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Transaction formalities, rules and practical considerations
Types of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
Private equity transactions in Turkey usually involve buyouts. In practice, private equity capital is primarily used by companies facing financial distress (but which are operationally viable) and unable to induce profitable investments owing to a lack of adequate financial resource. Additionally, private equity capital is utilised in Turkey by non-distressed companies aiming to develop their existing business and by entrepreneurs wishing to exit companies they have incorporated. Following company restructuring or a term of management over a few years, investors usually remain for two to five years and then seek high returns from a sale to a strategic buyer or a public offering. In some cases, private equity investors sell the target company to another private equity investment firm, as was the case in NBK Capital Equity Partners’ sale of Yudum to Afia International, Carlyle’s sale of Medical Park to Turkven and Esas Holding’s sale of Peyman to Bridgepoint.
Commonly, private equity investments in Turkey are realised by acquiring the target company’s shareholding through either a share subscription or a sale of shares, or both. Share purchase agreements and share subscription agreements are the main instruments for these investments. Another significant instrument is the shareholders’ agreement to grant rights of first refusal and tag-along and drag-along rights, or alternatively, initiating a public offering for the private equity investor.
Foreign interest in Turkish companies has increased significantly since 2006. Major investments by Bancroft, Pinebridge Investments (ex-AIG Fund), Partners in Life Science UK Ltd, Citigroup Venture Capital International, KKR, NBGI, Carlyle Fund, Abraaj Capital, Bain Capital, NBK Capital, ADM Capital and Argus Capital have confirmed this trend. Since then, even larger investments have proved how dynamic the Turkish market has become. Recent private equity deals include the following:
- Franklin Templeton Investments’ acquisition of a minority stake in DeFacto;
- Taxim Capital’s acquisition of a minority stake in restaurant chain Big Chefs and its acquisition of a stake in Netcad;
- Abraaj’s acquisition of Turkent Gıda (ie, KFC Turkey), Netlog Lojistik, Fibabanka, Hepsiburada.com and Yorsan, and stakes in Biletal İç ve Dış Ticaret AŞ (owner of biletall.com ), BRN Yatak and Yu-Ce Medikal (through its newly established Anatolian Growth Capital Fund);
- NBK’s acquisition of Inci Mobilya (Yatsan) and a stake in Sistem 9 Medya;
- Turkven’s acquisition of Medical Park and its joint acquisition of Ziylan Magazacilik along with Gozde Girisim and Bim AS and its joint acquisition of MNG Kargo with the Sancak family;
- Actera’s acquisition of Korozo Ambalaj and its joint acquisition of UN Ro-Ro with Esas Holding; and
- Turkven’s exit from Mavi through an IPO on the Turkish stock exchange and its exit from DP Eurasia through an IPO on the London Stock Exchange.
The healthcare sector has become a significant area of interest for private equity investors. Major deals in the sector include the following:
- Abraaj Capital’s acquisition of Acibadem (Abraaj succesfully exited Acibadem by selling its shares to Integrated Healthcare Holdings Sdn Bhd and Khazanah Nasional Bhd);
- NBK Capital’s acquisition of Dunya Goz (NBK exited Dunya Goz by selling its shares back to the existing shareholders after three years);
- Carlyle Fund’s acquisition of Medical Park (Carlyle successfully exited Medical Park by selling its shares to Turkven);
- Argus Capital and QFIB’s investment in Memorial; and
- Fiba Holding’s investment in Florence Nightingale Hospitals and Şifa Hospitals (Fiba exited these investments by selling its shares back to Florence Nightingale Hastaneleri Holding AŞ).
There is also a strong interest in public entities, which has coupled Turkish companies and foreign funds.
Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?
