Category: Turkiye

Capital Markets Board of Turkey [the “Board”] released a public press on February 1, 2021 regarding the issuance of the Draft Communiqué Amending the Communiqué on Tender Offers No. II-26.1 [the “Draft Amendment”] which envisages to make certain amendments to the Communiqué on Tender Offer No. II-26.1 [the “Communiqué”]. In this respect, while some existing provisions will be clarified with the Draft Amendment, the scope of the circumstances which do not trigger the tender offer obligation and the exceptions to mandatory offers will be expanded.

1: The Draft Amendment Defines Who Falls within the Ambit of Mandatory Tender Offer and the Methods for Calculating the Number of Shares.

Article 11 titled “Mandatory Tender Offer” of the Draft Amendment clarifies that only those who are shareholders as of the date on which the acquisition of the management control is disclosed to public will participate in the mandatory tender offer. The Draft Amendment further provides the date to be taken into account in determining the amount of shares subject to the mandatory tender offer. Accordingly:

• If management control [whether directly or indirectly] is acquired voluntarily or through one of the other methods, the date of the acquisition of the shares or voting rights entitling to management control is disclosed to public;

• If management control is acquired through a specific written agreement concluded by and among the shareholders, the date on which this specific written agreement is disclosed to public will be taken into account in determining the amount of shares subject to the mandatory tender offer.

2: The Principles regarding the Calculation of Mandatory Tender Offer Price Are Clarified, and the Board will have great discretion to cease the tender offer or recalculate the price.

Although the Draft Amendment does not amend the parameters for the determination of tender offer price, it removes the ambiguity as to the applicable mechanism under different scenarios, namely (i) acquiring the management control of the target company directly or indirectly, or (ii) whether the target company is listed on stock exchange or not. Hence, while the tender offer price remains unchanged for the shares of the companies listed on stock exchange, the Draft Amendment provides calculation mechanisms in determining the tender offer price for the shares or share classes of the companies that are not listed on stock exchange.

In case of a direct or indirect change in the management control of the target shares of which are not listed, the tender offer price shall not be lower than:

• the price determined in the valuation report prepared by the Board by taking into account the privileges attached to the share classes if any, and

• the highest price paid for the same share classes of the target within the 6 [six] months before the date on which the tender offer obligation

Moreover, the Board will be entitled to cease the tender offer or recalculate the tender offer price if it decides on existence of developments affecting the economy or the relevant industry. 

3: Scope of Circumstances which would not Give Rise the Mandatory Tender Offer and Exceptions to the Obligation to Launch a Tender Offer Are Expanded.

The Draft Amendment clarifies the circumstances which would not give rise the mandatory tender offer and introduces new exceptions to the obligation to launch a tender offer.

First, it is stated that the obligation to launch a tender offer will not arise in case of an acquisition of voting rights entitling management control as a result of the transaction concluded (i) by and among the legal entities being controlled by the same individual or legal entity or (ii) by and among those individuals or entities who possess management control and therefore, the statement of “transactions concluded among the group which has management control” will be removed from the text of article in order to prevent the uncertainty in practice.

Furthermore, the scope of circumstances which would not trigger the mandatory tender offer obligation is expanded. In this regard, the obligation to launch a tender offer will not arise in the following cases:

• Squeeze-out and sell-out rights arising as a result of obtaining the management control;

• As regards public companies listed on stock exchange, changes to management control as a result of new share acquisitions by existing shareholders through participating in share capital increases in which their pre-emptive rights have not been restricted;

• Unintended changes to management control as a result of events such as the suspension of voting rights of certain shareholders, capital decrease through share redemptions, amendments to the privileges attached to the shares, or share buy-backs by the

Also, in case of occurrence of any of the foregoing events, those who obtained management control of the company will be required to make a public disclosure within 2 [two] business days.

Furthermore, in addition to the existing cases, the Board will be entitled to grant exemption to the acquirer from the mandatory tender offer obligation, if the acquisition of shares triggering the change of management control results from (i) inheritance, (ii) partition of the inheritance or (iii) the legal matrimonial property between spouses.

4: Principles to be Specified in the Brokerage Agreement Are Regulated.

Pursuant to the Draft Amendment, shares banned from transactions, subject to legal disputes or other third-party claims cannot be excluded from the mandatory offer by way of incorporating a clause into the brokerage agreement. If there are such shares in the offer, their purchase price is to be reserved under a separate and interest-bearing account, until the ban is lifted, or legal claims are solved.

5: Brokerage Firm will be Liable for the Information stated on the Information Form.

