Category: Turkiye

With the Draft Communique on Principles Regarding Companies Whose Shares Will Be Traded on the Venture Capital Market [“Draft Communique”] published in the Official Gazette on 20 September 2022, it will be possible to sell shares of a non-public joint stock company to qualified investors on the stock with the status of a public company. The Draft Communique also regulates the liabilities and exemptions of such companies. It is expected to enter into force soon following collecting public opinion.

Regulations to be Complied with During the Sale of Shares

According to the Draft Communique, the Venture Capital Market [“VCM”] will be established in order for corporations that do not desire to offer their shares to the public but wish to be listed on the stock exchange to make operations in the market. Accordingly, the corporations will be able to sell their shares to qualified investors in VCM through capital increases, allowing for an alternative method of public offering for companies.

Within the scope of the Draft Communique, certain conditions must be complied with during and after the sale of their shares by corporations that wish to offer their shares to the VCM. They are first required to obtain approval from the Capital Markets Board [“CMB”] for the prospectus, the principles of which are governed by CMB. Prior to receiving this approval, the corporation must align their articles of association with CMB regulations. Furthermore, they are required to issue a decision regarding the partial or total limitation of their right to acquire new shares, excluding those that are within the registered capital system. If the prospectus is approved by CMB, the shares will be issued on the VCM for the acquisition of qualified investors. In other words, the company will -in a way- go public with the qualified investors’ participation to the capital increase.

Apart from all these, the financial statements of the corporation whose shares will be traded in the VCM must also meet the minimum limits determined in accordance with 2022 valuations, which stipulate that, shares of the companies prepared in accordance with the CMB regulations, and which have undergone a special independent audit must have (i.) total assets exceeding 50 million Turkish Liras, (ii.) net sales revenue exceeding 30 million Turkish Liras (iii.) and a registered capital of at least 5 million Turkish Liras.

These corporations will apply the method of sale on the stock exchange in the sale of their shares as specified, will not be able to sell additional shares and will not be able to convert the shares of their current partners that are not subject to capital increase into shares that are traded in the stock exchange. In addition, corporations covered by the Draft Communiqué will not be able to repurchase their own shares.

The Liabilities and Exemptions After the Sale of Shares

The respective corporations cannot initiate an initial public offering (IPO) for two years following the offering on the VCM. In addition, within five years of their entry into the VCM, companies must apply to the CMB for public offering through capital increase in order for their shares to be traded in other markets,  and this application must be approved by the CMB, as otherwise, the shares will be deemed to have been removed from the VCM by the stock exchange. Likewise, if these companies go through a merger or demerger, the shares will be deemed to have been removed from the VCM.

In accordance with the Draft Communique, the related corporations are exempted from the obligation to prepare quarterly and nine-month interim financial reports, and furthermore do not have to comply with the provisions of the Communique on Corporate Governance No. II-17.1, Communiqué on Mandatory Tender Offer No. II-26.1 and Communique on Material Transactions and Exit Rights No. II-23.3.

Assessment

With the Draft Communique presented to the public, it becomes possible for joint stock companies that meet the above-mentioned conditions and comply with the obligations to issue their shares to the stock market through capital increase without being obliged to initiate a public offering. In this respect, the options of non-public corporations to list their shares on the VCM as a regulated market, seem quite advantageous compared to the public offering in order to increase their visibility and receive financial support. The Draft Communique is expected to enter into force in the upcoming period.

By Zahide Altunbas Sancak, Partner, and Beliz Boyalikli, Legal Trainee, Guleryuz & Partners

Dentons Turkish affiliate Balcioglu Selcuk Ardiyok Keki Attorney Partnership has advised Qnbeyond Ventures on its investment in FirstBatch.

Qnbeyond Ventures is the corporate venture capital arm of QNB Finansbank, a Turkish bank. FirstBatch is a blockchain technology company.

BASEAK’s team included Partner Okan Arican and Associate Dilruba Guldogan.

BASEAK was unable to provide further information on the deal.

This case summary includes an analysis of the Ankara 2nd Administrative Court’s (“the Court of First Instance”) Sahibinden SoE decision (E. 2022/254, 15.04.2022) in which the Court of First Instance stays of execution of the Board’s decision where the Board imposed an administrative monetary fine on Sahibinden for hindering and complicating the on-site inspection as per Article 16 of the Law No 4054 on the Protection of Competition (“Law No 4054”) based on the grounds that the deleted WhatsApp messages did not contain business related issues and were still accessible from the other employees’ WhatsApp group (21-27/354-174, 27.05.2021).  

The Board’s Assessment on the WhatsApp deletion during on-site inspection

The Turkish Competition Authority (“TCA”) raided Sahibiden’s premises on April 9, 2021 within the scope of an ongoing investigation initiated by the Board to determine whether no-poaching/non-solicitation gentlemen’s agreement exists in labor markets and Sahibinden was part of this investigation. 

