Trends and climate
What is the current state of the M&A market in your jurisdiction?
During 2015, 245 mergers and acquisitions occurred in Turkey. Out of 245 deals, 114 had disclosed deal values adding up to a combined total of around $10.9 billion. The estimated value of all deals (including undisclosed deals) was around $16.4 billion in 2015, representing a 9% decrease on 2014 ($18 billion through 234 deals). Small and mid-cap transactions constituted the largest portion of 2015 transaction in terms of numbers.
In 2015 the contribution of foreign investors to the annual deal volume was considerably higher than 2014. The percentage increase can be linked to a comparative lack of privatisations in 2015, which are mostly driven by local investors. Representing 70% of the total deal volume in 2015, foreign investors concluded 125 transactions, combining to a total deal size of around $11.5 billion (including estimates for undisclosed values). These numbers suggest a 44% increase in the deal volume of foreign investors, compared to 2014.
The largest deal in 2015 was the acquisition of majority stake in Finansbank by Qatar National Bank, worth around $3 billion.
The statistics above are based on a report by Deloitte Turkey (www2.deloitte.com/content/dam/Deloitte/tr/Documents/mergers-acqisitions/annual-turkish-ma-review-2015.pdf).
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
Political uncertainty in Turkey during 2015 and the surrounding Middle East geopolitical situation led to a difficult year for the local M&A market. Overshadowed by these difficulties, the Turkish M&A market was somewhat stagnant during 2015. The heavy political agenda also directly affected the market, as the number of privatisation deals (which usually constitute the majority of Turkey’s M&A deal volumes) dropped to one of the lowest levels in the last decade in terms of deal numbers and deal volumes. Nevertheless, elections in November 2015 created a more stable political environment, which is expected to lead to an economic recovery and increased M&A deal volumes in 2016.
Are any sectors experiencing significant M&A activity?
Energy, manufacturing, financial services and food and beverage were among the most active M&A sectors during 2015. The manufacturing and energy led with 41 and 37 transactions, respectively. Services (18), technology (17), financial services (15) and food and beverage (15) were also notable in terms of deal numbers.
The energy sector continued to be the leading industry in terms of value, with a total deal value of $4.9 billion (including estimates for undisclosed values), representing 30% of the total annual deal value. Of the 10 largest deals during 2015, five were energy sector transactions, amounting to a total combined deal size of around $3.1 billion.
In terms of deal value, financial investors dominantly invested in the energy sector. Their focus on energy investments represented around 58% of total financial investor deal volume.
The statistics above are based on a report by Deloitte Turkey:www2.deloitte.com/content/dam/Deloitte/tr/Documents/mergers-acqisitions/annual-turkish-ma-review-2015.pdf.
Are there any proposals for legal reform in your jurisdiction?
There are no major reform proposals. However, proposed reforms exist for the Turkish energy regulation regime, which may have implications for investors.
What legislation governs M&A in your jurisdiction?
The primary M&A legislation in Turkey includes:
- the Commercial Code (6102), which is enforced by the Ministry of Customs and Trade and outlines general corporate law provisions for company incorporations, acquisitions, mergers and takeovers;
- the Capital Markets Law (6362), which is enforced by the Capital Markets Board and outlines general rules applying to public companies for business combinations;
- the following capital market communiqués and stock exchange regulations:
- the Communiqué on Mergers and Demergers (Serial II, 23.2), which regulates procedures and principles for mergers and demergers where at least one party is a public company;
- the Communiqué on Takeover Bids (Serial II, 26.1), which outlines general rules for mandatory and voluntary public bids;
- the Communiqué on the Principles Regarding Significant Transactions and Squeeze-Out Rights (Serial II, 23.1); and
- the Istanbul Stock Exchange Stock Market Regulation.
- the Code of Obligations (6098);
- the Corporate Tax Law (5520);
- the Labour Law (4857);
- the Law on the Protection of Competition (4054); and
- the Communiqué Concerning Mergers and Acquisitions Calling for the Authorisation of the Competition Board (2010/4).
How is the M&A market regulated?
The Ministry of Customs and Trade oversees the enforcement of the Commercial Code. Incorporation and some corporate actions by certain company types are subject to approval by the Ministry of Customs and Trade. Regardless of the company type, a ministry representative must attend meetings if the agenda includes amendments to the articles of association regarding:
- increasing or decreasing capital;
- adopting or leaving the registered capital system;
- increasing the registered capital ceiling;
- changing the company’s field of activity; or
- a merger, split or change of company type.
Publicly held companies are subject to the Capital Markets Regulatory Board’s regulations. Certain transactions and activities by publicly held companies are subject to Capital Markets Board review and approval.
