During these unprecedented times in which our country as well as the entire World must deal with the severe consequences of this pandemic, our goal is to assist our Clients with their legal needs specific to the consequences of COVID-19 while also maintaining our high quality service for any other legal needs they may have. In addition to daily legal updates on our website dedicated to COVID-19 related legal topics, in this issue, we also feature an article guiding members of boards of directors during their decision and strategy making processes to deal with the rapidly changing effects and consequences of COVID-19. This recent issue also reflects a balanced composition of articles touching upon the legal aspects of some of the most important technological developments in recent years such as the use of drones and the emergence of smart contracts in the era of blockchain technology. This issue also covers rather technical topics as reflected in our article offering a thorough analysis of the challenging aspects of international territorial disputes in terms of natural gas exploration activities. Our series covering Islamic financial instruments continues with an article offering an introduction to the concept of “hedging” under Islamic law governed finance transactions. In terms of infrastructure investments in the age of the growing funding gap, our project finance team explores the concept of project bonds for financing infrastructure investments, following our article in the previous edition of our newsletter discussing the use of sukuk to reduce the ever-growing funding gap for much-needed infrastructural developments. Following our article on the legal troubles that CEOs may face when using their personal social media accounts in a manner that circumvents capital markets disclosure requirements, this time we take a look at the use of “covert advertising” on social media platforms, which may also prompt legal issues if not used in compliance with the applicable advertising legislation. Our real estate team presents a guide-like article that walks readers through the process of acquiring Turkish citizenship via investment, while the fairly recent UN Treaty, the Singapore Convention on Mediation, is analyzed by our arbitration team. Our competition law team contributes to our latest issue with an article on the utilization of “leniency” in breaches of competition law, which requires a careful examination of the Turkish Competition Board’s precedents. We hope that you enjoy the latest issue of our newsletter and that we will soon, all together, enjoy healthier days. 6 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 The Financial Restructuring Regulation and Framework Agreement | 7 The Duties of Boards of Directors and Board Members in view of the COVID-19 Threat COVID-19, which has taken hold of the entire world, continues to be the leading topic on the country’s agenda. It is clear that this deathly epidemic has and will likely continue to have significant consequences not only on individuals but on corporations as well. While sectors such as tourism and public and air transportation are affected by the epidemic to the greatest extent, we see that uncertainty reigns over the entire business world. During this period of uncertainty caused by COVID-19, which has been declared a pandemic by the World Health Organization, we are once again reminded of the importance of boards of directors who are capable of effective risk management. It is crucial to protect business continuity from being negatively affected by both the direct impacts of the coronavirus and the measures adopted because of it. In this context, we would like to bring to your attention certain matters that aim to minimize the impacts COVID-19 may have on companies and society in general. FEATURED ARTICLE COVID-19 Related Announcements from Authorities Should Be Monitored Closely This epidemic disease, which has the ability to infect others even before its symptoms become noticeable, distinguishes itself from other diseases by how quickly it spreads. Consequently, the precautions and practices that are/need to be taken and implemented are constantly updated on a domestic and international level. Closely monitoring authorities’ announcements on the disease is of the utmost importance for boards of directors so that they can remain well informed of the most up-to-date developments, perform risk assessments based on their own line of business, organization, and infrastructure in accordance with such developments, and take the necessary actions as soon as possible. Necessary Precautions Should Be Taken at the Workplace COVID-19, which spreads through respiratory droplets, gives rise to the need for certain changes to be made to workplaces. The following are the primary steps that must be taken during this period with respect to workplaces: • Managers in charge of employees must be sufficiently informed of the symptoms of COVID-19 in order to form risk groups. • Sufficient information should be provided to employees regarding the disease and sanitizers should be placed in locations that employees may easily access to enable them to disinfect their hands. • Business travel should be postponed to the extent possible and videoconference should be preferred. • In order to prevent the disease from spreading among employees, businesses should switch to the home office method where possible and must ensure that the company has the necessary infrastructure for home office to protect against the interruption of business continuity and data security risks. Companies who choose to adopt home office may consider establishing a database with a list of the contact numbers that have been notified for such purpose in order to promote healthy and effective communication between employees. • If the company does not switch to home office, the transportation routes used by employees must be reported and the necessary measures should be taken to ensure that such employees get to their workplace without using public transportation during rush hour. • Task sharing should be organized within the company with regard to following the announcements made by authorities as explained under the first section above and working through measures to be taken at the workplace throughout the time the disease remains in effect. 1 Official Gazette: 27846 14 February 2011. • If companies are contemplating taking precautions such as measuring body temperature at the entrance of workplaces, detailed information should be obtained with respect to the risks that may arise from personal data protection regulations due to the processing of health data and companies should act accordingly. Boards should pass Resolutions through Remote Meetings It is vital that boards regularly meet and pass on the necessary resolutions throughout this process in order to maintain business continuity. During the period in which COVID-19 continues to have its impact, boards may prefer electronic meetings rather than meeting in person to pass the required resolutions. Article 1527 of the Turkish Commercial Code1 allows this option for companies whose articles of association include a provision on electronic meetings. If the necessary infrastructure is in place, all actions taken by board members such as attending electronic board meetings, expressing their opinions during such meetings, and voting will have the same effect as if made during an in person meeting. Board members also have the option to sign resolutions via their secured electronic signature. In order to vote electronically, the company must have a website allocated for this purpose, the suitability of the electronic media tools must have been evidenced with a technical report, this report must be registered and announced, and the identities of the voters must be kept confidential. Even though companies whose articles of association do not include a provision on electronic meetings are normally not allowed to convene board meetings electronically, following its announcement on 20 March 2020, the Ministry of Trade has paved the way for these companies to use this option with infrastructure support from the Central Securities Depository. Alternatively, board resolutions may be passed by way of circulating the draft resolution text in accordance with the procedure described under Article 390, paragraph 4 of the Turkish Commercial Code. As per the Ministry of Trade’s announcement, upcoming meetings for general assembly of shareholders may be cancelled with a board of directors’ resolution. 8 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 The Financial Restructuring Regulation and Framework Agreement | 9 Financial Planning of the Company should be reevaluated The economic recession, which will be felt more and more with the increasing effect of COVID-19, may particularly cause material disruptions to supply chains and may result in a shortfall in expected cash flow. Thus, companies should revisit their budgets for the year 2020 that they prepared before the outbreak and set targets in line with the epidemic conditions. During this process, the first steps to be taken in terms of financial issues are as follows: • Since projected cash flow will be uncertain while COVID-19 maintains its effect, sizeable investment projects that may aggravate the liabilities of companies should be postponed and companies should shift their focus to short-term goals. During this process, the primary goal of companies should be to maintain their existing performance with a more conservative approach. • When meeting their financial needs, companies should prefer shareholder loans to indebtedness to banks or other third parties. • Company assets should be recategorized based on liquidity and assets that may be quickly liquidated in case of an urgent need for liquidity should be determined. • Profit making companies should keep these profits in their reserve accounts instead of distributing profits to shareholders and should use these amounts to pay off company debt, if necessary. • For as long as the epidemic maintains its effects, a fast reporting network should be established and the cash flow of the company should be monitored through these reports on a regular (preferably weekly) basis. Another issue worth keeping in mind is the specific obligations imposed on boards of directors under Article 376 of the Turkish Commercial Code if it is realized from the financial tables of the company that its financial standing is at risk. Accordingly: • If it is determined from the latest annual balance sheet of the company that at least half of the sum of the share capital and legal reserves of the company have been eaten away as a result of losses incurred, the board should promptly invite the shareholders to a general assembly meeting and present to the general assembly the remedial measures it deems fit. • If it is determined that at least two thirds of the sum of the share capital and legal reserves of the company have been eaten away as a result of losses incurred, the board should promptly invite the shareholders to a general assembly meeting. The shareholders may decide to be content with one third of the share capital or to top up the share capital. If the general assembly of shareholders fails to act, the company is automatically dissolved. • If it is suspected that the assets of the company are not sufficient to cover its liabilities (borca batıklık), an interim balance sheet of company assets should be prepared based on business continuity and probable sales prices. If it is determined based on this interim balance sheet that the assets will not be sufficient to cover liabilities, a bankruptcy filing must be made before the commercial court of the place where the headquarters of the company is located. Supply Chain Management should be reorganized Since the most harmful effects of the epidemic occur on the supply chains of companies as mentioned above, the amount of stock should be arranged diligently and alternative sources should be explored in order to overcome the distortion effects on supply chains taking into account various scenarios. Legal Advice should be obtained for Non-Performance of Obligations It is possible that companies may have difficulties performing their contractual obligations due to the negative effects of COVID-19. What really matters here is whether the epidemic constitutes a force majeure event, hardship, or impossibility of performance. Considering its sphere of influence, conditions it causes, and measures taken to prevent it, COVID-19 might be deemed as falling under the scope of one these institutions. It is advisable to obtain legal advice from legal experts for consequences of breach of existing or future contractual obligations. Furthermore, companies should make sure that the prospective contracts they will enter into include a specific clause dealing with the fate of obligations in case of an epidemic. Possible Liabilities of Members Board of Directors Due to Failure to Take Necessary Measures Our abovementioned offered measures to be implemented during the course of the epidemic are the reflections of board members’ duty of care against the company provided in Article 369 of the Turkish Commercial Code. Accordingly, members of boards of directors are under the obligation to fulfill their duties with the care of a prudent manager and consider the interest of the company. Breach of such duties would cause a decrease in a company’s assets and would indirectly cause loss for the shareholders and creditors of the company. If the abovementioned measures are not taken, members of boards of directors may be held liable for the losses of the shareholders and creditors of the company. In such a case, the company and shareholders may claim the company’s losses, whereas creditors may claim their own losses. It should also be considered that failure to take measures in the workplace may constitute a rightful cause for employees to terminate employment since such measures can be interpreted as falling within the scope of the duty of an employer to protect its workers. Ümit Hergüner - Kayra Üçer - Zeynep Ahu Sazcı Uzun 10 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 11 01. THE SALIENT LEGAL ASPECTS OF NATURAL GAS EXPLORATION DISPUTES IN THE EASTERN MEDITERRANEAN AND the Legal Regime Applicable to Offshore Pipeline Projects The decades old Cyprus dispute between Turkish and Greek Cypriots has resulted in conflicting claims over where the boundaries of the exclusive economic zone (“EEZ”) lies within the Eastern Mediterranean. This dispute recently escalated due to the promise of making offshore natural gas reserves available to Cypriots upon the discovery of the Aphrodite gas field in an expedition licensed by the Greek Cypriot Administration (“GCA”), following the discovery of the Zohr gas field by Egypt and the discovery of the Leviathan and Tamar fields under the auspices of Israel. Eastern Mediterranean gas has heightened existing maritime boundary disputes in the region but could ultimately act as a catalyst for peace, hastening the need for regional cooperation. The Salient Legal Aspects of Natural Gas Exploration Disputes in the Eastern Mediterranean and the Legal Regime Applicable to Offshore Pipeline Projects The Continental Shelf and the Exclusive Economic Zone Geologically, the continental shelf is a natural seaward extension of a land territory. This seaward extension is an area adjacent to a continent (or around an island) that slopes away from the lowwater line to the deep seabed floor. In this regard, Articles 1 and 2 of the 1958 Geneva Convention on the Continental Shelf provide states party to the Convention the right to explore and exploit the natural resources of the “seabed and subsoil of the submarine areas adjacent to the coast” to “a depth of 200 meters or, beyond that limit, to where the depth of the suprajacent waters admits of the exploitation of the natural resources of the said areas.” However, this exploitability test has led to a significant amount of uncertainty due to technological developments that have enabled states to exploit the natural resources of the continental shelf in much deeper waters than imaginable in 1958.1 Hence, the 1982 United Nations Convention on the Law of the Sea (“UNCLOS” or “Convention”) 2 established more precise limits to the continental shelf, over which states may exercise their sovereign rights. According to Article 76 of the UNCLOS, the continental shelf encompasses “the seabed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 miles from the baselines… where the outer edge of the continental margin does not extend up to that distance.” Article 76 provides two possibilities for determining the outer limits of the continental shelf, either by (i) taking into account the outer edge of the continental margin or (ii) a 1 D. Smith and M. Pratt, “International Law of the Sea and Energy,” (2018) 16(3) OGEL 1, 3. 2 United Nations Convention on the Law of the Sea, 10 December 1982 (entered into force on 16 November 1994, No. 31363). As of 20 November 2019, UNCLOS has been ratified by 168 parties. Turkey is one of the states that has not signed or ratified UNCLOS. 3 Y. Tanaka, “The International Law of the Sea” (2nd ed. 2015 Cambridge), 143. 4 UNCLOS, Articles 76(1) and 77(3). 5 Tanaka, (n. 3) 147. If a coastal state has established an EEZ, that state will have the sovereign rights to explore and exploit all marine living resources on the seabed in the zone. 6 UNCLOS, Article 56 (1)(a). 7 UNCLOS, Article 56(1)(b). 8 Smith and Pratt, (n 1) 5. 9 UNCLOS defines the territorial sea as the area which extends up to 12 nautical miles from the baseline. Coastal states have sovereignty and jurisdiction over the territorial sea. See UNCLOS, Article 3. 10 UNCLOS, Article 79 (1). 11 UNCLOS, Article 79(5). 