The Draft Amendment also adds the brokerage firm on whose behalf the information form was signed to the list of persons liable for the mandatory tender offer information form if the information on the form appears to be incorrect, misleading or incomplete.

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

Alaz Eker Undar has been promoted to Partner and Head of the Banking & Finance practice at YBK in cooperation with CMS.

Undar has been serving as Co-Head of the YBK Banking & Finance practice in 2020. Prior to joining YBK in 2014, he spent over four years with Bezen & Partners and over half a year with Akol. 

According to YBK, he “has been with YBK since its early days,” with him also being “a senior figure in the M&A, Infrastructure, and Projects teams. He is the lead Sustainable Financing lawyer in the firm, with a particular interest in green cities and the financing of sustainable development.”

YBK Managing Partner, Done Yalcin congratulated Undar on his appointment, stating that he “is integral to the continued success of the Firm, locally and regionally; he is a true leader and a highly respected lawyer.” 

The “Regulation on the Conduct of Trials by Audio and Video Transmission in Civil Procedures” [“Regulation“] was published in the Official Gazette dated 30 June 2021 numbered 31527 and entered into force on the same date. The Regulation sets out the procedures of e-hearings, which have become more important due to the Covid-19 pandemic. According to Regulation, e-hearings will have the same legal consequences with the physical hearings.

• Standards of the E-hearing System and Interruption of Transmission

The Regulation requires that the image and the sound should be transmitted simultaneously and securely during the e-hearing and the video should be of a quality sufficient to reflect the facial expressions, body movements, attitudes, and behaviors of the speaker, while audio transfer should be able to convey the participant’s emotions and be of a quality sufficient to clearly understand the speaker. It will also be possible to submit information, documents, or evidence through UYAP [e-justice system] during the e-hearing.

The e-hearing will need to be reopened in case the audio and video transmission cannot be provided simultaneously during the e-hearing, or if any interruptions occur that makes it difficult to understand the statements of the speaker. However, if the disruption continues, the e-hearing will have to be terminated by stating the reasons for termination, and this issue should be written in the minutes of hearing. In such a case, the case will not be dropped provided that the party or the attorney was not at fault.

• E-hearings Can Be Held upon the Parties’ Request of or on the Initiative of the Court

E-hearing will in principle be held at the request of one of the parties. Upon request, the court may decide that the requesting party, their attorney, the witness, or the expert can attend the hearing and take procedural actions via the e-hearing system. However, statements regarding waiver, acceptance or settlement must be physically declared in the presence of the court at a hearing to be scheduled by the court.

Request for e-hearing should be submitted at least 2 [two] business days before the hearing date together with its justification. Only the attorneys who filed a request can attend the e-hearing in cases followed by multiple attorneys. Following the request, the judge renders a decision at least 1 [one] business day before the hearing date, and the decision hereby cannot be appealed.

The judge rejects the request in case the e-hearing request has not been made on time or if there are any legal, de facto, or technical obstacles that makes it difficult to hold an e-hearing. In addition, the judge is authorized to reject the request by giving reasons if s/he believes that the request is intended to abuse the right or to retard the hearing.

On the other hand, it is also possible for the court to ex officio decide to hear the witness or expert through the e-hearing system.

• Places Suitable for E-hearing

The Regulation sets forth a wide range of places to attend the e-hearing. Accordingly, the attorneys can attend the e-hearing from their offices, from places designated by the bar association or allocated in courthouses, or any place far from any influence and appropriate to observe the facial expressions, body movements, attitudes and behaviors of the speaker. In addition, the party requesting an e-hearing or the party that will take an oath or be interrogated via the e-hearing system, as well as witnesses, experts, and other interested parties, will be able to attend from places allocated for this purpose in courthouses or penal institutions where they are located.

On the other hand, the party who is decided to attend the hearing via the e-hearing system due to illness, elderliness or disability will be able to attend the hearing directly from their residence or institution. The same opportunity is available for witnesses, experts, or other relevant persons who are decided to be heard through this process.

• Identification in E-Hearings

In general, electronic signature or mobile signature will be taken as the basis for identification. The identification process will be carried out by the court. Accordingly, the identity of the party’s attorney will be verified by using secure electronic signature or mobile signature, UYAP records and similar methods, and the identity of the party participating in the e-hearing from other places where his/her attorney is allowed to attend will be verified by the court by examining the UYAP records or using similar methods.

Witnesses, experts and other interested parties attending the e-hearing from their residence or institutions due to illness, old age or disability will be identified by using secure electronic signature or mobile signature.