The case handlers found out that some of the employees deleted certain WhatsApp correspondences after the commencement of the on-site inspection. In order to be sure that the relevant deletion process was conducted during the on-site inspection, TCA Information Technologies Department’s opinion was requested and the relevant department confirmed based on the log records that the deletion had indeed happened after the on-site inspection begins. Accordingly, the Board imposed a fixed administrative monetary fine of %0.5 of Sahibinden’s gross income for hindering and complicating the on-site inspection as per Article 16(d) of the Law No 4054.

The Board recently adopted a similar approach in its other decisions concerning hindering and complicating the on-site inspection. There are many recent examples where the Board imposed an administrative fine of 0.5% of annual gross revenue of the relevant undertakings due to the deletion of correspondences even the employees were informed that deletion of such during the on-site inspection constitutes hindering or complicating the on-site inspection and leads to the imposition of an administrative fine (Eti Gıda, 29.04.2021, 21-24/278-123; Pasifik Tüketim, 29.04.2021, 21-24/279-124; Medicana, 17.6.2021, 21-31/400-202; Procter and Gamble, 8.7.2021, 21-34/452-227; İstanbul Gübre, 12.08.2021, 21-38/544-265). Recently, on March 3, 2022, the Board imposed fixed administrative monetary fine on Kınık Maden Suları A.Ş. due to the deletion of e-mail and WhatsApp correspondences after the employees were informed that they should not do so during the on-site inspection (03.03.2022, 22-11/161-65). In this decision, the Board concluded that recovering deleted data does not change the conclusion that deletion process during the on-site inspection constitutes hindering or complicating the on-site inspection. The Board confirms this approach in its another recent decision (D-Market, 22-03/35-16, 13.01.2022) by stating that the ability of the case handlers to access the deleted data from different devices does not change the fact that the deletion during the on-site inspection causes hindering or complicating the on-site inspection.

Sahibinden SoE decision on the deletion process

Sahibinden requested stay of execution and annulment of the Board’s fining decision. The Court of First Instance found that (i) Sahibinden internally conveyed an e-mail message to its employees on the date of the on-site inspection at 11:36 to inform that the employees should not delete e-mail messages and mobile conversations, and should provide all documents that the TCA requested during the on-site inspection, (ii) the case handlers can access the deleted conversations from the other employees’ mobile devices, (iii) the deleted messages belonged to the employee’s personnel mobile devices and (iv) the deleted messages did not include business related matters.  

Based on these findings, the Court of First Instance decided that the relevant act does not lead to administrative monetary fine and the Board’s fining decision is unlawful. The Court of First Instance also held that it is clear that if the administrative act subject to the case is applied, Sahibinden will be affected in a way that is difficult or impossible to repair. Consequently, the Court of First Instance decided to stay of execution of the Board’s fining decision on April 15, 2022. 

Subsequently, the TCA objected the Sahibinden SoE decision before the Regional Administrative Court and Ankara Regional Administrative Court 8th Administrative Chamber rejected TCA’s objection against the Sahibinden SoE decision on May 18, 2022. This decision is final and cannot be appealed against. Therefore, the execution of the Sahibinden SoE decision will be stayed.

Conclusion

As seen from the precedents on concealment of evidence during on-site inspections, the Board adopts an aggressive approach and opts to rule that deletion of correspondences during the dawn raid means hindering or complicating the on-site inspection and leads to the imposition of a fixed fine pursuant to Article 16(d) of the Law No 4054 without considering whether the deleted data concerns private content. However, in Sahibinden SoE decision, Ankara 2nd Administrative Court does not follow this strict approach and takes into account the content of the deleted data and the fact that the deleted data could be accessed from other devices. This shows that the Board and the administrative courts do not adopt the same approach when analyzing concealment of evidence during on-site inspections and it seems that the evaluation of the administrative courts on the matter would limit the Board’s strict approach on imposing fixed administrative monetary fine due to hindering or complicating the on-site inspection.

By Gonenc Gurkaynak, Partner, and Cansu Ince, Associate, ELIG Gürkaynak Attorneys-at-Law

The Aksan Law Firm has advised Livzym Biotechnologies on its latest investment round. Caliskan Okkan Toker advised the Turkey Development Fund on its investment.

Livzym Biotechnologies is an industrial enzyme producer and R&D center with an all-Turkish team.

Aksan’s team included Partner Alper Onar, Managing Attorney Emre Subasi, Senior Associate Merve Kutukcuoglu Karpuzcu, and Lawyer Oguz Madran.

Caliskan Okkan Toker’s team included Partners Sezer Caliskan and Mustafa Toker and Associate Basak Kandemir.

