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Typical transaction structures – public companies
What is the typical structure of a business combination involving a publicly traded real-estate owning entity?
In the Turkish real-estate market, the typical example of a publicly traded real-estate owning entity is real-estate investment company (REIC), which is a special capital market institution established for the purposes of operating and managing portfolios composed of real estate, real-estate projects, real estate-based rights, infrastructural investments and services, capital market instruments or other assets and rights to be determined by the Capital Markets Board (CMB). While investing in REICs has advantageous in certain aspects (eg, there are tax benefits), establishment of a REIC is more complicated when compared to traditional vehicles, such as joint-stock companies (JSCs) and limited liability partnerships (LLPs) and there are very strict establishment requirements (eg, higher capital, quotation and experience requirements for board members). Please refer to questions 35 and 36 for detailed information on REICs.
The other common structures of a business combination involving a publicly traded real-estate owning entity, are:
- direct acquisition of an operative and income generating asset, such as a hotel, by a publicly traded company;
- acquisition of shares of a real-estate owning public company, JSC or LLC by a publicly traded company;
- acquisition of shares of a real-estate owning publicly traded company by a private company; and
- execution of real estate-related agreements (ie, joint-venture agreements, surface right agreements, public concession agreements and private tender contracts) by a real-estate owning publicly traded company.
A successful investment in real-estate-structuring alternatives requires knowledge of all available structures together with their respective legal requirements and tax implications. When investing in one of the alternatives, the investors should take into account tax, regulatory and operational considerations of the relevant structure, together with the limitation in the governing documents of the relevant entities. In addition, (as explained below in detail) the identity of the purchaser is also important while determining the most convenient business combination. The purchaser may be an individual, an operational or non-operational (foreign or local) entity or a special purpose vehicle (SPV).
Despite the foregoing alternatives, Turkey still is a traditional real-estate market, and investors prefer direct investment in property itself instead of capital market instruments. Accordingly, investments through publicly traded real-estate owning entities do not yet constitute a significant portion of Turkish real-estate investments.
Typical transaction structures – private companies
Are there are any significant differences if the transaction involves a privately held real-estate owning entity?
JSCs having more than 500 shareholders or offering their shares to the public, and having shares traded at a stock exchange, are deemed as public companies under Turkish capital markets. Whereas the Turkish Commercial Code (TCC) mainly governs private companies, public companies are subject to both the TCC and the Capital Markets Law (CML) and must comply with the requirements under the CML. Under the CML, information, events and developments that may affect the value and price of capital market instruments or the investment decision of the investors must be disclosed to public by issuers or related parties on the Public Disclosure Platform (PDP).
Under the CML, the transfer of the whole or a significant part of a public company’s assets, and the acquiring or leasing significant amount of real properties from related parties, are defined as significant transactions. As explained in question 8, the general assembly of shareholders’ approval is required to carry out a significant transaction. Therefore, the board of directors must adopt a resolution to convene the general assembly of shareholders with an announcement published in the company’s website and in the PDP. Thus, if the deal involves a privately held real-estate owning entity instead of a publicly traded real-estate entity, the above options, apart from REICs, would still be applicable. However, the investor would bear less regulatory burdens.
Typical transaction process
Describe the process by which public and private real-estate business combinations are typically initiated, negotiated and completed.
Like in all commercial transactions, the first and probably the foremost important issue in the real-estate transaction, is the price. In private real-estate business combinations, price is typically determined by comparable market values, generally based on the seller’s expectation and sometimes based on an appraisal report prepared by professionals. On the other hand, publicly traded companies usually obtain multiple appraisal reports before a transaction to eliminate post-closing risks and liabilities and, in particular cases such as related-party transactions, due to legal requirements. In the recent years, it has also become very common for the publicly traded companies to organise a tender for private agreements or sales of assets.
If the parties decide to consummate the business transaction, the parties generally execute a term sheet, letter of intent (LoI) or an agreement having a similar nature in written form to express the party’s interest in doing the transaction. Such an agreement is generally non-binding and merely outlines the main terms of the transaction and the parties’ conditions for the consummation of the transaction (eg, satisfactory completion of the due diligence, obtaining regulatory and internal approvals).
Subsequently, the purchaser conducts due diligence exercises on the target (eg, legal, financial, accounting, business, tax) through its advisers. The due diligence allows the purchaser to understand strengths, challenges and opportunities of the target’s business, and it helps the purchaser to rationalise the acquisition decision and to establish the purchase price to be paid. If the outcome of the due diligence exercise is satisfactory for the investor, the parties start negotiating binding transaction agreements. In the case of a tender, the investor places a bid for the target upon completion of a satisfactory due diligence review, then the parties execute binding transaction agreements.
In the event of a share deal, the parties enter into binding agreements such as a share purchase agreement (SPA), a joint-venture agreement or a share subscription agreement. Under these agreements, the parties may decide to close the transaction once certain conditions precedent (CPs) are fulfilled. In such cases there will be an interim period where the sellers will remain as the owner of the target but be under the obligation to close the transaction when CPs (eg, obtaining approvals, financing of the transaction) are met or waived.
In the event of an asset deal, the investors either close the transaction by directly purchasing the real property through a title deed transfer before the relevant land registry, if the due diligence is fully satisfactory, or the parties enter into a promise-to-sell agreement, if there are CPs (eg, clean title, zoning plan amendments) that need to be fulfilled until the transfer of title or the purchaser wishes to create a contractual exclusivity over the target real property until the transfer of title.
If such a process involves a public company, then such a company must obtain certain corporate approvals, make a public disclosure and obtain appraisal reports from entities determined by the CMB, depending on the type and size of the transaction.
