Setting up and operating a joint ventureStructure
Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?
Joint ventures come in a number of forms, from 50:50 structures where each party enjoys equivalent management powers, to family-founded businesses in which the Turkish party wishes to retain management control with a strong financial or strategic minority partner, or entities where the foreign investor acquires control while the founding shareholders retain a minority stake in the company and continue to support the business in the short to middle term.
The differences in corporate culture must be taken into account when structuring a joint venture transaction between foreign and Turkish partners.Tax considerations
When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?
If the joint venture is established based on an existing capital company, the new partner or partners usually invest through subscription. In this case, valuation of the newly issued shares and calculation of share premium are the preliminary issues that should be taken into consideration from a local tax perspective (eg, the share price should not be reduced or inflated owing to another share deal or a toll manufacturing arrangement). In the case of debt financing, notional interest over the increased amount of capital may be partially tax-deductible at the level of the operating company.
Transfer of the existing shares to the new partner or partners could be another option, especially when the joint venture in Turkey is part of a global M&A transaction. This could be preferred instead of or in combination with subscription. The transfer of shares in a Turkish JSC may be tax-neutral if both the seller and the purchaser are non-residents.
Usually, tax treaties to which Turkey is a party require a one-year holding period for providing a capital-gains tax relief, and this applies to both JSC and LLC shares. Should the seller be a resident of Turkey, capital gains, if any, may be totally or partially exempt from taxation after two years of shareholding. There are a number of different value added tax (VAT) and stamp-tax exemptions for the investors.
For new investments, debt push-down arrangements are not allowed in Turkey; however, in order to promote equity substance in Turkey, investment-friendly enhancements have been made to the tax laws. Again, apart from certain transactional tax exemptions, notional interest over the share capital may be partially tax-deductible at the level of the operating company. Further, related-party financing may be provided to the joint venture in a tax-efficient manner up to a debt-to-equity ratio of 3:1.Asset contribution restriction
Are there any restrictions on the contribution of assets to a joint venture entity?
A joint venture entity can be newly established by the parties, with each shareholder contributing cash or capital in kind (such as property, equipment and intellectual property (IP)), or the foreign investor can enter an existing company by subscribing to a capital increase or purchasing shares from the existing shareholders. Depending on the structure, this will be reflected in an investment, subscription or share purchase agreement, either stand-alone or as part of a broader joint venture agreement.Interaction between constitution and agreement
What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?
It is commonly agreed that the provisions of a joint venture or shareholders’ agreement should be reflected in the company’s articles to the extent permitted by the law.
The joint venture entity is usually not party to the agreement because this would trigger the obligation for the company to register and publish the agreement at the trade registry. There may, however, be cases in which the parties elect to have the company execute the joint venture agreement as well and become directly bound by its provisions.
Corporate governance matters, such as the composition of the board of directors or a qualified majority for board and shareholder decisions, can, in most cases, be fully reproduced in the articles; but the Turkish Commercial Code (Law No. 6102) (TCC) significantly restricts the possibility for share-transfer restrictions to appear in the articles of JSCs (even though the new rules have so far been unevenly enforced by trade registries in practice). Therefore, it will not always be possible for the company’s articles of association to fully reflect tailor-made provisions on share-transfer restrictions agreed in the joint venture or shareholders’ agreement. Even where these restrictions are reflected in the articles and registered with the trade registry, they will not be enforceable vis-à-vis the company in the event of a dispute. LLCs, on the other hand, are not subject to the same restrictions.
Generally, joint venture or shareholders’ agreements are not considered binding with regard to the company from a corporate-law standpoint, but rather as separate documents evidencing a contractual relationship between the shareholders and entitling them to contractual remedies or recourse upon breach by one of the parties.Party interaction
How may the joint venture parties interact with the joint venture entity? Are there any restrictions?
There are no restrictions per se on interaction between the joint venture parties and the joint venture entity. If the joint venture entity or its parties constitute a publicly traded company, the restrictions on insider trading may impact the interaction between the joint venture parties and the joint venture entity. If the joint venture entity is considered an affiliate within a ‘group company’, the provisions of the TCC on group companies shall apply.