The Turkish M&A market never lacked surprises or activity and has always been one to watch, even at times when other markets were navigating doldrums. The rest of 2022 and 2023 are not likely to be exceptions and there is certainly room to be optimistic in terms of increased activity.

A number of factors, both domestic and international, play into Turkey’s hand and fuel the fires of optimism. The war in Ukraine and the ever-increasing number of sanctions against Russia and China appear to be helping Turkey recapture its position as the close-to-home manufacturing hub for European investors. Consequently, we see an increasing number of European manufacturers, in particular, those with a buy and build strategy, looking into Turkish manufacturing businesses. The lower cost of labor, a central location offering logistics advantages, and a gateway to otherwise not accessible markets as well as the size of its domestic market close to 85 million people make mouthwatering returns possible.

Venture capitalists are probably having the best time of their lives in the Turkish markets as activity is buoyant. Capital is not scarce as numerous funds have been raised recently and are looking to invest. Various legislative changes and incentives for technology development contribute to the investment fauna. Turkish tech entrepreneurs are becoming more and more global-minded and US or UK flips followed by Series A deals are common currency. As a consequence of the foregoing, Turkey ranks first in Europe – ahead of the UK and Norway – in terms of investments in the gaming industry, with Turkish startups receiving investments in the amount of USD 333 million in the first six months of 2022.

Turkey’s energy deficit is by now a known phenomenon and keeps fueling both local and foreign investors’ appetite for investing in energy projects, ranging from green energy to classic power plants. Joint ventures are a natural consequence of the foregoing, as Turkish players seek to partner with foreign investors either for financing or technology and know-how transfer reasons.

However, for anyone who has been keeping an eye on Turkey, it is never all sunshine and roses. The war in Ukraine is as much a risk factor as an opportunity. The elections in 2023 may be a concern for some, but it could also be easily argued that the market has already priced all scenarios. Perhaps more importantly, the soaring inflation and devaluation of the Turkish lira make life very difficult for companies that feed off the domestic market and whose revenues are primarily in liras.

Historically, volume business was the name of the game in Turkey, rising on the back of its large consumer base. However, with the devaluation of the lira and inflation, companies with no hard currency income appear to be stagnated and recording no growth in USD terms, although they record lira-based growth. E-commerce/marketplace companies with millions and millions of users are perfect examples of this.

The purchasing power of locals is in decline, and this has a direct impact on business growth. Investors of various PPP projects, typically on toll roads and in healthcare, look for exit opportunities. Companies with export capabilities and focusing primarily on foreign markets are, on the other hand, registering record profits and growth as their costs shrink.

Fintech companies were once the rising stars. We now observe a slowdown in fintech deals as a series of new regulations appear to have triggered more of a wait-and-see approach from investors. Ventures around telehealth solutions also lost a bit of steam as the panic in the early days of COVID-19 seems to be behind, and investors look at these companies with a more conservative lens due to new regulations.

With a few exceptions, Turkey has always been a mid-market deal making space. An interesting recent phenomenon is that the number of mid-market deals appears to be decreasing significantly, with mega deals and lower market deals taking the front stage.

Overall, Turkey remains a hotbed for deals where risk and opportunity walk hand in hand. The market remains as rich as Turkish cuisine, with something for all tastes. One just has to find that which fits their risk appetite.

By Dogan Eymirlioglu, Partner, Balcioglu Selcuk Ardiyok Keki Attorney Partnership

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The labor markets have been disrupted by the COVID-19 pandemic globally and Turkey had its fair share of lockdowns, economic downturns, and unprecedented shifts in the business landscape. One of these structural changes in, and challenges for, the Turkish market is remote working.

Working from home was just an existing perk – usually a one-day-off incentive granted by some companies in Turkey before the pandemic. During the pandemic, it became a widespread work model, also evolving into a hybrid model, especially for people who are not necessarily required to work on site. And we clearly see that this structure is becoming permanent for increasingly more organizations in the post-pandemic future, as employees and employers witnessed its benefits – less commute, fewer office costs, and efficiency (though this one is a never-ending debate). Remote work has never been as high up on the business agenda as it is today, with the trickiest area both for local and international companies located in Turkey: employing foreign citizens in Turkey.

Legal Aspects of Remote Working in Turkey

From a legal aspect, remote working caught Turkey off-guard. The first legislative provisions regarding remote working in Turkish law were included in the labor law in 2016, with only a few clauses including the definition of remote working and one article on the content of its contract. And as the pandemic significantly accelerated the adoption of remote work, companies had to consider the financial costs and safe work environment of their remote workforce. Many questions arose in practice: Which costs of remote employees must be covered by the employer? Should transportation and meal allowances paid for on-site workers continue to be paid also for the remote workforce? What utilities and equipment should employers provide to remote employees? If an accident occurs during the working hours of a remote employee, will it be considered an “occupational accident”? Considering the principle of interpretation in favor of the employee in Turkish law, what will be the approach of the courts against malicious overtime pay demands?