Law and regulation
Legislative and regulatory framework
What are some of the primary laws and regulations governing or implicated in real-estate business combinations? Are there any specific regulations or laws governing transfers of real estate that would be material in a typical transaction?
The TCC (and the CML, as the case may be), the Turkish Code of Obligations (TCO), Turkish Civil Code and the Land Registry Law and the Zoning Law may be deemed as the main laws to be implicated in real-estate-related business combinations, both for share and asset deals.
Depending on the encumbrances registered on the real property and the location of the real property, there may be additional laws and regulations applicable to the transaction. For instance, if the target real property is located within an organised industrial zone and accordingly bears the ‘organised industrial zone encumbrance’, the parties should take the additional requirements set out under the Implementation Regulation on Organized Industrial Zones into consideration. Similarly, if the target real property is located in an agricultural area, legislation pertaining to agricultural lands will be applicable to the transaction.
The most common supplementary legislation applicable to cross-border transactions are the:
- Foreign Direct Investment Law;
- Regulation on Implementation of Foreign Direct Investment Law;
- Regulation on Acquisition of Real Property and Limited Rights in Rem of the Companies, and its subsidiaries within the scope of article 36 of the Title Deed Law numbered 2644;
- Regulation on the Military Forbidden Zones and Security Zones; and
- Regulation on Administration of Treasury Real Estate.
Cross-border combinations and foreign investment
Are there any specific material regulations or structuring considerations relating to cross-border real-estate business combinations or foreign investors acquiring an interest in a real-estate business entity?
Foreign investors may acquire shares in public (without prejudice to the mandatory tender offer requirement explained under question 9) or non-public companies without any restrictions. The Foreign Investments General Directorate must be notified of such an acquisition of shares within one month following the acquisition.
On the other hand, the Land Registry Law stipulates certain conditions for acquisition of real property by foreign individuals and legal entities. Foreign individuals may acquire real property in Turkey by going through an approval procedure (very similar to the approval procedure for foreign capital companies as explained below) and certain areal and territorial restrictions.
The Land Registry Law prohibits foreign companies incorporated and resident abroad, from directly purchasing real property in Turkey. There are only three exceptions to this general prohibition. Accordingly, foreign companies carrying out their businesses within the scope of the Petroleum Law, Tourism Incentive Law and Industrial Zones Law may acquire real property in Turkey.
Considering the prohibition on the foreign companies, foreign investors generally establish a new subsidiary (an SPV) in Turkey or acquire the shares of an existing company. Following the establishment or share acquisition, the relevant SPV will be deemed as a foreign capitalised Turkish company (FCTC). FCTCs may acquire real property in Turkey by going through an approval procedure before the relevant governorship.
In order to directly purchase a real property, FCTCs are required to apply to the governorship where the target real property is located. The governorship, by corresponding with the military and police departments, determines whether the target real property is located within a military or special security zone, and if so, whether purchase of the particular property by the applicant endangers the national security or not. Upon positive assessment of the governmental authorities, the governorship informs the applicant company and the relevant land registry office that the requested purchase may be completed.
The same principles will apply if a foreign investor directly or indirectly acquires 50 per cent or more shares of a Turkish company owning a real property (ie, share deal). In such event, the relevant company must notify the Ministry of Economy, which will trigger the approval procedure explained above. If the relevant FCTC owns real properties located in military and special security zones and the governmental authorities decide that the new shareholder’s acquisition endangers national security, the company may be forced to dispose of the real property.
Choice of law and jurisdiction
What territory’s law typically governs the definitive agreements in the context of real-estate business combinations? Which courts typically have subject-matter jurisdiction over a real-estate-related business combination?
Under the International Private and Procedure Law, agreements pertaining to the ownership and usage rights of the real properties must be subject to the governing law of the country where such real property is located. In this regard, agreements pertaining to transfer of ownership of real properties located in Turkey must be subject to Turkish law. Moreover, under the Civil Procedure Law, civil courts where the real property is located will have jurisdiction in a prospective dispute.
The general rule explained above will not be directly applicable to SPA (or other transaction documents the such as share subscription agreement, a joint-venture agreement etc) executed for share deals, as the subject of the relevant agreement is the transfer of shares (or establishment of a joint venture, as the case may be), but not the transfer of the real property. Under such agreements, the parties may choose the applicable law at their own discretion.
Approval and withdrawal
What information must be publicly disclosed in a public-company real-estate business combination?
JSCs having more than 500 shareholders, or which offer their shares to the public and whose shares are traded at a stock exchange, capital market institutions (eg, intermediary institutions, investment companies including REICs, organisations and operations of stock and derivatives exchanges, and other organised markets) are subject to the CML and must comply with the requirements under the CML.
Under article 15 of the CML, information, events and developments which may affect the value and price of capital market instruments or the investment decision of the investors must be disclosed to public by issuers or related parties on the PDP. The scope of disclosure depends on the type and size of the transaction.
In addition, under the Communiqué on Principles of Real Estate Investment Companies, REICs (see questions 1 and 35) have additional disclosure obligations (eg, appraisal reports, financial reports, asset purchase agreements, promise-to-sell agreements, information regarding real property sale/acquisition below/above the amounts listed under appraisal reports).
Duties towards shareholders
Give an overview of the material duties, if any, of the directors and officers of a public company towards shareholders in connection with a real-estate business combination. Do controlling shareholders have any similar duties?
