Guarantees and collateral for acquisition financings in Turkey

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Other than the financial assistance prohibition, which may invalidate collateral or guarantees provided by target companies to third parties to facilitate the acquisition of their own shares, there are no restrictions on guarantees granted by related parties residing in Turkey or abroad, provided that such guarantee, which shall be deemed a related-party transaction, should be at arm’s length and in compliance with transfer pricing rules. It is debatable among legal scholars whether financial assistance prohibition applies to intra-group collateral and guarantees. Although no precedents have been rendered to date regarding this issue, the Turkish Commercial Code explicitly permits intra-group pledges and guarantees if the losses of the security provider are compensated by the parent company. Hence, in our view, this exception should be evaluated on a case-by-case basis by acquisition financiers and their advisors.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

Transactions entered by joint stock (target) companies to provide, non-exhaustively, advance payments, loans, collateral or guarantees for acquisition of their own shares by a third party shall be deemed null and void as per the Turkish Commercial Code. Financial assistance provided by banks or financial institutions in their ordinary course of business for acquisition of their own shares and share acquisitions by company or subsidiary employees are exempted from the financial assistance prohibition. On the other hand, if such transactions (i) reduce capital reserves that must set aside by law or company’s article of association, (ii) violate the rules regarding expenditure of legal reserves or (iii) do not enable the company to allocate legal reserves required by law, these exceptions shall also be null and void.

Unlike EU legislation, there are no explicit conditions or whitewash procedures under Turkish law regarding financial assistance prohibition or its remedy. As such a prohibition does not apply to limited liability companies, the requested collateral may be provided by limited liability companies rather than joint stock companies. To that end, the target company may be converted into a limited liability company prior to the provision of financial assistance transaction. Although there are no precedents, alternatives suggested by legal scholarship are an upstream merger of the target company into the acquiring entity, a downstream merger of the acquiring company into the target company, the target company’s acquisition its of own shares from the acquiring company, and capital decrease or dividend distribution at the target company level. Making target companies and purchasers parties to facility agreements as joint and several debtors and guarantors is also an ordinary market practice. However, such a transaction falls within the prohibition and hence is exposed to the risk of being deemed null and void. Interpretation by Turkish courts as to whether these alternatives may be considered circumvention of law remains unclear, as no precedents have been rendered to date.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

A pledge over the target company’s shares is the most preferred collateral in acquisition financing, as it does not fall within the scope of financial assistance prohibition. Other common security types are a pledge over movable assets, a pledge over bank accounts, assignment of receivables (eg, the target company’s dividends), mortgages, suretyships or guarantees. Although a floating charge is permitted (eg, movable pledge over stocks of commercial enterprise) under Turkish law, a pledge over all company assets (blanket lien) cannot be established. Alternatively, all of the current and future movable assets of an enterprise may be pledged without transferring usage rights under a movable pledge agreement. Other than movable assets, each security should be separately granted, as each type has its own validity and perfection requirements (eg, a mortgage over immovables should be established before the relevant title deed registry).

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Each type of collateral foresees different validity and perfection requirements.

A mortgage security can only be established by executing a written agreement in official form before the title deed registry.

A pledge over movable assets can only be established by executing a movable pledge agreement, which is prepared electronically in the central registration system (TARES) before a notary and by registration of such agreement in the TARES.

To establish a pledge over limited liability company shares, the pledge agreement should be executed before a notary. As for pledges over joint stock company shares, a written pledge agreement should be executed and share certificates (if issued) should be delivered to the pledgee.

A pledge over joint stock company shares listed on the stock exchange may be established through a written pledge agreement and electronic registration before the central registry agency (MKK).

An assignment of receivables agreement is also required to be executed in written form, preferably before a notary, in order to crystallise the perfection date.

Guarantees and suretyships granted by Turkish residents in favour of non-residents must be notified to the Turkish Ministry of Finance within 30 days from the issuance date. This notification is only for statistical purposes and does not constitute a perfection requirement.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

In principle, there are no renewal requirements for Turkish law collateral. Depending on the transaction type or pursuant to requirements foreseen under certain laws, the parties may choose to establish collateral for a limited period (eg, a mining licence mortgage cannot be established for a longer time than the validity term of the mining licence). If this is the case, the collateral should be renewed or extended prior to the expiry of such period.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

Turkish law does not require consents to be obtained from a works council or similar body for provision of guarantees or other security by the company. However, if the collateral grantor is a listed company and grants collateral or guarantee in favour of third parties within its ordinary course of business, the provision of such collateral or guarantee should be approved through a board resolution adopted with affirmative votes of the majority of independent board members.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

In principle, collateral may be granted in favour of all lenders on a pro rata basis, as security interests are ancillary rights to underlying obligations. Nevertheless, although there is no explicit regulation on the concept of parallel debt under Turkish law, it is common for parallel debt structures to be included in financing transactions and for collateral to be created in favour of an agent acting in the name and on behalf of lenders. If the collateral is established on a pro rata basis in favour of all lenders:

• secured assets that require physical delivery (eg, share certificates for pledge over shares) shall be preserved by one of the lenders in the name and on behalf of other lenders; and
• in cases where a lender assigns its portion to a new lender, security arrangements should also be amended and the new lender should accede to collateral accordingly.

Turkish law also allows other types of collective collateral arrangement (eg, joint creditorship) which may be structured depending on the specific needs of the transaction parties.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

There are no explicit rules in relation to protection to creditors prior to the release of collateral. Accordingly, the release process may be time-consuming in certain cases and creditors should ensure before releasing the collateral that they have received and collected all outstanding debts.

Describe the fraudulent transfer laws in your jurisdiction.

Fraudulent transfers are generally regulated under the Turkish Code of Obligations and the Turkish Execution and Bankruptcy Law, pursuant to which any disposals performed by an insolvent party that are detrimental to its creditors are deemed null and void. Transactions (i) within two years prior to execution or insolvency that were made without any consideration, (ii) within one year prior to execution or insolvency that included non-monetary payments, advances, deed restrictions or establishment of collateral for a then-current debt, and (iii) within five years prior to insolvency that were made with the intention of detriment to its creditors may be subject to cancellation.

Creditors should prove that the third-party purchaser was aware or should have been aware of the insolvent party’s financial condition and that the insolvent party was acting in bad faith or not as a prudent merchant. However, bad faith of the third-party purchaser is presumed in transfers of commercial enterprise and related party transactions. Fraudulent transfers of the deceased may also be subject to cancellation as per provisions of the Turkish Civil Code and the Turkish Code of Obligations.