While legal professionals were trying to answer these questions according to the provisions of the existing legislation, the Ministry of Family, Labor, and Social Services published a new regulation on remote working, which came into force on March 10, 2021.

This regulation covers all employees who work remotely under article 14 of the Turkish Labor Act. As per this regulation, many matters such as the costs arising from the arrangements of the workplace, the transition to remote work, and its duration depend on the mutual agreement between the employer and employee, while the employer still holds responsibilities such as informing the employee regarding the occupational health and safety measures, or providing the necessary training.

Open Questions and Remedies

Although the regulation eliminated some of the uncertainties, there are still many questions that will need clear answers – such as the legal consequences of remote working without a written remote working contract, the conditions of work accidents in the remote work model, the failure to agree on which expenses will be covered by the employer, the consequences of overtime work without the employer’s written request – not included in the regulation. Undoubtedly, as remote work is here to stay, the regulatory framework will need to revisit the fast-changing contours of the labor market.

To manage a smooth and compliant transition to remote work,  it is essential for companies to: publish a procedure that includes the principles of remote working; make an additional protocol to the employment contract with the employee and reach an agreement on the transition to remote working; determine the occupational health and safety measures to be taken at home, together with occupational safety experts, and notify employees of these measures in writing; determine which utilities and equipment will be provided by the employer; not to request the employee work overtime; warn the employee in writing if they work overtime without the written request of their manager; and research the reasons for the need of overtime work.

The approach of Turkish courts to the legal problems arising from the remote work model will become clear as further court decisions are made in the future.

By Onur Kucuk, Managing Partner, and Cigdem Soysal, Senior Associate, KP Law

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Turkey, a G20 country, has been experiencing an increase in energy demand with its high-speed economic and population growth which makes it even more dependent on energy imports for primary energy sources. To ensure the security of its energy supply, Turkey has set its mind to increase the share of renewable energy resources, as per its renewable energy and energy efficiency action plans. That being said, besides other obstacles, the country’s priority target cannot be achieved without an innovative financing resource.

Issued Green Bonds

In the last seven years, Turkey has introduced many green financing methods such as green loans, green sukuks, and green bonds. Among others, high investment costs, longer periods for investment returns, and investors’ high-risk perception of green investments make green investments less favorable compared to other investment methods. In this regard, green bonds as a capital market instrument step forth, by reducing the risk and cost of investment by attracting a more diverse base of investors.

The first green bond in Turkey was issued in 2016 by Turkiye Sinai Kalkinma Bankasi (TSKB), with the USD 300 million raised to be used in energy, health, and education projects. The launch of the bond is considered a significant success since the bond was demanded 14 times more than expected. Following the first green bond, several other companies issued green bonds to finance their sustainability-linked projects. Moreover, after TSKB, Turkey’s two biggest banks also issued green bonds to fund the construction of green buildings and renewable energy projects.

Recent Developments

Turkey has proved its commitment to sustainability principles. In 2020, the Turkish Capital Markets Board (CMB) amended its corporate governance regulation which requires public companies to indicate in their annual activity report whether they apply sustainability principles. If they do not, they must give detailed reasons for this and list the social and environmental risks arising from non-compliance by using a template sustainability report published by the CMB within the financial report submission period but, in any case, no later than three weeks before the general annual meeting. Thereafter, in mid-2021, Turkey published the Green Deal Action Plan to harmonize the EU’s actual and planned policy changes by adopting compliant roadmaps for foreign trade.

The Green Deal Action Plan included two specific goals regarding green bonds which are to establish the Sustainable Bond Framework Document, under which Turkey intends to issue green and sustainable bonds in international capital markets, and to draft a guide on green bonds. Not long after, on November 3, 2021, a draft guide on green bonds and green lease certificates was published by the CMB for public review, and later on, on February 25, 2022, the CMB introduced the applicable version of the guide. As of November 12, 2021, the Sustainable Bond Framework Document became applicable to any sustainable financing instrument to be issued by the Republic of Turkey. Also, both the mentioned guide and framework document were drafted as per the principles outlined in the International Capital Market Authority handbooks. Further, the CMB has decided to apply a 50% discount to the administrative fees applicable to capital market instruments to incentivize green investments.

Remarks and Suggestions

Between the invasion of Ukraine and the rapid increase in energy prices, Turkey has suffered from being heavily reliant on energy imports. Considering Turkey’s new economic model, which primarily aims to increase production and exports despite the risks and uncertainties related to its energy supply, Turkey’s priority target to ensure energy supply and maintain, and even increase, its economic growth depends on green energy and, hence, green financing. Accordingly, with the recent and expected interest rate increases, green bonds are expected to be in high demand for green projects, and recession concerns may make green bonds even more appealing for investors, with their low-risk fixed revenue opportunities. 