A JSC is managed and represented by its board, while an LLP is controlled by its managers. Accordingly, the primary duties of the board members are the company’s representation and management. Along with the duties and powers of company’s representation and management, under Turkish law, members of the board have the following obligations and duties:
- to not enter into transactions with the company;
- to not become indebted to the company;
- non-compete obligations;
- duty of care;
- confidentiality; and
- inviting shareholders to hold a general meeting.
As JSCs are managed and represented by a board, board members play an active role in the investment decisions (including real-estate-related investments). Board members are liable to the company, the shareholders and creditors of the company for losses that occur due to breach of their obligations and duties (eg, duty of care or entering into transactions below market value) arising from law or the articles. If the board delegates its powers and duties to a specific person or persons, it will not be liable for the fault of the person who receives the powers and duties, provided that the board acted with care while choosing that person. The TCC further states that the board cannot be liable for breach of law or the articles or fraudulent acts that are beyond its control, and release from such liability cannot be prevented based on the board’s duty of care.
With regards to the seller legal entity, under article 408 of the TCC, the general assembly of shareholders’ approval is required for the sale of a significant part of the company’s assets. In order to realise such transaction, the board of directors must adopt a resolution to convene the general assembly of shareholders.
On a final note, if the buyer is a Turkish legal entity incorporated as an JSC or LLP, the liabilities of the former’s board members and the latter’s managers will be governed by Turkish law.
What rights do shareholders have in a public-company real-estate business combination? Can parties structure around shareholder dissent or rejection of a real-estate business combination, and what structures are available?
If an individual or a legal entity, acting alone or in concert, take over the control of the management (ie, acquisition of directly or indirectly more than 50 per cent of the voting rights or regardless of such percentage, holding privileged shares to elect or nominate more than half of the board members) of a public company, such individuals/legal entities are obligated to make a mandatory tender offer to purchase the remaining shareholders’ shares. Accordingly, the remaining shareholders will have the right to sell their shares to individuals/legal entities taking over the control of the management.
There are different calculation methods under the Communiqué on Tender Offers for determining the mandatory tender offer price depending on whether or not the company is listed, there is an indirect change of control in the company, or the company has more than one class of shares. For instance, in a listed company, the price cannot be less than the arithmetic average of the daily weighted average stock exchange prices quoted within six months prior to the disclosure date of the SPA and, the highest amount paid by the offeror for the same group shares of the company within six months prior to the mandatory tender offer.
Under the CML, subject to certain exemptions, the shareholders of a public company have an exit right in the event of a significant transaction such as merger, de-merger or transfer of whole or a significant part of company’s assets. To exercise their exit right, the relevant shareholders must record their dissenting votes to the minutes of the general assembly meeting relating the significant transaction.
The price to be paid to an exiting shareholder depends on whether or not the company is listed on a stock exchange. In a listed company, the price will be the arithmetical average of the corrected weighted average prices quoted in the stock exchange for 30 days prior to the disclosure date of the planned significant transaction. In a non-listed company, the price to be paid to an exiting shareholder will be determined by a valuation report.
If, in a public company, a shareholder or a group of shareholders acting in concert acquires 98 per cent of the voting rights of a public company as a result of a tender offer or any other event, this shareholder or group of shareholders will be entitled to squeeze-out the remaining shareholders, subject to the CMB’s approval.
Moreover, in public companies, minority shareholders (those holding 5 per cent of the shares) also have certain rights, such as the right of board representation, calling a general assembly meeting and including an item on the agenda, and appointment or replacement of an independent auditor.
Are termination fees typical in a real-estate business combination, and what is their typical size?
In real-estate-related business combinations, the parties can freely determine the termination fees. In a share deal, the parties generally execute an SPA and negotiate possible damages arising from the breach of the agreement. In the event of a breach, the non-breaching party becomes entitled to request compensation for the damages determined under the SPA. In share deals, the parties generally determine a lump-sum penalty in the event of a contractual breach, the validity and enforceability of which are subject to certain conditions stipulated under the TCO.
Similar to share deals, in asset deals, the parties determine a penalty for a contractual breach, as the main goal under an asset deal is to create a contractual exclusivity over the target land until the transfer of title. In this regard, if the seller does not transfer the target real property to the potential buyer despite the existence of the promise-to-sell agreement, the seller is generally obligated to pay a considerable penalty. Moreover, the potential buyer will also have the right to request transfer of the title from competent courts in such event, whereas this is not possible in a share deal (if the SPA is not executed before a notary public).
In share deals, in order to protect against unsolicited acquisition, the parties generally insert exclusivity provisions into the transaction agreements, the breach of which is bound to a significant penalty amount. In asset deals, in order to create exclusivity over the target property, the investors request execution of a promise-to-sell agreement and insert penalty provisions in the event of exclusivity breach. Moreover, the investors also request annotation of the promise-to-sell agreement with the relevant land registry, which allows the investors to assert their rights under the promise-to-sell agreement to the new owner of the real property (even if the seller sells the target real property to a third party without the permission of the investor).
Are there any methods that targets in a real-estate business combination can employ to protect against an unsolicited acquisition? Are there any limitations on these methods?
There is no legislation governing or prohibiting hostile takeovers. However, hostile takeovers are not common in Turkey as most companies’ corporate structures do not allow acquisition of control through hostile takeovers. A vast majority of the publicly traded companies are controlled by a single or small group of shareholders, and the floating percentage is low, which makes a hostile takeover practically impossible.
How much advance notice must a public target give its shareholders in connection with approving a real-estate business combination, and what factors inform this analysis? How is shareholder approval typically sought in this context?
