Category: Turkiye

Although it is the first thing that comes into mind, share acquisition is not the only way to acquire a target. Turkish laws allow acquisitions to be completed through a number of other methods such as asset acquisitions, business acquisitions and merger, depending on preference of the buyer. This article will explain the processes for the acquisition methods concerning joint-stock and limited liability companies covering the requirements for valid acquisitions and matters to consider.

Share Acquisition

The most common and straightforward way to acquire a company is acquiring the target company’s shares by share transfer.

As a general rule, registered and bearer shares in a joint-stock company can be transferred freely as per Articles 489 and 490 of the Turkish Commercial Code No. 6102 (the “TCC”). However, Article 491 of the TCC stipulates that registered shares, nominal value of which are not fully paid-in, can only be transferred pursuant to company’s approval save for the exceptions also included in the said article. It should be also noted that foregoing freedom to transfer registered shares may be restricted if a significant reason is explicitly stipulated in the articles of association of the company, such as by requiring the board of director’s prior approval or limiting the buyers to a certain group. The board of directors of a joint-stock company is allowed reject transfer of a registered share on the grounds as set forth under Articles 493 and 495 of the TCC. In terms of Turkish corporate law perspective, transfer of bearer shares cannot be restricted.

If there are share certificates issued by the relevant joint-stock company representing shares being subject to the transfer, these share certificates must be endorsed and delivered to the buyer. Transfer of bearer share certificates must be also notified to the Central Securities Deposit (MKK), even if they are not publicly traded.

In terms of limited liability companies, articles of association may impose a total ban on transfer of shares pursuant to Article 595 of the TCC. Moreover, unless otherwise stipulated in the articles of association, the share transfer must be approved by the general assembly and the directors must apply for registration with the relevant trade registry. The transfer will be void if it is not approved by the general assembly.

Share transfers should also be duly registered with the share ledger of the relevant companies.

Asset Acquisition

Surely, buyers and investors may prefer acquiring assets of a company, instead of their shares. This method may be more advantageous for some cases where the target refers to only a specific asset, not the entire company.

As per Article 202 of the Turkish Code of Obligations No. 6098 (“TCO”), when liabilities attached are transferred together with the assets, the buyer will be liable against the creditors concerning the assets transferred as of the date the buyer notified the creditors or the date of announcement in the Turkish Trade Registry Gazette. Moreover, for 2 (two) years, the debtor (i.e. the transferor) and the buyer will remain jointly liable starting from the foregoing dates or the due date of the debts, whichever is later. The 2 (two) year period will not commence until the notification and announcement obligations are satisfied.

Under the Enforcement and Bankruptcy Law No. 2004 (“Enforcement and Bankruptcy Law”), transfers of all or significant parts of assets are considered to be conducted with the purpose to harm creditors through fraudulent transaction, and creditors have the right to file a lawsuit to annul such transfers. In this regard, in case a debtor fraudulently transfers its assets to a third party and the creditors of the debtor cannot collect their receivables due to such fraudulent transaction; the court may rule annulment of the transfer of assets upon request of a creditor. As per Article 280 of the Enforcement and Bankruptcy Law, in order to prevent annulment of asset transfers in case of a dispute, the debtor should announce the contemplated transfer in the Turkish Trade Registry Gazette 3 (three) months prior to the relevant transfer. In practice, although sellers and buyers usually tend to skip the foregoing announcement phase in order to accelerate the contemplated acquisition; however, the announcement has a significant effect since it may lead to annulment of the transaction, as the case may be.

In asset acquisitions, an essential aspect is to determine whether significant part of the assets or a significant asset is being transferred or the assets subject to the transfer constitute a unit. Otherwise, such transfer may not constitute an asset transfer within the meaning of Article 202 of the TCO and Article 280 of the Enforcement and Bankruptcy Law, and will merely be an ordinary sale and purchase transaction which does not require any announcement due to nature and value of the asset. It should be noted that relevant regulations draw only a general framework on this matter and there is not any explicit definition to make this assessment. Therefore, characteristics of the transaction should be evaluated on case-by-case basis.

In order to make the relevant registrations and announcements, general assembly resolution (on wholesale of significant part of assets in joint-stock companies) or board of directors’ resolution is required. In addition, for announcement under Article 202 of the TCO, Turkish Trade Registry Gazette mostly seeks notarized asset transfer agreement. The announcements will include the details of the assets subject to transfer.