Mergers, acquisitions and joint ventures which result in a permanent change of control in the target are subject to Competition Board approval if they exceed certain turnover thresholds.
Are there specific rules for particular sectors?
Certain sectors are regulated with specific legislation and are subject to oversight by separate governmental institutions. These include the IT, energy, banking, financial services and insurance sectors. Approval may be required for takeovers or mergers, either before or after the transaction (industry dependent). Authorities which regulate specific industries include:
- the Energy Markets Regulatory Authority;
- the Banking Regulation and Supervision Agency;
- the Information and Communication Technologies Authority; and
- the Mining Affairs General Authority.
In strategic sectors, foreign investment is restricted in order to prevent foreign capital majorities.
The Ministry of Customs and Trade must approve incorporation and some corporate actions by the following companies:
- financial leasing companies;
- asset management companies;
- companies providing consumer financing and credit card services;
- insurance companies;
- holding companies; and
- independent auditing companies.
An official Ministry of Customs and Trade representative must attend all general assembly meetings of these companies.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
A company can be acquired through the following types of transaction.
Acquisitions can be realised through share transfers, capital increases, asset transfers or business transfers.
Two types of merger are regulated under Articles 136 and following of the Commercial Code:
- establishment of a new company after the merger of two or more companies; or
- takeover of one or more companies by another company.
It is possible to split a business line from one company and merge it with another company by undertaking a demerger (Article 134 of the Commercial Code).
Due diligence requirements
What due diligence is necessary for buyers?
Comprehensive financial, tax, operational and legal due diligence is usually carried out during M&A transactions.
Buy-side legal due diligence usually focuses on:
- existence, good standing and ownership;
- corporate governance;
- material agreements (financing agreements or any agreements material to the target's business);
- liabilities (eg, those arising from court judgments and administrative fines);
- contingencies (eg, those that may arise out of pending, potential or threatened claims, lawsuits or administrative inspections or investigations);
- regulatory issues (based on the target’s main business sector);
- environmental issues;
- competition compliance;
- employment; and
- intellectual property.
What information is available to buyers?
Certain commercial registry records are publicly accessible and these are the main source of information about targets. All companies must register the following documents with the commercial registry and have them published in theCommercial Registry Gazette:
- articles of association, including the initial amount of share capital, the address and duration of the company, as well as information on shareholders and the management board;
- resolutions by the management board (board of directors or managers) and the shareholders' meeting, if the agendas of these are subject to registration under the Commercial Code; and
- minutes of general assembly meetings.
In addition, publicly held companies are also required to maintain a website and make certain corporate information available thereon. Under the Regulation on the Websites of Capital Stock Companies and the Communiqué on Corporate Governance Principles, the following information must be available on the websites of publicly held companies:
- commercial title;
- location of headquarters;
- committed and paid-up share capital;
- board members of joint stock companies and managers of limited liability companies;
- auditors' names, surnames, residence addresses and registered branches (if any);
- trade registry information;
- up-to-date information on the shareholding and management structure;
- information about privileged company shares;
- final version of the articles of association;
- public disclosures on material events;
- financial statements and annual reports;
- prospectus and further documents subject to public disclosure;
- agendas, attendance list and minutes of general assembly meetings;
- form for proxy voting at the general assembly meeting;
- mandatory information forms prepared for proxy solicitation and similar forms;
- takeover bids;
- buy-back policy;
- distribution of profit policy;
- information policy;
- information on related party transactions;
- ethical rules formed by the company;
- frequently asked questions and relevant answers; and
- for group companies, information on share transfers or acquisitions by an undertaking in a group of companies for the amounts stated in Article 198 of the Commercial Code (such disclosures must be made within five days of the transaction date).
Further, information on assets which must be registered to public registries is also available, as follows:
Ownership and encumbrance information for properties can be checked through land registry offices.
Information about trademarks, patents, industrial designs and utility models registered in the Patent Institute is public and can be obtained through its website (www.tpe.gov.tr/portal/default_en.jsp).
Ship registries provide information on ship ownership.
Owners of domain names obtained through nic.tr, which provides domain names with the ‘.tr’ extension, can be found on its website (https://nic.tr/).
What information can and cannot be disclosed when dealing with a public company?
Disclosure requirements for publicly held companies are primarily regulated by the Communiqué on Material Events (Serial II, 15.1). Accordingly, publicly held companies must disclose the following information on the public disclosure platform and the company’s website:
- inside information – material information which has not been publicly disclosed but which may influence the value of a capital market instrument or investor decision; and
- ongoing information – all other information which must be publicly disclosed and is not inside information.
