World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Turkey. View the full guide.
Hergüner Bilgen Özeke
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
In recent years, the sectors which attracted the most venture capital in Turkey have been (i) energy, due to Turkey’s sizeable energy demand; (ii) technology (e.g., e-commerce, internet and mobile services), due to many early-stage investments by financial investors into smaller entities; and (iii) manufacturing and services (e.g., food and beverages, chemistry, wholesale and retail trade, and telecommunications).
2) Do venture capital funds require any approvals before investing in your jurisdiction?
International treaties, the Foreign Direct Investment Law numbered 4875 (FDI Law), and the Regulation on the Implementation of the FDI Law are the main legal sources governing foreign direct investments in Turkey. The FDI Law, which entered into force on July 17, 2003, introduced extensive changes in favor of foreign investors by abolishing the approval system and introducing a more liberal system based on the principles of equal treatment between foreign and domestic investments. Therefore, foreign investments are no longer subject to any governmental approval. Under the FDI Law, investors are only required to notify the Ministry of Industry and Technology’s (MoIT) General Directorate of Incentive Implementation and Foreign Investment (General Directorate of Foreign Investment) of certain matters (e.g., the company’s activities or any change in the shareholding structure or share transfer) through an online platform.
In general, mergers and acquisitions are not regulated by governmental bodies, except for those concerning companies operating in regulated sectors. Sectors such as energy, telecommunications, banking, financial services and insurance are regulated by specific legislation and are subject to supervision of certain governmental institutions. Therefore, the parties to M&A deals involving companies operating in regulated sectors may need to obtain certain approvals and clearances from relevant government agencies. Although not exhaustive, some of the authorities regulating specific industries – and whose approval may therefore need to be sought in M&A deals – are as follows:
a. the Energy Markets Regulatory Authority (EMRA) for the energy sector;
b. the Banking Regulation and Supervision Agency (BRSA) for the banking sector;
c. the Undersecretariat of Treasury (UoT) for the insurance sector;
d. the Information and Communication Technologies Authority (ICTA) for the telecommunications sector; and
e. the General Directorate of Mining Affairs (GDMA) for the mining sector.
The Turkish Competition Authority (TCA) is also relevant in M&A deals if the turnovers of the transaction parties exceed certain thresholds. Please refer to Question 4 below for further details.
Finally, parties to the deal usually have to complete certain procedural steps with the relevant trade registry and the Turkish Ministry of Trade (MoT) for registration of governance actions. Appointment of members of the board of directors, amendments to company articles of association, and similar corporate actions need to be registered with the relevant trade registry in order to complete and register the governance processes.
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
Cross-border transactions are not subject to any special legal requirements. However, certain restrictions apply to foreign investments in strategic sectors. For example, if the acquirer is a foreign party and the transaction involves the transfer of any real property, approval from the relevant regulators may be required. Although any acquirer where more than 50% of which is controlled by foreign shareholders can acquire title to real estate or rights in rem (property rights other than ownership) in Turkey, there are restrictions such as (among others) real estate acquisition being listed among the Turkish company’s purposes and within its scope (as stated in the articles of association). Further, legal entities having at least 50% foreign shareholding must notify the government when they acquire real property in Turkey. In addition, for certain strategic sectors, the following restrictions apply:
a. For media service providers, foreign shareholders may not have more than 50% of the registered capital. In addition, foreign persons may not be shareholders of more than two media service providers as per Article 19(f) of the Law on Establishment and Broadcasting Services of Radios and Televisions numbered 6112;
b. For civil commercial aviation operators, the majority of the shareholders must be Turkish nationals as per Article 9 of the Commercial Air Transportation Regulation;
c. For the purchase of real estate in restricted military areas, military security zones, or strategic zones, further requirements may apply as per the Land Registry Law numbered 2644; and
d. For private education institutions, foreign investors may not hold any shares in private education institutions pursuant to the Law on Private Education Institutions numbered 5580.