One of the main problems in private equity transactions is private equity investor representation in the target companies and their subsidiaries’ corporate bodies. In deals involving subsidiaries, the private equity investors’ representatives often decline to join the subsidiaries’ boards. In order to overcome this, contractual obligations are imposed on the seller’s side, mandating the seller to reflect in its subsidiaries those corporate governance principles applicable to the target company. Such obligations, however, cannot be implemented under Turkish corporate governance rules. The Capital Markets Board of Turkey (CMB) issued corporate governance rules applicable only to listed companies (there are approximately 360 companies listed on the Borsa Istanbul stock exchange). While the guidelines on corporate governance are not strictly binding, listed companies are required either to implement the rules and declare their compliance, or explain the reason for their non-compliance in their annual reports. Yet companies have shown a relaxed attitude to such requirements because there are no statutory obligations to apply these guidelines. These corporate governance guidelines mostly relate to issues such as shareholder rights, duties of public disclosure and transparency issues, minority rights, independent auditing and the board of directors’ duties. However, Communiqué No. IV/56, dated 30 December 2011 and issued by the CMB, provides several guidelines for listed companies. This communiqué was replaced by Communiqué No. II-17.1 on 3 January 2014. Together these communiqués require listed companies to comply with corporate governance rules on the right of general assembly participation, board of directors structure, guarantees, pledge and hypothec resolutions, committees within a board of directors and financial rights granted to board of directors members. The criteria and minimum number of independent directors are binding, as are all other provisions concerning independent directors. Communiqué No. II-17.1 also requires listed companies to establish the following committees:
(i) auditing committee;
(ii) corporate governance committee;
(iii) risk determination committee;
(iv) nomination committee; and
(v) salary committee.
However, if the committees under (iii), (iv) and (v) cannot be established because of the organisation of the board of directors, the duties of such committees will be fulfilled by the corporate governance committee.
Under the new Turkish Commercial Code (TCC), effective as of July 2012, various clauses reflecting corporate governance rules are statutorily binding including those concerning announcements for general assembly meetings and publishing corporate information, such as shareholder structure and voting rights, prior to general assembly meetings.
The TCC also provides for new steps toward professional management and several provisions concerning company boards of directors introduce new concepts and fundamental changes, while others fill gaps evident in the repealed code. These include the following:
- allowing non-shareholders and legal entities to become board members;
- reducing the mandatory number of board members to one;
- introducing online board meetings;
- creating a clear distinction between a company’s management and representation, enabling the transfer of ‘authority to manage’ a company to one or more board members or third parties; and
- reformulating board members’ liability - introducing the ‘business judgment’ rule to replace the former ‘prudent merchant’ criteria.
Issues facing public company boards
What are some of the issues facing boards of directors of public companies considering entering into a going-private or private equity transaction? What procedural safeguards, if any, may boards of directors of public companies use when considering such a transaction? What is the role of a special committee in such a transaction where senior management, members of the board or significant shareholders are participating or have an interest in the transaction?
A squeeze-out was not possible in Turkey until a 30 July 2010 decision by the CMB set out principles and procedures for the voluntary delisting of public companies. Moreover, the new Capital Markets Law (CML) entered into force on 30 December 2012, introducing new mechanisms that substantially change Turkish capital markets legislation. The CML also regulated the majority shareholder squeeze-out right, but left it to a communiqué to explain how to exercise the right. In this respect, a communiqué entered into force on 1 July 2014, which was then amended, with the changes introduced on 12 November 2014.
Under the revised system, a shareholder acting alone or in concert with others holding 98 per cent or more of the total votes of a public company can exercise their squeeze-out right to purchase the shares of minority shareholders. Once the majority shareholder becomes eligible to squeeze out the minority shareholders, the minority shareholders will have the right to put their shares to the majority shareholder within three months. If there are any minority shares not sold during the three-month period, the majority shareholder can call the shares.
The minority sell-out price is the highest of the following:
- the weighted average trading price of the shares for the 30 days prior to the majority shareholder’s disclosure of its intent to exercise its squeeze-out right;
- the amount specified in an independent valuation determining the value of each class or group of shares;
- the share price used in transactions such as a tender offer or merger in the last year prior to the majority shareholder’s disclosure of its intent to exercise its squeeze-out right; and
- the weighted average of the weighted average trading price of the shares:
- for the past 180 days;
- the past year; and
- the five years prior to the majority shareholder’s disclosure of its intent to exercise its squeeze-out right.
Furthermore, according to the CMB’s Communiqué on the Principles Regarding Public Disclosure of Material Events, Series VIII, No. 54 (Communiqué No. 54), if an individual, legal entity, or group of individuals or legal entities acting in concert directly or indirectly acquire the management control of a public company, they must make a tender offer to acquire the remaining shares. Management control is deemed to be achieved when the following occurs:
- the share capital or voting rights of the acquirer directly or indirectly reach 50 per cent or more; or
- privileged rights entitling the acquirer to appoint or nominate the majority of the directors are acquired.
Are there heightened disclosure issues in connection with going-private transactions or other private equity transactions?
