Category: Turkiye

Turkish Constitutional Court with its decision with application number 2019/12190, published in the Official Gazette on 20.04.2022, ruled that court decisions on dismissal of unquantified debt lawsuits on procedural grounds violates right to access to court.

Background of Legal Dispute

In Turkish procedural law, pursuant to Article 107 of the Code of Civil Procedure No. 6100, unquantified debt lawsuits can only be filed in cases where the plaintiff cannot be expected to determine the debt amount, or where the debt amount is not determinable at all. If the plaintiff files an unquantified debt lawsuit for a determinable debt, the courts reject the case on the grounds that the plaintiff has no legal interest in filing this lawsuit [for instance, HGK. E. 2016/482 K. 2018/1047 T. 9.5.2018; HGK. E. 2015/2551 K. 2018/1022 T. 9.5.2018].

In the dispute at hand, the plaintiff, who is a municipality worker, filed a lawsuit for unquantified debt against the municipality before court of first instance for the short payment of wages and bonuses arising from the collective labour agreement. Court of first instance accepted the case, and the decision was appealed. In appellate level, the 22nd Civil Chamber of the Court of Cassation stated that remaining receivables can be calculated as per the collective labour agreement, therefore, the subject of the lawsuit is indeed determinable, and these claims cannot be subject of an unquantified debt lawsuit. Then, the court of first instance complied with the reasoning of the Court of Cassation and dismissed the case on procedural grounds, and thereafter, the Court of Cassation affirmed the decision. In response, the plaintiff filed individual application before the Constitutional Court.

Summary of Constitutional Court’s Decision

Firstly, the Constitutional Court noted that it was not its responsibility to dispute whether the Court of Cassation’s ruling was correct from civil procedural law perspective, and rather it would only assess whether the right of access to a court had been violated.

Subsequently, dismissal on procedural grounds’ decision would be regarded a suitable instrument if a lawsuit had been initiated through an incorrect procedure, to achieve the most effective litigation. According to the Constitutional Court, however, issuing a decision regarding dismissal on procedural grounds is not a tool that affects the applicant’s rights at a minimum level, but rather a heavy intervention. The Constitutional Court emphasized at this point that the judge is vested with broad powers and accordingly, has the right to clarify ambiguous issues.

As a result, the Constitutional Court ruled that dismissal on procedural grounds’ decision is not the last resort for a lawsuit filed through an incorrect procedure, and that choosing a method that makes access to the court impossible rather than opting for a less intrusive intervention tool violates the right to access the court.

It will be a matter of curiosity whether the tool of unquantified debt lawsuit will be abused following the Constitutional Court’s judgment.

By Baris Ulker, Senior Associate, and M.R. Cafer Koc, Legal Intern, Guleryuz & Partners

The Elmacioglu Law Office has announced the formation of a collaborative partnership with Seoulsolution.

According to Elmacioglu, the partnership allows the firms to “combine their respective expertise, experience, and local insight to help Turkish companies that want to do business in Korea, and Korean companies that want to do business in Turkey.”

Seoulsolution is a Korea-based business consulting and advisory firm, providing support to international companies to do business in Korea and Korean companies that are looking for opportunities abroad.

The Elmacioglu Law Office has legal offices across Turkey and North Cyprus and provides legal services to both local and international companies with a focus on maritime, energy, and labor law.

On May 27, 2022, the Law Proposal Amending the Press Law and Further Laws (“Draft”) has been published on Grand National Assembly of Turkey’s (TBMM) website, which includes significant amendments to various laws. The Draft is currently submitted before the relevant commissions (i.e. Justice Commission and Digital Platforms Commission) for discussions, and it is one of the agenda items of the Digital Platforms Commission’s meeting of June 1, 2022. The Draft is anticipated to be published within the second quarter of 2022. 

The Draft includes significant amendments in terms of (i) Press Law (e.g. including online news websites within the scope of the Press Law along with the printing and publication of printed works), (ii) Turkish Criminal Code (by introducing a new crime titled Public Dissemination of Misleading Information), (iii) Electronic Communications Law (by introducing the concept of Over the Top – OTT – services for the first time) and finally (iv) the Law No. 5651 (also known as the Internet Law), by introducing several significant obligations and liabilities on social network providers. 