12 UNCLOS, Article 79(3). 13 Mudric, “Rights of States Regarding Underwater Cables and Pipelines,” (2010) 29 ARELJ 235 14 Smith and Pratt, (n. 1), 6. distance of 200 nautical miles from the baseline. Therefore, in a legal sense, a coastal state has a continental shelf of up to 200 nautical miles regardless of the physical dimensions of the continental margin.3 The rights of a coastal state over the continental shelf within 200 nautical miles do not depend on occupation or express proclamation;4 they exists ipso facto and ab initio. However, a coastal state intending to claim a continental shelf beyond 200 nautical miles is required to submit geological and hydrographical evidence of the limits of the continental shelf to the Commission on the Limits of the Continental Shelf, established by the UNCLOS, to evaluate whether a states’ claims regarding the extent of their continental shelves conform to the Convention’s standards. Under Article 77 of the UNCLOS, coastal states may exercise sovereign rights over the continental shelf for the purpose of exploring and exploiting its natural resources. Natural resources essentially consist of minerals and other non-living resources on the seabed and in the subsoil but do not include non-natural resources such as wrecks lying on the shelf.5 Moreover, the EEZ is a legal regime introduced under the UNCLOS. It is an area beyond the territorial sea not exceeding 200 nautical miles from the baseline. Within the EEZ, a coastal state has sovereign rights over the exploration, exploitation, conservation, and management of natural and living resources of the waters superjacent to the seabed and of the seabed and its subsoil.6 Additionally, coastal states have jurisdiction over artificial islands and structures built, marine scientific research conducted in the zone, and the protection and preservation of the marine environment.7 Although the EEZ provides coastal states the right to explore and exploit the natural resources of the seabed and subsoil within the zone, paragraph 3 of Article 56 of the UNCLOS states that the rights set out with respect to the seabed and subsoil must be exercised in accordance with Part VI, which relates to the continental shelf. Thus, the distinction between these two zones is fundamentally of little significance to the oil and gas industry as the continental shelf and the EEZ’s boundaries coincide to a great extent.8 Coastal states have absolute sovereign rights over oil and gas resources under the seabed of the continental shelf and the EEZ. These resources can only be exploited by the coastal state or with the consent of the coastal state. In contrast, the rights of coastal states are much more restricted when it comes to laying submarine pipelines in the EEZ or on the continental shelf of the coastal state. Unlike in the case of territorial sea,9 where the coastal state has full jurisdiction, all states are entitled to lay submarine cables and pipelines on the continental shelf beyond territorial waters.10 The owner of a cable or pipeline to be laid must pay due regard to other submarine cables or pipelines already in position,11 and in the case of pipelines, must obtain the coastal state’s consent regarding delineation of the pipeline12 and the conditions for its decommissioning. Article 60 allows coastal states to establish safety zones around any installation in the EEZ/on the continental shelf to ensure safety with respect to both navigation and installation (e.g., around pumping stations).13 Therefore, the UNCLOS regime creates juxtaposing rights between international pipeline companies and coastal states.14 12 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 13 Scholars have argued that the goal of these provisions is to force international pipeline companies to enter into negotiations with coastal states with respect to the pipeline project that will transit through the state’s EEZ/continental shelf.15 However, thus far, no international court or tribunal has decided whose rights prevail if the coastal state refuses to allow the laying of a pipeline and the international pipeline company (and its state of origin) claims that they are entitled to lay such pipeline under Article 79 of the UNCLOS.16 Overlapping Maritime Zones: Maritime Boundary Delimitation More than 30% of the world’s seas and oceans fall under state jurisdiction because of the EEZ and continental shelf regimes. This creates the need for a consensus over a considerable number of international maritime boundaries.17 When the maritime zones of two or more states overlap, a line of separation must be drawn to distinguish between the rights and obligations of each state. Thus, delimitation is a course of action that involves the division of maritime areas when two or more states have rival claims. However, it is usually difficult to delimit these boundaries and resolve these disputes through negotiation, especially if offshore hydrocarbon deposits and submarine pipelines are situated (or are planned to be situated) in areas with overlapping claims. Having recognized that there would be times where the maritime claims of states would overlap, drafters of the UNCLOS included provisions for claims regarding the delimitation of overlapping areas in a territorial sea,18 EEZ, or continental shelf. 15 Ibid. 16 Ibid. 17 According to the University of Dundee, the Centre for Energy, Petroleum, and Mineral Law and Policy, and the Dundee Ocean and Lake Frontiers Institute and Neutrals (DOLFIN), fewer than half of the 640 or so potential maritime boundaries in the world have been agreed upon. accessed 27 November 2019. 18 UNCLOS at Article 15. 19 Maritime Delimitation in the Black Sea (Romania/Ukraine) (2009) International Court of Justice Judgment of 3 February 2009, ICJ Reports 61, paragraphs 116-122. 20 Provisional equidistance line means a line every point of which is equidistant from the nearest points of the baselines of the two adjacent or opposite states. See S D Murphy, International Law Relating to Islands (Brill Nijhoff, 2017) 228. 21 Ibid at paragraph 122. 22 Smith and Pratt, (n. 1) 9 23 See North Sea Continental Shelf (Federal Republic of Germany/Denmark; Federal Republic of Germany/Netherlands) International Court of Justice Judgment of 20 February 1969, paragraph 98; Continental Shelf (Libyan Arab Jamahiriya/Malta) International Court of Justice Judgment of 3 June 1985, paragraph 64. 24 G. Goolsby and M. Rowley, “Building a Cross-Border Pipeline,” (2007) available at , accessed on 11 January 2020. 25 The Energy Charter Treaty (ECT) was signed in December 1994 and entered into force in April 1998. The ECT has been signed by 53 countries including the European Union/Euratom. See , accessed on 12 January 2020. For the purposes of this article, we will focus on the provisions concerning the delimitation of EEZs and continental shelfs. Articles 74(1) and 83(1) both state that: The delimitation of the [exclusive economic zone/continental shelf] between states with opposite or adjacent coasts shall be effected by agreement on the basis of international law, as referred to in Article 38 of the Statute of the International Court of Justice, in order to achieve an equitable solution. The Convention does not prescribe what “equitable solution” actually means. Rather, it seems that determining the method by which delimitation should be made to reach an equitable solution is left up to international courts and tribunals. However, the tribunals have not been entirely consistent in their approach to determining an equitable division of maritime space. Nevertheless, in recent years, they have adopted a three-stage approach known as the equidistance/relevant circumstances method.19 Accordingly, they have (i) established a provisional equidistance line,20 (ii) considered whether there are any factors requiring an adjustment of the equidistance line to reach an equitable result, and finally, (iii) they have verified that the boundary does not “lead to an inequitable result by reason of any marked disproportion between the ratio of the respective coast lengths and the ratio between the relevant maritime area of each state by reference to the delimitation line.”21 Needless to say, there is no obligation for coastal states to follow this procedure and they are entirely free to agree to any maritime boundary delimitation method they see fit. A wide span of geographic, economic, and political issues have been cited as relevant factors that would justify a departure from the equidistance line method.22 Nevertheless, coastal length, proportionality and configuration, and the size of the island are the main factors considered by courts and tribunals.23 If Delimitation is Successful: How to Transmit Oil and Gas - Building a CrossBorder Pipeline Assuming delimitation is successful and the hydrocarbon deposits explored under the sea are made available for production, the next step is figuring out how the gas/ oil will be transmitted all the way from the sea to land where it will primarily be consumed. A common answer to this question is via transboundary submarine pipelines. However, a cross-border pipeline project is a highly complex task and the project owner must analyze commercial, legal, and technical risks before making a final investment decision.24 New challenges are added on top of these risks when two or more jurisdictions are involved in the project. For these reasons, participating states and project companies usually enter into so-called inter-governmental agreements (“IGA”) and host government agreements (“HGA”) that provide mechanisms to overcome these challenges and risks. IGAs and HGAs are also endorsed by the Energy Charter Treaty,25 which began preparing its own model form IGAs and HGAs in 2004. These model agreements were created to assist both members and non-members of the Treaty in negotiating pipeline projects. In general, both the IGA and HGA models intend to facilitate project-specific negotiations, ensure transparency, and reduce the costs of implementation.26 An IGA is an international treaty signed between the states involved in a pipeline project. It is a “high-level” agreement and thus focuses on the fundamental elements of a project, such as the commitment of each host country to the implementation of the project, the granting of land rights, and the protection of investments in each host country. Because IGAs are government-level agreements by nature, the specific exemptions and grants to be provided to the project at hand cannot be exhaustively listed in the IGA itself and instead need to be thoroughly elaborated elsewhere. This is customarily achieved by executing different HGAs signed between the party states’ authorities and the company undertaking the project. These agreements include a more detailed expression of the rights and obligations of the project companies in relation to each host government, such as the safety, permitting, and taxation regime applicable to the project. IGAs are generally treated as international treaties under domestic law and are ratified accordingly. Depending on the legal system of each host state, IGAs may be subject to a regime that is more protected than ordinary domestic law and may fall outside the inspection of the judiciary.27 Therefore, project companies will frequently seek to shield their HGAs from the laws of general applicability by incorporating them into the IGA. This is usually done by attaching the unsigned text of the HGA to the text of the IGA. By Ratifying the entire IGA in all of the relevant jurisdictions (with the HGA attached in the appendix), the project companies elevate the HGA to a status akin to an international treaty signed by and between signatory states. 26 The Energy Charter Secretariat, “Model Intergovernmental and Host Governmental Agreements Introductory Note” 2nd ed. available at: , accessed on 11 January 2020, 19. 27 For example, according to Article 90 of the Constitution of the Republic of Turkey, international treaties ratified in accordance with domestic law acquire the status of legislation. Agreements ratified this way are subject to a regime that is more protected than ordinary domestic legislation and are outside the inspection of the Constitutional Court. 28 Energy Charter Secretariat, “Intergovernmental Agreements and Host Government Agreements on Oil and Gas Pipelines – A Comparison” (2015) See: https://www.energycharter.org/fileadmin/ DocumentsMedia/Legal/Agreements_on_Oil_and_Gas_Pipelines.pdf> accessed 16 January 2020 29 The rule of capture is defined as “the right to drill for and produce oil and gas from a particular tract of land even though doing so will drain the hydrocarbon concerned from beneath the land of another party.” See J. W. Morris, “The North Sea Continental Shelf: Oil and Gas Legal Problems” (1967) 2 The International Lawyer 191, 20. 30 The Third Workshop on Joint Exploration and Development of Offshore Hydrocarbon Resources in Southeast Asia, held in Bangkok from 25 February to 1 March 1985, seen in M. Miyoshi, “The Basic Concept of Joint Development of Hydrocarbon Resources on the Continental Shelf” (1988) 3 International Journal of Estuarine and Coastal Law at 1, 6. As the first project in Turkey implementing the IGA and HGA models, the Baku-TbilisiCeyhan Crude Oil Pipeline Project (“BTC”) is a good example demonstrating how those planning to invest in the region can benefit from the dual legal regime created by IGAs and HGAs. Here, an IGA signed between the Republic of Turkey, the Azerbaijan Republic, and the Republic of Georgia in November 1999 concerned the transmission of Azerbaijani crude oil from the Caspian Sea to the district of Ceyhan in Turkey. Attached to the IGA, as an integral part, were HGAs signed by a consortium of 11 shareholders (including BP, Chevron, and SOCAR) and the host governments. All three states are contracting parties to the Energy Charter Treaty, and according to the Energy Charter Secretariat, these Agreements that were signed before the model agreements were published had a significant influence on the drafting of the model agreements.28 Alternatively, states may choose not to sign an HGA at all and may instead enter into an IGA that contains comprehensive and project facilitator provisions similar to an HGA. This occurred in the IGA signed for the TurkStream project between the governments of the Republic of Turkey and the Russian Federation. TurkStream is a natural gas pipeline that starts from Anapa in Russia’s Krasnodar Region, passes under the Black Sea, and lands ashore 100 kilometers away from Istanbul in Kıyıkoy. The agreement signed between Turkey and Russia incorporates detailed permitting, tax exemption, and dispute resolution provisions usually found in HGAs into the framework of the IGA. Hence, the project company made sure that all of the grants and exemptions provided to them would have the effect of law prevailing as lex specialis in each host country. Signing a comprehensive IGA instead of two separate agreements also enables all of the parties, including the project company, to resort to a single text to check what must be done if a particular feature of the substantive provisions is distorted or misstated in the enactment process of the statutes and regulations related to the project. If Delimitation is Unsuccessful: Hydrocarbon Exploration and Pipeline Projects If negotiations between states regarding delimitation of the EEZ/continental shelf are unsuccessful, the issue becomes whether coastal states are entitled to unilaterally exploit the hydrocarbon deposits or to prevent another state from laying an international pipeline in the disputed and undelimited maritime areas. There are no explicit provisions of international law, including in the UNCLOS, suggesting the presence of a “prior appropriation rule” or a “rule of capture,”29 which would allow for the exploitation of oil and gas from the disputed maritime deposits without liability. Similarly, no examples have been found in international case law where rule of capture was decided to be acceptable and legal. Furthermore, a group of lawyers specializing in international law of the sea and energy at the Third Workshop on Joint Exploration and Development of Offshore Hydrocarbon Resources in Southeast Asia agreed that no international rule of capture exists.30 There is also a consensus among academics that no international rule would allow for the exploitation of hydrocarbons from disputed maritime areas without liability. In the absence of such a rule, bilateral or multilateral cooperation seems to be the preferred route. The Salient Legal Aspects of Natural Gas Exploration Disputes in the Eastern Mediterranean and the Legal Regime Applicable to Offshore Pipeline Projects 14 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 15 When it comes to laying pipelines, all states are entitled to lay pipelines in the EEZ/on the continental shelf, as explained above. Given that it is unclear whether coastal states have the right to prevent other states (and international pipeline companies) from laying pipelines in their delimited and undisputed EEZ/continental shelf without their permission, it seems highly unlikely that states would be afforded such a right in undelimited and disputed maritime areas. However, it is important to note that this does not stop coastal states from putting forward alternative claims to stop international pipeline projects, including environmental claims or claims to restrain international pipeline project companies from causing permanent damage to the disputed maritime area. Implications of the Delimitation of Maritime Areas for Cyprus and the Future of Natural Gas Exploration and Production in the Eastern Mediterranean The hydrocarbon sources found in the Eastern Mediterranean have made regional states realize that they must first delimit their maritime zones in order to benefit from these underwater sources. So far, six states in the region have entered into bilateral maritime delimitation agreements: Egypt and Cyprus in 2003, followed by Lebanon - Cyprus in 2007 and Israel – Cyprus in 2010. 