The Capital Markets Board issued the Guideline on Material Events, which outlines the circumstances that must be disclosed to the public as inside information. Merger and takeover bids are deemed to be inside information which must be publicly disclosed if the bid is likely to have any effect on a capital market instrument’s value or on investor decisions (Article 5.5 of the guideline).
How is stakebuilding regulated?
If the buyer decides to build a stake in the target before announcing the bid for the shares of a publicly held company, the following disclosure requirements apply:
- Inside information and ongoing information must be disclosed to the public according to the Communiqué on Material Events. Changes in the shareholding structure and management control are deemed ongoing information, which must be disclosed to the public.
- Disclosure requirements will apply when a person's direct or indirect shareholding acting in a publicly held company exceeds or falls below 5%, 10%, 15%, 20%, 25%, 33%, 50%, 67% or 95% of the issued share capital or voting rights. As a result, if the buyer intends to build a stake in the target by acquiring direct shareholdings, a share transfers must be publicly disclosed if the percentage of shares or voting rights acquired reaches these thresholds.
What preliminary agreements are commonly drafted?
Letters of intent and memorandums of understanding
The most common preliminary agreements are letters of intent and memorandums of understanding. These cover material issues such as the percentage of share capital to be transferred and the agreed consideration for the transfer. The parties can also choose to set out the procedure to be followed throughout the acquisition process and afterwards.
The term ‘letter of intent’ is commonly used in strategic investment transactions. Terms such as ‘memorandum of understanding’, ‘term sheet’ and ‘non-binding offer letter’ are mostly used in financial investment transactions. These agreements can either be binding or non-binding, depending on the parties’ intentions.
Exclusivity agreements preventing the parties from entering into negotiations with other parties are commonly used in M&A practice. Exclusivity agreements can be made separately or provisions can be included in a letter of intent. Exclusivity agreements usually include a long-stop date, by which negotiations between the parties will continue. Such agreements may foresee that until the long-stop date, the transferor party must not offer shares or other rights in the target to third parties.
Transaction parties will usually sign a confidentiality agreement when due diligence requests are made and before receiving non-public information from the target. Non-disclosure provisions usually determine the scope of negotiations, as well as stating that information shared with the opposing party during the negotiations is strictly confidential and must not be disclosed to any party or authority without obtaining the other party's written consent.
What documents are required?
The main documents in a typical M&A transaction include:
- the share purchase agreement, including the parties' representations and warranties and the terms of the transaction;
- the shareholder agreement, which governs the company’s management after the takeover (if the acquisition is a partial takeover of the shares);
- ancillary agreements and the closing documents relating to the transaction – these may include share certificates representing the target’s shares, board resolutions, general assembly decision drafts, management and consultancy agreements and key employee agreements;
- if the transaction includes a merger or demerger, a merger/demerger agreement, along with corporate documentation necessary to register the merger before the Commercial Registry; and
- if the transaction includes an asset transfer, a separate asset transfer agreement, along with the documents necessary to register the asset transfer before the Title Deed Registry.
Which side normally prepares the first drafts?
The buyer usually prepares the first drafts of transaction documents.
What are the substantive clauses that comprise an acquisition agreement?
An acquisition agreement mainly consists of clauses regarding the parties’ material obligations, particularly regarding the sale and transfer of shares or assets and consideration or payment.
Acquisition agreements also include:
- conditions precedent for completion of the transaction;
- representations and warranties regarding the shares, company or enterprise being transferred;
- claims and indemnities in case of breach of representations, warranties or other agreement provisions; and
- closing provisions and procedures.
What provisions are made for deal protection?
Parties may agree on penalties for breach of contractual obligations or other contractual arrangements. These may serve as a break fee to protect the deal from third parties. A typical penalty clause allows the claiming party to claim the penalty amount solely based on the breach of the agreement, with no obligation to prove damages resulted from the breach.
What documents are normally executed at signing and closing?
The main documents prepared and signed at a signing meeting are the share purchase agreement and its annexes. Ancillary documents are also signed, as required by the nature of the transaction: it is common to sign agreements regarding the company's real estate, IP rights and key employees during the signing.
At closing, parties usually sign the corporate documents finalising the deal. The most common documents signed during closing are:
- release letters;
- share certificate transfer and delivery documents;
- bank transfer documents;
- resolutions and approvals from management regarding the share transfer;
- registration of the share transfer in the company's share ledger;
- resolutions regarding the appointment of the new management of the target; and
- amendments to the articles of association, if required.
Are there formalities for the execution of documents by foreign companies?
No specific regulations relate to the execution of documents by foreign companies. A foreign company can execute a document with the signature of the person authorised to represent the company. However, this authority to represent the company must be legally established, such as via a notarised signatory circular or a document with similar effect.