Business Acquisition

Business (commercial enterprise) acquisitions are in fact part of asset acquisitions. However, where the transferred assets are (i) sufficient to continue the commercial activities of a business, (ii) considered a business line on its own or (iii) where the seller’s capacity to carry out its commercial activities in the relevant business line is significantly reduced after the transfer, the asset transfer should be deemed a business transfer. Whether an asset transfer constitutes a business transfer must be examined on a case by case basis.

As per Article 11/3 of the TCC, transfer of a business must be made in writing as an agreement and such transfer agreement must be registered with the trade registry and announced in Turkish Trade Registry Gazette. As per Article 133 of the Regulation on Trade Registry, registration is a mandatory step for validity the transfer.

Article 202 of the TCO and Article 208 of the Enforcement and Bankruptcy Law as explained under the section (III) above are also applicable to business acquisitions.

It is also important to note that in practice, registration of transfer of business agreements are not very common and the practitioners need a detailed secondary legislation on this matter. General tendency is to treat business acquisitions as asset acquisitions and, realize and conclude the contemplated transactions by following the asset acquisition steps.

Merger

As per Article 136 of the TCC, companies may merge by way of (i) acquisition of the other company i.e. “merger by acquisition” or (ii) “merger by incorporating a new company” where companies form a new company together.  In merger by incorporating a new company, two or more companies’ assets are transferred to the new company as per the principle of complete succession and the companies merged will be terminated but will not be liquidated.

Article 137 of the TCC sets forth the permitted mergers. Under the said article, joint-stock companies and limited liability companies cannot be acquired by sole proprietorships.

For a valid merger, an agreement must be concluded. As per Article 145 of the TCC, merger agreement is required to be executed in writing. Article 146 of the TCC lists the mandatory content of the merger agreement. The list provides the minimum and the parties are free to extend the scope of the agreement. 

The merger will be concluded upon registration with the relevant trade registry. At the moment of registration, all active assets and liabilities of the acquired company will automatically pass on to the acquiring company. The merger decision will also be announced in the Turkish Trade Registry Gazette.

With regard to protection of shareholders’ rights, according to Article 142/1 of the TCC, in cases of merger by acquisition, the acquiring company must increase its share capital to the extent that it is required for maintaining the shareholders’ of the acquired company’s rights. Moreover, as per Article 140 of the TCC, shareholders of the acquired company have the right to claim from the company the shares and rights covering the value of their existing shares and rights. The shareholders of the acquired company holding non-voting shares shall be given the shares in the equal value with or without voting rights. Furthermore, privileged and dividend shareholders of the acquired company will be given rights in equal value or will be compensated in accordance with Article 140 of the TCC. 

As per Article 158 of the TCC, the shareholders of the acquired company will remain liable for the debts incurred prior to the announcement of the merger. Claims for such debts will be subject to a 3 (three) year period of time bar, save for certain exceptions.

During a merger process, the managing bodies of the merging companies are required to prepare a report on merger, either severally or jointly. This report must cover all the matters listed in Article 147 of the TCC. Preparation of this report may be waived from the merger process for small and medium sized enterprises provided that all of their shareholders agree to waive. 

If it has been more than 6 (six) months between the date of the balance day and the signing of the merger agreement or there have been material changes in the companies’ assets, the merging companies are required to prepare an interim balance sheet in accordance with Article 144 of the TCC.

Merging companies are required to submit merger agreement, merger report, past three years’ financial statements and interim balance sheets where required, to their stakeholders’ attention, at their headquarters and branches 30 (thirty) days prior to the general assembly meeting regarding merger. Furthermore, companies which are subject to independent audit, are required to publish the said documents on their websites. 

The TCC also provides a simplified way for joint-stock and limited liability companies’ mergers when the acquiring company holds 100% or 90% of the voting shares of the target company as per Article 155 of the TCC.

Conclusion

During acquisitions, distinguishing the method as per TCC and TCO (i.e. whether the acquisition is completed by share transfer, asset transfer, business transfer or merger) especially between an asset transfer/business transfer and merely a sale and purchase transaction is crucial in order to determine and satisfy the applicable requirements which may impact validity of the acquisition. While a share transfer is more straightforward, it will also transfer all the liabilities, debts and obligations of the company together with the shares. On the other hand, by acquiring assets, the acquirer will be able to benefit from the facilities of the company and enhance its business but will not be able to get the rights attached to shares. If it is decided that a merger is required, companies should also bear in mind that a simplified merger is an option. Although each method has separate advantages, features and outcomes, in Turkish M&A market, asset and business acquisitions are very popular in recent years.