Under Turkish law, the transfer of a whole or a significant part of a public company’s assets and acquiring or leasing significant amount of real properties from related parties, are defined as significant transactions. The general assembly of shareholders’ approval is required to carry out a significant transaction. Therefore, the board of directors must adopt a resolution to convene the general assembly of shareholders with an announcement published in the company’s website, and in the PDP at least three weeks prior to the date of the meeting (excluding the announcement and meeting days), which must include the agenda of the meeting.
Taxation and acquisition vehicles
Typical tax issues and structuring
What are some of the typical tax issues involved in real-estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?
In an asset deal, sale of real properties owned by individuals is subject to income tax. Capital gains arising from sale of a real property by individuals are subject to income tax at the marginal rate of 15 per cent to 35 per cent, depending on the income gained from the sale transaction. However, real properties owned and held by individuals for more than five years are exempt from the income tax.
Sale of real properties owned by legal entities is subject to corporate tax corresponding to 20 per cent of the income gained from the sale transaction. However, under article 5 of the Corporate Tax Law, 75 per cent of the income is exempt from income tax if the relevant legal entity is owned and held the real property for more than two years, provided that the amount of income exempted from corporate tax is transferred into a special fund account of the company and kept there for 5 years following the year in which the transaction took place. Companies engaged in trading of real property cannot benefit from the corporate tax exemption and their sale of real property is subject to corporate tax even if they hold a real property for more than two years.
Sale of real properties owned by legal entities is subject to VAT corresponding to 18 per cent of the purchase price. Sale of real properties is exempt from VAT if the relevant legal entity owned and held the real property for more than two years. Companies engaged in trading of real property cannot benefit from the VAT exemption. Sale of real properties owned by individuals is exempt from VAT.
In a share deal, transfer of shares is subject to:
- a corporate tax corresponding to 20 per cent capital gains derived from the transaction, if the seller is a legal entity; or
- an income tax corresponding to 15 per cent to 35 per cent depending on the income gained from the transaction, if the seller is an individual.
Capital gains derived from the transfer of shares in a Turkish company are:
- 75 per cent exempt from corporate tax; and
- 100 per cent exempt from income tax (if the seller is an individual and the company has issued share certificates representing such shares), if the relevant shares have been held for at least two years prior to their transfer.
Further tax benefits or exemptions may be applicable due to double taxation treaties.
In addition, in order to carry out the real-estate-related business combination, the parties may enter into written agreements, as explained above. Under the Stamp Tax Law, agreements executed in Turkey are subject to stamp tax. The stamp tax rate is 9.48 per thousand (0.948 per cent) of the value of the agreement, customarily determined by reference to the highest monetary figure in the agreement. The ceiling amount is 2,135,949.30 lira for 2018. As per a recent legislation change in 2017, SPAs and promise-to-sell agreements pertaining to commercial real estate and residences are now exempt from stamp tax.
Moreover, if the transaction is an asset deal, as the transfer of the target real property must be carried out through the official sale transaction before the land registry, this will lead to land registry fees. Under the Fees Law, the buyer and the seller are separately obligated to pay 2 per cent of the official purchase price (ie, 4 per cent in total) as land registry fees. In addition, as per a recent legislation change, this amount was temporarily reduced to 1.5 per cent for residences and workplaces until 31 October 2018.
Mitigating tax risk
What measures are normally taken to mitigate typical tax risks in a real-estate business combination?
In order to mitigate tax implications in asset deals and share deals, the parties insert provisions to the transaction agreements, avoiding the buyer’s liability pertaining to tax debts of the seller before the date of the transaction. In an asset deal, if the buyer decides to directly purchase the real property without executing a promise-to-sell agreement, the buyer generally requests that the seller pays the outstanding real-estate tax of the real property, if any.
Considering the high tax amounts explained under question 14, the tax implications are very important to structure the transaction. In order to find the most tax-efficient structure, investors engage professional tax consultants. These consultants determine possible tax implications of the transaction and develop the most suitable business model for carrying out the transaction. For instance, if the target real property is owned by a legal entity, investors prefer a share deal in order to avoid 18 per cent VAT and the land registry charges explained under question 14.
Types of acquisition vehicle
What form of acquisition vehicle is typically used in connection with a real-estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?
The types of capital companies most commonly used by foreign investors are JSCs and LLPs. A JSC is defined as a company whose capital is fixed and divided into shares. An LLP has some characteristics of a personal company. The fields of activity, operations, and other corporate matters of both types of companies are governed by their articles of association (articles), within the parameters set out under the TCC. In terms of tax liabilities, JSCs and LLPs have similar structures and there are no significant differences between these two company types.
In addition, as mentioned in our responses to question 14 above, depending on the size of the contemplated transaction and the tax implications, investors may consider establishing a REIC for real-estate-related business combinations (despite its long and cumbersome incorporation procedure and complex shareholding structure), as all income of REICs, including capital gains, portfolio management income, interest and dividend income, are exempt from corporate tax and REICs may distribute dividends without withholding tax.
Board considerations in take-private transactions
What issues typically face boards of real-estate public companies considering a take-private transaction? Do these considerations vary according to the structure of the target?
Under Turkish law, the only real-estate-related public company type is the ‘publicly held REIC’ (as explained under question 35). The Communiqué on Principles Regarding Real Estate Investment Companies regulates transfer of shares in publicly held REICs. As there are no specific regulations regarding take-private transactions under Turkish law, the rules applicable for all buyers are also applicable for private equities.