31 Official Gazette: 30976 12 December 2019. 32 G. M. Winrow, “Discovery of Energy Reserves in the Levant and Impacts on Regional Security” (2018) 15(60) UIdergisi 45,51. The most recent agreement in the region was signed between Turkey and Libya, which entered into force on 8 December 2019.31 The GCA and Greece claim that the GCA is a governmental authority with the right to represent Cyprus as a whole and thus has the right to delimitate the EEZ/ continental shelf with other states and to exploit hydrocarbon and other natural sources within its EEZ. Conversely, Turkey asserts that it has ipso facto legal sovereign rights in the seas where delimitation has been made in agreements concluded by the GCA. Turkey also states that the GCA does not have the right to represent the entire island and that the Turkish Republic of North Cyprus (“TRNC”) has equal rights over the maritime areas of the island. Furthermore, the leaders of Greece, Israel, and the GCA signed a trilateral agreement to build a 1,900 kilometer submarine pipeline to carry natural gas from the Eastern Mediterranean’s gas fields to Greece and Italy on 2 January 2020 (the EastMed pipeline project). This would be a very long pipeline: 700 kilometers undersea to Crete, 200 kilometers on land in Crete, and another 200 kilometers to the Greek mainland, passing through the Turkish EEZ set by the delimitation agreement between Libya and Turkey. Although gas prices are around $3.2/ mmbtu today, estimates show that the cost of this pipeline would be at least EUR 6 billion and that the price of gas at the destination would need to exceed $8/ mmbtu to make EastMed commercially viable.32 These facts lead one to believe that this agreement was actually signed for geopolitical reasons. Consequently, the quarrel shows no signs of diminishing. In an ideal world, mutual delimitation agreements between all states in the region would provide a strong and abiding solution in terms of both the exploitation of natural resources and the laying of offshore pipelines. This was the case in the Black Sea where a consensus was established in terms of maritime delimitation. The proposed SouthStream pipeline project passing through the EEZs of Russia, Turkey, and Bulgaria, as well as its successor, the TurkStream pipeline project, which passes through the Russian and Turkish EEZs before making an onshore landing in Turkey, benefitted from the coastal states agreeing on the map of applicable EEZ boundaries. Although recent tension surrounding the Turkish sponsored expeditions to explore hydrocarbons around the island of Cyprus seems to indicate that this option is still out of reach, economic and technical feasibility might actually bring all of the relevant states around one table to agree on mutual delimitation of the EEZ/continental shelf and on a new route for a pipeline to transmit the Eastern Mediterranean’s gas to further destinations in a more effective and profitable manner. Ümit Hergüner - Deniz Tuncel - Mete Siber Investment of a lifetime: Acquisition of Turkish Citizenship Through Real Estate Investment INVESTMENT OF A LIFETIME: Acquisition of Turkish Citizenship Through Real Estate Investment 02. From Dominica to Malta to Cyprus, investment is a worldwide and well-known tool used to acquire citizenship in foreign countries based on legitimate grounds. From an investor’s perspective, it is a desirable option owing to its lifelong benefits. How does the system work for Turkish citizenship? 16 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 17 Taking the Most Favored Path The option to acquire Turkish citizenship via investment provides one a considerably quicker and simpler road to getting citizenship. The process is more straight-forward compared mechanisms prescribed under the Turkish Citizenship Code No. 5901,1 regulating other ways of obtaining Turkish citizenship, such as by birth or by marriage. With an investment, investors bypass some of the burdensome prerequisites for becoming a Turkish citizen, such as the requirement to have lived in Turkey permanently for no less than 5 years or the requirement to speak Turkish at a level enabling one to adapt himself/herself to social life, among others. Investment is ultimately quicker and simpler as the primary requirement is merely investing a certain amount of money into Turkey. Reflection in Turkish law While the main prerequisite for this system is the same in all legal systems, i.e., having enough money to invest, the conditions vary from country to country. The mechanism for acquiring Turkish citizenship via an investment was made available under Turkish law on 12 January 2017 through an amendment2 made to the Regulation on the Implementation of the Turkish Citizenship Law (“Regulation”).3 This amendment introduced a number of methods to acquire Turkish citizenship through local investment, ranging from depositing a certain amount of money into a bank operating in Turkey to holding government-issued bonds and purchasing real property. The investment required for each method is subject to monetary thresholds, and in an amendment made to the Regulation on 18 September 2018, the government decreased the monetary thresholds for acquiring a Turkish passport. 1 Official Gazette: 27256 12 June 2009. 2 Official Gazette: 29946 12 January 2017. 3 Official Gazette: 27544 6 April 2010. 4 Official Gazette: 30540 18 September 2018. 5 For the purpose of this study, we focused on the details for acquiring Turkish citizenship via purchasing real property. This amendment4 reduced the limits from USD 1,000,000 to USD 250,000 for real estate investments and from USD 3,000,000 to USD 500,000 for bank deposits, among others. By virtue of the 2018 amendment, the minimum investment requirements for eligibility to obtain Turkish citizenship are as follows: • Making a fixed capital investment of at least USD 500,000, or its equivalent in another foreign currency or in TRY. The Ministry of Industry and Technology evaluates the pertinence of such investment, • Purchasing real property with a value of at least USD 250,000, or its equivalent in another foreign currency or in TRY, and providing the annotation of “not to sell the said real property for at least three years” on the land registry records. The Ministry of Environment and Urbanization evaluates the pertinence of such investment, • Generating employment for at least 50 individuals. The Ministry of Family, Labor, and Social Services evaluates the pertinence of such investment, • Depositing at least USD 500,000, or its equivalent in another foreign currency or in TRY, to a bank operating in Turkey and undertaking to hold the deposited amount at the respective bank for three years. The Banking Regulation and Supervision Agency evaluates the pertinence of such investment, • Purchasing government-issued instruments, the value of which are at least USD 500,000, or its equivalent in other foreign currency or in TRY, and undertaking to hold these instruments for three years. The Ministry of Treasury and Finance evaluates the pertinence of such investment, and • Purchasing a real estate investment fund participation share or venture capital investment fund participation share, the value of which is at least USD 500,000, or its equivalent in other foreign currency or in TRY, and undertaking to hold these participation shares for three years. The Capital Markets Board evaluates the pertinence of such investment. The Impact of These Changes The 2018 amendment was introduced with the goal of attracting foreign investors. The amendment was doubtlessly a milestone for the popularity of the mechanism in Turkey as the reduced thresholds encouraged investors to choose Turkey as the place to fulfil their investment objectives while acquiring Turkish citizenship as a result. Over the past few months, these considerably low thresholds set for acquiring citizenship have triggered much discussion, as some believe that the minimum thresholds provided are far too low. Nevertheless, an increase in the monetary thresholds seems unlikely, at least in the near future, because of the expected positive effect of the mechanism to the Turkish economy. An Overview of the Process In Terms of a Real Estate Investment5 Focusing on the acquisition of Turkish citizenship from a real estate investment perspective, as this is the most popular method, the process can be outlined in four steps as follows: (i) making an investment, (ii) obtaining confirmation, (iii) becoming a Turkish resident, and (iv) becoming a Turkish citizen. Step One: Making an investment According to the Regulation, the prospective applicant must purchase real property with a value of at least USD 250,000 in order to satisfy the principal investment requirement. The Regulation refrains from explicitly listing additional requirements. As per Circular 2019/5 issued by the General Directorate of Land Registry and Land Surveys (“General Directorate”) on the transactions to be performed before the land registries in relation to the acquisition of Turkish citizenship via purchasing real property Investment of a lifetime: Acquisition of Turkish Citizenship Through Real Estate Investment (“Circular”),6 the possible questions concerning implementation of the mentioned real property investments have largely been answered. The Circular lists the procedures and principles to be applied to transactions before the land registry under 14 different headings and addressees a number of gray areas, from the number and quality of real property concerned to the valuation and annotation processes. Out of all of the procedures and principles set forth under the Circular, the valuation report is the most crucial requirement, as it is the key component for the investment phase. The valuation report essentially sets forth whether the real property to be purchased bears a monetary value of no less than USD 250,000. Pursuant to the Circular, the valuation report must be issued by a valuation specialist, who must hold a valid license issued by the Turkish Capital Markets Board (SPK in Turkish) or the Appraisers Association of Turkey (TDUBS in Turkish). For foreign individuals who want to acquire title to real property, obtaining a valuation report is the first step, as set out under the Circular and under the General Directorate’s Circular numbered 2019/1 on the acquisition of real property by foreign individuals.7 Step Two: Obtaining confirmation Once the real property has been purchased, the relevant land registry office transfers the relevant application documentation (submitted together with the acquisition request) to the Ministry of Environment and Urbanization for its review. The Ministry of Environment and Urbanization processes the application and decides whether the applicant meets the criteria stipulated under the Regulation for citizenship purposes. In short, the Ministry of Environment and Urbanization checks whether the amounts shown on the title deed, valuation report, and the receipt of funds transferred are each over USD 250,000. If so, and when deemed appropriate, the Ministry of Environment and Urbanization issues a pertinence certificate, which is the core document to initiate the citizenship application process as set out under Article 20 of the Regulation. 6 The General Directorate of Land Registry and Cadaster, Circular No: 2019/5 (1799) 30 May 2019. 7 The General Directorate of Land Registry and Cadaster, Circular No: 2019/1 (1795) 15 February 2019. Step Three: Becoming a Turkish resident Immediately following the issuance of the pertinence certificate, the applicant must apply for and obtain a residence permit. The process for obtaining a residence permit is less complicated and burdensome if obtained solely for the Turkish citizenship application than the usual process for gaining lawful residency. One of the biggest conveniences is that the application (as well as the citizenship filing explained below) is made directly to the official citizenship offices (“Office”). This is the governmental authority taking care of citizenship application formalities such as collecting the relevant documentation and delivering such to the next competent authority in the process. Once the applicant has all of the requested documents, he/she must visit the Office to file an application, and within a week or two, the Office will provide him/her with a document evidencing his/her official residency status in Turkey. Step Four: Becoming a Turkish citizen At the final step, the applicant will need to file for citizenship. The key player in this phase is once again the Office who schedules an appointment date, checks the appropriateness of the documentation, and forwards the application to the Ministry of Internal Affairs (“Ministry”). The Ministry evaluates the application and the applicants’ eligibility to acquire Turkish citizenship at this stage. Their assessment of the application file lasts approximately 5-6 months and the final stage commences: a decision from the President of the Republic of Turkey. Upon receipt of a positive decision, the applicant officially acquires the Turkish citizenship. Melting Away the Unknowns As mentioned above, the amendments made to the Regulation provide some clarification on the requirements for obtaining citizenship through investment while still leaving a few ambiguities regarding how these amendments will be implemented in practice. Of all the changes, sub-paragraph 8 of Article 20 of the Regulation, which provides for the various methods of acquiring Turkish citizenship, may give rise to the most uncertainty. This provision allows investors to switch between investment types in order to complete the 3-year period for each investment type as specified under the Regulation. While it is possible to switch from one investment type to another in theory, the performance of such switch in practice is vague. Presumably, this uncertainty will be alleviated once the competent authorities set precedents. In sum, it became a straight-forward and time-efficient way to acquire Turkish citizenship in Turkey in the light of latest changes in the legislation. Serkan Gül - Ada Gavremoğlu 18 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 19 Covert Advertising by Social Media and Its Legal Aspects 03. In contrast to the inefficiency of traditional media, which imposes high costs and limits advertisements to be targeted at the general public, social media stands out with its low cost and tailor-made marketing features. During our day-to-day routines, we come across countless social media posts. While some of these posts may not appear to be advertisements, they are actually made with the intention of changing consumers’ attitudes and behaviors towards a particular product. In this article, we will analyze covert advertising, its prevalence in social media posts, and its implementation under Turkish advertisement law. Covert Advertising under Turkish Law Advertising is described as a means of communication with the purpose of promoting a product or service. Under Turkish Law, advertising is regulated under different statutes and regulations.1 1 Some examples are: The Law on the Establishment and the Principles of Radio and Television Broadcasting No. 6112; the Attorneyship Law No. 1136; the Regulation on Sales, Advertising, and Promotion of Medical Devices; the Regulation on Optician Establishments, Cosmetic Regulation, etc. 2 Official Gazette: 28835 28 November 2013. 3 Official Gazette: 29232 10 January 2015. 4 Türk Hukukunda Aldatıcı ve Örtülü Reklamlar, İnal, p. 97; Türkiye’de Örtülü Reklamlar ve Uygulamadaki Durum, Aktekin & Gürbüz, p. 44-47. However, the two main texts are: i) the Consumer Protection Law No. 6502 (“Law No. 6502” or “Law”) 2 and ii) the Commercial Advertisement and Unfair Trade Practices Regulation (“Commercial Advertising Regulation” or “Regulation”).3 Under Law No. 6502 and the Commercial Advertising Regulation, commercial advertising is defined as announcements that have the characteristics of marketing communications made through written, visual, audio, and similar methods in any medium by the advertisers in order to provide the sale or lease of a good or service and to inform or persuade the target audience in connection with a trade, work, craft, or profession. In the definition of commercial advertising in both the Law and the Regulation, communications made via any medium, including social media, may be qualified as advertising. Placing trade names or business names by using names, brands, logos, or other distinctive symbols or expressions for goods and services in articles, news, broadcasts, or programs without clearly stating that it is an advertisement and presenting such in a promotional manner is considered covert advertising under the Law and the Regulation. Audible, written, or visual covert advertising is prohibited in all kinds of communication tools under Turkish law. In the doctrine, three criteria are used to determine if covert advertising is in line with Article 23/1 of the Commercial Advertising Regulation: i) whether the information and/or visuals used in the advertisement are disproportionate, ii) whether the content of the news goes beyond the elements of the right to inform, and most importantly, iii) whether there is the intention to advertise.4 In our view, when determining covert advertising in social media, the most important criterion that must be assessed is the intention of advertising. Social media is a notable medium that offers cheaper and faster communication than traditional media. Not only is it cost saving and time efficient, but its direct access to consumers and customers also makes it appealing to businesses. Covert Advertising by Social Media and Its Legal Aspects For advertisements made on social media, the creation for social media posts by an advertising agency or company itself or any economic relationship between the person who shares the post and the company whose products, services, or trademarks are being promoted may indicate the intention of advertising. Covert Advertising through Social Media Posts Covert advertising simply means advertisement without mentioning or specifying the content as an advertisement, which is prohibited under Turkish law. In social media, we come across covert advertising on a daily basis without even noticing these posts are ads at first glance. It is clear that much of today’s ads are designed to grab our attention without letting us know that they are trying to sell us something. In this case, as there is no clear separation or labelling of sponsored content on social media, the law simply identifies such as covert advertising. It is obvious that detecting covert advertising requires a delicate interpretation and examination of the advertisement in question. Such an examination would certainly involve determining whether the advertisement carries any intent or purpose of ensuring the sale or usage of a particular product/ service and whether it is aimed at informing or influencing the key audience.5 Imagine two profiles mentioning a beauty product in their posts, one profile with a few hundred followers and one with a few million followers. The post shared by the profile with less followers would indicate that the reason for sharing the post is just personal taste; however, when the same exact post is shared by the profile with millions of followers, this creates suspicion that covert advertising is in use. Again, suppose you read a celebrity’s Instagram post discussing a new product. 