Below is an overview of the most crucial amendments that would have an impact on social network providers: 

1. Representative: According to the Draft, real person representatives of foreign social network providers (“SNPs”) with daily access of more than 1 million, must be Turkish citizens and residing in Turkey. Therefore, in terms of real person representatives, the obligation to reside in Turkey has been introduced.

In terms of legal entity representatives, the Draft requires the legal entity representatives to be established by the relevant SNP as a branch office incorporated in form of a stock corporation. In terms of Turkish corporate law perspective, there is no concept as “a branch office incorporated in form of a stock corporation”. However, we infer that the intention with the Draft is to drive SNPs incorporation of a “branch office of foreign entity” as at least one manager having full authority to represent the branch office has to reside in Turkey regardless of his/her citizenship.

These representatives of the SNPs should have full technical, administrative, legal and financial authority and responsibility.

Draft states that SNPs which already appointed a representative should comply with the new requirements within six (6) months following the publication date of the law. Otherwise advertisement ban and bandwidth throttling will directly apply, without implementing the notice and administrative fine steps.

2. Reporting Obligations: Draft states that SNPs should include information on title tags, algorithms regarding the contents that are put forward or that are reduced, advertisement and transparency policies in their reports. SNPs should also include the measures taken to ensure equality and impartiality against the users, and to enable users to update their preferences regarding the contents suggested to them and options for limiting data privacy options, by also adding measures regarding therein within the report. SNPs should also provide the information requested by ICTA. SNPs are also required to take necessary measures in their own systems, mechanisms and practices in cooperation with ICTA in order to prevent contents and title tags pertaining to crimes under the Law No. 5651. 

Additionally, SNPs should establish and publish an advertisement library which contains information on advertisement contents, advertisers, advertisement period, number of targeted persons or groups, etc. on its website, and include such information in the reports.

3. Information Requests and Audit: The Draft requires the representative of the SNPs to provide the information which is requested by the public prosecutor and courts for the identification of the potential perpetrators of the following crimes under the Turkish Criminal Code: sexual harassment of children, public dissemination of misleading information, damaging the government’s union and integrity, crimes against the Constitution, crimes against government secrets and spying. If such obligation is not fulfilled, the relevant public prosecutor might apply to Ankara Criminal Judgeships of Peace to request reducing the internet bandwidth of the relevant SNP at the rate of 90%.

Additionally, the Draft also authorizes the ICTA to request any information including but not limited to information systems, corporate structure, algorithms, data processing mechanisms and commercial approach for the compliance with the Law No. 5651, and SNPs should provide such information at the latest within three (3) months. Draft entitles ICTA to conduct on-site examinations regarding SNPs’ compliance with Law No. 5651.

4. Increased Sanctions: Draft authorizes the President of ICTA (“President”) to decide on advertisement ban decision for up to six (6) months, for the Turkish taxpayers, if the content removal/access ban decisions granted by the President are not enforced by the SNPs, in addition to the administrative sanctions regulated under Articles 8 and 8/A of the Law No. 5651. The President might also apply to the criminal judgeships of peace to request bandwidth throttling at the rate of 50%, and request bandwidth throttling at the rate of 90% in case the throttling decision is not enforced within thirty (30) days following the notification.

Besides, the Draft also foresees sanctions (i.e. administrative fine from ten thousand Turkish Liras up to one hundred thousand Turkish Liras) for the Turkish taxpayers who do not comply with the advertisement ban decisions.

In addition to the sanctions which are already in force, the Draft provides an administrative fine sanction which will be calculated as 3% of the previous year’s global revenue, in case of failure to comply with obligations on data localization, separated services to children, user rights, notification of identity for dangerous contents to life and property, failure to share information requested by ICTA regarding compliance with the Law No. 5651 and crisis plan.

5. Liability and Notification: Draft holds SNPs liable for the third party contents which constitute crimes, if it is obvious that the SNP aims users’ access to the relevant contents through title tags or distinguishing (e.g. promoting) methods. Besides, the Draft requires SNPs to report the content provider’s information to legal enforcement authorities for the contents which constitute danger to the safety of life and property and in non-delayable cases.

Some of the provisions related to news websites will enter into force on January 1, 2023 and the other provisions will be effective immediately as of the publication date.

By Gonenc Gurkaynak, Partner, Ceren Yildiz, Partner, and Nazli Gurun, Associate, ELIG Gürkaynak Attorneys-at-Law

Turunc has advised Bogazici Ventures on its participation in a USD 2 million investment round in Craftgate together with AK Portfoy and APY Ventures. The Gemicioglu law office advised Craftgate and, reportedly, the Aksan law firm advised APY Ventures.

