are made "one year" before the date of insolvency bankruptcy or seizure:
the issuance of new pledges to secure an existing debt, except where the debtor has previously undertaken to grant security interest;
debt payments that are not made in cash or through usual payment methods;
early payments for debts not yet due; and
annotations in the title deed registry to strengthen private rights (for example, annotations of lease agreements).
Gratuitous transactions (for example, donations) made within the two-year period before the bankruptcy of a company can be challenged for invalidity.
All transactions made by an insolvent debtor within five years of the bankruptcy or seizure proceedings with the intention to harm its creditors can be cancelled. This is provided that the other party to the transaction knew, or should have known, the debtor's intention and financial condition. If the other party did not know the debtor's intention, there will be a clawback risk if the other party who benefitted from the transactions made by the insolvent debtors knows or should have known the insolvent debtor's intention to harm their creditors.
The list of transactions identified above is not exhaustive. The Court of Appeal has explicitly stated in various cases that Turkish courts have the discretion to cancel any transaction in addition to those identified in TCEB. However, the court may use the legal framework provided by TCEB as a starting point in those cases.
A borrower or a financial sponsor can engage in debt buy-back if it is not prohibited under the finance documents. In practice, the borrowers, sponsors or other related parties tend to purchase the borrower's debt at a discounted price from asset management companies in the non-performing loan market.
A wide range of post-acquisition restructurings are available in Turkey. A common post-acquisition restructuring is a "debt push-down" that is, refinancing acquisition debt at a level closer to the operating assets. This reduces the effect of structural subordination of acquisition debt, being at the new company level and above the operating business being acquired. It can also increase the level of security available. However, the legality of these debt push-downs has not been judicially tested in Turkish law.
Republic of Turkey, Prime Ministry, Legislation General Directorate
Court of Appeals
The above includes the official and generally up-to-date information on laws enacted and the final decisions adopted by the Court of Appeals. The documents and decisions in those websites are in Turkish. Official English-language versions are not available.
M Togan Turan, Partner
Professional qualifications. Turkey, Solicitor
Areas of practice. M&A; banking and finance; corporate and commercial; competition and anti-trust.
Non-professional qualifications. LLM International Banking and Finance, University of London; LLB, School of Law, Istanbul University
Languages. English, Turkish
Professional associations/memberships. Chevening Scholarship; International Bar Association; Istanbul Bar Association.
- Lexis Nexis, Cross-Border Banking and Finance Guide (Turkey Chapter).
- IFLR, Mergers and acquisitions on the rise.
- IFLR, With great power comes great responsibility.
Sera Somay, Partner
Professional qualifications. Turkey, Solicitor
Areas of practice. Banking and finance; capital markets; Islamic finance; M&A.
Non-professional qualifications. LLM, School of Law, New York University; LLB, School of Law, Istanbul University
Languages. English, French, Turkish
Professional associations/memberships. International Bar Association; Istanbul Bar Association.
- "Sukuk in Turkey: An Alternative Investment Tool: Turkish Islamic Bonds", The Lawyer.
- The Euromoney International Debt Capital Markets Handbook 2015: A short history of Sukuk in Turkey.
- Turkey chapter in The Lending and Secured Finance Review (1st Edition) .
Nilüfer Türkçü Hıra, Senior Associate
Professional qualifications. Solicitor, Turkey
Areas of practice. Banking and finance; project finance; public-private partnerships
Non-professional qualifications. LLB, School of Law, Istanbul University; LLM, Private Law Istanbul University
Languages. English, Turkish
Professional associations/memberships. Istanbul Bar Association
- International Bar Association, Banking Law News, Financial assistance restriction in leveraged buyouts and alternative solutions in Turkey.
- Public Private Partnership Law Review, Turkey Chapter.