General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Transaction agreements between Turkish parties are generally governed by Turkish law. When there are foreign parties involved, the documentation is mostly governed by English law or other foreign laws. Collateral arrangements for creating security interest over the assets located in Turkey should be governed by Turkish law (due to the lex rei sitae principle) without prejudice to the nature of the transaction.
Pursuant to rules specified in the International Private and Procedural Law, Turkish courts will recognise and give effect to parties’ choice of foreign law in principle if the transaction involves a foreign element except for transaction agreements which are required to be governed by Turkish law (eg, agreements for the establishment of a mortgage over immovables located in Turkey). Any judgment rendered in foreign courts should be recognised and enforced by Turkish courts provided that the following requirements are satisfied:
- the judgment should be final and binding under the relevant foreign laws;
- a contractual or de facto reciprocity on enforcement of foreign judgments should exist between the country where the foreign judgment was rendered and Turkey;
- the judgment should not be in relation to the exclusive jurisdiction of the Turkish courts;
- the judgment should not contradict public policy in Turkey; and
- the counter-party’s right of defence should be complied with during the course of the trial.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
In general, there are no statutory restrictions regarding acquisitions carried out by foreign entities in Turkey. However, there may be required authorisations or certain restrictions for regulated sectors (ie, media, energy and banking). For instance, the consent of the Banking Regulation and Supervision Board is required for the acquisition of shares of banks established in Turkey which exceed a certain threshold, or the consent of the Energy Market Regulatory Authority must be obtained for direct or indirect acquisition of more than 10 per cent of energy companies or for any change of control thereof. There are certain restrictions regarding acquisitions of Turkish media service providers by foreign natural persons or entities. Apart from these statutory requirements, the target company’s articles of association may also impose certain limitations, such as requiring shareholder or board of directors’ approval for an envisaged share transfer.
Although no explicit restrictions were foreseen regarding cross-border lending except for utilisation of revolving loans from foreign financial institutions by Turkish residents, certain restrictions are introduced regarding foreign currency denominated loans either from abroad or from within Turkey by Turkish residents as per the amendments made on Turkish capital control rules in 2018. Accordingly, Turkish residents may use foreign currency denominated loans without being subject to any limitations if their outstanding foreign currency denominated loans are equal to or higher than US$15 million at the time of the envisaged use. For Turkish borrowers whose outstanding foreign currency denominated loans are less than US$15 million, certain thresholds and limitations regarding the loan amounts are set forth under the amendments. As the amendments specify certain exceptions for the requirement of having an outstanding foreign currency denominated loan which is equal to or higher than US$15 million, the involved parties and type of transaction must be evaluated on a case-by-case basis. For instance, entities that are incorporated for the sole purpose of acquiring the shares of a company will not be entitled to comply with this requirement.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
Acquisitions in Turkey are financed with either equity or debt, or most commonly by a combination of the two. A common debt structure used in acquisition financing in Turkey is debt financing provided by financial institutions in the form of senior secured debt. Although subordinated loans may be structured depending on nature of the transaction, this is not common for acquisition financings. Equity that may be granted by shareholders is generally provided in the form of shareholder loans.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
There are no statutory provisions that require certainty of financing for the acquisition of public companies. However, the offer documents must contain the amounts and sources of committed funding dedicated for the acquisition of a public company, as per Turkish Capital Markets rules. It is also possible for the Capital Markets Board to request a guarantee of funds from bidders. Turkish law does not require bidders to obtain confirmation by third parties (ie, generally banks or financial advisers of the bidder) that ensures availability of funding on the completion of such acquisition.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
Even though there are no statutory limitations regarding the use of loan proceeds by the borrower under Turkish law, the provisions of the relevant financing documentation generally restrict the use of proceeds and designate specific purposes for the loans depending on the type of loans utilised. According to the provisions of Decree No. 32 regarding the Protection of Value of Turkish Currency and Capital Movements Circular, loan amounts that have been extended by foreign financial institutions to Turkish residents should be transferred to Turkey through banks residing and licensed in Turkey. Similar to loan proceeds, Turkish law does not foresee any statutory limitations regarding the use of proceeds from debt securities. On the other hand, guidelines published by the Capital Markets Board require issuers to include the envisaged use of proceeds provided from the offering of debt securities under the relevant prospectus. Such statements should include detailed information regarding the planned area of use, especially if the proceeds are envisaged to be used for transactions other than the ordinary activities of the issuer, such as acquiring an asset or payment of debts.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
Borrowers will generally be required to indemnify lenders for any claims, losses, damages, fines, penalties and related expenses arising from the inaccuracy of representations and warranties granted by the borrower or breach of any obligations by the borrower as per the terms set forth under the financing documentation. The inclusion of tax indemnities, funding indemnities and currency indemnities in financing documents is also market practice in Turkey.