The volume and amount of the current green bonds may not be considered adequate for Turkey, where its energy needs increase each day and most of its energy supply is provided through imports. So far, Turkey has shown its eagerness to increase green energy through green investments and attract foreign investment through legislative and administrative action.

By Hulya Kemahli, Partner, and Arcan Kemahli, Counsel, CMS Turkey

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In the past few years, Turkey has experienced a veritable tech miracle. A swath of start-ups, primarily in the gaming and e-commerce sectors, has attracted multi-billion-dollar investments and achieved record valuations. Two companies have even reached decacorn status – a valuation of over USD 10 billion.

Act 1 – The Origin Story

“Turkey finally ended its long wait for the first unicorn back in 2020 through the acquisition of Peak Games, a mobile gaming company with an estimated worth of USD 1.8 billion, by Zynga,” Solak begins. Following this success story, he says that the start-up ecosystem in Turkey blossomed, with “four more unicorns and a decacorn in just the past two years.”

These companies are mobile gaming company Dream Games (valued at USD 2.75 billion), e-commerce company Hepsiburada (USD 3.9 billion), software and AI company Insider (USD 1.2 billion), e-commerce shopping platform Trendyol (USD 16.5 billion) – the country’s first decacorn – as well as its most recent decacorn, grocery delivery company Getir (valued at USD 11.8 billion).

Such a strong presence of successful tech start-ups in Turkey was primarily proliferated by private equity, according to Esin Attorney Partnership Partner Orcun Solak, KP Law Managing Partner Onur Kucuk, and GKC Partners Partner Emre Ozsar. “Most were founded as ‘garage start-ups’ in the form of partnerships of friends where, in minor cases, pre-seed and seed periods were funded from friends and family, or angel investors,” Kucuk explains. In their later stages, these companies sought growth mostly via “local and international VC firms,” he says. “All of Turkey’s unicorns are PE driven,” Ozsar underlines, with Solak adding that “venture capital and private equity investors have acted as catalysts in the growth of the country’s first unicorns in most cases, with a few exceptions – where the growth has been advanced by internal resources and investments from the strategic investors.”

These investors included, among others, Hummingbird Ventures, Earlybird Venture Capital, Index Ventures, Makers Fund, BlackRock, Sequoia Capital, Tiger Global Management, Wamda Capital, Riverwood Capital, and Aslanoba Capital, as well as sovereign funds such as Mubadala and the Qatar Investment Authority.

Act 2 – Sequel Investments

Following their successful streak, these pioneer companies continued investing elsewhere. Of all the tech unicorns, Solak says that “Getir is definitely the most active company in terms of investing the funds received elsewhere, to enhance its services offerings and turn its app into a ‘super app’ that provides multiple services in addition to the delivery of groceries.” To this end, Solak reports that Getir has acquired interests in car rental company Moov, e-commerce platform n11.com, and taxi platform BiTaksi.

Additionally, Getir made “two strategic outbound investments last year, as part of its global expansion plan,” Solak adds. “It has acquired Blok, a Spain-based rapid grocery delivery company, to branch out into Spain, Italy, and Portugal, and Weezy, a UK-based rapid grocery delivery start-up, in order to consolidate the UK market.”

Similarly, “Trendyol acquired Dolap, a company facilitating the C2C sale of used clothing items, and integrated those services in its platform, resulting in increased growth for both Dolap and Trendyol itself,” Guleryuz Partners Partner Zahide Altunbas Sancak reports. Moreover, Trendyol is quite interlinked with another prominent Turkish tech unicorn. “The founder of Trendyol was an early investor in Peak Games, while one of the founders of Peak Games, Evren Ucok, is still acting as the Chairman of Trendyol,” Altunbas Sancak explains, adding that “another founder and the face of Peak Games, Sidar Sahin, has previously acted as an executive in several Trendyol departments.”

She reports that, while both Trendyol and Peak are still “mainly operating in their primary area, the founders have also been making separate investments. In this vein, Peak founder Sidar Sahin is now making VC investments with Earlybird Venture Capital and, reportedly, making angel investments in smaller gaming companies as well.”

To illustrate the ripple effect that tech investments in Turkey have had, Balcioglu Selcuk Ardiyok Keki Attorney Partnership Partner Okan Arican highlights another gaming company – Rollic. In 2020, Rollic was also acquired by Zynga, for USD 126 million. “Afterwards, Rollic acquired four local gaming companies: Uncosoft, Creasaur Entertainment, Bytetyper (Forgerhero), and Zerosum.”