For a foreign notarised document to be enforceable in Turkey, the document must be apostilled by the competent authority in the contracting states of the Hague Convention Abolishing the Requirement for Legalisation for Foreign Public Documents 1961. In states which are not signatories to the Hague Convention, documents must be certified by the Turkish consulate in the relevant state.
Are digital signatures binding and enforceable?
An electronic signature is electronic data attached to other electronic data, or which has a logical connection with some electronic data, and is used for the purpose of identity verification (Article 3(b) of the Electronic Signature Code).
A secure electronic signature has the same legal effect as a handwritten signature under Turkish law (Article 5 of the Electronic Signature Code and Article 15 of the Code of Obligations).
However, bills of exchange, bonds, cheques and commercial bills similar to bills of exchange cannot be issued using secure electronic signatures (Article 1526 of the Commercial Code). In addition, legal transactions such as acceptance, surety and endorsement relating to these documents cannot be executed via secure electronic signatures.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Under Turkish law, parties to an agreement which includes a foreign element can determine the agreement’s governing law.
However, there are certain cases where Turkish law directly applies. These are stipulated in the International Private and Civil Procedure Law (5718). Accordingly, if a non-Turkish law is chosen as the applicable law for an acquisition agreement, Turkish rules still apply regarding:
- competition and unfair competition;
- title to shares/assets and their transfer procedures;
- notices under the agreement; and
What provisions and/or restrictions are there for foreign ownership?
In general, direct foreign investment is unrestricted so that foreign investors and their investments are treated the same as their local counterparts (Article 3(a) of the Direct Foreign Investment Code). However, some restrictions apply to foreign investments in order to prevent foreign capital majorities in strategic sectors, including the following:
- A foreign shareholding of media service providers cannot exceed 50% of the registered capital. Further, foreign persons cannot be shareholders of more than two media service providers, nor can they be granted privileged shares (Article 19(f) of the Establishment of Radio and Television and Broadcasting Services Code).
- Majority shareholders of civil commercial aviation operators with authority to carry passengers and cargo on scheduled or unscheduled flights must be Turkish (Article 9 of the Regulation on Commercial Air Transportation).
- Restrictions apply if the nature of the transaction includes the transfer of real estate. Foreign real persons or persons having foreign capital can acquire real estate or limited real rights (rights in rem) subject to certain restrictions (Article 35 of the Land Registry Law).
- Further requirements apply to purchasing real estate in military forbidden zones, military security zones or strategic zones (the Land Registry Law).
Turkish legal entities with foreign shareholders of more than 50% or which are otherwise controlled by foreign shareholders can acquire real estate or limited real rights (rights in rem) in Turkey subject to the following restrictions:
The real estate acquisition must be in line with the Turkish company’s purpose and scope (outlined in its articles of association).
If the land is in a military or private security zone, permission for the military zones and private security zones must be obtained separately from the relevant authorities (Article 36 of the Land Registry Law).
Further, a notification process applies for legal entities with foreign shareholders when acquiring a real property in Turkey (the Regulation on the Application of Article 36 of the Land Registry Law). Accordingly, the Ministry of Economy must be informed within one month if a foreign entity becomes the controlling shareholder in a Turkish company (which owns real estate in Turkey) as a result of the share transfer.
Valuation and consideration
How are companies valued?
Different valuation methods can be applied based on the type of company. Usually, the fair market value or the book value of the target’s shares is determined by independent auditors. Common valuation methods are applied in making such determination. These may include discounted cash flow models or price multiples (ie, the earnings before interest, taxes, depreciation and amortisation multiplier). Transaction documents usually state which valuation method will be used, the upper limit for the capital increase and/or the valuation and the financing method.
What types of consideration can be offered?
In general, full payment of the consideration is required in cash in Turkish lira.
In publicly held companies, consideration can be paid fully or partly in securities, provided that the written consent of the selling shareholder is obtained during the offer period. If consideration is paid in securities, the securities must be publicly traded.
What issues must be considered when preparing a company for sale?
It is increasingly common in Turkey to carry out legal and financial vendor due diligence before the sale of a company’s shares. This sell-side due diligence before offering shares is helpful in understanding and eliminating risks.
If the target has an existing agreement governing shareholder rights (eg, rights of first refusal, pre-emption rights, drag and tag-along rights), existing shareholders must be informed before the transaction. The procedures under this agreement must be followed in order to prevent objections to the sale.
Shareholder pre-emption rights are currently granted to all shareholders by law. Unlike under the common law system, these rights cannot be restricted unless otherwise permitted by law. Therefore, to finalise a capital increase which restricts certain shareholder rights, the management must have resolved on a decision which clearly identifies the reasons for such restriction and the shareholders whose rights are restricted must have approved such decision during the shareholder meeting.