By Gonenc Gurkaynak, Partner, Nazli Nil Yukaruc, Partner, Selen Ermanli Sakar, Senior Associate, and Irmak Yetim, Legal Intern, ELIG Gürkaynak Attorneys-at-Law

A new law proposal amending certain provisions of Law No. 5651 on Regulation of Broadcasts via Internet and Prevention of Crimes Committed through Such Broadcast and Turkish Criminal Code is submitted before the relevant commissions of Grand National Assembly of Turkey (“TBMM”) and has been published on TBMM’s website on February 3, 2022.

According to its preamble, the Proposal, amongst others, aims to target fake and anonymous social media accounts and handling of user complaints regarding online content through the establishment of a Social Media Complaints Evaluation Commission.

Once the Law Proposal Amending the Law No. 5651 and Further Laws (Proposal) is discussed and accepted by the TBMM, it will be sent to the President for review. Unless the President objects to the publication of the law and returns it to the TBMM, the President will then publish the law in the Official Gazette within fifteen (15) days. According to the current version of the Proposal, the proposed provisions will be effective immediately as of their publication date.

Significant Amendments Introduced by the Proposal

– Obligations of Access Providers. Law No. 5651 obliges the access providers to take measures for blocking alternative access channels regarding the broadcasts that were decided to be access banned. The proposal now requires access providers to take these measures “regularly” and notify such measures to ICTA at least on a 7 days period basis.

– Establishment of Social Media Complaints Evaluation Commission. According to the Proposal, a commission titled “Social Media Complaints Evaluation Commission” will be established in 81 cities to evaluate and decide on the applications to be made by the citizens within the scope of Article 8/1 of Law No. 5651 on social media and other additional commissions will also be established for the cities wherein the population exceeds 1 million per each additional one million population. The commission will be conducted through a president who is the governor or who is an official appointed by the governor.  The commission consists of five members; (i) the president of the commission, (ii) a member who will be appointed by the provincial police chief among the officials who are expert on the matter, (iii) a member who will be appointed by the public prosecutor’s office, (iv) a member who will be appointed by the bar association among its members and (v) a member representing ICTA.

Furthermore, the applications to be made by real persons and legal entities will be made through an automation system that the procedures and principles will be determined by ICTA. The commission will render its decision regarding the application within 24 hours following the receipt of the application; notify the removal of content/access ban decision to ICTA to be enforced within four hours. 

The commission shall file a criminal complaint in case it determines that the content constitutes a crime. If there is a decision of non-prosecution or acquittal, Article 8/7 and 8/8 (both are currently in force) will be applicable.

The applicant, content provider and social network provider might object to the commission decisions under the Law on Administrative Judicial Procedure No. 2577.

– Administrative sanctions. Social network provider might be imposed an administrative fine ranging from 300,000 Turkish Liras up to 1,500,000 Turkish liras by the president of ICTA if the commission decision is regarding a content of the social network provider and the mentioned social network provider does not enforce the commission decisions within 24 hours following the notification. Real persons and legal entities that are tax residents in Turkey are banned from placing new advertisements on the relevant social network provider, if the decision is not enforced within 48 hours following the imposition of the administrative fine, in this respect, new contracts cannot be executed and money transfer cannot be made regarding such. The president of ICTA might apply to the criminal judgeship of peace in order to reduce the internet traffic bandwidth of the social network provider by fifty percent, if the obligation is not fulfilled within 7 days following the advertisement ban decision.

– Catalogue crimes. The Proposal extends the scope of the catalogue crimes by additionally including the crimes of sexual harassment, threat, blackmailing, hate and discrimination, crimes against public peace and crimes regarding economy, industry and commerce to the list of catalogue crimes under Article 8 of Law No. 5651. 

– Other provisions. Sending obscene messages and contents with fake accounts is added to the crime of “sexual harassment” regulated in Turkish Criminal Code and a new clause regarding the case of committing the crime of “threat” with fake accounts is also introduced to the same law. Furthermore, an imprisonment sentence is regulated in terms of the parties who maintain and use software and applications which conceal or prevent determination of the identity of the perpetrator on internet for the purposes of committing crimes on internet against private life and private area of life, public peace, public trust, public health and disclosure of duty secrets and a new article titled “Use of Fake Identity on Social Content Networks and Internet” is introduced to Turkish Criminal Code.