4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
Transactions exceeding certain thresholds established in the Communiqué Regarding Mergers and Acquisitions Requiring the TCA’s Approval require the approval of the TCA prior to the consummation of the deal. A transaction is subject to the approval of the TCA prior to closing of the transaction if either of the following thresholds are met:
a. The total turnover of the transaction parties in Turkey exceeds TL 100 million (approximately USD 15,490,190) and the turnover of at least two of the transaction parties in Turkey exceed TL 30 million (approximately USD 4,647,057) each, or
b. The asset or activity is subject to acquisition in the transactions and at least one of the parties of the merger transactions have a turnover in Turkey exceeding TL 30 million (approximately USD 4,647,057) and the other party of the transaction has a global turnover exceeding TL 500 million (approximately USD 77,450,950).
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Venture capital investing, i.e., investing in early-stage and start-up businesses, has been on the rise in Turkey in recent years. The main strategy underlying the concept of venture capital is to acquire shares in newly formed or undervalued companies and exit from portfolio companies by selling shares through IPOs, private placements, or individual sales. The number of venture capital and angel investment deals has risen dramatically in the last few years making up almost 80% of all financial investor deals in 2019, particularly in the technology, internet and mobile services sectors, which made up around 30% of the total number of deals. Nonetheless, start-ups have very much become a trend in Turkey in recent years. With more and more business accelerators and incubators arriving on the Turkish start-up scene, this trend is expected to continue to grow in the near future, which should increase both the number and volume of investments made by venture capital firms and angel investors.
Investors may establish themselves in Turkey through acquisition of a Turkish company, which may be in the form of different company types depending on the necessity of the business. The most common types of capital companies used are joint-stock companies (JSC) and limited liability partnerships (LLP). The liability of shareholders of both JSCs and LLPs is limited to their capital contribution, save for potential secondary liability as to outstanding and unpaid public debts of the company. JSCs are better suited for large operations since the legal framework for the corporate governance of JSCs is more developed and more flexible compared to other business forms. Holding companies, telecoms companies, banks, financial institutions, intermediary institutions and insurance companies must be incorporated as JSCs. Also, only JSCs can make a public offering. One advantage of LLPs is that their corporate structure and documentation are well suited to reflect the parties’ commercial understanding. For example, strict share transfer restrictions, ancillary tag-along rights and drag-along rights may only be included in an LLP’s articles of association, which becomes enforceable vis-á-vis third parties.
6) Is there any restriction on rights available to venture capital investors in public companies?
Turkish Capital Markets Board (TCMB) regulations apply alike to local and foreign investors regardless of their domicile. As such, publicly held companies in Turkey can be 100% foreign owned with the exception of certain businesses (e.g., aviation or broadcasting companies), as detailed under Question 3 above. In addition, according to the TCMB legislation, in the event of the acquisition of shares leading to a change of control in the listed company (i.e., the acquisition of more than 50% of the shares or voting rights or the right to nominate a majority of the board), the buyer is required to launch a mandatory tender offer to the remaining shareholders. Also, as a general principle, publicly held companies are required to disclose to the public any inside information relating to transactions or events that may influence the value of their shares or investment decisions of investors. In any case, certain changes in share ownership or management control must be publicly disclosed by investors (e.g., any direct or indirect acquisition of 5%, 10%, 15%, 20%, 25%, 33%, 50%, 67% or 95% or more of the share capital or voting rights).
7) What protections are generally available to venture capital investors in your jurisdiction?
As for contractual protections; there are no mandatory representations, warranties or indemnities to be given by the parties to a corporate reorganization under Turkish law. With the exception of intra-group reorganizations, it is common to obtain certain representations, warranties or indemnities from the parties to a corporate reorganization. Special provisions may also be inserted to the share purchase agreement, such as a break-up fee if one of the parties walks away from the deal without any valid grounds. There is no specific requirement for break-up fees to be enforceable and the parties may contractually agree on and customize break-up fee provisions. Aside from standard contractual protections, venture capital investors may have board appointment or board nomination privileges attached to the shares they hold, which are usually set out in the shareholders’ agreements and the articles of association of the target. It is also common for them to have veto rights over certain matters regarding the management of the company.