What tips would you give when negotiating a deal?
Before beginning negotiations in Turkey, the rights or obligations granted or prohibited by Turkish laws should be considered. Incorporations, share transfers, mergers and demergers of Turkish companies must comply with the Commercial Code.
Detailed legal, financial and tax due diligence is advised before beginning negotiations. Transaction documents should include specific provisions and indemnities based on the results of such due diligence.
The tax risk of the transaction and the target should be carefully evaluated and structured in the transaction documents.
The company’s existing agreements involving shareholder rights (eg, rights of refusal, pre-emption rights, drag and tag-along rights) must be reviewed carefully. Share purchase agreements must include representations and warranties as to the shares and third-party rights in such shares.
The transaction financing method should be structured carefully, taking into account the financial assistance provisions under Turkish law. For example, it is prohibited to grant shares in a target as an advance, loan or security to finance the acquisition of its own shares (Article 380 of the Commercial Code). This restriction prevents leveraged buy-outs to a large extent. Transactions involving provisions contrary to the financial assistance restrictions will not be deemed invalid as a whole. However, any loan transactions involving advance payment, loan or security contrary to Article 380 will be deemed invalid. The financial assistance provisions and their application to a transaction should be evaluated on a case-by-case basis.
Are hostile takeovers permitted and what are the possible strategies for the target?
No specific regulations under Turkish law address acquisition of control in a company via a hostile transaction. Hostile bids are uncommon in Turkey because most public and private companies are controlled by a single shareholder or a small group of shareholders.
However, the regulations applicable to public companies may allow acquisition of a company’s shares without collaboration with its management in certain circumstances. A voluntary bid or a competing bid may be used to purchase a company’s shares without its management’s collaboration. In such case, the company’s management must prepare a report stating its opinion on the bid and reasons for the opinion. The report should include the management’s opinion on the voluntary bidder’s strategic plans for the target and their likely effects on the target’s activity and employees.
Since a hostile bid is presented against the will of the target’s management, the management board may choose not to cooperate with the bidder. As the management body is obliged to protect the best interests of stakeholders and the company, it must take all necessary measures to prevent a hostile takeover if such takeover is against stakeholder interests.
If the management body refuses to cooperate, the bidder cannot carry out full due diligence of the target, nor obtain comprehensive and sufficient information on the target’s financial situation. The market price may not reflect the real share value and the bidder is prevented from determining a fair and accurate bid price. The bidder is vulnerable to hidden risks and must rely on other sources (eg, publicly available information).
A limited or joint stock company’s management body can reject share transfers which are contrary to the company’s articles of association. The management body can include an approval requirement for transfer of registered shares by setting out explicit clauses in the company's articles of association. For publicly held companies, the management body may reject the transfer of registered shares only if the articles of association imposes a limit on the registered shares that can be acquired (Article 495 of the Commercial Code).
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Warranties and indemnities from the seller are typically included in acquisition agreements. The seller's warranties usually include:
- the existence of the shares or assets;
- title to the shares or assets;
- shares or assets being free from any collusions and claims;
- information about the target's organisation and good standing;
- the seller's authority to enter into the necessary transactions;
- representations regarding the target company's financial standing;
- representations regarding the existence and accuracy of financial statements;
- information regarding the company's tangible and intangible assets; and
- tax-related matters.
Limitations and remedies
Are there limitations on warranties?
Basket and de minimis rules commonly apply to limitations on warranties. The most common limitations include:
- time limits;
- baskets; and
- de minimis (mini baskets).
What are the remedies for a breach of warranty?
In the event of a breach of warranty, the parties usually agree that the seller granting the warranty will indemnify a party which incurs damage or loss (usually the buyer) for all the loss that it incurs. Such penalty should be proportionate to the breach and expected damage resulting from such breach.
It is common to include specific indemnities in an acquisition agreement and grant the buyer a put option and/or a compensation right. In such case, if a specific indemnity event occurs after the signing of the agreement, the buyer can exercise its put option or claim compensation. Specific indemnities are usually drafted in accordance with due diligence findings.
Parties can agree on other remedies in case of a breach of warranty.
Are there time limits or restrictions for bringing claims under warranties?
Parties can determine and agree the time limits applicable to claims under warranties. The typical time limit is two years, or five years for tax-related matters.
If there are no other provisions in the share purchase agreement, Article 146 of the Code of Obligations foresees a 10-year limitation period for claims arising out of a contract.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Stamp tax must be paid on all agreements that include a price, including share purchase and asset sale agreements. The stamp tax rate for 2016 is 0.948%, calculated on the highest amount in the agreement and paid for each copy of the document subject to stamp tax. In any case, the stamp tax collected from each document cannot exceed the cap determined by law, which for 2016 is TRY1,797,117.30.