By Gonenc Gurkaynak, Partner, Ceren Yildiz, Partner, and Batuhan Aytac, Senior Associate, ELIG Gürkaynak Attorneys-at-Law

BTS & Partners has advised Arisan Kimya’s shareholders on the sale of the company to Vinmar International. Kolcuoglu Demirkan Kocakli advised the buyer. 

Founded in 1988, Arisan Kimya is a chemicals distribution company focusing on three main industries: life sciences, materials science, and industrial chemicals.

Vinmar International is a Texas-headquartered marketing, distribution, and project development company providing business solutions for plastics and chemicals producers and users. The company has over 50 offices servicing more than 100 countries and territories.

The BTS & Partners team was led by Partner Okan Arican and included Senior Associate Riza Yucel and Associate Mine Hazal Senol.

The Kolcuoglu Demirkan Kocakli team was led by Partner Bihter Bozbay and included Senior Associates Gozde Zorlu and Basak Islim and Associates Can Baykut and Revna Ulu.

Hande Karakulah has joined L’Oreal as Legal & Scientific Director in Turkey.

Prior to her move, Karakulah was the General Counsel, Turkey, Middle East & Africa at Natura& Co, a role she held since Avon was incorporated into the company. She had been with the Avon team since 2011. Between 2010 and 2011, she worked for British American Tobacco.

Before moving in-house, Karakulah was a Partner at ADMD Law Office, where she worked between 2005 and 2007.

“After 10 years in cosmetics, I am thrilled to join a leading company of the industry” commented Karakulah. “I also find this wonderful opportunity very exciting because it entails the leadership of the scientific regulatory team.”

In 2021, Karakulah offered an interview to CEE In-House Matters reflecting on the expansion of her role as a result of Natura&Co’s 2020 acquisition of Avon. You can find the interview here.

Originally reported by CEE In-House Matters.

Corporate governance principles are essential in order to protect benefits of minority shareholders and investors. Appointment of independent members is one of the most important elements that ensure proper implementation of the corporate governance principles. As a part of corporate governance principles regulated under the capital market legislation, independent board members must be appointed by the companies who are expected to objectively supervise the company and enlighten the public if necessary. It is important to have an independent member who will execute his/her duties without being influenced in order to create reliable cooperation. 

In light of the foregoing, Corporate Governance Communique No. II-17.1. (“Communique”) stipulates mandatory provisions regarding appointment of the board of directors. For example; as per the Communique, the board of directors must consist of at least 5 (five) members, a majority of the members of the board of directors must have non-executive duties and there must be independent board members among the non-executive board members. In addition, the number of independent board members cannot be less than 1/3 (one-third) of the total number of board members in the public companies and in any case there cannot be less than 2 (two) independent members.

In this article, our aim is to briefly summarize requirements around appointing of the independent board members and their duties.

Requirements to be an Independent Board Member

The Communique also determines specific criteria for the ones who wish to be an independent member of the board of directors. According to 4.3.6 of Corporate Governance Principles that is Annex 1 of the Communique (“CGP”), independent board members must hold the following qualifications: 

• must not have an employment relationship at an administrative level to have significant duties and responsibilities within the last 5 (five) years, not own more than 5% of the capital or voting rights or privileged shares either jointly or solely or not to have a significant commercial relation between the corporation, companies on which the corporation hold control of management or have significant effect and shareholders who hold control of management of the corporation or have significant effect in the corporation and legal entities on which these shareholders hold control of management and himself/herself, his/her spouse and his/her relatives by blood or marriage up to second degree,
• must not be a shareholder (5% and more), an employee at an administrative level to have significant duties and responsibilities or member of board of directors within the last 5 (five) years in companies that the corporation purchases or sells goods or services at a significant level within the framework of the contracts executed, especially on audit, rating and consulting of the corporation, at the time period when the corporation purchases or sells services or goods,
• must have professional education, knowledge and experience to duly fulfill the assigned duties,
• must not be a full-time employee at public authorities and institutions after being elected (except being an academic member at university provided that is in compliance with the relevant legislation),
• must reside in Turkey,
• must be capable to contribute positively to the operations of the company, to maintain his/her objectivity in conflicts of interests between the corporation and the shareholders, to have strong ethical standards, professional reputation and experience to freely take decisions by considering the rights of the shareholders,
• must have time for the company’s business in order to follow up the activities and duly fulfill the allocated duties, 
• must not have conducted membership of board of directors more than a term of 6 (six) years in the last 10 (ten) years,
• must not be registered and announced as a board member representing a legal entity and
• must not be the independent member of the board of directors in more than 3 (three) of the companies as such; the corporation or the controlling shareholders of the corporation who hold the control of management corporations and in more than 5 (five) corporations in total which are admitted to the trading on the exchange.