Arican also points out that former Peak employees have formed a further “28 successful video game studios” and that Peak co-founder Rina Onur Sirinoglu has, “following her successful exit, become the founding partner of 500 Istanbul, which is an early-stage VC fund.” Sirinoglu has also co-founded Spyke Games, which Arican reports has “raised USD 50 million from Griffin Gaming Partners in its last investment round, with an approximate valuation of USD 250 million.”

Act 3 – Success, at Home and Abroad

Such vibrant tech sector activity has also produced benefits for the broader economy in Turkey. “The fact that Turkey has generated unicorns and decacorns recently can bolster the tech-savvy young population’s belief in the Turkish start-up ecosystem and avoid human capital flight out of Turkey,” Solak says. “Moreover, the birth of new start-ups by entrepreneurs who have gained experience under Turkey’s unicorns could generate more foreign direct investment.”

Given the fact that Turkey has had a “significant current account deficit,” according to Solak, attracting as much FDI as possible is critical. “In recent years, technology start-ups have boosted their shares in Turkish FDI inflow, and according to the Successful FDIs in Turkey in 2021 report published by the Presidency of the Republic of Turkey Investment Office, Turkey’s entrepreneurship ecosystem raised USD 1.6 billion of funding in 2021, while international investors were involved in 89% of the investment volume,” Solak says, explaining the impact.

Moreover, these investments have had a positive impact on employment rates. “For instance, in her press statement after Trendyol’s latest investment round, Trendyol CEO Demet Mutlu said that Trendyol, directly and indirectly, contributed to the employment of 1.1 million people,” Solak reports.

“Currently, there are six Turkish unicorns, and four more are expected to come by the end of 2023,” Altunbas Sancak reports. “According to the Startup Watch 2021 Report, Turkish start-ups attract nine times more investment compared to the previous year.” She stresses that more and more international investments are being made in Turkish tech companies, “bringing liquidity to the country in a time of need.”

Kucuk agrees with both, adding that “it would not be misleading to comment that the financial resources created through the exits were somehow reinvested in the digital economy,” pointing again to the example of Peak. “The team who founded Peak Games then founded Dream Games and moved it to a success story as well,” he says. Such is the positive impact on the economy, Arican chimes in, that there is even a new term – Turcorn – created for Turkish unicorns. “The Turkish government has embarked on a mission to increase the number of Turcorns.”

And how wouldn’t it, given the numbers? “According to the Startup Watch Year in Review 2021 report, 15% (44 deals) of the 294 deals that were completed at the angel and venture capital level were joined by foreign investors and, in terms of the total investment amount, the share of foreign capital is 89%,” Solak outlines. Moreover, in the first half of 2022, he reports that foreign investors participated in 25% of angel investor and VC deals.

Kucuk builds on this and sheds light on the most attractive sectors for investors. “Turkey is an attractive platform for start-ups, especially in gaming, fintech, and e-commerce. Other hot verticals include SaaS, artificial intelligence, health technology, marketplace, and mobility,” he says. “These industries attract more attention because Turkey has great engineering talents with lower costs, has an attractive consumer market, and its population consists of young and tech-savvy generations.” Kucuk feels that the upwards momentum of the past few years is a good indicator of the “potential of the start-up ecosystem for the next decade.”

Focusing on a specific sector, both Solak and Arican agree that gaming in particular is thriving. “In the aftermath of successful investments in Peak Games, Dream Games, and Rollic, as well as the achievements of local game studios on the global stage with their products, 305 new gaming studios were set up from 2019 to 2021, and Turkey has become a vital gaming hub in Europe,” Solak says.

“Gaming is an interesting vertical in Turkey because the country has both a large population of users and qualified developers,” Arican adds. “Moreover, Turkish founders have proven themselves through many successful companies.” He too points to the Startup Watch Year in Review 2021 report, saying that the “gaming sector became the center of attraction, with 52 deals for a total of USD 265 million raised, and valuations increased by 80% in Turkey.”

Act 4 – Governmental Input

“The Turkish government supports the local venture capital and technology start-up ecosystem through a variety of public institutions and organizations, granting many types of support, including direct cash support, tax exemptions, consultancy services, and others,” Solak reports. He specifically highlights the beneficial effects of TUBITAK, the state-owned Scientific and Technological Research Council of Turkey, and KOSGEB, the Small and Medium Scaled Industry Development and Support Directorate. Moreover, Solak says that the Ministry of the Economy provides financial incentives, tax breaks, and other benefits for tech companies and start-ups and those investing in them.

Altunbas Sancak adds that the government provides particular support to companies located in special zones – technoparks. “There are income, stamp, and corporate tax exemptions for the enterprises located and operating in these zones, and tax exemptions for salaries of R&D employees working there,” she explains.