Under the applicable legislation, exiting from publicly held REIC status (ie, going or take-private) requires amendment of the articles of association at a general assembly meeting. The company must then apply to the CMB for its consent. The CMB will consent to the amendments only if outsider(s) have made a tender offer to take over all shares of the shareholders who have not attended the relevant general assembly meeting or cast affirmative votes for the amendments at the relevant general assembly meeting. The REIC’s board of directors must prepare a report containing the justifications for exit, the company’s field of activity and projections after the exit, and an analysis of effects of exit on the company. This report must be published in the PDP on or no later than the date of the CMB application. The report is important, as it is one of the items that the CMB will take into consideration while giving a decision on whether or not to approve the amendments. If the report is not clear or does not contain sufficient satisfactory information, the CMB may reject the amendments.
The completion period of going-private transactions varies depending on the integrity of the information and documents submitted to the CMB, the company’s swiftness to take the required actions and the CMB experts’ workload. A going-private transaction of a publicly held REIC takes approximately three months.
A general assembly meeting must be held to discuss and resolve the amendment of the articles of association. Following the general assembly meeting, the company must apply to the CMB for its consent on exit from publicly held REIC status.
If there are shareholders who have not attended the general assembly meeting or have not casted affirmative votes to amendments, the company must also carry out a tender offer for a third party to acquire the shares of those shareholders and submit an information note to the CMB in this regard. The actual tender offer process starts within a maximum of six business days following the date of approval of the information form by the CMB and not any later than two months following the date the obligation to make a tender offer arises (ie, date of the general assembly meeting). The actual tender offer period cannot be less than 10 business days or more than 20 business days.
After concluding the tender offer, a general assembly meeting must be held to finalise the going-private transaction. A copy of the Turkish Trade Registry Gazette, in which the minutes of the general assembly meeting is announced, must be sent to the CMB within six business days following the announcement date.
If the amendments to articles of association resulting in exit from publicly held REIC status are not finalised at a general assembly meeting within three months following the date of receipt by the REIC of the CMB’s consent relating to exit from publicly held REIC status, then the CMB’s consent becomes null and invalid.
Time frame for take-private transactions
How long do take-private transactions typically take in the context of a public real-estate business? What are the major milestones in this process? What factors could expedite or extend the process?
The completion periods of going-private and take-private transactions vary depending on the integrity of the information and documents submitted to the CMB, the company’s swiftness to take the required actions, and the CMB experts’ workload. A going-private transaction of a publicly held REIC takes approximately three months.
A general assembly meeting must be held to discuss and resolve the amendment of the articles of association. Following the general assembly meeting, the company must apply to the CMB for its consent to exit from publicly held REIC status.
If there are shareholders who have not attended the general assembly meeting or have not casted affirmative votes to amendments, the company must also carry out a tender offer for a third party to acquire the shares of those shareholders and submit an information note to the CMB in this regard. The actual tender offer process starts within a maximum of six business days following the date the CMB approves the information form and no later than two months following the date the obligation to make a tender offer arises (ie, date of the general assembly meeting). The period of actual tender offer cannot be less than 10 business days or more than 20 business days.
After concluding a tender offer, a general assembly meeting must be held to finalise the going-private transaction. A copy of the Turkish Trade Registry Gazette, in which the minutes of the general assembly meeting has been announced, must be sent to the CMB within six business days following the announcement date.
If the amendments to articles of association resulting in exit from publicly held REIC status are not finalised at a general assembly meeting within three months following the date of receipt by the REIC of the CMB’s consent relating to exit from publicly held REIC status, then the CMB’s consent becomes null and invalid.
Are non-binding preliminary agreements before the execution of a definitive agreement typical in real-estate- business combinations, and does this depend on the ownership structure of the target? Can such non-binding agreements be judicially enforced?
As explained under question 3, in both share deals and asset deals, it is common to execute a non-binding term sheet, LoI or an agreement having a similar nature form to express the potential purchaser’s interest in doing the transaction, regardless of the ownership structure of the target. These non-binding agreements cannot be judicially enforced (ie, the parties are not entitled to request performance of the obligations under the agreement from the counter-party). However, under Turkish law, if parties enter into negotiations for concluding an agreement, they are obligated to act diligently and prudently. If one of the parties breaches these obligations and the non-breaching party incurs damages accordingly, the non-breaching party may raise compensation claims, even if there is no binding agreement between the parties.
Describe some of the provisions contained in a purchase agreement that are specific to real-estate business combinations? Describe any standard provisions that are contained in such agreements.
When negotiating the transaction agreement for an asset deal (ie, the promise-to-sell agreement), the buyer’s main intention is to prevent investments by other third-party purchasers and create a contractual exclusivity over the target land until the transfer of title. In this regard, the buyers generally request an exclusivity provision and annotation of the promise-to-sell agreement with the relevant land registry. However, the sellers can be reluctant to include penalty provisions in the promise-to-sell agreement. Accordingly, exclusivity provisions under promise-to-sell agreements are always hot topic in the negotiations.
Naturally, buyers always wish to obtain the title of the target property free from any encumbrances and make clean title a condition of the closing. However, sometimes, there are encumbrances on real properties used for commercial purposes, as the owner uses the real property as a collateral in its business transactions. In this regard, if the encumbrance is of significant importance, buyers generally request de-registration of the relevant encumbrance and make de-registration a CP to closing. In this respect, in every transaction, the parties negotiate the CPs to be inserted in the transaction agreements.
On another note, issues related to zoning plans are almost always discussed in negotiations. If a zoning plan must be amended to ensure that the buyer is able to use the real property for its business activities, the buyer may request that zoning plan amendments should be a CP to closing under the transaction agreement. Moreover, if the buyer is an FCTC, the buyer generally requests that the governorship’s permission for purchasing the real property should be a CP under the promise-to-sell agreement.