 Appointment of Independent Board Members

Generally, independent board members are appointed by the general assembly in similar with the other members of the board of directors. The general assembly considers the candidate proposal for independent membership. Candidate proposals are prepared by the board of directors or by the nomination committee if it is established.

After receiving proposal for nomination from the current members of the board of directors and/or the shareholders, the nomination committee takes them into consideration. Candidates submit a written declaration to the nomination committee stating that he/she is independent within the framework of relevant legislation, articles of association and the criteria set forth in the CGP.

The nomination committee evaluates the candidates who wish to be independent board members and consider whether they fulfill the independence criteria determined under CGP. After evaluation, the nomination committee reports the candidates to the board of directors, the board of directors reviews the report and prepare a list consisting of legible candidates for independent members within the framework of the report of nomination committee and submits the list to the Capital Market Board (“Board”) at least 60 (sixty) days prior to the general assembly meeting. The Board reviews the list and determines the ones who are capable of being independent member in line with the independency criteria. Appointment of the candidates who are not found as independent by the Board are not discussed during the general assembly meeting.

Also, the company must disclose at Public Disclosure Platform the list of the candidate independent members and of the candidates who have not been accepted as candidate independent member, at the latest with the announcement of the general assembly meeting. General assembly resolution shall be announced together with the opposing votes and the grounds thereof, via the corporate website of the company.

Responsibilities of Independent Board Members

Under Turkish laws, independent members do not have different duties from the executive and non-executive members of the board of directors. However, it is mandatory for independent members to be objective and transparent. According to the Turkish Commercial Code No. 6102, all members of the board of directors are jointly and severally liable to the company, the shareholders and the creditors of the company for damage occurring due to their fault and non-fulfilment of the duties stated in the laws or the articles of association.

Conclusion

Independent members are essential players while maintaining corporate governance in publicly-held companies. Independent members must fulfill specific criteria stated in this article. Such qualifications are proof that such member must perform his/her duties by respecting independency and transparency. While participating in board of directors and committees, the independent members take responsibility for management and audit of the companies.

By Gonenc Gurkaynak, Partner, Nazli Nil Yukaruc, Partner, and Isil Ertekin Cokca, Associate, ELIG Gürkaynak Attorneys-at-Law

Purchase price is invariably among the most contentious points during the negotiation phase of an M&A transaction. Especially in cross-border transactions, the buyer may wish to minimise risks by opting for alternative payment methods. One is these methods is “earn-out,” where a part of purchase price will be calculated by reference to the future financial performance of the target company.  Statistics pertaining to the year of 2020, indicate that earn-out clauses were used in around 27% of the acquisitions concluded in the United States. Also, earn-out clauses are frequently being used in share purchase agreements concluded in Europe. This is especially the case in deals involving start-up companies, where the uncertainty increases on the factors of target company’s future performance and the buyer does not have any in-depth market experience.

What is ‘Earn-Out’ Payment?

Earn-out is a purchase price adjustment mechanism in the share purchase agreement under which part of purchase price will be paid in the future upon the fulfillment of certain conditions set out in the agreement. Accordingly, the purchase price is divided into two parts: (i) a fixed amount to be paid at the time of the transfer of the shares, (i.e., at the closing), and (ii) a variable amount to be paid after the closing based on the expectations of future income of the target company. Therefore, the remaining portion of the purchase price is paid to the seller only if the parameters set forth under the share purchase agreement are met. Otherwise, the buyer is not obliged to pay an earn-out payment in addition to the fixed amount. The earn-out amount to be paid in the future would often range from 20% to 30% of the total purchase price. In addition, larger or lower percentages can be arranged on a case-by-case basis.