Disclosure requirements under Turkish securities law are determined by two communiqués: Communiqué No. 54, applicable to listed companies, and the Communiqué on the Principles Regarding Public Disclosure of Material Events of the Corporations Whose Offered Securities are Non-Listed in a Stock Exchange, Series VIII, No. 57 (Communiqué No. 57), applicable to other public companies (ie, joint-stock companies that have over 250 shareholders but whose securities are not listed). Both communiqués require that all events affecting the value of the capital markets instrument or the investors’ decision to buy or sell such an instrument be disclosed to the public. Communiqué No. 54 also introduces the right to postpone disclosure obligations in favour of listed companies.
What are the timing considerations for a going-private or other private equity transaction?
There are no specific timing considerations for private equity investments in Turkey. Typical aspects of a mergers and acquisitions transaction also apply to private equity transactions. In general, the due diligence, drafting and negotiation phases take no less than two months. Communiqué 2010/4 regulates the circumstances that lead to a requirement to notify the transaction to the Turkish Competition Authority (TCA). The TCA issued a new communiqué (Communiqué No. 2012/3) on 31 December 2012 revising article 7 of the current communiqué, which regulates the threshold test. Under these new changes, companies should notify the TCA regarding their merger when the following occurs:
- the combined Turkish turnover of the transaction parties exceeds 100 million liras and the Turkish turnover of each of at least two of the transaction parties separately exceeds 30 million liras; or
- the Turkish turnover of the asset or the activity to be acquired in acquisitions and of at least one of the transaction parties in mergers exceeds 30 million liras and the worldwide turnover of at least one of the other transaction parties exceeds 500 million liras.
Therefore, if a notification threshold is met, a filing must be carried out and TCA approval must be obtained prior to the proposed transaction’s implementation. Please note that following a new amendment to the Turkish merger control regime introduced on 24 February 2017, acquisitions in the same relevant product market by the same undertaking within three years are regarded as a single transaction for the purpose of the calculation of whether the applicable turnover thresholds have been met.
Preparation for notification takes one to four weeks, depending on the complexity of the transaction and the volume of the required translation, and the TCA typically decides within four to six weeks. Therefore, the parties should envisage a period of at least two months between the signing and closing in which to obtain TCA approval. The notification must include the signed or current version of the transaction agreement. A transaction document indicating the agreed general structure of the deal (memorandum of understanding, letter of intent, term sheet, etc) may also be submitted, provided the clearance is obtained prior to the transaction’s signing phase.
Depending on the nature of the transaction and target, other regulators or types of regulators can have jurisdiction over the transaction, such as the Banking Regulation and Supervision Agency for banks and certain other financial institutions, the CMB for brokerage houses, portfolio management companies and other companies that are active in capital markets, the Treasury for insurance and pension companies, the Energy Market Regulatory Authority for energy distribution and generation companies, and the Radio and Television Supreme Council for broadcasting companies.
Dissenting shareholders’ rights
What rights do shareholders have to dissent or object to a going-private transaction? How do acquirers address the risks associated with shareholder dissent?
In principle, shareholders do not have statutory consent or approval rights in straightforward mergers and acquisitions transactions. However, shareholders may have contractual consent or approval rights deriving from a shareholders’ agreement or a joint venture agreement executed between them. In these cases, if all the shareholders possessing these contractual rights are not cooperative regarding the mergers and acquisitions transaction at hand, issues and complications may arise.
Shareholders have a statutory pre-emptive right pro rata to their shareholding regarding shares issued under a capital increase. This should be considered in share subscription deals. This pre-emptive right can only be restricted or revoked based on valid grounds and by a general assembly resolution with an aggravated quorum. With respect to public targets, investors should be mindful of the close supervision of the CMB and lawsuits that may be filed by minority investors.
On the other hand, for going-private transactions there are a number of options for purchasers and shareholders:
Once the majority shareholder becomes eligible to squeeze out the minority shareholders, the minority shareholders will have the right to put their shares to the majority shareholder within three months (see question 3 for more details).
Furthermore, according to Communiqué No. 54, if an individual, legal entity, or group of individuals or legal entities acting in concert directly or indirectly acquire the management control of a public company, they must make a tender offer to acquire the remaining shares (see question 3).
Shareholders also have a sell-out right if the material events listed in the relevant communiqué of the CMB occur.
What notable purchase agreement provisions are specific to private equity transactions?