Capital gains on a share sale must be included in a company’s taxable profits, subject to 20% corporate tax (the Corporate Tax Law).
Exemptions and mitigation
Are any tax exemptions or reliefs available?
In regard to a share sale, 75% of the capital gains from the sale of shares held by a tax resident entity for at least the two-year period before the sale are exempt from corporate tax.
A share sale is exempt from tax if the shares are sold in consideration for other shares. Therefore, if the buyer acquires the seller’s shares using its own shares as consideration, the share sale is exempt from tax (the Corporate Tax Law).
For companies that are not tax resident in Turkey, applicable double taxation treaties should be considered.
In regard to an asset sale, 75% of the capital gains from the sale of an immovable asset that is held by a tax-resident entity for at least the two-year period before the sale are exempt from corporate tax.
For companies that are not tax resident in Turkey, applicable double taxation treaties should be considered.
If the asset benefits from investment incentives, some tax exemptions may arise due to the incentives.
The value contributed to the surviving entity by the dissolving entity (merger profit) is subject to corporate tax. Merger transactions which meet certain conditions in the Corporate Tax Law are defined as ‘takeover transactions’ and are considered tax free for corporate tax purposes. Accordingly, the following is required for a tax-free merger:
- The legal or business centres of the merger companies are located in Turkey.
- The assets and liabilities of the dissolving entity must be transferred to the surviving entity over their balance sheet values as of the date of merger (the date the surviving entity’s merger resolution and authorised organs are registered with the competent trade register office).
- The dissolving entity’s corporate income tax return must be submitted to the competent tax authority within 30 days of the merger announcement in the Commercial Registry Gazette.
- The surviving entity must undertake payment of the dissolving entity’s tax obligations which have and will accrue, as well as duly perform the dissolving entity’s other fiscal and tax obligations.
If these pre-conditions are fulfilled, only the profits derived by the dissolved company before the acquisition date will be subject to taxation. Merger profits will not be subject to corporate tax.
Tax-free mergers under the Corporate Tax Law are considered exempt from:
- value added tax (VAT) (the Value Added Tax Code);
- documents issued due to the merger transaction are exempt from stamp duty (Article 9 of the Stamp Duty Code); and
- transactions made as a result of a merger are exempt from the official legal charges (Article 123 of the Law on Legal Charges).
Demergers which meet Corporate Tax Law conditions are deemed to be pure demergers and receive the related tax exemptions. Pure demergers involve transfers of all assets, receivables and undertakings of a fully responsible tax payer equity company to two or more existing (or to be established) fully responsible taxpayer companies by dissolution, without liquidation process over the book value of the subject assets, receivables and undertakings. To be deemed a pure demerger, such transfers must be made in consideration for acquiring the transferee company’s shares by the existing shareholders of such transferor company. Further conditions for being considered a tax-free demerger are the same conditions as noted above for tax-free mergers. Tax-free pure demergers also benefit from all tax exemptions applicable to tax-free mergers.
The Corporate Tax Law outlines three types of partial demerger transaction:
- the transfer of real estate existing in the balance sheet of a fully responsible taxpayer company or permanent representative of a foreign institution qualified as a company;
- the transfer of participation shares which have been held for at least two years; and
- the transfer of one or more production or service enterprises as capital in kind over its book values to an existing (or to be incorporated) fully responsible taxpayer company.
Income arising from partial demergers is tax free, as well as exempt from VAT, legal fees and stamp duty obligations.
What are the common methods used to mitigate tax liability?
It is common to sign only one original copy of the share or asset agreement and to issue certified copies for all parties to the transaction in order to mitigate stamp tax liability, as the stamp tax is paid for each signed original copy.
What fees are likely to be involved?
Fee requirements depend on the parties, the type of entity (eg, real person, company, cooperative, branch office or liaison office) and the type of acquisition.
If the transaction involves the registration of a document (eg, a board or shareholder meeting resolution) to the Commercial Registry, the registration and announcement fees calculated based on the document must be paid to the Commercial Registry.
A payment to the Competition Authority is required as a contribution fee before registering a merger, incorporation or capital increase (0.04% of company capital).
Based on the transaction, notary fees may apply. These are calculated based on the nature of the document (the Law on Legal Charges).
Management and directors
What are the rules on management buy-outs?
There are no specific rules on management buy-outs. The general rules under the Commercial Code apply to the purchase of the company shares by employees. Stock option plans are used as a common means of ensuring that the management or key employees dedicate themselves to the development of the business for a pre-determined period of time.