Moreover, there are certain protections available to minority shareholders under Turkish law. A shareholder or a group of shareholders owning shares of at least 10% (in publicly held companies: 5%) of the share capital of a privately held company may enjoy the minority shareholders’ rights granted under the TCC. The aforementioned 10% threshold may be decreased by the articles of association (AoA) of a company. The following minority rights are regulated under the TCC: (i) postponement of the financial statement discussions (Article 420); (ii) appointment of an independent auditor (Article 438); (iii) request for a general assembly of shareholders (GA) meeting and addition of an item to the meeting agenda (Article 411-412); (iv) rights as to settlement and release of directors, auditors, and incorporators with respect to the incorporation and capital increase of a company (Article 559); (v) right to request the dissolution of a company (Article 531); (vi) right to request issuance of share certificates (Article 486/3); (vii) right to request the replacement of the auditor (Article 399/4(b)); and (viii) veto rights in GA meetings (Article 421).
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
Warranty and indemnity insurance (W&I Insurance) is relatively new to the Turkish market, and the number of closed deals involving W&I Insurance is still significantly low. It is a tool that is relatively more appealing to individual sellers and financial investors that have not been fully involved in the day-to-day operations of the target and are not willing to be held accountable vis-á-vis the buyer going forward. Recent policies are mostly taken out by non-Turkish deal parties through non-Turkish insurance companies. One major reason why is the lack of a specific legal framework surrounding W&I Insurance. Since W&I Insurance is not among the insurance categories specified under Turkish legislation, the only option for Turkish insurance companies for now is to obtain the approval of the Directorate General of Insurance to issue W&I Insurance policies within the scope of one of the general categories specified in their operation licenses (such as surety, general liability, or financial losses). Very few Turkish insurance companies have officially started to get the relevant authority’s approval for the product.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
The most common form of exit is a trade sale. However, there have been a number of IPOs in the previous years. Trade sales are advantageous because they are relatively easy to arrange. On the other hand, IPOs are likely to yield better proceeds for the investor but are more complicated to launch.
Should the investment fail to generate the expected revenues, investors may pursue an exit plan through put options, if they were negotiated in the shareholders’ agreement or the share purchase agreement. The investor may also try to negotiate a share sale deal with the company’s existing shareholders or other prospective shareholders. Minority shareholders mostly have tag/drag-along rights under the shareholders agreement. It would be wise to negotiate share transfer provisions such as put and call options or tag/drag-along rights in the shareholders’ agreement by specifying the detailed conditions to secure a safe exit from the company. Investors may also acquire preferred shares that offer privileges on dividend distribution and which benefit from the profits at a maximum. Nomination of the directors and voting privileges as well as veto rights are also very favorable.
In addition, according to the TCMB legislation, in the event of the acquisition of shares leading to a change of control in the listed company (i.e., the acquisition of more than 50% of the shares or voting rights or the right to nominate a majority of the board), the buyer is required to launch a mandatory tender offer for the remaining shareholders. Also, as a general rule, shareholders holding a minimum of 10% of a company’s share capital (5% for public companies) are deemed minority shareholders and benefit from a number of minority rights (e.g., may prevent the release of board members and request liquidation of the company).
As for buybacks, the TCC enables JSCs to acquire their own shares provided that such acquisition does not exceed 10% of the JSC’s share capital. In order to do so, the GA should provide authorization to the board of directors; the board of directors will determine the amount to be paid for the acquisition of the shares having regard to the minimum and maximum amounts provided in the authorization. The purchase price should be paid from the distributable reserves of the JSC. The acquisition consent granted to the board of directors by the shareholders cannot exceed five years and such a decision should include nominal values of the shares together with upper and lower limits to be paid or those to be acquired. Only shares that are fully paid-in can be acquired. The foregoing rules also apply to the acquisition of a parent company’s shares by its subsidiary.
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
The challenges faced in financing may cause Turkish entities to conduct IPOs or to conclude partnerships, especially with foreign investors. As noted in Question 5 above, only companies formed as a JSC may make a public offering. Please also refer to Question 9 above for further information regarding the IPO practice in Turkey.
The approval of the TCMB shall be sought in order to launch an IPO. A domestic prospectus (izahname) shall be prepared for the approval of the TCMB as well. The share capital of the company to be IPOed should be fully paid in and the shares should be freely transferable. It is mandatory to retain a brokerage house (aracı kurum) for the offering. Moreover, the AoA of the company to be IPOed shall be adapted to the regulations of the TCMB. If the IPO will be launched for the shares to be issued as a result of a share capital increase (instead of offering the existing shares), the GA should resolve that the statutory pre-emption right of the existing shareholders will be partially or entirely limited.
Hergüner Bilgen Özeke
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The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.