Category: Turkiye

With the Communiqué on Principles Regarding Companies Whose Shares Will Be Traded on the Venture Capital Market [II-16.3] [“Communiqué”] published in the Official Gazette on 18.5.2023, the procedures and principles regarding the sale of non-public joint stock companies to qualified investors for trading in the stock exchange came into effect.

The draft for the Communiqué were previously published for public feedback in September 2022. While the regulations in the draft were mostly implemented as is by the Communiqué, the threshold values in the draft were decreased.

You can find our article on the draft of the Communiqué here. In this article, we covered the key matters of the procedures and principles brought by the Communiqué.

What Does the Communiqué Offer?

Due to the Communiqué, joint stock companies that do not desire to offer their shares to the public but wish to sell the shares to qualified investors by being traded on the stock exchange can now operate in Istanbul Stock Exchange as publicly traded companies. In this framework, non-public joint stock companies will be traded on the Venture Capital Market [“VCM”], which is established as a separate market, and will be able to offer their shares to qualified investors through capital increase.

Within the scope of the Communiqué, some requirements are stipulated to be complied by joint stock companies that wish to issue their shares to the VCM through capital increase. These requirements are as follows:

• Harmonizing the articles of association of the joint stock companies with the Capital Markets Board [“CMB”] regulations,
• Making a decision regarding partial or total limitation of the right to purchase new shares, excluding joint stock companies with the registered capital system, and
• The prospectus’ approval by the CMB, as determined by the CMB.

Apart from these, the financial statements of joint stock companies whose shares will be traded in the VCM for the previous year must have (i.) total assets exceeding 20 million Turkish Liras, (ii.) net sales revenue exceeding 10 million Turkish Liras and (iii.) and a registered capital of at least 10 million Turkish Liras must be fully paid in order to transition to the capital system.
Joint stock companies that meet the above-mentioned conditions will be able to be traded by qualified investors by increasing their capital. In other words, non-public joint stock companies will be able to issue their shares to qualified investors. However, these companies are not allowed to sell additional shares or to convert the shares of their present partners that are not subject to capital increase into a listed property. These companies will also not be able to repurchase their own shares.

Liabilities and Exemptions After the Sale of Shares

Joint stock companies traded in the VCM by fulfilling all the requirements are subject to certain obligations after the sale of their shares. Accordingly, the following requirements must be met in order to prevent the related shares from being later withdrawn from the VCM:

• The company cannot initiate an initial public offering within two years following the year it started to be traded on the VCM,
• Within five years at the latest, it should apply to the CMB for public offering through capital increase and ensure that this application is approved by the CMB, in order to ensure that its shares are traded in other markets,
• It cannot be a party to any transaction involving a merger or division.

In addition, companies whose shares are traded on the VCM will also be subject to the public disclosure obligation that is applicable to public companies in case of change of control or transfer of certain amount of shares outlined in the relevant regulation. It is also obligatory for these companies to publish general information on the Public Disclosure Platform and make necessary updates within two business days in case of any change in this information.

On the other hand, these joint stock companies are also granted some exemptions, and they have been exempted from the requirement to publish interim financial reports every three and nine months. Additionally, these companies will not be required to abide by the terms of the Communiqué on Corporate Governance No. II-17.1, Communiqué on Mandatory Tender Offer No. II-26.1, and Communiqué on Material Transactions and Exit Rights No. II-23.3.

Conclusion

With the entry into force of the Communiqué, joint stock companies in Türkiye will be able to issue their shares to the stock exchange -without offering to the public- in the new market called “Venture Capital Market” established within the Istanbul Stock Exchange. In this way, they will be able to reach qualified investors and obtain financial support.

By Zahide Altunbas Sancak, Partner, and Beliz Boyalikli, Associate, Guleryuz Partners

The Aksan Law Firm has advised Simya VC on its investment in Werover, in a USD 400,000 round that also included angel investors Semiramis Kulak and Arman Koklu.

Werover is an Izmir-headquartered software development company that provides predictive maintenance technologies for renewable energy assets via artificial intelligence, IoT, and robotics.

Simya VC provides investment capital, mentorship, and network support to early-stage start-ups.

Earlier this year, Aksan advised Simya on its investment in AI-powered content creation tool developer Evercopy (as reported by CEE Legal Matters on April 21, 2023).

The Aksan team was led by Partner Alper Onar and included Managing Associate Emre Subasi and Associate Rezan Bilge Nisli.

Aksan did not reply to our inquiry on the matter.

Former Counsel Dogukan Berk Aksoy and former Senior Lawyer Ece Alkan have both been promoted to Partner with Yetkin Attorneys at Law in Ankara.

Aksoy is an expert on intellectual property, commercial, corporate and M&A, and dispute resolution legal matters. He has been with Yetkin Attorneys at Law since 2022, when he joined as a Counsel. Prior to that, he spent over four years as a solo practitioner and, earlier, four years as an Attorney at Law with CMS between 2014 and 2018. He started his career with Cinar & Cinar in 2011, as a Trainee.