5 Gönenç Gürkaynak, Esq, Metin Berat Ataseven and Nazlı Gürün, Analysis of Surreptitious Advertising: How Does It Become An Increasing Trend?, http://www.mondaq.com/turkey/x/802648/ advertising+marketing+branding/Analysis+Of+Surreptitious+Advertising+How+Does+It+Become+An+Increasing+Trend 6 Published by Influencer Intelligence in association with Econsultancy. https://econsultancy.com/reports/influencer-marketing-2020/ 7 An influencer is someone who affects or changes the way that other people behave, for example through their use of social media. https://dictionary.cambridge.org/dictionary/english/influencer 8 In some posts, after a few minutes of talking and giving advice on how to do a make-up look, a hair style, etc. influencers suddenly mention a specific product by a specific brand. A consumer may not understand that it is advertising activity and may simply trust that the product is a personal recommendation. 9 Official Gazette: 28886 18 January 2014. 10 Regulation on the Jobs and Job Descriptions of Health Professionals and other Professionals Working in Health Services, Official Gazette: 29007 22 May 2014. 11 https://www.independent.co.uk/life-style/instagram-diet-restrictions-cosmetic-surgery-weight-loss-content-age-a9111186.html She tells how wonderful it is and all of its great features. Would that recommendation factor into your decision to buy the product? Probably. Now, suppose you come to learn that the celebrity has been paid to share a personal post about the product. Would that change your perception of your celebrity’s glowing recommendation? You bet. According to the ‘Influencer Marketing 2020’ report, “61% of consumers, aged 18 to 34, have at some point been swayed in their decisionmaking by digital influencers.”6 Influencers, a relevantly new term created in the age of social media, are those who shape the attitudes of consumers through their posts on social media such as blogs, tweets, videos, photos, stories, etc.7 Sometimes these influencers, as well as celebrities, share posts describing how they use a certain product and/or service and how they were satisfied with it. By seeing these kinds of posts, the consumer trusts the taste/appreciation of those individuals and also wishes to have the same experience. At this point, the idea of advertising does not cross your mind as there is no mentioning of any advertisement. By simply trusting that these influences and their posts are genuine, you are inclined to buy the same products. However, the truth behind these types of post may be bitter: it is a covert advertising!8 The consumer should be protected from believing that an influencer presents a product he/she praises by conviction even though there has been a trade-off. Social Media Advertising from the Perspective of Advertising Law Restrictions On social media platforms, such as Instagram, Facebook, and YouTube, we see covert advertising being used as a walk around mechanism to avoid advertising restrictions. It is crucial to distinguish that selling lipstick or a bag as part of a lifestyle preference is far different from selling pharmaceuticals, medical devices, and other health-related products. Under Turkish law, sectors including optical, pharmaceuticals, medical devices, alcohol, and tobacco have special restrictions when it comes to advertising. For example, in the optical sector, advertising is restricted under Article 24 of the Regulation on Optician Establishments.9 Accordingly, optical products including contact lenses cannot be advertised. However, it is not surprising to see social media posts from celebrities or influencers showing of the contact lenses they use, which ultimately promote the product through displaying the visual and mentioning the name of the brand and their satisfaction with the relevant brand. Likewise, in the health sector, under the Regulation on Health Professionals, one of the main principles is that health professionals and other professionals working in health services are not permitted to publish any misleading, demand increasing, or self-promoting advertisements.10 Rather, they may only publicize their names, titles, fields, and addresses. Additionally, the Commercial Advertising Regulation also emphasize that “advertisements cannot include expressions or images concerning post or pre-treatment.” Despite such limitations on advertising in the health sector set out under the relevant legislation, it is not hard to see social media posts including images of pre and post treatments describing the success of the treatment and providing the addresses and names of the individuals or institutions implementing such treatment. Recently, Instagram announced that its new policy will restrict posts for diet products such as weight-loss teas and cosmetic procedures for uses under the age of 18.11 Instagram aims to prevent underage users from consuming diet products or from being exposed to commercials promoting cosmetic surgery. 20 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 21 Certain posts claiming miraculous results that are somehow related to commercial offers such as discount codes will also be removed due to this new regulation. These changes are expected to be implemented by Facebook as well. Sanctions for Covert Advertising in Social Media As per Article 61/7 of the Consumer Protection Law No. 6502, advertisers, advertising agencies, and media establishments (mecra kuruluşları) are obliged to comply with the provisions of Article 61 which states that audio, written, and visual covert advertising is prohibited through any kind of medium. Under the Commercial Advertising Regulation, advertising media is defined as a medium where those who convey advertisement and promotional messages and those who are able to receive that message meet, such as television, printed media of any kind, communication channels like the internet, telephone, radio, and cinema, and billboards, magazines, and newspapers. With such a wide interpretation, influencers’ social media profiles may also be qualified as advertising media by the Advertising Board, and accordingly, influencers may also be obliged to comply with the prohibition on covert advertising. As per Article 77/12 of the same Law, the Advertising Board is authorized to grant the suspension or revision of such advertisement and/or impose administrative fines. If such breach is made via the internet, the administrative fine is TRY 104,781 for the year 2020. The Advertising Board may impose these sanctions separately or together as it deems appropriate. Although covert advertising is subject to various sanctions, in practice we do not come across these sanctions when it comes to advertisements made via social media. Not only is it difficult to spot covert advertising when it is done on social 12 For similar views please see: https://www.asa.org.uk/news/online-influencers-is-it-an-ad.html; http://www.mondaq.com/uk/x/786478/Social+Media/ Influencing+the+Influencer+how+to+be+CMAcompliant; 13 https://www.wired.com/story/instagram-sponsored-posts/ ; https://www.agorapulse.com/blog/instagram-influencers 14 https://www.socialmediatoday.com/news/facebook-rolls-out-new-updates-for-branded-content-tags-to-improve-transpar/540050/ 15 https://www.ftc.gov/news-events/press-releases/2017/04/ftc-staff-reminds-influencers-brands-clearly-disclose 16 https://www.gov.uk/cma-cases/social-media-endorsements 17 http://www.rechtsprechung.niedersachsen.de/jportal/portal/page/bsndprod.psml?doc.id=KORE576642017&st=null&showdoccase=1 18 https://www.lexology.com/library/detail.aspx?g=b4748a7c-eca6-4afb-9906-f2cbc21c65ac media, but there is also a lack of explicit provisions regarding influencers on social media. What to do? In order to avoid engaging in covert advertising, we suggest including information indicating that the post is actually an advertisement. This may be done by clearly labeling the content as an advertisement or adding hashtags such as “#ad”, “#ads”, “#advert”, or “#sponsoredpost”.12 If an influencer shares a post in connection with an agreement between himself/herself and a brand, this should be labeled as such. To encourage this, Instagram initiated the “paid partnership” tool in 2017 which allows influencers to disclose when a post is sponsored by labeling the post accordingly.13 Similarly, Facebook also changed its ‘Paid’ tag on branded content posts to ‘Paid Partnership.”14 As another great step towards regulating sponsored content on social media, the Federal Trade Commission of the United States sent notifications to influencers ordering them to stop engaging in covert advertising.15 Likewise, the Competition and Markets Authority of the United Kingdom filed an investigation on whether famous people on social media are granted a benefit in exchange for promoting a product or service.16 It is also worth mentioning that a German court did not find the #ads hashtag adequate as the commercial character of the post was not sufficiently identified.17 Likewise, the Danish Consumer Ombudsman’s guidance does not find mentioning “in collaboration with @[company name] Affiliateagreement” or the hashtags “#Spons” or “#Ad” sufficient.18 The Turkish Advertisement Board’s evaluation of covert advertising on social media is not as precise, as stated above, and there is currently no direct legislation or sanctions applied to social media posts made by influencers or celebrities. Therefore, there are currently no published or known administrative fines imposed on any influencers or celebrities as of the publication of this article. However, similar to other countries, covert advertising through social media is an area that is increasingly on the radar of Turkish authorities who have the power to impose fines and take other actions. Final Remarks Considering the growing number of social media users, the role of social media advertising has changed over the past few years. However, its legal boundaries are still not as clear as in the case of traditional advertising. Although covert advertising is regulated under the Commercial Advertisement and Unfair Trade Practices Regulation, its sanctions with regards to social media are not yet effective as it is tricky for the Advertisement Board to distinguish covert advertising from personal applause and track it case by case. Social media influencers and celebrities should be conscientious of the legal boundaries of posting advertisements just as a businessperson should be aware of their legal limits. Although the regulation is not precise in the realm of social media, influencers and celebrities may consult legal counsel to ensure compliance with the general advertising regulations and legislation on unfair commercial practices to avoid abusing trust relations in order to promote transparent communication. Another solution to the lack of a specific legal framework for covert advertising is to establish precise regulations referring to covert social media advertising. In summary, influencers, celebrities, and brands should aim to establish transparent communication showing their commercial partnership to their followers or target audience in compliance with designated legal boundaries. Ayşe Hergüner Bilgen - Dilber Vanessa Kohen Poyastro - Seher Elif Köse Özgüç Project Bonds for Infrastructure Investments The growing need for building new infrastructure and power plants, and for rehabilitating existing ones, results in an immense need for funding. This need is particularly heightened if a country is in a key location in terms of global trade routes and thus requires adequate transportation infrastructure; has a sizeable population or has had a sudden rise in its population due to increasing immigration and hence has increased infrastructure (both economic and social) and energy needs; intends to develop many projects at once, etc. As a country that checks all of these boxes, Turkey has an extensive need for funding for infrastructure and energy projects. Because of increasing banking regulations, the latest example of this being the Basel III regulations, banks can no longer singlehandedly meet the financing needs of sizeable infrastructure and energy projects. Given the capital adequacy requirements applicable to banks and the 1 Please see our Article titled “Mobilizing Sukuk in Infrastructure Financing” in our Fall 2019 issue for an overview of the use of sukuk in project finance: https://herguner.av.tr/publications/fall-2019- newsletter/ 2 For example, the USD 450 million Eurobond issue for Mersin International Port in 2013 is referred to as a project bond issue in some sources, but is mostly deemed a high yield financing rather than a project bond given that the bond issue was unsecured and the covenants involved were mostly incurrence-based (see https://www.lw.com/news/first-turkish-infrastructure-bond). 3 Association for Financial Markets in Europe (AFME), “Guide to infrastructure financing,” http://www.d20-ltic.org/images/AFME_Guide_to_Infrastructure_Financing_1_1.pdf limits on exposure to certain countries, areas, sectors or sponsors, the financing needs of investors may not be met through conventional methods of funding. This is especially the case for countries such as Turkey where multiple and voluminous infrastructure projects are developed at the same time. To overcome this funding gap, investors, lenders, and governments are seeking ways of mobilizing alternative forms of financing. An example of this is the rise of sukuk financing, which was covered in our previous issue and has become a prominent alternative source of financing in recent years.1 Another method of alternative financing for infrastructure and energy projects, which has been widely used throughout the world but, save for very limited and atypical limited earlier cases,2 has only recently made its mark on the Turkish project finance market, is project bonds. Project bonds: An overview Project bonds deviate from regular corporate bonds in the sense that they are issued to finance a specific project and the bond proceeds are paid exclusively from the cash flow generated by that project as opposed to the overall revenue of the issuing entity. This means that project bonds are long-term investments, especially when issued to fund greenfield projects involving an extensive construction phase. As a result, project bonds are particularly attractive for capital markets investors looking for stable and long-term investment opportunities, such as insurance companies, wealth funds, and pension funds. Although the volume of investments made by these institutional investors utilizing project bonds is still not at desired levels, these investors, particularly insurance companies, are becoming increasingly more comfortable with project bonds.3 Project Bonds for Infrastructure Investments 04. Infrastructure and energy are two of the most important cornerstones of any country’s economy. All economic sectors are in need of sound infrastructure and a reliable supply of energy. Manufacturing requires uninterrupted and stable power, and commerce can only thrive if raw materials and manufactured goods are transported through well-maintained roads, railroads, ports, and airports. A power failure in a hospital may have dire consequences, and proper healthcare services can only be provided in hospitals built to match the needs of the population and the latest medical technologies. 