The provisions related to group companies under the TCC prohibit the parent companies from abusing their control over their affiliates in any way that would result in their affiliates incurring losses (eg, through loss or the transfer of profit of the affiliate). The elements of abuse of control in agreements or transactions, however, do not invalidate such agreements or transactions, and the parent company is required to compensate the losses of the affiliate within the same financial year or provide a method for compensation within that financial year.Exercising control
How may the joint venture parties exercise control over the joint venture entity’s decision-making?
The provisions of a joint venture agreement or shareholders’ agreement determine the corporate governance principles of a joint venture entity.
There are certain fundamental shareholders’ rights that are enforceable without limitation, regardless of the amount of the shareholding in the company. These fundamental rights are granted to all shareholders in all companies and cannot be impaired or hindered by the actions of the majority. In case of infringement, the aggrieved shareholder is entitled to remedies to enforce its rights. The fundamental rights of the shareholders include, among others:
- the right to vote;
- the right to participate in shareholders’ meetings and challenge shareholders’ resolutions or board of directors’ resolutions;
- the right to sue directors, managers and auditors; and
- the right to challenge merger, spin-off or conversion transactions.
In addition to the above-mentioned rights of shareholders, there is a special category of rights granted to minority shareholders holding 10 per cent or more of the capital of private companies and 5 per cent or more of the capital of public companies, and these can be exercised by shareholders satisfying such thresholds only. The minority shareholders’ rights under the TCC are, among others:
- the right to call a general assembly meeting or add an item to the agenda of the general assembly meeting;
- the right to defer discussions regarding financial statements of the company and matters related thereto; and
- the right to request replacement of the independent auditor from the court.
The TCC further envisages the squeeze-out of shareholders from JSCs and LLCs.Governance issues
What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?
The TCC has been adopted with the aim of bringing Turkish corporate governance up to (and, in some respects, beyond) EU standards, particularly in the area of transparency. For example, companies that satisfy the criteria set out in the legislation must maintain a website that contains certain information, including financial statements, directors’ reports, auditor reports, calls for general meetings and meeting agendas.
If the joint venture entity’s shares are publicly traded, additional obligations (eg, compliance with corporate governance principles of the Capital Markets Board of Turkey, appointment of an independent board member and public disclosure) also apply.
Other than the statutory rules, joint venture parties try to avoid any governance issues by providing special rights to each party through privileged shares. For instance, privilege on the right of representation on the board of directors, the right to dividends, the right to liquidation proceeds and voting rights are often established in the articles of the joint venture entity to avoid any governance issues at the project level.Nominee directors
With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?
Under the TCC, the directors (and, more generally, third persons in charge of management) should act prudently and diligently in the performance of their duties, and must act in the best interests of the company.
The TCC forbids directors from engaging in activities similar to those of the company that could be considered as competing with the company’s scope of activity. Directors cannot, therefore, be involved in other companies that are active in similar areas of business, in any capacity, including as an unlimited partner, director, employee or consultant. This prohibition may be lifted through authorisation granted by the shareholders in general assembly.
Directors are obliged to keep confidential all information obtained in the course of performing their duties. As a result, the directors are prohibited from disclosing any company secrets they may learn during board meetings or in the performance of their duties. The confidentiality obligation of the directors may be opposed to third parties.
Under the TCC, in case the directors fail, whether by wilful misconduct or negligence, to perform their duties set forth in the law or the articles of association, they will be liable against the company, the shareholders, and the company’s business partners, such as corporate creditors and suppliers, provided there is a sufficient causal link between the director’s negligent act or omission and the loss.Competition law
What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?