Are there any limitations on a buyer’s ability to gradually acquire an interest in a public company in the context of a real-estate business combination? Are these limitations typically built into organisational documents or inherent in applicable state or regulatory related regimes?
Except for the mandatory tender offer requirement explained under question 9, there are no limitations on a buyer’s ability to gradually acquire an interest in a public target in the context of a real-estate-related business combination.
Certainty of closing
Describe some of the key issues that typically arise between a seller and a buyer when negotiating the purchase agreement for a real-estate business combination, with an emphasis on building in certainty of closing? How are these issues typically resolved?
See question 19.
Who typically bears responsibility for environmental remediation following the closing of a real-estate business combination? What contractual provisions regarding environmental liability do parties usually agree?
In both share and asset deals, the seller generally bears the responsibility for environmental remediation before the closing of a real-estate-related business combination. If the outcome of environmental due diligence works is not satisfactory for the buyer, the buyer may request insertion of certain specific indemnity and compensation provisions under the transaction agreements. Moreover, the buyer may also request that the seller participate and raise necessary objections in prospective lawsuits to be filed against the buyer in connection with environmental matters. Sellers generally take such claims from buyers into consideration. However, the sellers tend to cap their liability arising from environmental remediation works, whereas the buyers insist on unlimited liability.
Other typical liability issues
What other liability issues are typically major points of negotiation in the context of a real-estate business combination?
In share deals, if the seller has multiple shareholders, buyers generally request that the sellers should be jointly liable for the obligations arising from the transaction agreements, in order to avoid filing separate lawsuits against each of the sellers. In return, the sellers request that they should be liable. Moreover, the sellers generally request that there should be a cap for their liabilities under the transaction agreements, whereas the buyers request unlimited liability.
Under the TCO, limitation of liability provisions under transaction agreements stating that the debtor is not liable for its gross negligence will be invalid. Accordingly, the parties always negotiate the scope of limitation of liability provision in accordance with the mandatory rule set out under the TCO with utmost care.
In asset deals, the sellers generally request that they should not be liable to pay the costs arising from the transaction agreements and the sale transaction. On the contrary, the buyers request that the seller should be liable to bear their part of transaction costs, especially the land registry fees.
Sellers’ representations regarding leases
In the context of a real-estate business combination, what are the typical representations and covenants made by a seller regarding existing and new leases?
Investors generally wish to acquire a target property in a vacant condition. In this regard, the parties insert provisions to transaction agreements stating that the relevant real property is in a vacant condition and the seller did not execute any lease agreements in connection with the target property. Under Turkish law, upon acquiring the title of the target property, the buyer automatically becomes a party to the existing lease agreements executed by the seller. In this regard, if the lease agreement executed with the lessee is commercially feasible (eg, the lease amount determined under the agreement is higher than the average value), investors may also decide to purchase the target real property occupied by a lessee, in order to generate income from the lease agreement. Moreover, the buyer may also request a covenant from the seller stipulating that the lessee will evict the real property within a certain time period, failing which the seller will be obligated to pay a certain penalty or compensation to the buyer (subject to our explanations under question 25). Under Turkish law, it is not common to request representations regarding new leases. However, depending on the commercial understanding of the parties, the parties are entitled to insert covenants regarding new leases to transaction agreements.
Legal due diligence
Describe the legal due diligence required in the context of a real-estate business combination and any due diligence specific to a real-estate business combination. What specialists are typically involved and at what point in the transaction are the various teams typically brought in?
The due diligence works carried out in the context of a real-estate-related business combination differ from share deals and asset deals. In an asset deal, the due diligence has three main components:
- checking the land registry records;
- checking the zoning plans; and
- checking the cadastral records.
It is also recommended to visit the target real property or the site in order to determine the existing status of the real property.
The land registry records contain and indicate a real property’s:
- rights in rem; and
- annotations regarding lease agreements, court decisions, such as preliminary injunction etc., if any.
In this regard, checking the land registry records is vital for determining the representations and warranties (R&Ws) and CPs for the transaction agreements and structuring the transaction. Under the applicable legislation, attorneys at law are entitled to review the land registry records of real properties by visiting the relevant land registry, even if they do not have a power of attorney. In this regard, it is common that legal teams of investors carry out the land registry records check.
Zoning plans indicate the construction conditions for a real property and examination of these plans is especially important for construction projects. Zoning plans also indicate the intended use of the land, which is important for investors to understand whether the real property can be used for commercial, industrial, residential purposes. In this regard, before concluding the transaction, the investor should have the zoning plans examined to determine whether:
- the target real property is in line with its intended use;
- the buildings on the target real property are in line with the applicable legislation; and
- it is possible to carry out any further construction on the target real property.
Inspection of zoning plans and checking the condition of the buildings constructed on the target real property requires technical knowledge. Therefore, investors generally engage construction firms to determine whether buildings on the target real property were constructed in accordance with zoning legislation and meet the requirements of the construction licence or occupancy permit.
A real property’s cadastral records indicate the exact location and borders and dimensions of the real property. If a building is constructed on the land, control of the cadastral record gives the opportunity to verify whether the building has been constructed in accordance with construction licence obtained pursuant to the relevant zoning plans.
In a share deal, in addition to the due diligence works listed above, the investors should carry out a more comprehensive due diligence on the target legal entity (eg, legal, financial, accounting, business, tax), through its advisers. During the due diligence exercise, the buyer’s advisers review whether:
- there are any encumbrances over the shares in the target legal entity;
- there are any share transfer restrictions; and
- the target entity obtained all governmental permits and approvals in order for the target entity conducts its business etc.