22 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 23 The fact that the project bonds for the Elazığ project were issued in international markets by an entity incorporated under the laws of Luxembourg begs the question: Is it possible, and feasible, to issue project bonds in Turkish capital markets? To answer this, we should have a look at the applicable capital markets regulations as well as the general financial challenges with bond issues in Turkey. Legal challenges The Capital Markets Code No. 636217 and the Debt Instruments Communiqué (VII-128.8)18 regulate the issue of bonds under Turkish law. Until very recently, the only provision of Turkish law that treated project bonds differently from corporate bonds was Article 9(9) to the Debt Instruments Communiqué, which stipulated that the issue limits set out under the Debt Instruments Communiqué do not apply to debt issues sold to investors abroad that are made to fund or refinance projects carried out under Law No. 3996 on the Procurement of Certain Investments and Services under the BuildOperate-Transfer Model19 or the BLT Law. However, in February 2020, the Omnibus Bill No. 7222 Amending the Banking Law and Other Laws,20 which has introduced Article 61/B to the Capital Markets Code No. 6362, finally made the statutory introduction to project bonds in Turkey in a way in a way that set the backbone and paved the way for secondary legislation to further put some meat on the skeleton. Accordingly, through project funds (which have also been introduced with this February amendment), project developers will be able to issue “project-backed securities”, i.e., project bonds, which will be backed by the proceeds of the assets and rights generated by a project. As noted, specifics on the issuance and regulation of project bonds, including the type of assets and rights that will constitute the subject matter of bonds, are not detailed in Article 61/B, and will be determined by the Capital Markets Board through secondary regulation.21 17 Official Gazette No: 28513 30 December 2012. 18 Official Gazette No: 28670 7 June 2013. 19 Official Gazette No: 21959 13 June 1994. 20 Official Gazette No: 31050 25 February 2020. 21 As of the date of drafting of this article, the secondary regulation has not been issued, nor has a draft of it been shared with the public. We hope to be able to provide more details on the secondary regulation in our Summer 2020 edition, assuming that there will be more input by then. 22 Official Gazette No: 29565 24 June 2004. 23 https://www.tcmb.gov.tr/wps/wcm/connect/7b1a6b8b-cd10-43ae-90b4-b3d702fae602/hmkexcelEn.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-7b1a6b8b-cd10-43ae-90b4-b3d702fae602-mYtW..w. The forthcoming secondary regulation, which will introduce rules specific to project bonds, is certainly good news, as the current regulations, which were drafted with only corporate bonds in mind, fall short in taking into account some of the characteristics of project bonds. To give an example, pursuant to Article 16 of the Borsa İstanbul A.Ş. Listing Regulation,22 in order for debt securities to be listed in Borsa İstanbul (i.e., Istanbul Stock Exchange), three (or in certain cases two) years must have passed since the incorporation of the issuer, the financial statements and independent audit reports of the last two years must be annexed to the bond prospectus, and the issuer must have made profits in the last two years (or in certain cases only in the preceding year). These time barriers make the issuance of project bonds by a Turkish project company extremely difficult, if not impossible, as these companies are usually SPVs established specifically for the purposes of the project and therefore cannot profit until the project is well underway. Another similar barrier to the issuance of project bonds subject to Turkish laws is the issue limit (i.e., leverage ratios) imposed under Article 9 of the Debt Instruments Communiqué, which is determined based on the issuer’s amount of equity. In a project finance deal, the sponsors cannot be expected to inject sufficient equity to meet these limits at the offset. It is expected that the secondary regulation to be introduced by the Capital Markets Board will take these issues into consideration, and remove these obvious barriers to the issuance of project bonds in the Turkish capital markets. Financial challenges Another key challenge in issuing project bonds in Turkey is the lack of a sufficiently large and active bond market. Although Turkey is one of the largest local currency bond markets among developing countries, the size of its capital markets is small when compared to that of developed countries and government bonds make up the majority of debt instrument issues. As of December 2019, the total nominal value of corporate domestic bonds amounted to roughly USD 18.5 billion, with almost 70 % of these bonds issued by banks.23 The credit rating of the Turkish government is another challenge not only for issuing project bonds in Turkey but also for using project bonds to finance major projects in Turkey. These projects usually involve payments made by government entities (e.g., availability payments or power purchase fees) and/ or guarantees or debt assumption by the State. With the big three credit rating agencies currently having assigned Turkey the below investment grades (BB- (stable) by Fitch, B1 (negative) by Moody’s, and B+ (stable) by S&P), projects depending on government payments may not be attractive to investors. However, as seen from the example of the Elazığ project, this challenge can be overcome through a credit enhancement mechanism. Conclusion: A new era? The Elazığ example has shown that Turkish project developers are more than open to the idea of financing their investments through project bonds. Once the Capital Markets Board issues its secondary regulation on project bonds, project developers will be able to utilize this alternative source of funding directly in the Turkish markets. To ensure that project bonds will be a viable option, it should be made sure that the detailed legislative framework answers the project developer’s needs. Senem Denktaş - A. Zafer Yılmaz Project Bonds for Infrastructure Investments Project Bonds v. Debt Financing A recurring argument against the use of project bonds from the issuer’s perspective, especially where the financing relates to greenfield projects, is the issue of “negative carry”. The concern here is that the issuer receives the funds at once and upfront at closing, whereas the capital expenditure costs spread over a construction period lasting several years. During this period, the issuer is required to pay interest on the amounts that are neither needed nor used. Still, this problem can be overcome with a delayed draw mechanism whereby the funds are made available with multiple draws in line with construction needs or with a combination of project bonds and debt financing.4 Another argument in favour of debt financing over bond financing may be that the company has limited access to capital markets due to the size of its business or its financial status5 or because of confidentiality concerns.6 However, these are not likely significant concerns for companies taking on major infrastructure and energy projects, which require a sizeable investment by nature and are closely followed up by all stakeholders. Finally, an investor may prefer the flexibility of debt financing to the strict terms of bond financing. This usually does not constitute an obstacle to using project bonds for infrastructure or energy projects, given that such projects will involve feasibility studies that identify all applicable risks and financing models that make provision for the same. However, in developing or less developed countries, there may be risks that cannot be fully identified from day one, which may result in the need for additional or altered financing. Examples of these 4 Crédit Agricole Corporate and Investment Bank, ‘Fundamentals’ (Project Bond Focus 2018, 2018), 2, https://www.ca-cib.com/sites/default/files/2018-11/Project%20Bond%20Focus%20-%20 Fundamentals%202018%20FINAL%20v2.pdf 5 Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (2nd edn, OUP Oxford 2014), 57. 6 Sarah Paterson and Rafal Zakrzewski (eds), McKnight, Paterson, & Zakrzewski on the Law of International Finance (2nd edn, OUP Oxford 2017), 452. 7 Crédit Agricole Corporate and Investment Bank (n. 2) 2. 8 http://www.sacyr.com/es_en/Channel/News-Channel/news/featuresnews/2017/Premios/20171222_Premio_Pedemontana-Veneta.aspx 9 https://www.globenewswire.com/news-release/2017/10/02/1160772/0/en/Alberta-PowerLine-Closes-1-4-Billion-Financing.html 10 https://www.ifre.com/story/1474489/asia-bond-paiton-energys-us2bn-dual-tranche-project-bond-v91pgqkgzw 11 https://www.mitsui.com/jp/en/topics/2019/1229677_11243.html 12 https://www.sullcrom.com/australia-pacific-lng-completes-14-billion-refinancing-2018 13 https://www.bloomberg.com/news/articles/2019-09-18/california-backs-big-bond-deal-for-virgin-trains-las-vegas-line 14 Official Gazette No: 28582 9 March 2013. 15 Romina Bandura and Sundar R. Ramanujam, Innovations in Guarantees for Development (Rowman & Littlefield 2019), 40. 16 https://www.ebrd.com/work-with-us/projects/psd/elazig-hospital-pppp.html risks include exchange rate fluctuations, sudden increases in construction costs due to general economic recession or international trade regulations, etc. Project bonds can be particularly preferable for certain investments. Among other benefits, a project bond issue allows the issuer to stabilise its financing costs for the lifespan of the project. Project bond covenants are also less strict compared to the covenants undertaken for debt financing.7 Most importantly, as stated above, traditional financing may not always be available due to capital adequacy requirements and exposure limits. Project Bonds in Practice An area in which project bonds are particularly used throughout the world is the energy sector. This is because energy projects promise stable, longterm income for the issuer based on off-take arrangements/power purchase agreements. Similarly, project bonds are widely used to finance infrastructure projects based on availability payment structures where the State party commits to making periodic payments to the project companies. These are ideal projects for bond issuances as they are less susceptible to fluctuations in demand amounts. Infrastructure projects with usage-based fees are considered more risky when compared to availability-based contracts given the potential issues with the predictability of future usage unless there are state guarantees in place mitigating the demand risk. The number of recent examples seen around the world highlight the importance of project bonds in major infrastructure and energy investments. In the last few years alone, some of the largest projects in various sectors were financed through project bonds. These include the USD 1.571 billion financing of the Pedemontana-Veneta highway project in Italy,8 the CAD 1.4 billion project bond issue for the Alberta Powerline Project in Canada,9 the USD 2 billion dual-tranche issue by the Indonesian power producer Paiton Energy,10 the USD 1.1 billion bond financing by Mitsui & Co., Ltd. to procure refinancing for its floating production storage and offloading charter project in Brazil,11 and the USD 1.4 billion project bond issue by Australia Pacific LNG to refinance its natural gas project in Australia.12 The next few years promise even bigger projects, as evidenced by plans to issue project bonds for the high-speed train project between California and Las Vegas, which is currently in the works and has recently obtained approval for a USD 3.2 billion bond issue from California.13 Is Turkey Ready for the Era of Project Bonds? Project bonds have already made their mark in Turkey with the Elazığ Healthcare Campus project. The project, which is currently being developed under Law No. 6428 on the Construction, Renovation, and Purchase of Services by the Ministry of Health by way of the Public-Private Partnership Model and Amendments to Certain Laws and Decrees with the Force of Law (“BLT Law”),14 was financed through a project bond issuance. The 20-year bonds, which were classified as “green and social,” were issued by the Luxembourg entity ELZ Finance S.A. who went on to on-loan the bond proceeds to the Turkish project company, ELZ Sağlık Yatırım A.Ş.15 In order to obtain an investment rating, the bonds were credit enhanced by the European Bank for Reconstruction and Development (EBRD) and political insurance was provided by the Multilateral Investment Guarantee Agency (MIGA).16 24 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 Introduction to Hedging Under Islamic Finance 25 Therefore, the principal amount is not exchanged in an interest rate swap and is only used as a virtual value to calculate the amount of interest the parties owe one another. The payments are netted on the settlement date. Interest rate swaps are usually entered into to convert floating rate loans to fixed rate loans or to change the index on a floating rate loan. They are particularly used in project financing when a floating rate syndicated bank loan is the most cost effective source of funds but the borrower wants fixed-rate loans.3 Islamic Financial Instruments Used in Hedging Transactions Traditional Islamic financial structures address the futures, options, and swaps correspondents amongst the conventional financial instruments. In literature, salam and urbun contracts are pointed out as substitutes for conventional derivatives with their deferred payment or partial payment features.4 In essence, salam is when a buyer makes a payment at the time the contract is executed whereas the subject matter of the contract is delivered at a future date. This structure is associated with forward contracts because it allows for future delivery. However, salam contracts differ from typical forwards as they require full payment at the time the contact is executed. An urbun contract is simply a down payment sale where the full purchase price is not paid at the time the contract is executed. This contract provides the purchaser the option to terminate the contract and forfeit its right to purchase the relevant good or to conclude the transaction and deduct the advance payment from the total purchase price. If the purchaser does not proceed with the sale, the down payment remains with the seller and the purchaser does not have any recourse to such payment. The validity of urbun contracts under the Islamic principles of law has been heavily discussed among Islamic scholars and the 3 Ibid. 4 Eisenberg, David M., Derivatives and Islamic Finance, Islamic Finance: Law and Practice, Oxford University Press, 2012, p. 209. 5 Ibid. 6 Ibid. 7 Ibid. 8 https://www.iifm.net/standards/brief-on-iifm-standards/ 9 https://www.iifm.net/wp-content/uploads/2019/06/IIFM-PRS-Product-Explanation_3_0.pdf 10 https://www.iifm.net/wp-content/uploads/2019/06/ISDA-IIFM-Two-Unilateral-Independent-Waad-based-IFX-Forward-Standard-Confirmation.pdf 11 https://www.iifm.net/wp-content/uploads/2019/06/ISDA-IIFM-Tahawwut-Hedging-Master-Agreement_0.pdf general belief is that these transactions are prohibited due to their uncertainty.5 The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) approved the validity of urbun contracts in 2004 but on the condition that the option to purchase cannot be transferred to third parties.6 Despite discussions surrounding the Sharia compliance of these contracts, they have formed the basis for the call (urbun) and put (reverse urbun) options that are included in the derivatives. The third Islamic law instrument is wa’d, which corresponds to a unilateral promise by a party to undertake certain obligations in the future. The current Islamic hedging instruments are mainly based on the wa’d structure together with a master agreement to establish a fair compensation mechanism for the parties if such a mechanism would have been available otherwise had they entered into a straightforward conventional hedging agreement. The enforceability of promises as legally binding obligations has been a subject of discussion among Islamic law scholars. Yet, in principle, a unilateral undertaking would be enforced by an English court so long as the respective form conditions are fulfilled.7 Hence, the International Islamic Financial Market (“IIFM”) in collaboration with the International Swaps and Derivatives Association (“ISDA”) has published the first standard Islamic hedging template for profit rate swap transactions.8 Two sets of interest rate swap templates have been published based on the wa’d concept:9 (i) a two-sales wa’ad structure where each party grants a unilateral wa’ad in favour of the other party and the party’s right to exercise the other party’s wa’ad is subject to the satisfaction of an exercise condition on the exercise date and (ii) another template that involves a single-sale wa’ad structure where only one party (the buyer) grants the wa’ad in favour of the other party (the seller). The standard document for foreign exchange forwards is also based on the wa’d structure with “single-sided binding wa’d” and “two unilateral and independent wa’d” structures.10 A master agreement template11 has also been published for the framework on Islamic profit rate swaps, Islamic cross currency swaps, and Islamic foreign exchange forwards. In Our Next Issue: Enforceability Hedging instruments under the Islamic finance scheme are currently structured by creating cash flows through backto-back murabaha transactions and tackling the gharar (risk and uncertainty) prohibition through two mutually exclusive undertakings diminishing the other through the conditional transaction structure. This structure presents certain issues that remain subject to further dispute in terms of Sharia’ compliance and further financial engineering may be required to prevent the notion of hedging under Islamic finance from mimicking cash flow under the conventional finance scheme and to create a different mechanism to minimize price fluctuation risks. The current template documentation published by the ISDA/IIFM collaboration serves as an intermediary solution for employing “Islamic” requirements in financial transactions. Yet, new alternatives are necessary to balance the risks faced by borrowers stemming from currency fluctuations and to push Islamic financing engineers to improve the current deficiencies in the hedging market. In the next series of our newsletter, we will delve further into the enforceability issues with respect to the Islamic finance template hedging documents published by IIFM and the relevant legal concepts those agreements correspond to under civil law and common law systems. Piraye Kuranel Başol - Nilay Akçay Introduction to Hedging Under Islamic Finance 05. As part of our series focusing on the use of Islamic finance instruments in project finance transactions, this article provides an overview of the currently available instruments that may be employed by Islamic financiers for hedging purposes while in our next issue we will address the enforceability of these instruments. Currency and price fluctuation risks render concerns with regard to stabilizing the pricing of Islamic financial instruments, which are inherently based on a fixed price structure, in the face of changing market conditions. In conventional project financing schemes, this issue is addressed through hedging agreements, which are mainly forwards, futures, and swaps, globally executed under the ISDA’s template documents. While thus far, Islamic finance engineering has resulted in the ISDA/IIFM collaboration for crafting hedging documents, it is clear that further financial engineering is required to address these inherent risk management concerns. The Role of Hedging Transactions In project finance transactions, economic risks are always a significant consideration when assessing the risks of a project, alongside completion, technological, political, and environmental risk factors. 