The company sets out the conditions which the employee must fulfil to acquire the stock option right. Common stock option plan mechanisms include the following:
- Phantom stock option – a share transfer is not actually realised but it is deemed that the employer acquired the relevant number of shares during an exit where the employee deserves a premium equivalent to the value of the vested shares granted to them in the option agreement. Therefore, this is the most preferred mechanism by the companies.
- Stock option through conditional capital increase method – employees may benefit from the conditional capital increase method which enables them to obtain new shares of the company under their employee stock option plans. As stock option plans through capital increases lead to dilution of shares, such plans are subject to the general assembly’s approval. Therefore, this mechanism is not preferred by companies.
- Stock option through share transfer – redemption of the shares after a share transfer is difficult and there are usually many restrictions on share transfers in the agreements executed between shareholders. Therefore, this mechanism is not preferred by companies either.
What duties do directors have in relation to M&A?
For joint stock companies, members of the board of directors and all other third parties responsible for company management must perform their duties diligently, protecting the company’s interests. They are prohibited from competing or dealing with the company for their own benefit (Articles 395 and 396 of the Commercial Code). Directors are prohibited from discussing matters concerning their own interests (or their relatives’ interests) which conflict with the company’s interests (Article 393 of the Commercial Code).
For limited companies, managers and other persons responsible for company management must perform their duties with utmost diligence in order to protect the company’s interests (Article 626 of the Commercial Code).
Additional diligent management obligations are determined for publicly held companies. A board of directors must balance the corporation’s risk at the most appropriate level through strategic decisions, as well as manage and represent the corporation by primarily protecting the long-term benefits through prudent risk management (the Communiqué on Corporate Governance Principles). A publicly held company’s board of directors must keep inside information confidential and not disclose or use the information until it is publicly disclosed.
Accordingly, if a conflict of interest arises when making decisions, the company’s management must put the company’s interests before the personal interests of themselves, the shareholders, their relatives, other members of the board of directors or any third parties.
Further, certain restrictions might apply if a controlling shareholder is also the parent company of a corporate group (Articles 195 and following of the Commercial Code). A parent company must not exercise its control in a way which would cause an affiliate to incur loss (Article 202(1) of the code).
If the parent company abuses its dominance over an affiliate, minority shareholders of this affiliate are entitled to request the purchase of their shares from the controlling shareholder (Article 202(2) of the code).
Consultation and transfer
How are employees involved in the process?
As a rule, there is no employee consultation process for M&A transactions. However, during mergers and demergers obtaining employee consent is advised since employees can object to their employment contracts being transferred to the buyer.
Making material changes to employment conditions is subject to the relevant employee’s consent. In some cases, the buyer may be in a position to terminate some employment contracts due to redundancy. Redundancy is not a default valid cause for terminating the employment contracts under Turkish law. Therefore, the employee is entitled to claim notice and severance payments, as well as re-employment (or compensation instead of re-employment). As a result, the financial burden of terminating employment contracts must be taken into account before the transaction.
It is recommended to decide on employment issues before an acquisition, preferably before initiating the process. This approach prevents unexpected and unfavourable situations arising, or delays in the decision-making processes with respect to dismissals and terminations.
What rules govern the transfer of employees to a buyer?
As a rule, a share acquisition does not affect the target’s employees, provided that the partial or complete acquisition of shares does not materially alter the terms of employment after the acquisition. Nevertheless, after a complete acquisition, an adjustment is usually made to the employment conditions of the seller's employees and the buyer's existing employees. If the conditions of the seller's employees become less favourable than before, these employees are entitled to terminate the employment contract on the basis of just cause. If the conditions remain same after a partial or complete acquisition of target shares, the employees will not be involved in the process.
Article 6 of the Labour Law makes specific provision for acquisitions involving a workplace transfer. Where the transaction involves the transfer of a workplace wholly or partially to another entity, all employment agreements effective with respect to that workplace at the transfer date will be automatically transferred to the transferee, without requiring employee consent.
If a transfer occurs, the transferor and the transferee are jointly liable for obligations which arose before the transfer date and that exist as of the transfer date. The transferor employer’s liability for these obligations is limited to two years after the transfer date.
The acquisition, whether by way of share transfer or a workplace transfer, will not constitute just cause for the termination of employment agreements by either the employer or the employee. Severance and notice must be paid to employees if the employer terminates the employment contract exclusively on the basis of the transfer without just cause.
Mergers and demergers
A merger or demerger leads to the automatic transfer of employment contracts to the new employer, provided that the employee does not object to the transfer of employment. If the employee objects, the employment with the former employer is deemed to terminate at the end of the applicable notice period. Employees cannot object to the transaction itself. However, they receive the opportunity to challenge their automatic transfer to another entity, even within intra-group reorganisations. Therefore, to prevent future disputes, it is common practice to obtain the consent of transferred employees in merger and demerger transactions. It is also common to offer key employees better conditions to prevent them from leaving the company by exercising this right after the merger or demerger.