Craftgate is a cloud-based payment gateway. The startup company was founded in Istanbul in 2020.

Turunc’s team included Managing Partner Kerem Turunc, Partners Esin Camlibel and Yasemin Erden, Attorney Gozde Kiran, and Associates Beste Ergul and Selay Turgut.

Gemicioglu’s team included Managing Partner Bora Gemicioglu and Principal Lawyer Tugce Bursali.

Real estate is responsible for around 40% of global greenhouse gas emissions. Given the industry’s high impact, a comprehensive decarbonization strategy is essential. As environmentally conscious investors and tenants focus on zero-carbon buildings, green building ecosystems and life-cycle assessments become necessary. Accordingly, green building certification processes are needed to ensure that habitats are environmentally sustainable. These certification processes assess many building components, from ventilation systems to insulation materials, for their impact on human and environmental health.

Turkish Construction Industry

With the employment and value it creates, the construction industry is the locomotive of the Turkish economy. As one of the central pillars for achieving the goals stated in the Declaration of National Contributions, it therefore plays a crucial role in the country’s sustainability initiatives. It is also evident that ensuring sustainability by maintaining a decarbonization strategy and establishing energy efficiency projects has a huge impact on the industry and, therefore, sound guidelines for creating a sustainable construction industry in the future are needed.

Regulatory Developments

Creating a national legal infrastructure to facilitate circular economy models within the construction value chain is of the utmost importance. Turkey has taken concrete steps in this direction over the last two decades by developing policies and legislation on energy efficiency, which is one of the main pillars of a sustainable housing model. Although the 10th and 11th National Development Plans and the National Energy Efficiency Plan provide a good perspective on how Turkey intends to exploit its huge potential for a circular economy, the most important legislation is the Energy Efficiency Law No. 5627 and the Energy Performance of Buildings Regulation (Regulation), both of which aim to reduce the total cost of Turkey’s energy consumption.

A recent piece of legislation is the Communique on the Implementation of Green Certificates for Buildings and Settlements (Communique), published in the Official Gazette on June 9, 2021, which sets out the assessment guidelines for green buildings under the regulation of the same name. According to the Green Certificate Assessment Guide, published as a supplement to the Communique, buildings are assessed in six modules, including the assessment of building materials and life cycle. As a result of the assessment, buildings are certified at one of four levels: Pass, Good, Very Good, and National Superiority. These certificates are valid for the lifetime of the buildings. Unlike other certification systems, the Turkish Green Certificate System includes assessment criteria for disaster management.

In addition, Turkey has been working on further steps to be taken towards a greener world in the future. In addition to the Green Deal Action Plan, which emphasizes the importance of the circular economy, the Climate Change Action Plan 2011-2023 sets out three main long-term goals for buildings: increasing energy efficiency in buildings, increasing the use of renewable energy in buildings, and limiting greenhouse gas emissions from housing. The Regulation is indeed an effective instrument to achieve these objectives as it provides solid commitments regarding the concept of energy-efficient building. It is anticipated that the Climate Change Action Plan 2023-2030, expected in the fourth quarter of 2022 according to the Green Deal Action Plan, will include further measures for greener real estate.

Last but not least, according to the latest regulation published by the Ministry of Environment, Urbanization, and Climate Change on February 19, 2022, starting from next year, buildings with a total floor area of more than 5,000 square meters will have to be built as “near-zero energy buildings” (i.e., buildings that have a high energy performance and use renewable energy to a certain extent), with the obligation to use at least 5% renewable energy and achieve an energy efficiency rating of Class B or higher.

Conclusion

The construction industry has enormous potential for the circular economy due to its high material consumption, labor-intensive nature, and long-term impact on the overall economy. Accordingly, a sustainable Turkish construction sector will address the main issues arising from urban growth, climate change, and renewable energy with a comprehensive perspective. The regulatory instruments for Turkey’s green transition are crucial for developing a building stock that adds sustainable features to the value chain.