An acquisition, merger or formation of a full-function joint venture falls within the scope of Communiqué No. 2010/4 on Mergers and Acquisitions Requiring the Approval of the Competition Board if it triggers a change of control in management of the target business or entity. Such transaction would be subject to a merger-control filing under the Turkish merger-control regime to obtain prior permission from the Turkish Competition Board (the Board) if the following turnover thresholds are triggered:
- the transaction parties’ aggregate turnover in Turkey exceeds 100 million liras and the Turkish turnover of at least two of the transaction parties separately exceed 30 million liras; or
- the assets or operations of the target, or at least of one of the transaction parties in the case of merger, have a turnover in Turkey exceeding 30 million liras, and the worldwide turnover of at least one of the other transaction parties exceeds 500 million liras.
Turnover thresholds for the purpose of the above criteria are calculated by taking into account not only the direct parties to the transaction, but also certain related entities, such as the joint venture (parent) party and group subsidiaries.
As for the joint venture entities, a joint venture transaction (where the above-mentioned turnover thresholds are triggered) would be notifiable so long as the joint venture is a full-function joint venture. Under Communiqué 2010/4, a joint venture must be of a full-function character and satisfy two criteria: (i) existence of joint control in the venture; and (ii) the joint venture being an independent economic entity established on a lasting basis (ie, having adequate capital, labour and an indefinite duration) to qualify as a concentration, subject to merger control.
Additionally, a transaction can be subject to a short-form notification if the combined market share of the parties in any horizontally affected market does not exceed 20 per cent and if the market share of one of the parties in the vertically affected markets is below 25 per cent.
With respect to the review periods of the merger-control filings, there is an implied approval mechanism where a tacit approval is deemed if the Board does not react within 30 calendar days upon a complete filing. However, in practice, the Board almost always reacts within the 30-calendar-day period by either issuing a written request for information or, very rarely, by already rendering its decision.
The Competition Authority, upon its preliminary review (Phase I) of the notification will decide either to approve, or to investigate the transaction further (Phase II). Any written request by the Competition Authority for missing information will cut the review period and restart the 30-calendar-day period from day one as of the date on which the responses are submitted.
If the notification leads to Phase II (ie, if it is found to be problematic under the applicable dominance test), it becomes a fully fledged investigation. The investigation (Phase II) takes about six months. If deemed necessary, this period may be extended only once, for an additional period of up to six months by the Board. In practice, extremely exceptional cases fall for Phase II review, and most notifications obtain a decision within the first-phase review process.
At the operational stage, the joint venture entity must comply with the general competition-law principles depending on its operations, regardless of whether it is full-function. In other words, according to article 4 of the Competition Law, which prohibits restrictive agreements, it should not be the joint venture’s objective to restrict competition among or between the parties and the joint venture itself, and nor should this occur as a consequence of the joint venture’s operations.Provision of services
What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?
The joint venture parties provide financial and technical know-how, equipment lease or another administrative services to the joint venture entity through independent and individual agreements (also known as satellite agreements) entered into between the relevant joint venture partner and the company.Employment rights
What impact do statutory employment rights have in joint ventures?
In general, Turkish labour laws and policies do not distort or impede investment in Turkey, are considered to be generally in line with similar laws of other European countries and do not allow for protection above and beyond what other countries typically provide. However, they do tend to favour employees, which may make amending or terminating employment contracts challenging. For example, often, employers must provide a valid reason to terminate an employment contract if they employ more than 30 employees, and they must generally provide their former employees with severance pay and two to eight weeks’ prior notice, or otherwise make a notice payment based on the duration that the employee was employed. In addition, requesting re-employment is usually upheld by the courts, especially if it is based on the employee’s performance.
Turkish law only allows the permanent transfer of employment contracts to another employer by way of the employee’s written consent. Upon such transfer, the transferee employer (eg, the joint venture entity) shall be the new employer of employment contract with all of its rights and obligations. As it is, an employee’s start date of employment under the transferor employer (eg, the joint venture partner) is taken into consideration in terms of all entitlements based on the employee’s length of service.Intellectual property rights
How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?
The joint venture parties may contribute IP rights (eg, trademark, patent, licence) to the share capital of the joint venture entity at its incorporation. If that is not the case, the IP rights held by one of the joint venture partners may be allowed to be utilised through licensing agreements to be entered into between the relevant joint venture partner and the company.