Alkan, a corporate, employment, and dispute specialist, joined Yetkin Attorneys at Law in 2016, as an Attorney at Law before being promoted to Senior Lawyer. She holds an LLB from Bilkent University and also serves as a member of the executive board at ETKIYAP, a Turkish impact investing platform.

Sadik & Sadik has changed its name to Sadik & Capan with the addition of Nazli Tonuk Capan as Co-Managing Partner. 

As reported by CEE In-House Matters, Capan joined from HSBC, where she worked since 2021. Before moving in-house, she worked for Paksoy between 2018 and 2021, first joining the firm as an Associate and being appointed to Senior Associate in 2021. Between 2013 and 2017, she was an Associate with Eryurekly and between 2010 and 2011 worked as an Associate with Senguler & Senguler Law Firm.

Capan will co-manage the firm together with Serra Sadik Hiziroglu, who has been with the firm since 2020.

The Aksan Law Firm has advised portfolio manager Maxis and venture capital fund Founder One on their investment in Istanbul-based online education company Argedu.

Founder One is an Istanbul-headquartered venture capital fund that specializes in early-stage technology-focused investments. Founded in 2017, Maxis is an Istanbul-headquartered venture capital, private equity, and portfolio management company.

Argedu Education Chairman and CEO Mustafa Karayel stated that the investment tour will also be the beginning of a very important growth period for the company: “We broke new ground in Turkey with our work in the field of digital education. With cinematic visual effects and 3D models, we have built a unique new-generation educational platform that appeals to the visual intelligence of our students and focuses them on success. This investment from Founder One will empower us to become one of the world’s leading impact initiatives.”

Earlier this year, Aksan also advised Maxis and Founder One on their investment in online platform UnoMoi (as reported by CEE Legal Matters on February 8, 2023).  

The Aksan team was led by Partner Alper Onar and included Managing Associate Emre Subasi and Associate Betul Colak.

Aksan did not respond to our inquiry on the matter.

Paksoy has advised the EBRD on its USD 110 million loan to Enerjisa Uretim.

“The financing is provided to fund Enerjisa Uretim’s expansion plan on its existing wind power portfolio and acquisition of another operational wind power plant with a capacity of 55 megawatts,” Paksoy informed.

Enerjisa Uretim is an Istanbul-headquartered energy generation and trade company.

Seven months earlier, Paksoy had advised the HSBC Group on a USD 102 million export credit agency-backed commercial green financing for Enerjisa Uretim (as reported by CEE Legal Matters on October 21, 2022). 

The Paksoy team was led by Partner Sera Somay, Counsel Zekican Samli, and Associate Bulent Ozturk.

Paksoy did not reply to our inquiry on the matter.

The Aksan Law Firm has advised APY Ventures on its investment in Turkish autonomous robot developer Saha Robotik.

APY Ventures is a Turkey-based venture capital firm focused on investing in early-stage technology start-ups.

Saha Robotik is a Turkish company that develops autonomous robots for delivery and labor-intensive purposes.

The Aksan team was led by Partner Alper Onar and included Managing Associate Emre Subasi and Senior Associate Merve Kutukcuoglu Karpuzcu.

The firm did not reply to our inquiry on the matter.

Dentons Turkish affiliate Balcioglu Selcuk Ardiyok Keki Attorney Partnership has advised APY Ventures’ Bilisim Vadisi Venture Capital Fund and Ostim Venture Capital Fund on their investment in Buyutech.

Buyutech is an Ankara-headquartered technology company.

APY Ventures is an Istanbul-headquartered venture capital fund, focusing on investments in Turkey-based technology startups.

The BASEAK team was led by Partner Okan Arican and included Associate Dilruba Guldogan.

BASEAK was unable to disclose further information on the deal.

Former Guner Law Office Partner Omer Erdogan has joined Kinstellar Turkish affiliate Gen & Temizer Ozer as a Partner in Istanbul.

According to Kinstellar, Erdogan has “18 years of experience advising multinational and local companies on their investments in Turkey and abroad.” He is a banking and finance and real estate expert.

Prior to joining Kinstellar, Erdogan spent ten years with the Guner Law Office, nine of which as a Partner. Before that, he spent two and a half with Cetinkaya and, earlier, three and a half years with Dentons legacy firm Denton Wilde Sapte.

“Omer has a proven track record handling complex transactions in Turkey and is well respected by his peers and clients,” Kinstellar Managing Partner Patrik Bolf commented. “We’re delighted that he’s here to add even more strength to the outstanding team we have in Turkey and welcome him to Kinstellar.”

Due diligence review, which is frequent in acquisition transactions, basically refers to an examination of the target company prior to the buyer’s acquisition. This term originates from Anglo-American legal system, and Swiss-Turkish doctrine has yet to generate a new term and thus uses the term “due diligence” in their legal terminology.

