In addition to the GDP growth expectations, Turkey currently has a solid management pool and has significantly reduced its issues around accounting and tax compliance in the last few years. Current hot sectors in the private equity and venture capital market include:

Turkey is the 15th most attractive destination for foreign direct investment (FDI) in the world according to the UNCTAD World Investment Prospects Survey, 2008-2010. Despite the impact of the worldwide financial crisis on FDI the prospects remain good. In the first quarter of 2011, Turkey posted record GDP growth of 11%, even higher than China's 9.7%, and it is expected that the FDI will show similar results.

The old Code contained little or no corporate governance rules. The new Code has a very significant focus in this area with the aim of bringing Turkish corporate governance up to the European standard. In some areas the new Code may have overshot the mark in that respect. For instance, with regard to transparency, until now private Turkish companies were effectively black boxes. Going forward, disclosure obligations will attach to almost everything. Companies will need to have a website that discloses extensive information, including all:

Missing or misleading information on these websites will qualify as criminal offences and may lead to serious sanctions for offenders. Arguably, that level of disclosure would be more appropriate for listed companies, where the need to protect minority investors is a key principle.

Another novelty that will have great impact is the obligation for annual accounts to be prepared on the basis of new Turkish accounting and reporting standards, which are based on international financial reporting standards (IFRS), and for them to be audited. The new Code goes beyond the requirements of the main body of EU legislation, which contains various exemptions in this area, especially for smaller-sized companies. In addition, the new Code introduces requirements to ensure the independence of the auditors of the company, applicable to both listed and non-listed Turkish companies. These requirements are very similar to those under the US Sarbannes-Oxley Act (although the Sarbannes-Oxley Act applies only to public companies). The new Code places a large responsibility on the accounting firms and introduces two new categories of auditors, transaction auditors and special auditors.

Overall, these are significant developments with the likely effect of making the financial position of Turkish companies much more trustworthy.

The new Code explicitly recognises concepts such as put options and call options, as well as introducing forced buyouts and squeeze-outs. Forced buyouts are only fully binding and enforceable in limited liability companies. However, even though the new Code has brought the rules that relate to limited liability companies more into line with those for joint stock companies, limited liability companies may still not be the preferred investment vehicles for many investments as certain tax disadvantages remain.

Uncertainty as to whether drag-along, tag-along or other options can be put into a joint stock company's articles of association under the new Code, may shift interest to limited liability companies, which can incorporate such contractual rights in their articles of association.

The new Code also allows for the first time Turkish joint stock companies and limited liability companies to buy their own shares. Limited liability companies may be allowed to acquire up to 20% of their own shares (in exceptional circumstances) and joint stock companies will be allowed to buy back up to 10% of their own shares, which is considered a huge improvement for minority PE investments.

For the first time IPOs will be possible immediately (within two months) of the formation of a joint stock company, which highlights IPOs as increasingly viable exit routes for investments in Turkey.

Under the old Code, having a minority investment in Turkey could lead to a number of difficulties, as there was very little legal protection for minority shareholders. The new Code makes several adjustments that improve minority shareholders' position. For example, shareholders' rights to information are substantially increased. Any shareholder now has a right to:

To maintain a proper balance, the new Code introduces the right of a majority shareholder holding at least 90% of the company's shares to buyout a minority shareholder whose reckless attitude or bad faith is blocking the company's business operations.

The board of directors will now need to provide an "important reason", as defined under the company's article of association, to block a transfer of shares. Alternatively, the board can require that the company, majority shareholders or even a third party buys the shares at their fair value. Under the old Code the board of directors of a Turkish Company could reject new shareholders (resulting from share transfers) at their own discretion. This change should reduce the risk of a board of directors frivolously refusing to accept a share transfer to a private equity minority shareholder trying to exit its investment in the company.

The new Code provides an extensive definition of a group company. A group company is defined by reference to the notion of control. Significantly, this includes being able to exercise control through contractual arrangements. The new Code sets out important requirements for disclosure of intra-group transactions, and imposes a duty of compensation or adjustment where a transaction was to the benefit of the parent and to the detriment of the subsidiary. These are generally welcome arrangements for minority investors in a subsidiary entity of a larger group, as they are expected to rationalise intra-group arrangements.