By Done Yalcin, Managing Partner, and Arcan Kemahli, Counsel, Yalcin Babalioglu Kemahli in Cooperation with CMS

This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Open Banking doesn’t just happen because regulations enforce it, it’s commercially embraced as an opportunity to make a nation’s financial infrastructure more efficient, more resilient, and better serve customers. We look forward to the opportunities it will bring to the economy and society as a whole. Open Banking Implementation Entity the ‘OBIE’ Implementation Auditor Imran Gulamhuseinwala, UK

The success of innovation in payment systems for Fintech organizations depends on analyzing the demand for technology and preparing for it, in line with the wishes of the users. Therefore, it is foreseen that fintech institutions that work and produce services by listening to their users in the development of financial processes and the facilities to be provided will achieve permanence in the financial world. According to the ‘Pulse of Fintech H2 2020’ report published by KPMG, 105.3 billion dollars of fintech investments were made in the world in 2020. According to the data published by the Presidential Finance Office only for 2021, the number of fintech companies that are actively operating has reached 520. When we examine the year 2021, the investment made in the fintech sector reaches 64 million dollars. While the number of unicorns, which was 563 in 2020, reached 832 in 2021, it is seen that 162 of these companies are fintech companies and the sector that produces the most unicorns in financial technologies. The ‘open banking’ technology, which is the subject of our article, stands out as one of the most important developments that design the future of the financial sector.

What is in the system and how does it work?

In the open banking system, ‘Account Information Service Providers (AISP)’, institutions that collect financial data, and customers can perform their financial transactions in their accounts in different banks on a single platform. In this way, customers who can collect their financial data in one place can have more control over their own data. For example, BNP Paribas, in cooperation with the Tink company, enables customers to view their accounts in other banks from the Easy Banking application. With this system, BNP Paribas customers can add their accounts in Belfius, ING, and KBC banks in Belgium. When we examine the examples in our country, we see that Türkiye İş Bankası implements the open banking system with TekCep -TekPOS applications developed for its legal customers and initiatives such as Vomsis, Finmaks, and Finstant.

Payment Initiation Service Providers (PISP), on the other hand, act as agents that mediate authorized third-party companies to make online payments without the need for customers to use a credit or debit card. They manage the payment between them. Companies with this authorization will be able to initiate a payment process on behalf of the customer and then withdraw money directly from the customer’s account with the approval of the customer. If the customer has more than one account, the account from which the money will be withdrawn will be determined by the customer.

What are the advantages? 

Fintech institutions and banks aim to be the largest financial application both at home and abroad as a financial super-app. In our publication series, we have explained with examples the many financial experiences offered to customers by both banks and fintech institutions. The most effective model among these financial applications, ‘open banking’, is a business model that enables customers to manage their data and financial lives more actively, and to access services that suit their needs as a whole from different platforms at lower fees. The Application Programming Interface (API) agent is needed for this access to work securely. With this interface, two different applications work in integration with each other, and data exchange is provided. Under the restrictions stipulated by the legislation, different products and services will be offered for each customer by using the information such as regular bill payments, limit and expenditure information, applied loans, and money transfers of customers recorded in banks’ systems, by third party companies through APIs. An example of this is the recommendation of banks and fintech companies that do not charge or have low EFT fees to a bank customer who transfers a lot of money. Again, to the extent permitted by law, banks will be presented to customers by transferring and analyzing their own financial data and showing loan products with appropriate interest rates and maturity options according to the income and expenses of the users. Thus, customers will be able to view the products and services offered by each bank and determine the most suitable financial actor for their budget by comparing them. For example, platforms such as BiriKredi, Finekra, Kredya, and Accountkurdu allow customers to compare the loan rates offered by banks. In this process, an application can also be developed, such as a listing bank or fintech applications that provide cashback for users’ subscriptions such as Netflix, Spotify, and Blu Tv.

Now let’s examine how the regulatory rules regarding open banking are shaped.

On what basis? What’s happening in Turkey?     

After the Payment Services Directive (Payment Services Directive 1; PSD1), which was implemented in the European Union in 2009, the regulatory infrastructure of open banking was created with the Payment Services Directive 2 (Payment Services Directive, PSD2), which ended in 2018 with the harmonization process. The basis of open banking in Turkey was regulated by Law No. 7192 on Payment and Securities Settlement Systems, Payment Services, and Electronic Money Institutions with the amendment made to Law No. 6493 in 2019. As of 2020, legislative work gained momentum and open banking was defined with the Regulation on Information Systems and Electronic Banking Services of Banks. Accordingly, open banking is defined as an electronic distribution channel service where customers instruct the bank to perform or perform their banking transactions.