Representations and warranties are of central importance as they determine the framework of the seller’s liability to the private equity investor. Under Turkish law, a share transfer is deemed a sale of shares (rights) exclusively, and is not considered a sale and transfer of the enterprise. Therefore, the seller’s liability is limited to the respective shares and cannot be extended to the enterprise automatically. Representation and warranties are used to extend this liability. However, the provisions themselves do not achieve this. To protect private equity investors against any breach of representations and warranties regarding the enterprise, the legal character of the representations and warranties must be carefully crafted. There are several ways to structure the legal character of representations and warranties; however, in Turkish legal practice, the legal character of the representations and warranties is often not defined. In our view, the seller’s representations and warranties can be structured as the seller’s primary obligations. Although a debtor’s primary obligations depend on the debtor’s fault under Turkish law, parties may agree otherwise. In this respect, the structuring of the representations and warranties as the seller’s primary obligation is insufficient without also including the seller’s liability for its representations and warranties independent of the seller’s fault in the parties’ agreement. To overcome challenges arising from Turkish law provisions regulating the sale of goods, the seller should also guarantee against negative actions by third parties, such as governmental authorities and other third parties, regarding certain matters (namely, the seller should guarantee that no tax authority will file any legal or criminal complaint against the company and, failing this, the seller agrees to fully indemnify the company and its shareholders). To strengthen the protection of the private equity investor, the parties may agree that the investor’s due diligence does not limit the seller’s liability. In practice, however, sellers often challenge this. In such cases, another approach places the due diligence documents on a DVD attached to the share purchase agreement as an addendum.
Generally, sellers are increasingly convinced of the need for material adverse change clauses, but still attempt to quantify or otherwise limit them. In secondary buyouts where the seller is also a private equity firm, indemnification provisions may involve an amount in escrow. As a private equity fund may be wound up, investors are keen to secure a portion of the seller’s potential liability with an escrow account. Typically, reaching an agreement on this amount is a lengthy, difficult process. In most cases, total liability is limited to a percentage of the purchase price. Remaining issues, such as representations and warranties in private equity investments, share the characteristics of other types of mergers and acquisitions.
Participation of target company management
How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations for when a private equity buyer should discuss management participation following the completion of a going-private transaction?
A significant portion of companies listed in Turkey are managed by a founding family, and consequently, management participation may be comparatively limited. In cases where the family members play a significant role in the business or there are key employees for the business, investors are ready to offer attractive compensation packages, including equity-based incentives or exit bonuses to facilitate the retention of family members or key employees at least for a certain transition period.
Another important development is the conditional capital increase system, a new procedure introduced by the TCC. In line with this new method, a company’s general assembly may decide, by amending the articles of association (AoA) (or by drafting the AoA in such a manner during the incorporation), to conditionally increase the company share capital to enable holders of newly issued convertible bonds and similar debt instruments (ie, company creditors) to exercise their exchange rights, or to enable employees to exercise their stock purchase options, giving them the right to hold shares in the company. The practical impact will be that the conditional capital increase will allow the creation of a legal structure for employee stock option plans. A stock option mechanism was much desired by investors and, with the adoption of this mechanism under the TCC, stock option plans will be easier to realise.
What are some of the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of financing and tax issues related to executive compensation. Can share acquisitions be classified as asset acquisitions for tax purposes?
As a general rule, the gain the shareholder of the target company earns from the sale of its shares is subject to corporate income tax (CIT) at the standard rate of 20 per cent if the shareholder is a legal entity. However, if the shareholder has been holding printed share certificates representing its shares (the limited liability company shares or joint-stock company shares) for at least two years before their disposal, 75 per cent of the gain from the sale of its shares is exempt from CIT, provided the following conditions are met:
- the sale price is received before the end of the second calendar year following the year in which the sale occurred;
- that the portion of the gain benefiting from the exemption is maintained in a special reserve account on the balance sheet for five years; and
- the selling company’s business is not the trading of securities.
If the shareholder of the target company is a real person and if the target company is a joint-stock company, then the gain derived from the sale of his or her shares will be 100 per cent exempt from income tax on the condition that the real person shareholder holds the shares for more than two years and the share certificates representing his or her shares are printed.
If the target company is a limited liability company, then the gain derived from the sale of his or her shares will be subject to income tax of between 15 and 35 per cent.
Regarding stamp tax, papers with regard to the share transfers of joint-stock companies, limited liability companies and partnerships limited by shares is exempt from stamp tax with the amendment made on Stamp Tax Law by Law Amending Certain Laws to Improve the Investment Climate No. 6728, which entered into force on 9 August 2016.
For the acquirer, interest payments made for financing a transaction can be deducted from the tax base. These interest payments must be in compliance with the thin capitalisation and transfer pricing regulations.