Earn-Out Parameters

Earn-out clauses should be designed in a way to avoid a conflict of interest and to reach a balance between the parties. Thus, the starting point for triggering a fair earn-out claim is the calculation of target company’s objective financial data. Objective financial data related to the target company’s financial status can comprise of budget targets, such as cash flow, balance sheet income, gross or distributable profit, annual turnover, EBIT (earnings before interest and taxes), and EBITDA (earnings before interest, taxes, depreciation, and amortization). However, such calculation formulas may not reflect the actual financial position of the target company, thus buyers prefer to agree on achieving certain turnover targets instead of using foregoing target values. EBITDA is one of the most preferred parameters since the buyer has less possibility to manipulate the costs.

Non-financial parameters can also be decided upon to determine the future payment of the purchase price. In general, non-financial events are being used as a basis while acquiring start-ups and companies operating in regulated sectors, such as condition of seller’s remaining their role in the company management post-closing or obtaining necessary official permissions. For example, in the acquisition of a start-up company where the future performance of the target company is tied to the seller’s management, the parties may negotiate on the seller’s executive role in the target’s management for an earnout time period. Henceforth, the seller is entitled to receive the remaining purchase price only at the end of such time period. Similarly, for a target company operating in pharmaceutical industry, acquiring official permissions or a patent can be envisaged under the share purchase agreement as a condition for earn-out payment. In this respect, the seller will only be able to receive the remainder of the purchase price after obtaining the official permission or patent.

On the other hand, parties may also agree on both financial and non-financial parameters at the same time under the share purchase agreement.

Why Earn-Out?

Earn-out offers a fair value to both the buyer and the seller. Generally, seller will be paid with the fixed price at the closing, and the remainder of the purchase price is dependent upon the occurrence of certain parameters agreed on between the parties. That being said, for the parties this has the advantage that the buyer only pays a portion of the purchase price upfront and eliminates uncertainties regarding the future performance of the target, and the seller is to receive additional compensation in the future if the business achieves financial or non-financial goals which they envisage.

Earn-out arrangements are effective ways of holding the seller responsible for the information they provide about the expectation of target company’s future state. Furthermore, an earn-out clause can also be attractive for the seller, as it gives them the possibility of benefiting from a longer-term successful transaction beyond the purchase price.

As a result, the interests of buyer who may suffer from the uncertainties and risks regarding target company’s future financial performance can be insured by providing an earn-out protection. For this reason, use of earn-out clauses are increasing drastically in due course particularly in acquisitions of  start-up companies, and such arrangements become more attractive for both buyer and seller in case the parameters are formulated correctly.

Earn-out Mechanism under Turkish Law

Earn-out is not specifically regulated in Turkish law. However, Turkish law allows parties to agree on a purchase price payable upon the fulfilment of certain conditions, thus it does not prevent the implementation of earn-out mechanism.  Moreover, price determination based on the fulfilment of certain condition in the future refers to the existence of retarding condition [geciktirici koşul]. To be precise, terms and conditions of the share purchase agreement subject to the earn-out payment can be referred as a retarding condition within the scope of Article 170 of the Turkish Code of Obligation Law No. 6098 [“TCO”]. 

As mentioned above, such retarding condition can be determined based on the future financial expectations or the occurrence of the non-financial events. In this respect, the seller will not be entitled to receive the relevant portion of the purchase price until the condition is fulfilled.  That part of the purchase price will be due and payable to the seller only after the delaying condition is fulfilled.

Article 175 of the TCO is worth mentioning here. Pursuant to this provision, if the buyer assuming control following the share transfer prevents the fulfilment of conditions set out in the share purchase agreement in order to avoid the obligation to make the earn-out payment, the relevant condition could arguably be interpreted as being met, and the seller becomes to be entitled to the earn-out payment due to the buyer’s actions in bad faith. Again, depending on the characteristics of the earn-out agreement, the TCO’s provisions on sale and mandate contracts may be applied by analogy.[1]

Earn-out-Related Disputes

An earn-out agreement is attractive for both the seller and the buyer: while the seller is entitled to a higher purchase price upon the success of the company, the buyer will pay a part of the purchase price instead of total purchase price only if the conditions are fulfilled. However, earn-outs are one of the main grounds of disputes between the parties. For instance, buyer’s strategy in long-term investment plans, or transferring a large percentage of the company’s assets, or investing in other companies would highly likely affect seller’s future earn-out receivable, thus cause a dispute between the parties.