Banks operating in our country are held liable by the BRSA to take extremely strict security measures. While the CBRT was assigned to carry out studies related to open banking in Regulation and Law No. 6493, the authority to make regulations on issues other than financial and payment areas was given to the BRSA. Therefore, the BRSA and the CBRT were chosen as the regulatory and supervisory authorities for the open banking service.     

On December 1, 2021, the CBRT published the communiqué and regulation as a guide for the account information service providers (AISP) and payment initiation service providers (PISP) ​​explained above. The rules that must be followed in the performance of the services envisaged in the relevant legislation by organizations holding an operating license were specified. These rules are related to the business models and information systems to be developed by the organizations, and the deadline for compliance has been determined as 1 December 2022.

What does the Payment Services Directive 2 (PSD2) in EU Countries provide? How will users’ financial data be protected?

As we mentioned above, with the Payment Services Directive 2 (PSD2), open banking service has entered our lives conceptually. In EU countries, it is obligatory to register with the European Banking Authority for the authorization and supervision of companies that will provide all account information services and payment initiation services. Apart from these, companies are also expected to provide liability insurance or a similar assurance, depending on the size of the activity, to ensure sustainability in the provision of these services.

In line with the permission of the customers, the Directive brings some regulations on data sharing between banks and third-party companies authorized for banking activities. From this point of view, we can say that perhaps the most striking regulation of PSD2 on open banking is that ‘data sharing’ is made compulsory without leaving it to the initiative of the banks. Therefore, PSD2 turns the open banking service into an obligatory practice within the EU countries, the framework of which is drawn by laws.      

It is essential for a company that collects the financial data of customers in banks to be able to access it within the scope of customers’ consent. Therefore, the phenomenon of ‘data ownership’ will belong to the customers at some point and the transactions will be carried out within the scope of the permission given by the customers. It should be especially noted that this access is limited to data such as balance information and account movements, not all the data of the customer at the bank. Thus, the data received from different banks are combined and presented to the customer, and this information is analyzed as stipulated in the law to provide some value-added services. However, if the data collection company’s purpose of using the data is based on developing business models, additional consent from the customers is required for this. It is seen that there is no need to establish any contractual relationship between companies that collect financial data, companies that provide payment initiation services, and banks. Because bank customers now have the opportunity to access banking data from different platforms, these transactions can be carried out within the scope of the permission given by the customers.

When using customer financial data, both banks and third-party companies will have to comply not only with PSD2 but also with the rules in the General Data Protection Regulation (GDPR). GDPR stipulates the obligation of obtaining explicit consent from customers for the use of financial information, establishing systems for withdrawing this consent at any time, and providing detailed information on how and for what purpose this data will be used. To protect financial data, a regulation was also brought so that companies providing both services do not have absolute access to the passwords used by customers when logging into the bank system.

The Evaluation of the Situation in Turkey 

Many services offered by third-party companies take place in our daily lives. For example, synchronous tracking of online orders placed by all of us as consumers on the map is realized by using Google APIs. The open banking ecosystem, on the other hand, allows the sharing of financial data of customers with third-party companies through these APIs, as explained above. With the exchange of these financial data, it is aimed to provide certain products and services to customers. In such a flow, the existence of legal regulations in our country is needed to prevent unauthorized access to the financial data of customers and to prevent data breaches. In this context, it will also be necessary to determine the rules under which financial data will be processed and transferred.

Based on the protections on personal data available in Turkey, both account information service providers (AISP) and payment initiation service providers (PISP) ​​are required to obtain explicit consent from customers for the processing of their data. This express consent by the customers can be withdrawn at any time and will have the right to limit the scope of their consent. In addition to obtaining express consent, customer consent will also be required. However, it is still unclear how these rights will be exercised and how the customer’s consent and approval will be obtained. 

In PSD2, banks must share their financial data with third-party service providers in case of obtaining the consent of the customers, while there is no regulation in Turkish law regarding such data sharing obligation. We can say that this situation hinders the development of open banking in Turkey. For this, harmonization studies should be carried out in parallel with the EU legislation in Personal Data Protection Law. This compliance is valid not only based on Personal Data Protection Law, but also on the Banking Law. Because according to the Banking Law, explicit consent is not sufficient for the sharing of personal data. This regulation also undermines the function of the provisions regulating explicit consent in the Personal Data Protection Law, In addition, the BRSA has the authority to prohibit the sharing and transfer of customer data abroad, and a separate regulation should be made regarding this situation.