1 Finnerty, John D.; ProQuest, Project Financing: Asset-Based Financial Engineering, Oxford, 2013. 2 Ibid. Hedging contracts, particularly forwards and futures, are available for most currencies which enables sponsors to secure a future delivery of payment in a certain currency on the agreed terms of today. In FX denominated financing projects, it is almost the norm to require borrowers to execute a hedging arrangement to secure the debt service and loan to value ratio of the borrowing entity when there is a currency fluctuation risk, and Turkish practice follows in line with this global norm. Currency risks mostly arise when the project’s revenue stream and cost stream are denominated in different currencies. In such case, any variation in the exchange rate of the different currencies utilized in the project can deteriorate the debt service ability of the project. This risk can be mitigated through hedging arrangements using currency forwards or futures or through currency swaps. Forward Contracts A forward contract obliges the seller to deliver the buyer i) a specified quantity ii) of a particular commodity, currency, or other item iii) on a specified future date iv) at a specified price agreed to by the parties on the date of the contract.1 A futures contract deviates from a forward contract such that i) a futures contract is traded on an organized exchange, whereas forward contracts are entered into in an over-the-counter market, and ii) futures contracts are standardized, whereas forward contracts are customized to suit the subject of the contract or the time of delivery.2 Swap Contracts A swap contract obliges two parties to exchange specified cash flows at specified intervals. In an interest rate swap, cash flows are determined by two different interest rates in the same currency. 26 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 Leniency in Turkish Competition Law 27 The latest application of the leniency and fines regulations, in its decision dated 18 April 2019 and numbered 19-16/229- 101 (“Ro-Ro Decision”), followed its predecessors in this respect and provided some valuable hints regarding what to take into account when deciding whether a leniency application is worth the effort and cost. The legislation has not rendered full immunity invalid for posterior applications made after the TCB has already seized evidence through other sources to substantiate a violation, but it has remained vague with respect to the application of the relevant provisions. Based on this ambiguity, the TCB has shown an unwillingness to grant full immunity to posterior applicants. In other words, after the TCB has its hands on “enough” evidential material, there is a remote possibility of getting out of the investigation without a fine by way of a posterior leniency application regardless of the value of the prospected applicant’s contribution. Nevertheless, their contribution does not go unrecognized. The legislation sets forth that companies applying for leniency that are not eligible to benefit from full immunity will still be granted a fine reduction between 17% (one-sixth) to 50%, mainly varying based on the order of their application. In the Ro-Ro decision, the TCB further recognized that in addition to application order, the quality and efficiency of the applicant’s cooperation also has an effect on the amount the fine is reduced. Providing the TCB with valuable evidential material, even if the TCB already believes that it has enough evidence to fine the companies under their investigation, could have a clearly discernable effect on the fine. 3 Turkish Competition Board decision dated 20.08.2014 and numbered 14-29/610-264. The leniency legislation sets forth that evidence provided by the applicant that would cause an increase in the fine will not be used against the applicant itself, i.e. among other consequences, the fine to be imposed on the applicant will not be increased based on the evidence provided within the scope of the leniency application. The TCB provided a good example of this principle in action in its recent Ro-Ro decision. The evidentiary material provided by the applicant revealed that the cartel under investigation lasted longer than the TCB managed to prove by its own means. However, the term of infringement for the applicant was set according to the evidentiary material initially found by the TCB from its on-spot inspection rather than based on the evidence submitted by the applicant. Furthermore, the applicant’s contribution was taken as the basis for the highest possible reduction of the fine allowed under the current legislation. The Regulation further requires applicants to submit information and evidence that is at their disposal. This may include information on the products affected, the duration of the cartel, the names of the undertakings parties to the cartel, and specific dates, locations, and participants in cartel meetings. In this respect, the TCB does not seem to be fastidious. In one decision,3 the TCB granted a 50% reduction on a fine issued to an undertaking just because this undertaking had accepted the fact that they were a member of the cartel in their leniency application, even though no other useful documents or information were provided. On the other hand, the Regulation does not require firms to admit or confess the existence of a cartel. Nevertheless, as the Ro-Ro decision reveals, taking a strictly defensive position and denying that any infringement exists may be interpreted as contradictory to the gist of the leniency application as well as the cooperation promise of the applicant. A delicate choice must be made when formulating a defensive strategy and statements to avoid giving off the impression that abusing the legislative shortfalls could make a difference in the success of the leniency application. Final remarks Leniency applications may be tricky to navigate at first for undertakings that face anti-competitive allegations for the first time. However, practice has shown that, as per the Turkish legislation, the benefits outweigh the risks. If the relevant undertakings act swiftly and without hesitation, they may receive partial or even full immunity from the possible fines. Considering that the TCA imposed administrative fines amounting to TL 350 million in 2018 and TL 282 million in 2019, even the slightest chance of mitigating the economic loss that undertakings may face proves to be a smart strategy. Süleyman Cengiz - Mey Akkayan Leniency is mainly regulated under Article 16 of Law No. 4054 on the Protection of Competition1 (“Law No. 4054”), the Regulation on Active Cooperation for the Purpose of Detecting Cartels2 (“Regulation”), and the Guidelines on the Explanation of the Regulation (“Guidelines”). This legislation involves provisions that leave considerable space for interpretation from the Turkish Competition Board (“TCB”); hence, the TCB’s reasoned decisions offer valuable hints and insight regarding the latest trends, opportunities, and risks for companies who wish to apply for the leniency regime. As such, we will take a look at some of the key takeaways from recent TCB decisions below. The Turkish leniency regime regulates two alternative timing options with respect to approaching the TCB for leniency in relation to a cartel: (i) before the TCB initiates any investigative steps towards the discovery of a cartel (prior application) or (ii) after the TCB initiates an investigative procedure (posterior application). 1 Official Gazette: 22140 13 December 1994. 2 Official Gazette: 27142 15 February 2009. The TCB promises full immunity to the first prior applicant. It is quite simple for the TCB to determine whether a prior application is eligible for full immunity as there are only two questions that must be answered: (i) is there an ongoing investigative procedure and (ii) has anyone else submitted a prior application before the applicant. The answer to this second question can also be confirmed by the TCB without compromising anonymity. Evaluating the fate of a posterior application is a bit more complicated and involves several uncertainties. Posterior applicants that are “lucky” enough to submit their application at a point in the investigation when the TCB does not have sufficient evidence to substantiate a violation are eligible for full immunity. The problem here is that prospective applicants are rarely well informed of the evidential power the TCB has with regard to its findings. In most cases, prospective applicants are only knowledgeable about the findings of the TCB based on the documents they provide themselves. At this stage, the prospective applicant must make a series of evaluations and decisions regarding whether full immunity is achievable; if not, they must assess what the highest fine reduction could be and whether an application for the realistic fine reduction is still desirable. The answer to whether the evidential material in the hands of the TCB is “enough” is based on a subjective and premature evaluation made by the TCB. This evaluation is made long before the investigation period is concluded, before the evidential material is reviewed in detail and assessed within the scope of the law, and before an investigation report is issued. Highlights of the Current Implementation Uncertainties remain embedded in the procedural aspects of the leniency regime by its construction. On the other hand, with each implementation, the TCB provides further insight and clarity regarding the leniency regime it intends to establish. Leniency in Turkish Competition Law Leniency, or active cooperation, is a useful tool both for undertakings that face or may face “cartel” allegations by the Turkish Competition Authority (“TCA”) as well as for the TCA since detecting cartels, which are usually kept secret, is difficult. 06. 28 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 29 The Capital Markets Board (“CMB”) issued the Communiqué on Real Estate Investment Funds (“Communiqué”) on 3 January 2014, 1 effective as of July of the same year. 2 The Communiqué and its amending communiqués set out the principles governing REIFs, which are overseen by the CMB. In this article, we will introduce you to this useful vehicle, REIFs, and walk you through the applicable legislative procedures to establish and operate one. Establishment Stage: Founders & Foundation REIFs essentially work as asset pools, consisting of contribution payments made by qualified investors, 3 and are founded and managed by a portfolio management company or a real estate portfolio management company (“Founder”). REIFs issue contribution shares representing the participants’ contributions to the REIF. REIFs may either be established for the limited purpose of acquiring a single piece of property or operating in an identified sector or may be established without a specific purpose or sector restrictions, within the limits of the permitted purposes set out in the Communiqué. They may also be established for either a specified or unspecified term. Why REIFs: Low Risk Nature, Benefits, & Tax Advantages For investors looking to profit from the real estate sector, REIFs offer major advantages, especially for foreign investors who do not wish to be exposed to the risks associated with engaging in real estate projects. This is because foreign investors have the chance to enter the real estate sector under the supervision of the CMB and the management of professionals instead of investing in project development companies without such oversight. 1 Official Gazette: 28871 3 January 2014. 2 The CMB issued several communiqués amending the Communiqué on Real Estate Investment Funds on 30 November 2016, 30 June 2018, 20 December 2018, and 6 July 2019 (“Amending Communiqués”). 3 Investors in possession of more than a total of TRY 1,000,000 in capital markets instruments and cash deposits and other institutional investors stipulated in the Communique on the Sale of Capital Markets Instruments and the Communique on the Establishment and Operation Principles of Investments. 4 According to the currency rate on 08 February 2020. The low risk nature of REIFs is enhanced by the fact that REIFs can only invest in buildings that already have a building utilization permit. Thus, investors are never faced with the risk of being unable to develop a project. These investments are also not subject to the restrictions against foreign investors for purchasing real estate. Additionally, the exit process is significantly easier and shorter than liquidating or selling the shares of a project development company. Along with the opportunity for foreign investors to invest in the real estate sector without the cost and risk of purchasing property or investing in a real estate development project, REIFs also offer the following significant tax advantages: • REIFs are exempt from corporate tax. There is withholding tax on the corporate income of REIFs regardless of distribution; however, the withholding tax is set at a rate of 0%; • Non-resident and resident corporate entities are subject to 0% withholding tax on their fund earnings as capital gain and dividends. This withholding tax is final tax for non-resident corporate entities who do not have a permanent establishment in Turkey. On the other hand, resident corporate entities and non-resident corporations with a permanent establishment in Turkey add these earnings to their regular income from other sources and pay 22% corporate tax; and • Non-resident and resident individuals are subject to 10% final withholding tax on their fund earnings as capital gain and dividends. Some scholars argue that this amount should be 0% for nonresident individuals; however, since the legislation is relatively new, there is no clear guidance from the tax authority, but we believe that this should be clarified on a case-by-case basis. Requirements & Conditions The CMB imposes strict requirements on companies to qualify as portfolio management companies in terms of their organization and membership, such as requiring the companies to be established as joint stock companies with at least TRY 2 million in initial capital (TRY 1 million (approximately USD 166,738.92) 4 for real estate portfolio management companies) and requiring their shareholders’ history to be free of bankruptcy, criminal activity, and license revocations by the CMB. However, the general manager, Board of Directors’ members (“Board”), and the Founder of these portfolio management companies do not need to be domiciled in Turkey. Thus, any private individual or legal entity with sufficient financial power, regardless of nationality or residence, may set up a portfolio management company and an REIF. Founders that are only portfolio management companies, rather than real estate portfolio management companies, are subject to certain experience and licensing requirements. Such companies must have at least one Board member with a minimum of five years of industry experience in real estate investments, must employ at least one real estate valuation expert and one general manager who is licensed by the CMB, and must form an investment committee of at least three directors, one of whom is the licensed valuation expert. If an REIF is managed by a portfolio management company other than the Founder, the management company must meet these requirements as well, which can be fulfilled by employing qualified persons through employment contracts. Real Estate Investment Funds (REIF): An Appealing New Investment Vehicle REAL ESTATE INVESTMENT FUNDS (REIF): An Appealing New Investment Vehicle 07 . In 1938, Swiss Law stipulated Real Estate Investment Funds (“REIFs”) for the first time, and following that, in 1959, Germany became the second country to issue provisions concerning REIFs. Over the years, Austria, Czech Republic, Finland, France, Hungary, Ireland, Luxembourg, Portugal, Slovakia, Spain, and the United Kingdom came to recognize REIFs. In line with the European Union’s regulations and international practices, Turkey finally codified REIFs in 2014 and has recently issued a major set of amendments. 