Finally, there is no regulation that would classify a share acquisition as an asset acquisition for tax purposes.
Debt financing structures
What types of debt are typically used to finance going-private or private equity transactions? What issues are raised by existing indebtedness of a potential target of a private equity transaction? Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt financing or granting of security interests?
Banks prefer senior (secured) debt for leveraged buyouts. Additionally, a number of mezzanine credit facilities can also be seen in the market.
There are no margin loan restrictions under Turkish law and banks are usually willing to provide credit to finance a target’s acquisition. The new TCC, however, imposes new restrictions on financial assistance, potentially affecting the financing of leveraged buyouts. The new TCC also does not allow the shareholders of joint-stock companies to be indebted to their own companies unless the shareholder has fulfilled its capital contribution commitment in full and company profits cover the preceding year’s losses. Additionally, joint-stock companies may no longer provide an advance, loan or security (eg, share pledge, assignment of receivables) for the acquisition of its own shares by a third party. The former code did not recognise or restrict financial assistance, and thus, private equities could obtain loans from banks to purchase company shares and in return provide the bank the target company’s shares and assets as collateral. Under the TCC, legal transactions breaching this rule will be deemed null and void. The two exceptions are transactions concluded by banks and other financial institutions in their ordinary course of business (where the target itself is a bank or other financial institution) and transactions concluded by the company’s employees (eg, management buyout) or one of its subsidiaries.
How the financial assistance prohibition will apply to limited liability companies under the TCC has yet to be clarified. Provisions for joint-stock companies that apply by reference to limited liability companies are indicated under the TCC; however, the financial assistance prohibition is not listed. The answer remains unclear about whether choosing a limited liability company will allow private equity funds to freely take share pledges from target companies. Moreover, this solution will not be possible for targets operating in regulated industries, which must be organised as joint-stock companies. These sectors include banking, debit and credit cards, financial leasing, factoring, consumer finance, asset management, foreign exchange dealing, brokerage, portfolio management, investment advisory services, insurance, auditing and agricultural and public warehousing.
Another financial assistance model may be considered as the TCC allows centralised cash management and cash pooling in intra-group companies. Intra-group companies can pool their excess cash under the parent company or in an intra-group financing company to be established for this purpose, provided such intra-group companies pooling their excess cash are entitled to request balancing from the parent. In that sense, the pooled cash can be used by the acquiring intra-group company requiring financial assistance.
There are no further restrictions on debt financing for private equity transactions.
In the event of change of control in a target company, the permission of the target company’s creditors (banks, financial institutions and third parties) is often required under the agreements executed between the creditors and target company. The parties to the transaction often require this permission as a condition precedent to the share purchase agreements. A second issue that may arise concerns the target’s collateral and other security for existing indebtedness.
The target company often requests the buyer private equity company to share the risk of security provided by the target company. In practice, private equity investors are not willing to provide or share the risk of such security.
Debt and equity financing provisions
What provisions relating to debt and equity financing are typically found in going-private transaction purchase agreements? What other documents typically set out the financing arrangements?
The regular financing documentation for a private equity buyout usually consists of a loan agreement and the security documentation. Security documentation principally involves share pledges and - depending on the complexity of the transaction - assignment of dividend receivables, commercial enterprise pledges, usufruct rights over the shares, deposit pledge agreements, mortgages over real estate or pledges over the goods of the target and escrow agreements. These broad security requests are rarely accepted by international private equity firms, but are more common in acquisition finance by Turkish companies.
Fraudulent conveyance and other bankruptcy issues
Do private equity transactions involving leverage raise ‘fraudulent conveyance’ or other bankruptcy issues? How are these issues typically handled in a going-private transaction?
Theoretically, in the event of the target’s bankruptcy, the target’s directors may be accused of fraudulent conveyance where the target’s assets secure the acquirer’s financing. No precedent, however, exists in Turkey for this type of fraud. Furthermore, the TCC has significantly limited the application of leveraged buyouts under Turkish law and therefore the possibility of such issues occurring becomes even more remote.
Shareholders’ agreements and shareholder rights
What are the key provisions in shareholders’ agreements entered into in connection with minority investments or investments made by two or more private equity firms? Are there any statutory or other legal protections for minority shareholders?
Standard provisions of a shareholders’ agreement, such as transfer restrictions, board representation, veto rights and option rights, are common features in Turkey. As investors stay for a short time and later exit the company, exit mechanisms such as tag-along and drag-along rights, right of first offer (ROFO), right of first refusal (ROFR) or the initiation of a public offering, which can be major ‘deal breaker’ issues, are also regulated by shareholders’ agreements.