The Ideal Result: Coopetition and Rapid Regulatory Steps in Open Banking

Although open banking is interpreted as the last point of the financial sector; Since the banking sector is one of the areas where the impact of digitalization is felt most, technological developments and the classical banking understanding and culture will also benefit from the transformation. In the new digital era, customers prefer transparency-based service providers that make their lives easier and shape their preferences, rather than banks that only offer inward-looking products through their channels. For this, fintech should not be seen as a threat to banks, on the contrary, they should work in coordination for value-added services in the digital field with smart collaborations.

It is seen that the new open banking approach must be based on a competitive perspective. Financial actors need to increase their standards for APIs and develop new business models, and regulatory authorities need to take quick action to complete compliance processes.

By Onur Kucuk, Managing Partner, and Ezgi Anasiz, Associate, KP Law

Aydemir Consultancy has advised Oppo on its collective labor agreement negotiations with the Turk Metal Union.

Oppo is a Chinese consumer electronics and mobile communications company.

Aydemir Consultancy’s team included Managing Partner Ilber Aydemir and Senior Associate Erdem Sural.

Former Teva General Counsel & Local Compliance Office for Turkey & MEA Dinc Sanver has joined Pearson as its Legal Director Turkey & Middle East.

Sanver had been with Teva since 2020 (as reported by CEE In-House Matters on August 21, 2020). He started his career in private practice in 2008. In 2010, he joined the Istanbul Patent Trademark Consultancy as a Legal Consultant & IP Specialist. In 2011, he moved to Samsung Electronics Turkey where he worked as a Legal Compliance Manager until 2017 when he joined Zimmer Biomet as its Compliance Manager EMEA, a role he held until joining Teva this year. Since 2005, Sanver has also been serving as the General Counsel at the Istanbul Bar. 

“I am excited to join Pearson because their mission and values exactly fit with my personal ambitions because in Pearson: We believe that every learning opportunity is a chance for a personal breakthrough,” Sanver commented. “As compliance professionals, our aim is to educate people on compliance to maintain an ethical business environment. So learning is the key to achieving this goal. Further, I believe my background in regional healthcare will support me a lot for this purpose as well as my legal background due that this role is a legal and compliance combined role in the complicated MEA region.”

In 2021, Sanver was interviewed by CEE In-House Matters for our In-House Buzz series, an interview you can find here.

Originally reported by CEE In-House Matters.

Turunc has advised Istanbul-based Ege Kimya San. ve Tic. A.S. on a collaboration agreement with France-based Amber Energy for designing, building, and operating a cathode active material precursor pilot plant in Sakarya, Turkey.

Founded in 1955, Ege Kimya is an industrial chemicals manufacturer with its head office in Istanbul and factory in Adapazari, Turkey.

Amber Energy specializes in the engineering, fabrication, and installation of complete process packages for the manufacture of NCM CAM precursors from metal sulfates to a range of customer specifications.

Turunc’s team included Managing Partner Kerem Turunc and Associate Naz Esen.

In today’s world, both globally and in Turkey, there are an increasing number of corporations that are in constant search of funding and investment either to grow a newly started promising business or to increase the profitability and efficiency of an already established business by moving it to the next level. In order to meet this need, there are also individuals or corporations, that is to say, investors, with the capital to provide the liquid injection in exchange for shareholding position or other certain benefits in the invested company.

From this context emerged a number of concepts that describe various ways of investor-company relations such as angel investing, private equity and venture capital. In this article, we will explain the latter two concepts, as they form the most frequently encountered methods of corporate investment and are frequently confused with one another due to their interconnected nature both in regulation and in application.

How Are Private Equity and Venture Capital Similar?

Private equity and venture capital are modes of capital investment that both concern third party investors or investing firms buying into a corporation that is in need of capital injection. In both of these forms of investment, the investors invest capital into a private company in exchange for equity, and usually aim to exit from this investment after it turns a profit for them.

Another similarity between the two approaches is that they are both hands-on investments, as in the investors will usually wish to be involved in the business, and may even wish to take a majority stake in the corporation in order to directly run it, or to otherwise be represented in the Board of Directors. While this means a change of control in the business against the previous shareholders, it also means new and valuable expertise coming along with the capital injection, potentially increasing profitability in the long term.