• Recording and Storage

Any kind of media recording is prohibited during the e-hearing. However, the court is authorized to record the trial by notifying the reason if it deems necessary. However, disclosure of these records without the consent of the court and the persons concerned is strictly prohibited. In this respect, persons who violate the prohibition on recording may be sentenced to imprisonment up to 6 months pursuant to Article 286 of the Turkish Criminal Code No. 5237.

By M. Tarik Guleryuz, Partner, and Baris Ulker, Senior Associate, Guleryuz & Partners

Mediation is essentially a dispute resolution method; and an ancient institution throughout the history of mankind that is traditionally recognized in almost all societies. Instead of bringing an action before court; by applying mediation, the disputing groups [i.e., the villagers, townsfolk or members of a profession] discuss the issue with the assistance of a third person, and that third person assists parties in reaching a settlement. In this conventional system based on the fundamental principle of freedom of will, mediation is perceived to be an “alternative” dispute resolution method free from the coercive power of state. Such situation similarly appears in the settlement of disputes between the states.

Furthermore, mediation has been subject to myriad definitions as a concept. “Mediation as a form of alternative dispute resolution is normally considered to prevent the potential dispute with the assistance and contribution of the independent and impartial third person who facilitate discussions between the disputing parties aimed at forming an agreement on the settlement of the dispute or with regard to key issues of the dispute” is the most frequently used definition of mediation. Thus, the traditional mediation seems preferable alternative/option for the disputants with its definition both in legal doctrine and in the vocabulary. For instance, people who are called as “muslih” under the institution of “muslihun” in the Ottoman Empire, acted as an optional mediator who is entitled to reconcile the parties without resorting the Muslim judge for the settlement.

Nevertheless, the ever-extending regulations frequently known as “mandatory mediation” that require the parties to apply for mediation prior to filing a lawsuit have many distinct characteristics in comparison to conventional mediation methods. Reaching an agreement on a “mandatory” basis divests the structure of “mediation” based on the concept of freedom of will. Therefore, many lawyers delineate “mandatory mediation” for the parties to undertake as a legal prerequisite to commencing proceedings. In this respect, mandatory mediation compels parties to enter the process of mediation than being an alternative to the traditional system of court procedures. Mandatory meditation, which was designed as a prerequisite for litigative action is generally seen as a manifestation of the liberal tradition maintaining for the minimization of the state. Locke, Hume and Smith’s understanding of “night-watchman state / monarchy” advocates the lowest intervention of the state in the areas other than security and judiciary. Hence, the mandatory mediation procedure results in the transfer of conventional judicial power of the state arising under its sovereignty and therefore, may be considered an obstacle in attaining access to justice.

Mandatory Mediation and The Approaches under Turkish Law

Mandatory mediation was initially envisaged under Turkish law as of 1 January 2018 for the settlement of labour disputes except those arising out of the occupational accidents and work-related diseases. In the following period, the new legislations regarding mandatory mediation entered into force for: (i) the commercial disputes concerning monetary receivables and compensation claims [as of 1 January 2019] and (ii) the consumer disputes falling under the specified monetary thresholds and non-monetary claims fall within the scope of consumer courts [as of 22 July 2020]. For the disputes stated herein, mandatory mediation is recognized as a legal prerequisite under the Civil Procedure Law to the extent its compulsory nature. Thus, the foregoing types of disputes must be referred to mandatory mediation, before pursuing the dispute in court. If a lawsuit is brought before the court without applying to mandatory mediation, the case will be dismissed on procedural grounds without any further examination of the merits of the case. In other words, mandatory mediation is therefore considered as a required step to be exhausted for the respective disputes. Otherwise, the right of access to justice is lost.

For each case, the whole process of mediation may be completed within the different periods of time depending on whether parties reach an agreement on settlement or not. In addition to this, during the mediation procedure statutes of limitation will be suspended. Consequently, if the parties apply to mediation within the statutory period of time, the legal periods will be suspended until the completion of the procedure. If the parties fail to reach an agreement on the settlement during negotiations, they will be entitled to resort to court within the relevant statute of limitation which resumes as of the completion of mediation procedure.

It is stated that mandatory mediation is essential for the encouragement of voluntary mediation as a result of its implementation throughout years. In case of a conflict, the idea of creating an alternative to “file a suit” notion which comes to the mind as the first option delivers the main purpose of the mandatory mediation institution. Together with these aspects, mandatory mediation can be referred as a temporary but useful tool for breaking down the prejudices towards the mediation institution. Hence, before the introduction of mandatory mediation in Italy, the number of applications for voluntary mediation was 18.525 in 2010, however, this number has increased to 41.604 in 2013 after the process became mandatory.