Hence, not only the value and calculation of the purchase price to be paid in the future, but also the factors which would affect the amount of the earn-out payment should be considered during the negotiations. At first, restrictive covenants can be envisaged in the agreement so as the seller to retain a level of control over the operations of the target or to prevent the buyer from making significant changes that may lead to decrease in the earn-out amount. Also, in cases where buyer’s decisions affects the target’s economic activity, and therefore cause loss in the company, the earn-out payment can be calculated as if no loss has been occurred.

[1] For more information on the earn-out clauses in Turkish law and applicable provisions of the TCO, please see Atamer Y.M. / Altunbaş Sancak Z., Earn-Out Clauses in Share Purchase Agreements- A Comperatibe Overview, BATIDER 2019, Issue 3, pp.97-136.

By Zahide Altunbas Sancak, Partner, and Sevinc Jafarova, Associate, Guleryuz & Partners

Paksoy has advised Coca-Cola Icecek Anonim Sirketi on a USD 500 million seven-year issuance of 144A/RegS bonds at a fixed coupon rate of 4.50%. Joint book runners HSBC Bank plc, J.P. Morgan Securities plc, and Merrill Lynch International were reportedly advised by Allen & Overy.

According to Paksoy, “Coca-Cola Icecek had received an investment-grade rating from S&P in late 2021 on top of its already existing investment-grade rating from Fitch. Marked as Turkey’s largest sustainability-linked bond, the transaction is also regarded as the first sustainability-linked bond of the beverage industry in the EMEA region. The company, under the bond conditions, will have a key performance indicator tied to water usage reduction, and has committed to reporting and externally verifying its performance on an annual basis.”

According to the firm, “the bonds will mature in 2029 and are admitted to listing on the Euronext Dublin. The proceeds will refinance part of USD 500 million outstanding bonds due in September 2024, the company’s debt, support CAPEX investments, and working capital needs.”

Paksoy’s team included Partner Omer Collak, Senior Associate Merve Kurdak, and Associate Bulent Ozturk.

Bigen Kamcioglu has joined Katara Hospitality, the hospitality arm of the Qatar Sovereign Wealth Fund, as its Legal Manager.

Kamcioglu moved from Al Rayyan Tourism Investment Co. (ARTIC), a subsidiary of Al Faisal Holding, where she was the Legal Manager since 2019. Prior to that, she spent almost six years with Katara Hospitality.

Before moving in-house, she worked as an Associate Lawyer with Cerrahoglu Law Firm in Istanbul from 2010 to 2013.

Kamcioglu is a graduate of Koc University’s School of Law and holds an LL.M. degree from the University of London.

Originally reported by CEE In-House Matters.

Since the President’s speech on December 20, 2021, “FX-Protected Deposit Accounts” have been at the forefront of talks on banking and finance applications. The instrument, of which the legal foundations were laid with Communiqué No. 2021/14 on Supporting the Conversion of Turkish Lira Deposit and Participation Accounts [“Communiqué“] published in the Official Gazette immediately following the speech, on December 21, 2021, found an ever-expanding field of application with amendments adopted in the following days and finally took its final form. In this article, we will examine FX-protected deposit accounts with their legal basis.

What is an FX-Protected Deposit Account?

An FX-Protected deposit account is a banking instrument individuals may prefer instead of their FX deposits [deposits in foreign currency], in which the opportunity cost arising from the appreciation of foreign currency types is guaranteed in case of an appreciation rate exceeding the determined TL interest rate on the maturity date of the deposit. Savings currently held in US Dollars, Euros and British Pounds can be converted into Turkish Lira and into a FX-protected TL time deposit account.

Who Is Eligible to Open a FX-Protected Deposit Account?

When FX-protected deposit accounts were first being discussed, it was announced that only real persons could benefit from the instrument. Indeed, legal entities were initially excluded from the scope of the Communiqué, as the scope was determined as “to regulate the procedures and principles regarding the support to be provided to deposit and participation fund holders in case FX-deposit accounts and foreign exchange denominated participation funds of real persons are converted into Turkish lira time deposit and participation accounts”.

At the current stage, this initial stance has been abandoned and the Communiqué was amended on 11 January 2021, this time allowing legal entities to open FX-protected deposit accounts. As a result, legal entities residing in Turkey, excluding banks and other financial organizations, might now benefit from this instrument in the current situation.