The specific performance of certain provisions, such as transfer restrictions and drag-along rights, may be too cumbersome, unavailable under conventional structures or only achievable after long and arduous proceedings. Such provisions are set forth both in the AoA and shareholders’ agreements. Where identical provisions appear in both the shareholders’ agreement and the AoA, parallel proceedings are initiated. This is because shareholders’ agreements and AoAs are often subject to different laws and dispute resolution mechanisms, such as local litigation and international arbitration. Parallel proceedings further complicate and prolong any resolution of a dispute. Another typical exit provision in shareholders’ agreements for private equity investments in non-public companies is the right to exit through an IPO, whereby the private equity investor has a preferential right to sell its shares. For listed companies, some actions or provisions bear the risk of being deemed unfair to small investors. With the enactment of the TCC, companies no longer have as much flexibility when entering into shareholders’ agreements granting special rights to majority shareholders.
Under the TCC, shareholders representing at least 10 per cent of a company’s share capital are deemed minority shareholders, benefiting from a number of rights. As for public companies, a 5 per cent shareholding is deemed a minority shareholding under the CML. Minority shareholders have the right to do the following:
- prevent the release of liability for board members or auditors, or both;
- request the appointment of a special auditor;
- summon an extraordinary meeting and add additional items to the agenda;
- postpone discussions on the balance sheet in a general assembly meeting for one month;
- demand the winding up of the company;
- demand the issuance of share certificates;
- nominate members to the board of directors; and
- demand the replacement of the independent auditor.
Acquisition and exit
Acquisitions of controlling stakes
Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company?
With respect to private companies no requirement exists. According to Communiqué No. 54, if an individual, legal entity, or group of individuals or legal entities acting in concert directly or indirectly acquire the management control of a public company, they must make a tender offer to acquire the remaining shares. See question 3 regarding management control.
In this respect, an application must be made to the CMB within six business days of the acquisition of the shares transferring management control in order to launch a mandatory tender offer. The mandatory tender offer must be initiated within 45 business days of the acquisition, and must remain open for between 10 and 20 days.
The value of the mandatory tender offer must not be less than the highest price paid for the company’s shares by the acquirer within six months prior to the acquisition that causes the tender offer requirement; such payments include the acquisition that causes the tender offer obligation. Price adjustment mechanisms, additional payment options and other elements increasing the shares’ purchase price that cause the tender offer obligation are also taken into consideration.
What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity buyer?
The exit options are generally regulated by means of a combination of put options, call options, tag-along rights, drag-along rights, ROFO or ROFR. Since the specific performance is not recognised under Turkish law, the enforcement of these options is generally secured with conventional penalties or other security mechanisms, such as an escrow or share pledge.
Tag-along rights, drag-along rights, ROFOs and ROFRs, and their pricing and mechanism, are substantially similar to international market practice. With respect to put and call options, either an automatic right is granted upon the lapse of a specific period of time (eg, expiry of the lock-up period) or the options are triggered with events of default (defined as ‘material breaches of contract’) listed on an item-by-item basis in the shareholders’ agreements. Put and call options triggered in the event of default mainly have cure periods and purchase prices designed in a manner to penalise the material default of the defaulting party (eg, lower fair market value for call options or higher fair market value for put options).
An IPO must be channelled through a joint-stock company. With the enactment of the TCC, as transfer restrictions cannot be included in the AoAs of joint-stock companies, it is expected that most private equity investors will prefer to invest through limited liability companies. Therefore, private equity companies are likely to establish a limited liability company that will later be reorganised into a joint-stock company before an IPO is launched.
One other issue that should be kept in mind is the joint-stock company’s right to ask that the shares not be transferred to the third-party purchaser that is the intended transferee, but to the target company itself, another shareholder or a third party at a price to be determined by a court as fair value. This provision has been established under the TCC and presents a significant problem for minority shareholders in Turkish joint-stock companies.
Representations and warranties are designed for the benefit of the buyer, to define the target enterprise and determine the seller’s liability where the target enterprise is not as represented. Representations and warranties in a share purchase agreement may be structured to serve as contractual penalties to compensate for any shortfall in the buyer’s expected benefit from the transaction, and particularly in the event of a seller’s breach of representation and warranty or its obligations under call or put options.