In addition, the buyer’s financial and legal advisers review material agreements to which the target entity is a party and guarantees provided by the company to third parties, to determine financial risks of the transaction. If the target legal entity conducts production activities, an environmental due diligence exercise may also be conducted.
How are title, lien, bankruptcy, litigation and tax searches typically conducted? On what levels are these searches typically run? What protection from bad title is available to buyers and does this depend on the nature of the underlying asset?
As explained under question 25, the land registry records indicate the encumbrances established on real properties. In this regard, during the land registry records check carried out before the relevant land registry, the investors’ legal counsels will be able to determine whether there are any mortgages, liens, attachments established on the real property. As per a litigation search, in share deals, the buyers generally request information and documentation regarding their lawsuits from the seller. This information and documentation is either uploaded to virtual data room or delivered to the potential buyer. In asset deals, the litigation search is generally conducted by visiting the competent courthouse during the site visit. Tax searches are conducted by investors’ tax advisers.
If there are significant encumbrances on the target real property that may jeopardise the transaction (eg, a mortgage, an expropriation annotation or a promise-to-sell agreement in favour of a third party) the buyers will request de-registration of the encumbrances until the title deed transfer. In order to ensure that the encumbrances are de-registered, the investors generally insert a provision to the promise-to-sell agreements and make de-registration of the encumbrances as a CP to the closing (ie, the official title deed transfer before the land registry). If the encumbrances established on the target real property are not vital for the closing, investors may decide to purchase the real property as is and request insertion of a specific indemnity provision to cover possible damages arising from the encumbrance.
Representation and warranty insurance
Do sellers of non-public real-estate businesses typically purchase representation and warranty insurance to cover post-closing liability?
Depending on the risks identified or known by the sellers and deal’s size, the sellers may purchase R&W insurance to cover their post-closing liabilities.
Review of business contracts
What are some of the primary agreements that the legal teams customarily review in the context of a real-estate business combination, and does the scope vary with the structure of the transaction?
In a real-estate-related business combination, if the seller has executed a lease agreement in connection with the real property there are strict regulations under the TCO jeopardising their validity, so legal teams generally review the following provisions of the lease agreement within the scope of the due diligence works:
- the validity of penalty provisions; and
- the rental fee and rental fee increase related provisions.
For instance, under the TCO, in lease agreements executed for a specific term, the lessor is not entitled to terminate the lease upon expiration, based only on the fact that the term of the lease has expired. Without prejudice to other termination rights granted to the lessor, at the end of 10 years of extension, the lessor may terminate the lease without any cause by notifying the lessee with three months’ notice prior to the start of each following rental year. In this regard, if the buyer acquires the real property together with a lease and it believes that the lease agreement will expire at the end of the term, the buyer should realise that it will only be able to evict the lessee after the 10th extension year and structure the transaction accordingly.
Moreover, in order to carry out business activities in facilities located in the shore, sellers execute usage right or easement right agreements with the Treasury (as the shores are under the possession or control of the Treasury). In this regard, if the buyer intends to carry out a real-estate-related business combination for a real property located in the shore, the legal teams of buyer must review the usage and easement right agreements executed with the Treasury, as these agreements generally include change of control provisions. This will enable the buyer to request necessary remedies under the transaction agreements.
Breach of contract
Remedies for breach of contract
What are the typical remedies for breach of a contract in the context of a real-estate business combination, and do they vary with the ownership of target or the structure of the transaction?
Please refer to our explanations under question 9.
How does a buyer typically finance real-estate business combinations?
The corporate structure and the size of the transaction, the type of the target (ie, asset or share) and the investors’ financial status are the main factors determining the acquisition financing method. The most traditional method in Turkey, for the investors having financial power, is to finance the acquisition deal by using the investors’ own funds. However, due to market fluctuations, cash needs and high acquisition prices and costs, investors acquiring assets or shares usually act conservatively and prefer using acquisition financing from the banks and financial institutions (ie, lenders).
An acquisition financing structure is determined on the relevant investor’s needs and in accordance with applicable regulations. Lenders usually finance asset deals through debt financing in the form of secured debt. Senior term loans are the principal elements of debt financing structure. The amount, term, repayment mechanism of the loan and the collateral package to be provided by the investors are determined under the relevant loan agreement to be executed between the lender and the borrower.
As for the share deals, among other financing structures, a leveraged buyout (LBO) through an SPV incorporated by the investor is the most common and preferred method to acquire shares in the target legal entity. In this structure, the SPV (the investor) acquires controlling shares in the target company for a purchase price that is financed by the senior term loan provided by the lenders.
In order to secure the relevant SPV’s obligations under the relevant loan agreement, the entire or a significant part of the target company’s assets are used as collateral for the loans, along with the assets of the investor. However, in 2012, the TCC introduced the financial assistance prohibition, which prohibits the granting of advances, loans or securities by a target company for the purpose of enabling a third-party company to acquire the target company’s shares.
What are the typical obligations of the seller in the financing?
Sellers are not usually party to financing agreements (eg, loan agreements, security agreements) executed by and between the lender(s) and the investors. In share deals, the investors request that the target company also becomes a party to the financing agreements. However, the lenders usually request inserting certain R&Ws and CPs regarding the target company’s or the target asset or shares’ legal status into financing agreements.
What repayment guarantees do lenders typically require in the context of a property-level financing of a real-estate business combination? For what purposes are reserves usually required in the context of property-level indebtedness?