30 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 Real Estate Investment Funds (REIF): An Appealing New Investment Vehicle 31 In that regard, 80% of an REIF’s assets must be invested in real estate-related investments. Monetary Threshold and Offering Requirements REIFs are required to reach a total net asset value of at least TRY 10 million (approximately USD 1.7 million)8 within one year of the date of the REIF’s first sale of shares to qualified investors. If the fund value does not reach the required minimum within the time limit, the Founder must apply to the CMB to deregister the REIF. REIFs must begin offering shares within six months of registering its bylaws before the Trade Registry Directorate following the CMB’s approval. The REIF’s offering memorandum, containing information on the REIF’s assets and sales conditions, must be approved by the CMB prior to offering its shares for sale. If the REIF does not begin offering its shares within the time limit, the Founder must deregister its bylaws from the Trade Registry Directorate; however, the CMB may grant an additional 6-month grace period if there are reasonable extenuating circumstances. Furthermore, REIFs can only sell their shares to qualified investors. 8 According to the currency rate on 1 January 2020 Sales of Contribution Shares and Dividend Distribution Restrictions apply to the sale of shares as well. An REIF’s contribution shares can be issued and delivered to investors in exchange for cash payments, real estate related rights, or the assignment of shares by returning them to the REIF in exchange for the mentioned consideration. Regardless of the restrictions applied to the sale of shares, contribution shares may also be traded among qualified investors. Regarding transfers among qualified investors, the Communiqué sets out a flexible regime and the only precondition for this type of transfer is that the Founder must be provided with documentation indicating that the transferee is also a qualified investor. Following the transfer, the Founder must report the change in REIF ownership to the Central Securities Depository Institution, the authority with which the founder must report all of its shares for tracking. That being said, further transfer restrictions may be implemented by inserting the necessary provisions into the incorporation documents of the REIF. The Communiqué does not set out any restrictions on the distributions of profits. Thus, REIFs are free to distribute dividends in accordance with their own bylaws and the applicable law. Customized REIFs Turkish legislation allows for the customization of REIFs based on the investors’ needs. Closed-end REIFs are available for limited and infinitive term investments. Specific REIFs are available for sector oriented or even target oriented investors. Private REIFs are also available, whereby the participation shares may only be held by investors designated under the REIF’s by-laws. It is also possible to only grant managerial rights or veto powers to certain investors in the REIF’s management by virtue of a tailor-made management agreement executed between the founder and the investor. Participation shares may be broken down into classes and prerogatives may be granted to each class to ensure diversity of investors while favoring the major investor in the REIF. The Turkish legal environment leaves sufficient room to customize REIFs in a way that would most benefit and protect the REIF’s investors’ expectations. Nazım O. Kurt - Berkan Özer Management, Legal Personality, and Term & Termination By default, the Founder’s Board of Directors represents the REIF in all of its activities. This representative authority may also be assigned to one or multiple executive directors. In any case, decisions concerning the issuance of participation shares, termination of the REIF, increases in management fees, and other issues that may affect the participants’ investment decisions must be made through a Board of Directors decision. The Founder of an REIF can also receive portfolio management services from another management company, real estate portfolio management company, or real estate and venture investment fund portfolio management company. However, such an arrangement does not release the Founder from its fiduciary responsibilities. REIFs do not possess a separate legal identity from their Founders. They are only considered to have a legal identity when completing specific and determined tasks such as registering or deregistering property. Since REIFs do not have a legal identity, they are not subject to the regular liquidation procedures imposed on joint stock companies under the Turkish Commercial Code.5 REIFs with a defined term simply liquidate when the term expires, and REIFs without a defined term liquidate within 6 months of sending a termination notice to the CMB with the CMB’s permission. While the REIF management fee may be considerably high, as market prices grow and the number of sector actors increases, the management fee will likely decrease overtime as a natural result of competition. Protected Title and Asset Portfolio Even though REIFs do not have a legal identity, the REIF’s assets are kept separate from the assets of the Founder and the manager. Thus, REIFs cannot be subject to seizure or be pledged for the debts of their Founder or manager and will not be 5 Official Gazette: 27846 14 February 2011. 6 Subsidiaries mean companies whereby these entities hold more than 50% of the total share capital. 7 Affiliates mean companies whereby these entities hold from 15% to 50% of the total share capital. affected even if the Founder is subject to bankruptcy or similar proceedings. The sole activity of an REIF is to manage the portfolio consisting of several assets (e.g., real estate and real estate-based rights and shares in certain domestic and foreign joint stock companies) and other CMB-approved investment vehicles for these listed assets. Permissible Activities To manage the portfolio, the Founder or the manager may carry out the following activities on behalf of the REIF: • Purchase, sell, lease, or promise to purchase or sell all kinds of land plots or brown field projects in order to make purchase-sale interest or obtain rental payments. However, a building utilization permit must be issued for all buildings and condominium ownership must be established; • Acquiring land plots, buildings, and real estate-based rights even with encumbrances such as mortgages which may affect the value of the investment, provided that the bylaws explicitly authorize acquisition of the encumbered property and the encumbered property does not exceed 30% of the REIF’s value; • Acquire and sell construction rights, usufruct rights, and timeshare rights on properties owned by third parties, which are registered with the land registry. Similarly, third parties may acquire and sell construction rights, usufruct rights, and timeshare rights existing on an REIF’s property to others; and • Invest in projects developed by the Directorate of the Collective Housing Administration, Provincial Bank Joint Stock Company, municipalities and the subsidiaries6 and affiliates7 thereof, and/or by companies whereby such entities have the privilege of designating nominee(s) to the Board of Directors provided that such projects hold duly issued construction licenses. Under the amended regime, the most significant investment options include projects developed by companies such as KİPTAŞ, TOBAŞ, and Emlak Konut GYO. Along with the permitted activities that REIFs can carry out, they can also hold shares in a joint stock company engaged in the construction or development of projects. In that regard, REIFs may be indirectly involved in the development of projects. However, as explained below, the Communiqué allows REIFs to invest up to 20% of their total value in the shares of joint stock corporations, even if more than 75% of these companies’ holdings are invested in domestic real estate. Restricted Activities While the Communiqué permits REIFs to perform the above actions, they are restricted from carrying out the following activities: • Invest in real estate projects, take on construction work for real estate projects, or employ personnel or acquire equipment for these projects, except for those stated under the Permissible Activities section above; • Provide services to others with their own personnel for project development or project management, and following up official permitting applications, etc.; • Operate hotels, hospitals, shopping centers, business centers, commercial parks, commercial warehouses, residential developments, supermarkets, and the like, or to employ personnel for this purpose; • Acquire any property whose transfer is restricted, except for encumbered property as mentioned above; • Make frequent, short-term real estate purchases and sales from the REIF’s portfolio; and • Purchase, sell, or rent real property in other countries. As indicated in the permitted and restricted activities listed above, REIFs cannot get involved in the construction or development phases of projects. As there are limitations on activities that REIFs can conduct, the Communiqué sets out limitations on their portfolio management as well. 32 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 33 Arbitrating Smart Contract Disputes Arbitration, an alternative dispute resolution mechanism in which parties agree to resolve their disputes before an arbitral tribunal, may play a vital role in the resolution of disputes arising in connection with or out of transactions made via smart contracts.5 Disputes may arise: i) between the parties of a smart contract (e.g., due to the sale of defective goods), ii) due to technical difficulties in the smart contract application, or iii) due to the performance of oracles should the oracles feed erroneous information to the system and cause unjust enrichment. In this article, we will focus on disputes between parties. 5 Similar opinion: Francisco Uríbarri Soares, New Technologies and Arbitration, Indian Journal of Arbitration Law, Volume 7, Issue 1, (2018). Available at: http://ijal.in/sites/default/files/IJAL_Volume_7_ Issue_1_Francisco_Uribarri_Soares.pdf 6 Data, Blockchain and Smart Contracts, Regulatory Task Force Report Swiss LegalTech Association (SLTA), p. 56. Available at: https://www.swisslegaltech.ch/wp-content/uploads/2018/05/SLTA-RegulatoryTask-Force-Report-2.pdf 7 Please note that arbitration institutions (such as ICC, LCIA, SCC, ISTAC, etc.) have not yet prepared or published any rules regarding the settlement of blockchain and/or smart contract disputes. 8 One debate regarding smart contract disputes is whether or not existing dispute resolution methods are sufficient. According to one approach, smart contracts may be adjudicated by existing alternative dispute resolution procedures. According to a second approach, the existing legal system cannot address the legal challenges of blockchain and smart contract disputes and thus a special mechanism in the blockchain should be established. There are some startups specialized in blockchain dispute resolution mechanisms in which arbitration mechanism is embedded into smart contract systems and once arbitral awards are rendered in the blockchain, the smart contracts transfer the assets. While we focused on traditional arbitration in this article, for more information you may refer to: Darcy Allen, Aaron Lane, Marta Poblet, The Governance of Blockchain Dispute Resolution, p. 5-7. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3334674. Arbitration has several advantages for settling disputes arising from smart contracts. First, since smart contracts and blockchain technology are a novel and complex area, special knowledge by the arbitral tribunal is crucial. State courts do not yet have the technological expertise to deal with such complex disputes. However, in an arbitration dispute, parties may choose specialized arbitrators allowing the needed expertise into the proceedings. Second, there may be difficulties when determining the competent state court or governing law due to the distributed ledger technology. As smart contracts operate via distributed nodes across the world, it is hard to determine the contract’s place of performance, which would determine the competent state court and governing law.6 However, with arbitration, parties can choose the law governing their dispute as well as determine arbitration as the exclusive jurisdiction mechanism for disputes arising between them, thus alleviating the uncertainty over jurisdiction and governing law. Third, arbitration is likely to resolve disputes in a shorter time compared to state courts. In institutional arbitration, parties may also resort to expedited arbitration mechanisms, which would save even more time.7 Finally, privacy and confidentiality is always one of arbitration’s main advantages. However, arbitration is not without its challenges in the area of smart contracts.8 When a dispute arises between two parties in a smart contract, the arbitral tribunal’s first job would be to determine that the parties actually decided that their dispute would be settled through arbitration. Arbitration in the Era of Smart Contracts Arbitration in the Era of Smart Contracts 08. Blockchain is a distributed ledger technology, an open source-based innovation that intends to change the way transactions are performed. It is a decentralized database system, and in this article, we will walk you through the basics of blockchain technology and smart contracts, explain why arbitration is beneficial in smart contract disputes, and explore the challenges that may arise in an arbitration procedure. Blockchain Technology in a Nutshell Blockchain is a distributed ledger technology, an open source-based innovation that intends to change the way transactions are performed. It is a decentralized database system. Once a new block is entered into the system, all users add that block to their current blocks and thus a chain of blocks are brought together to create a database. Each block is chained to the previous block and is recorded across a peer-to-peer network using a cryptographic trust and assurance mechanism. Currently, a well-known example of a public blockchain is Bitcoin in which everyone is free to create a wallet, become a miner, and perform transactions.1 However, Bitcoin is only the tip of the iceberg when it comes to blockchain technology. 1 Miners performs transaction verification functions for a fee in the form of newly created bitcoin units. For more information: Ahmet Usta, Serkan Doğantekin, Blockchain 101, p. 123. 2 Alexander Savelyev, Contract Law 2.0: Smart Contracts as the Beginning of the End of Classic Contract Law, p. 15. 3 ICC Dispute Resolution Bulletin, 2018 Issue 1, Robots Replacing Arbitrators- Smart Contract Arbitration, p. 25. 4 Balázs Bodó, Daniel Gervais, João Pedro Quintais, Blockchain and Smart Contracts: The Missing Link in Copyright Licensing?, International Journal of Law and Information Technology, Volume 26, Issue 4, Winter 2018, p. 312. Available at: https://doi.org/10.1093/ijlit/eay014 Smart Contracts One of the most promising features of blockchain technology is the development of smart contracts.2 Smart contracts are a set of codes embedded in blockchain that enables parties to engage in transactions by performing specified actions subject to certain conditions. It can be described as pieces of code stored on a blockchain that read and write data in that blockchain’s database and are triggered by blockchain transactions. Smart contracts operate via distributed nodes (computers) that can be in different jurisdictions. Smart contracts are conditional in nature as they are executed only if the specified conditions are met. One of the most notable features of smart contracts is that they are selfenforcing by nature. Once a smart contract is concluded on a blockchain system via digital signatures, the smart contract executes itself independent of the parties when the conditions are met. For example, imagine a smart contract based on an insurance relationship that includes the provision “once the temperature decreases to 0° Celsius, a transfer of assets will take place from the insurance company’s wallet to farmer X.” In the event that the temperature falls to or below the prearranged 0° Celsius and this information is provided to the system by oracles (third parties providing information and data to the blockchain system), the smart contract automatically initiates the action “transfer assets from the insurance company.”3 Currently, only digital assets that exist on blockchain may be transferred via smart contracts, but in the future, the application of smart contracts may expand beyond cryptocurrency assets to other information that may be recorded on blockchain such as copy rights, vehicle licenses, and real estate deeds.4 34 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 Regulatory Challenges with Regard to Drones Used for Both Recreational and Commercial Purposes 35 Over the course of the last few years, there has been a sharp increase in both the number of Small Unmanned Aircraft Vehicles (“UAVs”) and the number of UAV pilots in Turkey. According to data shared with the public on 11 October 2019 by the Directorate General of Civil Aviation, the number of UAVs across Turkey has increased to 32,100 while the number of UAV pilots has reached a total of 48,000. Considering that there were only 8,349 UAVs in 2016, 20,813 UAVs in 2017, and 27,560 UAVs in 2018,1 the market’s rapid expansion will likely continue in the coming years with the help of Turkey’s attempt to produce 100% locally sourced drones. Currently, the Turkish drone market is worth 50 million dollars.2 Drones have become more and more popular for both recreational and commercial users in Turkey. In fact, Turkey comes in sixth in the world for the largest sale of hobbyist drones. In terms 1 https://iha.shgm.gov.tr/public/haberler?ID=1516077 2 