An alternative mechanism, escrow, is required when part of the shares or consideration must be set aside for a certain period of time under put, call and other share purchase options or as a security for potential representation and warranty breaches. The escrow agreement should be drafted under Turkish law, whereby an escrow agent is the parties’ representative who holds these assets on their behalf. Escrow is typically not a substitute for a pledge; sometimes, however, the escrow agent’s authority is elevated to the level of a pledge.
Portfolio company IPOs
What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?
The most common way to enable an IPO exit is through standard shareholders’ agreement provisions, such as board appointment rights, veto rights and transfer restrictions. Another useful provision imposes obligations to support and vote in favour of the IPO process. With the enactment of the new TCC, such provisions cannot be contained in the AoA, but rather in the shareholders’ agreement. Further to the new TCC, the heightened protection of minority rights and shareholders’ agreements may not harm or limit minority rights in any way.
Under the CML, all capital market instruments that will be publicly offered or issued must be registered with the CMB. Therefore, shares cannot be offered or sold prior to registration. In the event of a violation, the CMB may impose an injunction on the issued shares and sue to annul an unauthorised issuance.
A lock-up period is commonly included to prevent shareholders from trading shares for 90 to 180 days following the first day of trading after an IPO, to protect the post-IPO value of the shares. Unlike European markets, exits from portfolio companies through an IPO are not common in Turkish practice, therefore there is no established practice in this respect, but this trend has started to change with Mediterra Capital’s exit from Logo Yazılım through a sale to international investors and Turkven’s exit from Mavi Jeans through an IPO. Turkven also launched an IPO for DP Eurasia on the London Stock Exchange. These developments in the past two years have convinced the private equities that an exit through an IPO can also be an option in the Turkish market.
Target companies and industries
What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?
Private equity transactions have not focused on any particular industry or type of company. Investments include the following sectors:
- food and drink (KFC, Yorsan, Mey Icki and Yudum);
- the health sector (Acibadem, Dunya Goz, Medical Park, Universal Hospital, Kent Hospital and Memorial Hospitals);
- retail (SPX, DeFacto, Ziylan, Penti, Koton, Yargıcı and Migros);
- transport (Netlog, MNG Kargo, UN Ro-Ro and Kamil Koc);
- media (Digiturk);
- IT (Abraaj’s acquisition of a stake in Hepsiburada.com and Biletall.com and Delivery Hero’s acquisition of Yemeksepeti.com); and
- real estate.
There appears, however, to be a lack of interest or suitable targets in Turkey’s three main industries: financial services (especially banking, but one exception to this is Abraaj’s recent acquisition of a minority stake in Fibabanka), textiles and tourism.
There are no specific regulatory provisions preventing private equity firms from entering any sector. Investment in certain sectors, such as the financial services sector, energy and media, however, require disclosure of the ultimate beneficial owners of the shareholders. Therefore, private equity firms may have difficulties in explaining their fund structure. There are also certain thresholds regarding foreign ownership in certain industries, such as radio and television. Private equity firms have attempted to overcome these thresholds by establishing trust relationships with Turkish individuals (yet compliance with the regulations may still be an issue). This approach may not be practical under private equity firms’ charters, which may prevent a firm from acquiring shares exceeding the statutory limit. There are also several restrictions on foreign ownership of real estate and vessels, which complicate certain investments.
What are the issues unique to structuring and financing a cross-border going-private or private equity transaction?
Dividend payments to certain offshore jurisdictions popular for fund management, such as Jersey, are subject to a 30 per cent withholding tax in addition to the 15 per cent tax applied to all Turkish dividend payments.
Even though no specific regulatory provision prevents foreign private firms’ entry into any line of business in Turkey, disclosure to public authorities is required as to the ultimate (direct and indirect) beneficial owners of the shares in companies conducting certain business activities, such as financial services, telecommunications, energy and media.
In complying with these regulations, private equity investors may have difficulty explaining their fund structures. Moreover, in some industries, such as radio and television, there are certain upper limits on foreign ownership. These thresholds might be overcome by establishing trust relationships with Turkish individuals.
Foreign individuals and legal entities are also partially restricted in the direct and indirect ownership of real property. Foreign entities may purchase real property in limited circumstances under special legislative acts, primarily the Law on Promotion of Tourism, the Petroleum Law and the Law on Organised Industrial Zones. These limitations can be avoided through the establishment of a Turkish legal entity (special purpose vehicle (SPV)) in Turkey, which may even have 100 per cent foreign shareholders. Using a Turkish SPV to purchase property in Turkey is usually realised in one of two ways.