The main purpose of due diligence is to rectify the information asymmetry between the parties. At the beginning of negotiations, the buyer’s knowledge of the target company is usually limited to the publicly available information, and this puts buyers at a disadvantage in certain aspects of the transactions such as contract drafting and making appropriate offers. Due diligence review eliminates these concerns and provides an equal negotiation stance for the buyer.

The due diligence review is usually conducted before an acquisition. Even though such review is not directly regulated under Turkish law, it has a direct effect on seller’s liability. According to the Turkish Code of Obligations No. 6102 [“TCO”] art. 222, the seller is not liable for the defects buyer knows or is able to know at the time of the contract’s conclusion.

However, this provision is not mandatory, meaning that the parties may agree otherwise. Indeed, in practice, the effect of due diligence on the seller’s liability is frequently regulated in share purchase agreements.

What is Due Diligence?

Due diligence in corporate acquisitions can be defined as the buyer’s elaborate examination of the target company, whose shares the buyer plans to acquire, prior to the transaction. During this process, an assessment of the target company’s financial and legal status is made through a review that includes but is not limited to the company’s assets, loans, accounts, contracts, and pending lawsuits. Essentially, this review can be conducted prior to or after the share purchase agreement or after the closing. However due to the fact that due diligence review is almost always carried out before the signing in practice, our article focuses on due diligence review conducted prior to signing of the share purchase agreement.

The Effect of Due Diligence to the Share Purchase Agreement

After the due diligence review, the buyer can identify the problems, setbacks or shortcomings of the target company. These may be issues that can be resolved or eliminated before the closing, or they may be potential risks that may arise in the foreseeable future. For example, problems regarding an incomplete certificate may be rectified and the respective certificate may be obtained. Or it may be possible to put subcontracted workers on the company’s payroll, who are legally considered to be the company’s own employees. However, a lawsuit to which the target company is a party, cannot be resolved in a short while. Such problems must be considered during contract negotiations and covered in the share purchase agreement.

Shortcomings identified by the buyer that can be remedied promptly are usually agreed as closing conditions, that is to say that the seller undertakes to remedy the said shortcoming before closing. In above mentioned examples, the seller undertakes to obtain the incomplete license or put the subcontracted workers on company payroll. It is possible to regulate other matters as closing conditions, as well. For instance, if the target company has guarantees in favor of sellers, these may be requested to be removed at closing or immediately thereafter. Finally, if the problem is of a nature that cannot be resolved in a short period of time and it contains considerable risk in the future, they are likely to be regulated under seller’s liability as per the share purchase agreement. The said risk may be directly accounted for in the purchase price, or it may be left on the seller to indemnify the target company or the buyer pursuant to seller’s warranty, or the risk may be shared between the parties.

The Effect of Due Diligence to Seller’s Liability

Due diligence conducted before the sale contract limits the seller’s liability as per TCO art. 222. The seller can no longer be held liable for defects that the buyer knows or should have known within the scope of due diligence. In fact, the seller’s warranties cannot be relied on regarding the defects buyer knows, thus the buyer may only ask the seller to be liable for any damage that may occur in the future due to that said defect. On the other hand, it is possible for seller to give warranty that there are no defects that the buyer should have known.
In short, the seller shall not be liable for any defects the buyer learned or should have learned -unless they give warranties that such defects do not exist- during the due diligence review.

Therefore, it is vital that the due diligence review is conducted with utmost care, considering the seller can avoid liability by claiming that the defect should have been known from the information and/or documents they disclosed during the due diligence review, but the buyer’s consultants did not notice the said defect. The fact that the buyer knew or should have known about the defect must be proven by the seller; however, since it is difficult to prove this issue, it is recommended that the matters that the buyer knows or should know to be regulated in the contract. In any case, keeping a copy of all information and/or documents provided during the due diligence review would be a good strategy on the seller’s side, since they may not be able to access those after the closing.

In practice, the effect of due diligence to the seller’s liability is an important issue during the negotiation phase. The seller aims to confirm all of the information and documents provided during the review is known to the buyer through putting a clause in the share purchase agreement. This strategy called the general disclosure concept, poses a clear risk for the buyer, especially in case of a review process with a multitude of information and documents.
On the other hand, the buyer would like to include all matters that relieve seller of their liability in the agreement. In this scenario, the parties draft a disclosure letter as an addendum to the contract that identifies all of the issues for which the seller will not be liable for.

Conclusion

According to the TCO art. 222, the seller will not be liable for the defects the buyer knows or should have known. Thus, the information and documents disclosed during the due diligence review, which is extremely frequent in M&A practice, may lead to non-liability of the seller. In such cases, disputes may arise regarding various issues, such as the scope of seller’s liability and the defects that could have been understood from the disclosed documents. In order to avoid these problems after the acquisition, it is recommended that the seller and the buyer mutually determine the disclosed matters and agree on the liability regime in the contract.

By Zahide Altunbas Sancak, Partner, Guleryuz Partners