Altunbas Sancak and Kucuk both point to the additional structural incentives that venture capital investment companies and funds enjoy. These companies “operate under the regulation of the Capital Markets Board of Turkey but are also subject to many financial incentives,” Altunbas Sancak says, pointing primarily to tax breaks. “The revenues of VCICs and VCIFs are exempt from income tax, while dividends earned from VCIC and VCIF shares are also exempt from corporate tax,” Kucuk chimes in. “Companies that invest in VCICs or VCIFs also benefit from a variety of other tax incentives, to increase participation in venture capital investments.

Act 5 – Aftermath

Still, even the strong and continuous development of the Turkish start-up ecosystem is not impervious to global events. “The Turkish economy has been directly and indirectly affected by the unpredictability of the exchange rates, rising inflation, the COVID-19 pandemic, and the ongoing Russia-Ukraine war,” Arican says. “So, there is uncertainty in the Turkish market which may cause a decrease in the valuations of some technology companies,” he believes, and this “may result in down-rounds for some unicorns.”

Solak says that “the upcoming 2023 general elections to be held in Turkey create further uncertainty for investors.” This situation, “coupled with Turkey’s current account deficit and dependence on external energy sources, puts more pressure on the Turkish lira, which will eventually cause high volatility and inflation.” He feels that, on the one hand, tech start-ups must be mindful of such volatility; on the other hand, foreign investors might use this as an opportunity.

Altunbas Sancak agrees, adding that foreign investors are already stepping in to take advantage of the profitable currency exchange rate in Turkey. “After the devaluation, we have observed that the foreign companies either start a business or grow their businesses in Turkey, to take advantage of low salaries and expenses.” She believes that “every decline in the Turkish lira is a massive benefit for investors, because foreign buyers have access to foreign currency,” especially if investors move quickly, before prices in Turkey readjust.

Still, not to end on a gloomy note, Kucuk says that – despite all of the global turmoil – “record high investments were witnessed in the first quarter of 2022, and Turkish ventures are still ambitious to reach more funds, also spurred by the fading of the pandemic.” He further adds that the war in Ukraine has “led to some flow of capital to Turkey, as investors look for safe environments to channel their capital, in addition to Turkey being a great hub both for the East and the West, with tremendous potential.” Solak agrees with Kucuk, saying that “Turkey’s start-up ecosystem has maintained its momentum in the first half of 2022, with approximately USD 1.4 billion invested in seed, early, and later VC stages,” a new half-year record, and stresses “Turkey has still managed to present a new unicorn, Insider, and a new decacorn, Getir, in the first half of 2022.”

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Recent decades have witnessed economic turmoil, crises, recessions, inflation surges across the world, and, lately, the long-lasting effects of the pandemic globally. During these downturns, the issue of financial restructuring has surfaced as a key concern of policymakers, financial institutions, and market players.

As of the second half of 2018, the concept of “financial restructuring” has become a trending topic again in the Turkish market, both because of the impact of changes made in relevant legislation and the economic developments in the country.

With the additional article introduced in Banking Law no 5411 on July 19, 2019, it became possible to restructure the debts of commercial loan debtors (Debtors) arising from loan arrangements with banks, financial leasing, factoring, and financing companies (Credit Institutions) within the scope of framework agreements and contracts, for a period of two years. The two-year period was extended by Presidential Decree for an additional two years to July 19, 2023.

A total of 43 Credit Institutions, 21 of which are banks and 22 other financial institutions, have become parties to the framework agreement approved by the Banking Regulation and Supervision Agency so as to ensure that their debtors could benefit from this financial restructuring model.

Two different framework agreements were entered into force depending on the amount of total principal debts of the Debtors to the Credit Institutions. The large-scale framework agreement is applicable for Debtors with a total principal debt of TRY 25 million or more and the small-scale framework agreement is applicable for principal debt below that threshold. In 2021, the threshold was amended to TRY 100 million.

In the framework agreement, the main purpose of the financial restructuring is expressed as enabling the Debtors which have already faced or are likely to face temporary difficulties in their loan repayments to the Credit Institutions to fulfill their repayment obligations and to continue contributing to employment, through measures given in the framework agreement. These measures include, among others, an extension of the maturity dates; a reduction of the amount of, or waiver from, principal, interest.

A Debtor that intends to benefit from financial restructuring should apply to any of the three Credit Institutions that have the highest amount of receivables from them and already signed the framework agreement.

Upon the acceptance of a proper submission of the application by the Credit Institution, the protection period named the Standstill Process commences for the Debtor and the Creditor Institutions.  During the Standstill Process, execution proceedings cannot be conducted, and other legal remedies cannot be applied by the Creditor Institutions with regard to the receivables in the scope of the financial restructuring, except for the cases that may cause loss of rights due to statute of limitations.