In the past, before the Turkish government modernised the tax system, leveraging transactions raised fewer issues. A common acquisition structure used a Turkish acquisition company (BidCo), which obtained a loan from a financial institution (such as a bank) in order to acquire the shares in a Turkish target. Interest paid on such a loan would be exempt from interest withholding tax, while interest paid to a foreign shareholder in general would be subject to Turkish withholding tax and VAT. After the acquisition the target would merge with the Turkish BidCo and a debt-push down would be realised. Unfortunately, Turkish tax authorities no longer allow deduction of interest after such a merger, based on a substance-over-form principle. However, there are still good reasons to use a Turkish BidCo to acquire the shares in a target and merge them directly after to the acquisition, including that:

See box, Leveraged acquisition by debt-push down and merger.

To the extent the Turkish target has a freely distributable profit or general reserve, a viable alternative to a debt push down by way of a merger can be structured as in the chart below, see box, Alternative acquisition structure).

By structuring the acquisition as described in the five steps, a part of the debt required for the acquisition will finish at the level of the Turkish target, allowing deductible interest expenses to be offset against the profits of the target.

Normally a merger transaction would take approximately two to three months, as there are legal procedures to be followed. Besides the tax and legal implications, a target's negative equity position may trigger certain issues when registering the merger at the Trade Registry. In several cases the Trade Registry has rejected the merger of technically insolvent companies, especially if the merged entity also had negative equity or was technically insolvent.

One of the most important changes which the new Code introduces is the restriction on financial assistance. Under the new Code, a target will no longer be able to enter into any transaction that constitutes loans and collateral being given in relation to the acquisition of the target's shares. This will have a negative impact on leveraged buyouts, since the collateral given by target companies will be null and void. The solution would be avoid either merging the BidCo and the target company, or the target giving collaterals (such as an assignment of receivables, a mortgage on properties and so on).

The Turkish tax code also gives thin capitalisation rules, which require additional attention when granting loans to a target. In certain circumstances it can be beneficial to finance the target through hybrid instruments. Besides potential tax advantages, hybrid instruments may provide more flexibility in the way a private equity player is able to fund its target.

In addition to the tax issues, the new Code introduces certain restrictions on financial assistance by prohibiting advancing funds, making loans and providing security and guarantees by a target company for the acquisition of its own shares. While there are a some exceptions, however, leveraging a private equity investment in a Turkish target will require more monitoring.

When a fund has found a promising target in Turkey and has defeated the competition for the deal, the existing shareholders may not be willing to sell the entire company or the investor may not wish to buy the entire company. Depending on the percentage of interest acquired (a minority or a majority interest) the fund usually seeks decisive voting power in the target. Even in a situation where only a minority interest is acquired, the fund may have control. This can be achieved by reshaping the articles of association to include veto rights or structuring the interest through a double SPV. As shown in the chart below, see box, Retaining voting power, the fund acquires an aggregate direct or indirect interest of only 36% in the target, but will have a majority interest in both SPVs. As a result (and subject to the provisions of a shareholders' agreement) the fund could have almost full control over its investment, while the aggregate direct or indirect ownership of the founders stays at 64%.

Many investments into Turkey are structured either through a Luxembourg or through a Dutch SPV. From a buyer's perspective, if a fund does not acquire all of the target's shares it is preferable for the remaining shareholders to no longer hold shares directly in the target but at the higher level of the foreign (such as Dutch or Luxembourg) SPV. Where the shareholders agreement is then made subject to Dutch or Luxembourg law, they will be afforded protection due to the enforceability of governance rules and provisions, and other arrangements such as drag- and tag-along rights. Sometimes, this would also facilitate the use of preference shares or the implementation of option programmes. See box, Rolling up co-shareholders into the Netherlands.

The Netherlands has an advantage over Luxembourg when the structure also needs to provide for tax efficiency for Turkish founders in respect of their remaining interest. The tax treaty concluded between The Netherlands and Turkey (as with the one between Turkey and Sweden) eliminates double taxation with the effect that dividends distributed by a Dutch company to a Turkish resident should be fully exempted from Turkish taxation.

The "Turkish Miracle", which is how Hillary Clinton described the growth of the Turkish economy while the entire world is in crisis, is here to stay. This makes Turkey a country to watch closely for private equity and venture capital investments. Besides economic growth, Turkey offers significant opportunities for foreign investors as its geographical position allows it to function as a gateway between Europe, the Middle East and Central Asia. Hence, opportunities exist not only in the dynamic domestic market (with a population of over 73 million) but throughout the region. Structuring such investments can be challenging but is never impossible, and is worth spending some time on, to get it right. The new commercial code should have a positive influence on future investments into Turkey as it brings their legal system into the 21st century.