http://www.milliyet.com.tr/ekonomi/her-yerde-drone-var-6043036 3 Article 4 of Law No. 5431 on the Organization and Duties of the Directorate General of Civil Aviation, Article 437 of Presidential Decree No. 4 dated 15 July 2018, and the Turkish Civil Aviation Law No. 2920 of industry, a group of GSM operators in Turkey recently developed a technology that utilizes drones as flying base stations to be used during natural disasters. Still, there are major risks that come with having thousands of UAVs flying through Turkey’s airspace day in and day out. Damage to property, interference with air traffic including in-air collisions, and violations of individual privacy are among the most prevalent risks. Therefore, regulatory changes must be executed to preserve the safety and privacy of individuals in accordance with these recent technological developments. However, this technology has bred new hurdles for legislators with regard to covering all aspects of UAV usage. Since existing regulations issued by the Directorate General of Civil Aviation are highly centralized around traditional manned aircrafts rather than UAVs, and since these newly developed innovations bring to light various issues that remain unregulated, there are numerous legislative challenges with regard to drones being used for both recreational and commercial activities. Data protection related issues in particular pose a major challenge for legislators. Below, we will touch upon some of the regulatory challenges faced in relation to UAVs taking into consideration existing legislation relating to the use of drones for both recreational and commercial purposes. Relevant Authority and Legislative Background The Directorate General of Civil Aviation is authorized to issue instructions and directives in order to ensure conformity with international rules concerning UAVs.3 With respect to the above-mentioned authority, the Directorate General of Civil Aviation issued the Unmanned Aerial Regulatory Challenges with Regard to Drones Used for Both Recreational and Commercial Purposes 09. While drones are becoming even more popular every day, the legislation is trying to catch-up in order to ensure their safe usage by imposing an adequate liability regime. The law in several countries requires that a valid arbitration agreement be executed in written form, either directly in the contract or as a separate agreement. At the time of this article’s publication, to the authors’ knowledge, no arbitration proceedings have been initiated concerning a dispute arising out of a smart contract; therefore, we are yet to know whether an arbitration clause within a smart contract would suffice for an arbitral tribunal. To be on the safe side, the best option would be to conclude a written main contract including an arbitration clause or a written separate arbitration agreement. Assuming there is a valid arbitration agreement between the parties, another problem might arise after an ad hoc or institutional arbitral tribunal renders its arbitral award. There may be an arbitral award that party (A) shall pay an amount to party (B). The question then would be how the award is to be executed by the parties. As explained above, smart contracts are a set of codes performing actions based on pre-defined conditions. In order for the arbitral award to transpire in the blockchain world, this arbitral award needs to be entered into the blockchain mechanism. It is argued that an arbitral tribunal may insert its award into the blockchain as an oracle, and accordingly, the smart contract would perform the action ordered by the tribunal.9 In other words, the smart contract would transfer the assets from party (A) to party (B) as per the award. Yet, this may require the tribunal to receive pre-determined access to the smart contract. Even if a valid agreement exists and the arbitral award is successfully entered into the smart contract, there is always the possibility that party (A)’s assets are not adequate in the blockchain system. In this case, party (B) might also want to resort to party (A)’s assets in the non-blockchain world, i.e. through the state court where party (A)’s assets are. That is when the need for enforcement of an arbitral award would arise. 9 ICC Dispute Resolution Bulletin, 2018 Issue 1, Robots Replacing Arbitrators- Smart Contract Arbitration, p. 25; Allen/Lane/Poblet, p. 7. 10 Official Gazette: 26728 12 December 2007. 11 These criteria are set out in Article V of the New York Convention and in Article 54 of the Turkish International Private and Procedural Law No. 5718 The recognition and enforcement of foreign arbitral awards is regulated mainly by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) to which 160 states are contracting parties, including Turkey. Additionally, in Turkey, the International Private and Procedural Law No. 571810 regulates conduct between parties where the New York Convention does not apply. According to these sets of rules, a competent Turkish court must render an enforcement decision for a foreign arbitral award to be executed in Turkey and Turkish courts may only do this if the judgment meets certain criteria.11 One of such criteria is the existence of a valid arbitration agreement between the parties. Above, we briefly mentioned that a valid arbitration agreement must be in written form. As the evaluation of these elements is independent of the competency decision issued by the arbitral tribunal, concern may arise if the state court decides that the arbitration agreement in a smart contract is invalid even if the tribunal decided that there was sufficient basis for competency. Under Turkish law, an arbitration agreement may either be included in the main contract as an arbitration clause or be in the form of a separate agreement. Additionally, an arbitration agreement must be made in writing and must be a written document signed by the parties or in the form of a letter, telegram, telex, or fax exchanged between the parties or via an electronic medium reflecting the parties’ agreement. Likewise, Article II/2 of the New York Convention states that “the term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” At first glance, smart contracts seem to be unable to fulfill the criterion for a valid written agreement. While it may be argued that a smart contract is an electronic medium, there is always the possibility that courts will decide otherwise. In addition, the term “electronic medium” exists in domestic Turkish law, but not in the New York Convention. Neither Turkish courts nor other state courts party to the New York Convention have faced the question yet of whether smart contracts fulfill the written requirement of an arbitration agreement and no easy solution can be found within the doctrine either. Therefore, we reiterate the importance of erring on the side of caution and drafting a separate written arbitration agreement ensure that there are no difficulties in the enforcement of arbitral awards. Final Remarks As blockchain technology progresses, not only cryptocurrencies but any assets registered to blockchain technology will be able to be transferred via smart contracts. This will inevitably lead to the rise of disputes between parties of smart contracts. In this article, we briefly explained the benefits of arbitration as well as the challenges that may be faced in smart contract disputes and provided some temporary solutions to overcome such challenges. Our belief is that with this emerging technology, arbitration will be a more convenient dispute resolution mechanism than litigation. Nevertheless, arbitration is not yet ready for this upcoming technology, so problems may occur in the stages of competency, implementation, and enforcement of arbitral awards. To answer these problems, arbitral institutions and lawmakers need to take action. S. Aslı Budak- Seher Elif Köse Özgüç 36 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 A new UN Treaty: The Singapore Convention on Mediation 37 A new UN Treaty: Singapore Convention on Mediation 10. The United Nations Convention on International Settlement Agreements Resulting from Mediation, known as the “Singapore Convention on Mediation” (“Convention”), provides States international standards for the cross-border enforcement of international settlement agreements resulting from mediation. Vehicles Instruction4 (“Instruction”) on 22 February 2016, which was last amended on 5 July 2019. The Instruction contains provisions for both recreational and commercial users and regulates various topics such as classification, importation, convenience for flight, special flight permits, maintenance and repair, liability, insurance, registration, pilot licenses, no-fly zones, and security. However, UAVs weighing less than 500g do not fall within the scope of the Instruction. Considering the pace of innovation, it is highly likely that many UAVs weighing less than 500g will be used in the near future; therefore, new regulations will need to be introduced as well. Liability Regime Owners and operators of UAVs are liable for damages incurred by third parties.5 If the pilot is below the age of 18, the responsibility will be attributed to the pilots’ legal representatives.6 Similarly, third party liability insurance is required for UAVs weighing more than 25kg and for all UAVs used for commercial purposes regardless of their weight. Additionally, UAVs must be registered with the registration system kept by the Directorate General of Civil Aviation.7 For pilots operating UAVs weighing between 500g and 25kg that are solely used for recreational or sportive purposes, no training is required.8 According to a recently introduced amendment, if the previously mentioned UAVs are used for commercial purposes, pilots must receive training from certified training organizations. Furthermore, according to Article 17 of the Instruction, there are three types of flight zones: 4 http://web.shgm.gov.tr/documents/sivilhavacilik/files/mevzuat/sektorel/talimatlar/2019/IHA_talimati_revizyon3.pdf 5 Article 10 of the Instruction. 6 Article 14 of the Instruction. 7 Article 11of the Instruction. 8 Article 14 of the Instruction. 9 Official Gazette: 25611 12 October 2004. 10 Article 27 of the Instruction 11 Official Gazette: 29677 7 April 2016. 12 https://www.forbes.com/sites/gregorymcneal/2015/01/31/will-recreational-drone-flying-lead-drone-usage-in-2015/#3744d69653ce For UAVs weighing between 500g and 25kg, flight is only allowed between sunrise and sunset and certain meteorological conditions must also be met. The UAVs may not exceed a height of 400ft and the flight must take place away from other human beings and structures as per Article 19 of the Instruction. Pilots are responsible for taking all of the necessary precautions to prevent in-air collusions and to prevent any outside interference that may result in a terror attack or an illegal act in accordance with Articles 20 and 25 of the Instruction respectively. Finally, while there are no specific regulations in the Instruction concerning violations of the right to privacy via UAVs, a single reference is made to Article 134 of the Turkish Criminal Code No. 5237,9 which sets forth violations of privacy via imagery data recording.10 Privacy Considerations The Turkish Personal Data Protection Law No. 669811 and the Turkish Criminal Code No. 5237 are also applicable to violations and crimes committed through UAVs, as these areas are still not completely regulated under the Instruction. Still, these general provisions were enacted long before developments ensued in the field of UAVs; therefore, they do not cover all aspects of drone usage. For this reason, we hope the legislators will quickly harmonize all of the UAV legislation under one single code that can be easily amended in conjunction with new technological developments. Considering that 75.1% of respondents in a survey conducted by SkyPixel, the world’s largest drone photo and video sharing platform, stated that they plan to use drones for photography purposes,12 special regulations should also be enacted to safeguard the individual right to privacy. Since the Turkish Personal Data Protection Law No. 6698 and the Turkish Criminal Code No. 5237 do not currently contain special provisions covering UAVs, the matter should be evaluated in accordance with the general provisions of the mentioned laws. Article 4 of the Personal Data Protection Law No. 6698 sets out the procedures and principles for processing personal data and Article 6 regulates the same for data of a special nature. Since most drones are mounted with high definition cameras, anyone who purchases an off-the-shelf drone could easily hover it over another individual’s private property or use it to gather information by peering into the window of a skyscraper. Therefore, pilots must comply with the mentioned regulations when using their drones for photography and filming. Article 134 of the Turkish Criminal Code No. 5237 sets forth that any person who violates the privacy of another’s personal life shall be sentenced to a penalty of imprisonment for a term of one month to three years, and where such violation of privacy occurs as a result of recording images or sound, the penalty shall be increased by twofold. Still, it is critical to have specific legislation regulating data protection and violations of individual privacy through the use of UAVs in order to appropriately protect the right to privacy. In conclusion, regulatory challenges with regard to UAVs are arising from today’s fast-paced technological developments. A multitude of legal areas may be affected by violations incurred from the use of UAVs, so the legislator is tasked with trying to quickly implement legislation to prevent these potential dangers and cover all of the risks posed by UAVs. So far, the Directorate General of Civil Aviation has done a splendid job in ensuring conformity with international rules while closely monitoring international developments, which is key to keeping ahead. Ece Başaran Küçük – Mustafa Mert Dicle Green Zones Red Zones No-Fly Zones Flight is permitted without any prior consent. Applications must be made to the Directorate General 10 days prior to taking flight to receive permission. Flight is prohibited for these zones and pilots cannot apply for permission to fly in these zones. 38 | Hergüner | Bilgen | Özeke Attorney Partnership - Winter/Spring 2020 39 The Convention also binds each Contracting Party and allows a party to invoke the settlement agreement before the competent authority when a subsequent claim or application related to the settlement agreement is made.10 In order for a Contracting Party to rely on a settlement agreement, (i) the parties’ signatures and (ii) evidence that the settlement agreement resulted from mediation must be submitted to the competent authority of the Contracting Party to prove that the matter has already been resolved.11 The Convention will enter into force once it is ratified by at least three Contracting Parties; however, as of the publication of this article,12 no country has ratified the Convention. How the Convention Applies to Turkey When Turkey ratifies the Convention, it will become part of the Turkish legal system. Six months after Turkey ratifies the Convention, it will enter into force (provided that the Convention is also ratified by at least two other Contracting Parties). The Convention will apply to settlement agreements concluded after the date the Convention enters into force. If a Turkish entity/party is involved in an international commercial transaction, instead of resorting to state courts (litigation) or to arbitration, they may use mediation. At the end of the mediation process, if the parties reach common ground, they can execute a settlement agreement. In the event that the counterparty does not obey its obligations under the settlement agreement, the other party may request its enforcement from a competent authority of the Contracting Party where the assets of the counter party are located. If the assets are located in Turkey, enforcement and execution of the settlement agreement will be carried out by the competent Turkish courts and enforcement offices. 10 Article 3/2 and Article 6 of the Convention. 11 Article 4 of the Convention. 12 As of 20 February 2020. 13 https://www.singaporeconvention.org/news-7aug-signing-ceremony.html; https://www.lawgazette.co.uk/news/singapore-mediation-treaty-attracts-46-sign-ups/5071266.article . Additionally, after executing the settlement agreement, one of the parties to the settlement agreement may bring a parallel claim before the Turkish courts. In that case, once the Convention enters into force in Turkey, the counterparty will be able to invoke the settlement agreement before the competent Turkish authority as a defense mechanism to establish that the matter has already been resolved via mediation. The Bright Future for Mediation The Convention applies to settlement agreements that are (i) a result of a mediation procedure, (ii) international, (ii) commercial, and (iv) were made in written form. Although the Convention has not yet entered into force, it gathered 46 signatories at the very outset at the signing ceremony on 7 August 2019 that hosted ministers and officials from 70 countries.13 The Convention continues to increase its signatories and has now gained over 50 signatories in the past several months, indicating that the Singapore Convention on Mediation may become the “New York Convention” of mediation in the future. Although it remains to be seen how many countries will ratify the Convention, the Convention’s initial popularity indicates that the Singapore Convention on Mediation will bring growth to the practice of mediation, an alternative dispute resolution method used in lieu of litigation and arbitration, in settlement of international commercial disputes.