What are the rules in relation to company pension rights in the event of an acquisition?
In case of a workplace transfer or merger or demerger, the transferee must take into account the initial date when an employee began working with the transferor with respect to all rights calculated on the basis of the employee’s service period, including pensions.
In Turkey, employees generally participate in government pension schemes. Government pension schemes are not affected by the transfer of the employment contract. A pension is earned as a result of mandatory payments by individuals to the Social Security Institution. When the individual fulfils the minimum periods or premium days, they can claim a pension payment from the Social Security Institution. Pension-related payments are not borne by the employer.
However, it is common for private companies, particularly large companies, to offer private pension schemes to employees. If the transferred employees are offered a private pension by the seller, the buyer must also grant this right after the acquisition. Failing to do so would constitute a material change in the employment conditions and require employee approval. Therefore, the new employer may decide to offer the transferred employees a private pension scheme with similar conditions to the previous pension scheme, or provide them with an equivalent monetary benefit.
Other relevant considerations
What legislation governs competition issues relating to M&A?
Competition issues are regulated under the Code on the Protection of Competition (4054). Accordingly, the merger by one or more undertakings or acquisition by any undertaking or person from another undertaking of its assets or all or a part of its partnership shares to hold a managerial right for the purpose of creating a dominant position or strengthening a dominant position that would result in significant weakening of competition in a market for goods or services within the whole or a part of the country is illegal and prohibited (Article 7 of the Code on the Protection of Competition). The only exception is through inheritance.
The parties can apply to the Competition Board to receive a negative clearance certificate indicating that the M&A agreement is not contrary to the code. M&A agreements which fall within the scope of Article 7 must be notified to the Competition Board.
If a notification is not made, the board will proceed with examining the respective M&A agreement on its own initiative. On examination, the board may decide that the M&A agreement conforms with the code and grant permission, but also impose a monetary fine for failure of notification. Otherwise, if the M&A agreement violates the code, the board will:
- impose a monetary fine for failure to notify;
- require the M&A transaction to be ceased;
- require all illegal consequences of the deal to be removed;
- require all shares and assets be returned to their former owners, and if not possible, to third parties; and
- request other measures it considers necessary.
Are any anti-bribery provisions in force?
There is no specific law on anti-bribery in Turkey. Rather, it is regulated mainly under the Penal Code (5237). Accordingly, both the giver and receiver in a bribery situation are liable to imprisonment for between four and 12 years.
What happens if the company being bought is in receivership or bankrupt?
If an acquisition is made in bad faith to prevent creditors from claiming their debts, an annulment claim can be made under the terms and conditions stipulated under Articles 277 and following of the Enforcement and Bankruptcy Law.
An annulment claim allows the creditor to annul creditor disposals made in bad faith, to prevent their assets being liquidated and negatively impact the claimant creditor. As a general rule, the claimant is the creditor of an execution proceeding that is unable to fulfil its credit and the defendant will be:
- the debtor who sold its property; and
- any third party which bought the property before an attachment/bankruptcy annotation was applied over the property.
In some circumstances, a party that later buys the property from the third party can also be subject to the annulment claim.
If the court accepts the annulment claim, the creditor is entitled to liquidate the subject asset, even though this property is registered on the title deed to the third party (or fourth party in some circumstances).
Further, the Commercial Code allows companies in liquidation and financial distress to be a party of a merger transaction under certain conditions.
Participating in merger of a company in liquidation
A company in liquidation may take part in a merger transaction, provided that:
- the distribution of assets has not begun yet; and
- the company in liquidation will be the acquired company (transferee) as a result of merger (Article 138 of the code).
These conditions must be substantiated by submitting relevant documentation to the Commercial Registry Office.
Participating in merger where capital loss or insolvency has occurred
Any company which has lost half of its total capital and statutory reserves or is insolvent may take part in a merger provided that:
- the acquiring company has freely disposable equity capital sufficient to meet the lost capital or the insolvency situation; and
- it is the acquired company as result of the merger (Article 139 of the code).
These conditions must be substantiated by submitting relevant documentation to the Commercial Registry Office.
Bankruptcy of the target
Companies in bankruptcy cannot become involved in mergers or demergers. During bankruptcy, the right to dispose of the company’s assets is vested in the bankrupt estate, not the company itself. In addition, if the target is in concordatum, the court may rule on specific precautionary measures for sale of the company’s shares (Article 285 of the Enforcement and Bankruptcy Law (2004)).