Collaterals established to secure the investor’s repayment obligations and other liabilities arising from the financing agreements differ for each transaction. Even if investors have the financial power to realise the transaction, investors generally prefer to finance the lower percentage of their investment by their own savings and the remaining parts by using loans, due to the high value of real property investments. In practice, investors execute loan agreements with a term of 10 to 12 years, in order to finance their investments. The maximum amount of a loan is to be determined both by borrower and lender.
Banks and other financing institutions determine the amount of the loan, in line with the borrower’s EBITDA value. Moreover, the parties are free to determine interest rates in line with current market rates which are to be accrued for three, six or 12 months under loan agreements. Financing institutions often require technical, financial due diligence reports and appraisal reports for the real property from loan applicants, which may vary according to the nature of a contemplated project, in order to negotiate the loan amount. In order to secure the receivables, lenders may require securities such as:
- account pledges;
- commercial enterprise pledges;
- share pledges; and
- assignment of receivables.
In practice, the most preferred security is to establish a mortgage on the target real property. The parties must execute an official mortgage deed before the relevant land registry office, and the mortgage deed must be registered with the land registry. A lender is not permitted to automatically gain title over the mortgaged real property upon the debtor’s default. Upon default, the lender must follow special foreclosure proceedings, to be carried out by the competent execution office, and enforce its monetary claims by foreclosure of the mortgages on the relevant real properties.
In a share deal, it is possible to establish a pledge on the deposits in a bank account in Turkey, as a security vehicle. Depending on the amount of the loan and the investor’s credibility, banks may lend money to such an investor, relying on their right to establish a pledge on the investor’s account under their general loan agreement with the investor.
A commercial enterprise pledge (CEP) is a type of pledge that allows banks and financial institutions to create a pledge on all movable property and certain intangible rights of a pledger, without receiving the possession of the collateral. In a CEP, the pledger may continue to use the collateral in its business operations.
Under Turkish law, it is possible to establish a pledge on the shares of capital companies. In this regard, investors may also consider establishing a share pledge over the shares of their legal entity established in Turkey, in favour of a bank, to provide financing for the contemplated investment.
Receivables of entities or individuals may be assigned to third parties for project financing. For instance, investors may assign their rental incomes, arising from agreements to be executed for a shopping mall development project, to a bank for financing the shopping mall construction project.
With the assignment of receivables, all rights relating to such receivables, such as filing lawsuits for collection of overdue payments, claiming default interest for late payments, are assigned to the financing institution. Accordingly, the relevant institution will have the right to collect the investors’ receivables directly from third parties.
The above-mentioned security methods alone are not always sufficient for banks to provide financing to investments. In this regard, the banks may request investors to provide collateral packages in order to increase the bankability of their contemplated investments. Investors generally establish share pledges over the legal entities’ shares and assign their receivables arising from agreements to be executed within the scope of their prospective investments, to increase the bankability of the investment.
What covenants do lenders usually insist on in the context of a property-level financing of a real-estate business combination?
Covenants, R&Ws to be included in the financing documents depend on the type and size of the transaction, as well as the financing structure. These R&Ws are specific for each deal. However, the lenders usually request to include certain standard representations, warranties and covenants regarding encumbrances, distribution of dividends, financial status of the company, taxation, compliance with the applicable legislation, governmental licences, finance documents and additional borrowings from third parties.
Typical equity financing provisions
What equity financing provisions are common in a transaction involving a real-estate business that is being taken private? Does it depend on the structure of the buyer?
The security methods explained under question 32, except mortgages, are also commonly used for going-private transactions.
Collective investment schemes
Are real-estate investment trusts (REITs) that have tax-saving advantages available? Are there particular legal considerations that shape the formation and activities of REITs?
REITs (REICs under Turkish law) are capital market institutions established for the purposes of operating and managing portfolios composed of real estate, real-estate projects, real estate-based rights infrastructural investments and services, capital market instruments or other assets and rights to be determined by the CMB.
A REIC may be established directly as a real-estate investment company, or a JSC may be converted into a REIC by amending the articles of association in accordance with the provisions of the CML. The articles of association of a REIC must be in accordance with the CML. The founding partners, board members and the general manager must meet the conditions required in the applicable legislation.
The initial share capital of a REIC must be at least 30 million lira (or 100 million lira for REICs exclusively managing portfolios composed of infrastructural investments and services). Shares representing a certain proportion of share capital must be issued in return for cash and fully paid in or included in the unconsolidated audited financial statements of the REIC for the last accounting period.
At least 75 per cent of total assets of a REIC established for engaging in activities and operations in a specific field of activity, for investing in a particular project or real estate, or in a particular infrastructural investment and service, must be composed of investments made thereunder.
A REIC must apply to the CMB to conduct a public offering (or if it manages exclusively portfolios composed of infrastructural investments and services; to conduct a public offering or sell shares to qualified investors by private placement) for the shares representing 25 per cent of the initial share capital or issued capital, within three months following its duly establishment or transformation into a REIC.
Private equity funds
Are there particular legal considerations that shape the formation and activities of real-estate-focused private equity funds? Does this vary depending on the target assets or investors?
Real-estate investment funds (REIFs) are funds that enable financing of real property investments by using investment funds and provide investors the opportunity to benefit incomes generated from these investments. Only portfolio management companies and real-estate portfolio management companies holding operating licences issued by the CMB may establish REIFs. Under the applicable legislation, only the qualified investors may benefit from the REIFs.
Compared to similar structures, REIFs provide some advantages to investors in terms of additional revenues, and their investor’s ability to cash out the fund units.