Real persons can register accounts with maturities of 3 or 6 months, or a year, whereas legal entities can only register accounts with maturities of 6 months or a year. Aside from that, there is no substantial difference in how individuals and legal persons can utilize the instrument.

There are no further limitations on the opening of FX-protected deposit accounts based on the country of origin, citizenship, nationality, or country of incorporation in case of legal persons. As a result, any natural or legal person residing in the country is eligible to register an account. Furthermore, the rule allows non-resident Turkish citizens working abroad, either as an employee or self-employed, to register an account.

FX Protection and Other Privileges Granted to FX-Protected Accounts

The one-week repo interest rate of the Central Bank of the Republic of Turkey [“CBRT“], commonly known as the policy rate in the public, has been determined as the lowest interest that a bank can pay to FX-protected deposit accounts within the framework of the Communiqué. Therefore, the minimum amount to be paid to the customer at the end of the maturity period will be the sum of the principal and the policy interest accruing during the maturity period. Banks can also set an interest rate higher than the CBRT’s policy rate to be applied to FX-protected deposit accounts.

If the appreciation rate of the determined foreign currency during the maturity period is below the interest rate applied to the account, no further payment is made to the customer. However, if the exchange rate protection is activated, in other words, if the determined exchange appreciates in a rate above the interest rate, the difference between the appreciation and the interest amount must also be paid to the customer. In this case, while the bank pays the interest applied to the account, the CBRT pays the difference between the appreciation rate and the interest applied to the account. For example, if a customer deposits 10,000 TL in a FX-protected deposit account with 15% interest and a 1-year maturity, and the determined foreign currency appreciates by 10% in the same period, the bank will pay the customer 11.500 TL, consisting of principal + interest, because the appreciation of the currency remains below the interest rate. However, in the same case, if the currency appreciates by 20%, since the appreciation rate goes above the interest rate, 12.000 TL consisting of the principal + interest + FX appreciation is paid to the customer, and the 500 TL portion consisting of the difference between the interest and the appreciation rate is paid by the CBRT. While calculating the exchange rate difference payments, the buying rate for the US Dollar, Euro and British Pound, announced by the CBRT at 11:00 am every day, is taken as a basis. In case of withdrawal of money from the account before maturity, no appreciation payment is made by the CBRT.

In order to encourage FX-protected time deposit accounts, no deposit deductions are made from these accounts and no withholding tax is charged. However, there are ongoing debates about improving the privileges of FX-protected accounts and introducing some tax exemptions for account holders.

(In)Adequacy of Current Regulations

The Communiqué dated December 21, 2021, which currently constitutes the sole legal instrument regulating FX-protected deposit accounts, fails to encapsulate the entirety of the statements made by the administration on the subject and some aspects of the instrument that is already being used in application. For example, while it has been widely reported that a maximum interest rate was put in force for banks in FX-protected deposits, this application is yet to be regulated within the scope of the Communiqué. The fact that this, and other debate regarding FX-protected deposit accounts are still going on demonstrates the need for comprehensive legislation on the issue, preferably enacted by the Grand National Assembly. Otherwise, the absence of such legislation will invariably lead to debates on legal predictability and raise doubts about the instrument.

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

Kinstellar and its Turkish affiliated firm Gen & Temizer Ozer have advised Turkish developer Dream Games on a USD 255 million Series C investment round, led by Index Ventures. Orrick, Herrington & Sutcliffe reportedly advised Dream Games on English law. Goodwin Procter reportedly advised Index.

The Makers Fund, IVP, and funds and accounts managed by BlackRock, Kora, and Balderton Capital participated in the round.

According to Kinstellar, “the company will use the funding to continue investing in and developing Royal Match and to work on its next launch. Dream Games became the third ‘unicorn’ in Turkey following its series B round in July 2021.”

Dream Games is an Istanbul-based mobile gaming company and the developer of Royal Match.

Kinstellar previously advised Dream Games on its series A (as reported by CEE Legal Matters on March 8, 2021) and B (as reported by CEE Legal Matters on July 8, 2021) investment rounds, both in 2021.

The Kinstellar team was led by Partner Emre Edmund Ozer and included Associate Beliz Zorlu and Of Counsel (and Sevener Hukuk Partner) Orhan Can Sevener.

Kinstellar was unable to disclose further information on the deal.