If the Creditor Institutions which own two-thirds of the receivables subject to financial restructuring agree on implementing the financial restructuring project for a Debtor, all Credit Institutions which are the creditors of Debtors have the obligation to restructure their receivables as per the framework agreement.

According to information provided by the Banks Association of Turkey, 325 debtors with total outstanding payment obligations of TRY 99,5 billion have benefitted from financial restructuring as of May 2022. 290 such companies are within the scope of large-scale applications, with TRY 99,085 million, and 35 of them are small-scale applications, with TRY 421 million in payment obligations. The data does not include the loans that banks have restructured on their own initiative, apart from the aforementioned regulations.

Considering the increasing global risks such as the Russia-Ukraine conflict, which has a critical impact on energy and food resources, supply-chain problems, and fluctuations in major economies, it is safe to conclude that companies will increasingly continue to restructure their finances. Having said that, restructuring tools will need to expand beyond the conventional amend & extend policy and introduce more comprehensive items such as debt to asset swaps, debt to equity swaps, or haircuts. Above all, the relevant legislation is expected to evolve to meet the changing needs for more complex structures and to open the path for companies and financial institutions to benefit from such tools.

By Onur Kucuk, Managing Partner, and Ekin Kotan, Associate Partner, KP Law

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

For the last few years, and especially since the second half of 2021, Turkey has been struggling with an ever-growing financial and economic crisis. Dubbed as one of the “Fragile Five” economies in financial circles, the country has long been seen as a developing economy with a high degree of dependence on foreign investment and US monetary policy, limiting its power to control and contain financial emergencies.

With new global and regional risk factors affecting a big part of the world, Turkey – already a fragile economy – decided on a highly unconventional monetary policy, resulting in extremely high inflation and currency devaluation as well as falling real wages and purchasing power for wage-earners.

Turkey is now taking unprecedented legislative and executive measures in an effort to slow down the depreciation of the Turkish lira. These measures have lately included a new banking instrument protecting lira investors against foreign currency appreciation and restrictions on mortgages and, most recently, the restriction on Turkish lira borrowing for corporations holding foreign currency assets.

With the Banking Regulatory and Supervisory Authority’s (BRSA) Decision No. 10250, dated June 24, 2022 (Decision), Turkish lira borrowing by companies subject to independent audit, except for banks and financial institutions, has been restricted, depending on the amount of foreign currency assets (FX-Assets) they are holding.

Companies Subject to the Decision

Companies that fall within the scope of the decision are those holding FX-Assets worth the equivalent of TRY 15 million, which form more than 10% of total company assets or 10% of the most recent year’s sales total (whichever is higher). In this respect, companies that meet the two foregoing conditions will no longer be able to borrow Turkish lira commercial cash loans from Turkish banks. Companies’ assets will be reviewed via the consolidated balance sheets or the most recent annual financial audit report.

Moreover, gold deposits, foreign currency denominated securities and stocks, and other monetary assets such as reverse repo with non-residents are also regarded as foreign deposits, while other financial assets such as Eurobonds, non-resident securities, and debt instruments denominated in foreign currencies are not considered so.

Companies Not Subject to the Decision

Companies with a foreign currency net position deficit will still be able to use commercial cash loans in Turkish lira limited to the amount of such position deficit. However, it is required that these companies: (1) have their position deficit determined, and (2) apply to the lending bank with their most recent financial statements prepared by authorized independent audit firms.

In addition, companies holding FX-Assets below TRY 15 million as of the loan application date, need to determine the company’s total assets and net sales revenue for the last year, along with their FX-Assets portfolio and the most up-to-date financial statements prepared by an independent audit firm. Additionally, these companies are to declare and undertake to the bank that the TRY equivalent of their FX-Assets will not exceed TRY 15 million until the term of the loan and, even if it exceeds such amount, they will still stay outside the scope of the restriction. Banks will be able to determine whether the threshold has been exceeded during the loan period through statements that must be submitted within the first 10 business days of each month, based on the companies’ prior month-end balance sheets.

Banks may also require the companies to disclose all information and documents regarding the loan and will be responsible for updating the agreement within this scope and adapting business transactions accordingly. However, no standard form will be issued regarding the information and documents customers must provide.

Structural Changes Needed

Foreign currency speculation has no doubt been an aggravating factor for the ongoing financial and economic crisis in Turkey, and the BRSA’s decision supposedly aims to prevent speculation, in order to strengthen the lira.

However, with the underlying structural reasons for the speculation still present, the restriction, which is arguably a form of capital control, may act more as a red flag for potential new investors. In any way, it is clear that such measures can only act as a lifeboat in the short term, and deep structural changes are needed for the Turkish economy to thrive.

By Zahide Altunbas Sancak, Partner, and Yasemin Keskin, Senior Associate, Guleryuz Partners

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.