Under the first option, the private equity company incorporates a Turkish SPV, which acquires the real property after obtaining special permission from the regional governorship and other authorities to ensure the property is not in a military zone, private security zone or strategic zone. This procedure is usually completed within one to two months. Once cleared, there are no obstacles to acquiring the real property indirectly through a Turkish SPV. As a further obligation, a Turkish SPV must seek the relevant ministry’s approval for a projection of its project concerning real estate property it has acquired without a building (ie, site only) within two years of acquisition. Upon approval, the commencement and completion dates are designated by the relevant ministry, and the approved project is sent to the land registry for project registration. If the project is not submitted to the ministry within two years of the real estate property acquisition, or not completed by the completion date, the real estate property shall be liquidated within a certain time period designated by the Ministry of Finance, which cannot exceed one year. Otherwise, the real estate property will be liquidated by the state, with proceeds from the liquidation sale paid to the right owner, excluding expenses incurred from the sale.
As a second option, real property may be acquired by a Turkish SPV with 100 per cent domestic capital (namely, with Turkish shareholders). After the acquisition, the private equity investor acquires the shares of the Turkish SPV, and thus indirectly acquires ownership of the real property. In this case, a procedure similar to that of the first option is followed. Unlike the first option, however, the procedure commences after acquiring the real property. Therefore, this procedure leads to post-acquisition approval, rather than approval being a condition precedent to the acquisition. The transferee company serves notice to the Ministry of Economy within one month following the acquisition of the shares, indicating the company’s shareholding structure has changed and a foreign person has become a shareholder. The Ministry of Economy then notifies the General Directorate of Land Registry and Cadastre. The land registry follows the same procedure used for Turkish subsidiaries with a foreign shareholding (as explained in the first option) and confirms with the regional governorship and other authorities that the real property is not in any military zone. The land must be liquidated within six months if the application is rejected. This term can be extended for an additional six months in case there are reasonable grounds for extension. Otherwise, the land will be sold by the Ministry of Finance.
The restriction on acquiring real property by foreign entities plays an important role, especially for private equity firms investing in manufacturing and retail because of the facilities and premises held by the target companies.
Club and group deals
What are some of the key considerations when more than one private equity firm, or one or more private equity firms and a strategic partner or other equity co-investor is participating in a deal?
Club deals are common in Turkey (the most recent ones are the acquisition of Ziylan by Turkven, Gozde Girisim and BİM and the acquisition of UN Ro-Ro by Actera and Esas Holding). Although the largest acquisition in the Turkish market so far was a group deal (BC Partners, DeA Capital and Turkven’s acquisition of Migros), there are no specific regulations regarding private equity firm club or group deals. The terms of a club agreement should be carefully drafted to comply with local competition law. This risk increases if the target has a concession from the government or enjoys a natural monopoly. In these cases, in the absence of competition in the market, any pre-offer deals may be deemed restrictive by the Competition Authority.
Issues related to certainty of closing
What are the key issues that arise between a seller and a private equity buyer related to certainty of closing? How are these issues typically resolved?
Private equity buyers tend to include vague provisions to their benefit in share purchase agreements that entitle them to easily walk away, such as a condition precedent requiring the private equity buyer to obtain all internal approvals. Given the many private equity deals in the Turkish market, sellers are well aware that a private equity buyer may decline to close the transaction, and sellers often seek to ensure that the share purchase agreement includes no subjective conditions precedent solely for the private equity buyer’s benefit.
Another complication that arises in certain private equity deals is the seller’s tendency to renegotiate the financial terms before or after signing. In such cases, the private equity buyer invests in the target jointly with another investor, walks away from the deal or negotiates with the seller to reach financial terms acceptable to both parties.
To ensure a successful closing, private equity buyers include termination fees in share purchase agreements, whereby the sellers must pay termination fees to the private equity buyer if they fail to close the deal.
Update and trends
Update and trends
Have there been any recent developments or interesting trends relating to private equity transactions in your jurisdiction in the past year?
2016 was a year with a low amount of private equity activity in terms of numbers and especially value of deals, but 2017 has shown some signs of recovery. 2018, however, is expected to witness a meaningful increase in private equity deals as the numerous private equity deals concluded between 2011 and 2013 have reached their exit period and investors will look to use the recovery in the M&A market as an opportunity to realise their exits. Furthermore, the government’s efforts to stimulate the economy and ameliorate the investment climate will also contribute to the private equities’ ongoing efforts and this synergy may help to see a busy year in the private equity market.