What Are Differences Between Private Equity and Venture Capital?

While private equity and venture capital models largely overlap, and are sometimes even used interchangeably, there are actually some key differences between the models in their target investments, shareholding strategies and exit strategies.

First of all, the models target vastly different types of businesses. Private equity investors generally look for established businesses that are struggling and in need of capital injection for one reason or another. Private equity investors buy into the business, make significant changes and improvements that help it turn a healthy profit, and then exit. This approach also means that private equity investors take on less risk, as they enter into an established business not with the expectation of multiplying their investment, but to return it back to a profitable situation, making a relatively low return on their investment in the process.

In contrast, venture capitalists are on the lookout for start-ups that offer unique and new perspectives on the market, which are usually corporations that are yet to ever turn a profit and still in need of further establishment of their operation in order to become an actual actor in the market. This approach comes with a much larger risk, as the venture capitalist is essentially investing in an idea. However, as the investment targets are small operations that are just getting started, the potential return is much higher, and the venture capitalist potentially stands to earn multiple times its initial investment upon exit.

Another point of dissimilarity between private equity and venture capital is the favoured shareholding strategy of the investor. While investors make sure to retain some of the control of the company in both forms of investment, private equity investors are much more likely to require a majority stake in the company, essentially giving them full control of the company in most cases. This allows private equity investors to act freely within the corporate structure and make any decision regarding corporate governance as well. In contrast, venture capitalists generally ask for a minority stake in the company. While this tends to cede some level of control and insight to the venture capitalist, the original shareholder, who is usually the origin of the idea, retains the ultimate decision authority.

Finally, the exit strategies of venture capitalists and private equity investors are also vastly different. As a private equity investor is looking for a quick and minor return, it aims to turn the company profitable as soon as possible, and looks for a quick exit afterwards. A venture capitalist, on the other hand, is looking for a substantial payout, and is willing to stick with the company over longer periods. In any case, after it is satisfied, the investor may exit the company via multiple methods such as an IPO, a trade sale or a secondary buyout.

Turkish Legal Framework on Private Equity and Venture Capital

As with any form of investment, corporate investors and the companies that are being invested in also require some form of regulation in order to streamline the investment process while offering protection against some of the risks. Therefore, venture capital and private equity investments are regulated areas in many jurisdictions.

In Turkish Law, there is no legal distinction between private equity and venture capital and also no legislation regulating the general aspects of capital investments. Instead, the Communiqué on Venture Capital Investment Companies of 2013 [“CVCIC”] and the Communiqué on Venture Capital Investment Funds of 2014 [“CVCIF”], both issued by the Capital Markets Board of Turkey regulate the formation and operation of Venture Capital Investment Companies [“VCIC(s)”] and Venture Capital Investment Funds [“VCIF(s)”], which are specific forms of companies and funds dedicated to capital investments. While the Communiqués do not specify the form of investment that should be undertaken by VCICs or VCIFs, they are more suited towards investors looking for venture capital investments.

Companies that are formed or operating under CVCIC must be formed as joint stock corporations with a share capital of at least 20,000,000 Turkish Liras, must bear the phrase “Venture Capital Investment Company” in their title, and must be publicly traded at present or in the future, with a free float rate of at least %25. There are also several other requirements that must be met by these companies and their founders, which are explained in detail within the CVCIC.

On the other hand, funds that are formed under CVCIF are not legal entities and are only funds that are formed by several licensed entities such as portfolio management companies or venture capital investment companies.

VCICs and VCIFs operate under the regulation of Capital Markets Board of Turkey, but are also the subject of many financial incentives as a result. The main benefit of VCICs and VCIFs are tax incentives. 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. Companies that invest in VCICs or VCIFs also benefit from a variety of other tax incentives aimed to increase participation in venture capital investments.

Conclusion

As a developing economy, Turkey has an emergent market of start-ups, as well as a functional capital market, which creates an environment fit for foreign or national corporate investment of any form. CVCIC and CVCIF also help create an incentivised process for prospective investors looking to invest into Turkish firms.

Meanwhile, start-ups and other companies looking for investment should approach potential investors with a clear plan and proposal regarding shareholding structure and growth strategy in order to secure reliable investment that will help serve the companies while ensuring adequate legal and financial protection.

By Zahide Altunbas Sancak, Partner, and Aziz Can Cengiz, Attorney, Guleryuz & Partners