Examples of Mandatory Mediation in the World 

The mandatory mediation is not a practice specific to our country. Especially in Europe, “European Code of Conduct for Mediators” was published in 2004 pertaining to mediation. The Directive of the European Council dated 21 May 2008 and numbered 2008/52/EC regarding “The Certain Aspects of Mediation in Legal and Commercial Disputes” has been approved by the European Parliament and the implementation of mandatory mediation was left to the discretion of the member states. With the Law issued in 2013, Italy has made the use of mediation compulsory for the disputes arising from the real estate, insurance, banking, finance, property sharing, inheritance, family law, rental law, negligence allegations against healthcare professionals and smear claims through the press.

Mandatory mediation has also been adopted in various states of Australia. For instance, disputes arising out of the agricultural claims, workplace leases and the state-specific condominium system (Strata Scheme) in the state of New South Wales are subject to mandatory mediation. On the other hand, courts in Australia also have discretionary powers in referring other disputes to mandatory mediation. Accordingly, the court can refer the dispute to a mediator without the prior consent of the parties, and therefore, parties of the dispute will be compelled to attend at the mediation meetings.

In comparison with the implementation of mediation in Australia, the mandatory mediation attempts resulted in disappointment in England. Some disputes can still be referred to the mediation with the court order. If one of the parties unreasonably refuses such referral, then the court is allowed to award the costs incurred during the proceedings against that party even if it is the prevailing one. Although the boundaries of the court’s authority in referral the dispute to the mediator are not regulated by law, according to the Jackson Report, which is one of the most important documents in terms of alternative dispute resolution methods in England, insurance disputes, material and moral compensation claims arising from the injuries and negligence allegations towards to healthcare professionals are considered the main types of disputes that are appropriate for the application of mediation.

Mediation from Liberalism Perspective and the Problem of Access to Justice

Without taking into account the conventional voluntary mediation lacking of coercive power of state, the institutionalization of mediation and its implication -sometimes compulsorily- to judicial system as an alternative dispute resolution method are essentially quite novel understanding in our legislative system. It is the fact that this trend -the so-called “adventure of the privatization of judicial system”- is closely related to the privatization, one of the fundamental principles of liberalism. The United States, where the management of the prisons has been transferred to the private sector in many states, is the leader of this trend.

Mandatory mediation -despite the allegations of breach of constitution- is a tremendous example in terms of the judicial outlook for the desire of the states to gradually transfer their interventionist and protectionist role. States and political competences tend to expand the implementation of mandatory mediation in all developed legal systems on the grounds of diminishing the well-known and famous workload of the judiciary. However, the global crises that have occurred in the last century caused the concept of the state to change, the neo-liberal views and the concepts of “night-watchman state” and “let them do” to strengthen.

The rhetoric of the “workload of the judiciary” notion with regard to the mandatory mediation gains strength against the opposing view which is basically based on the argument of access to justice, and the implementation of mandatory mediation is broadening its scope. Admittedly, the severe global economic crisis triggered by the Covid-19 outbreak and the economic transformation associated with it will increase the workload of the judiciary. This will be a very important argument for the further expansion of the implementation of mandatory mediation. In our country, the implementation of mandatory mediation is still being discussed for the settlement of disputes arising from the family law and similar legal disputes. The consolidation of the views advocating the mandatory mediation will accelerate the implementation of it in the several areas of law in the future.

By M. Tarik Guleryuz, Partner, and Baris Ulker, Senior Associate, Guleryuz & Partners

Debt collection cases, driven by the ongoing currency crisis in Turkey, as well as shareholder and other partnership disputes, have been the main focus of the Guleryuz & Partners law firm of late, according to Partner Tarik Guleryuz.

“At Guleryuz & Partners, we act for debtors and creditors, whether individual or corporate, in debt collection, insolvency, and enforcement proceedings and provide legal services in complex restructurings as well as M&A transactions and disputes arising thereof,” says Guleryuz. He reports that his firm has recently been handling high-value debt collection cases, mostly on the creditors’ side. Guleryuz explains that the increase in work stems from the ongoing economic crisis in Turkey: “when the economy is not doing very well and exchange rates are unstable, there is naturally an increase in the number of high volume debt collection cases.”

Guleryuz reveals that the cases range in value from EUR 100,000 to the tens of millions. Most recently, his firm helped its clients in collecting a total of EUR 17 million. He explains that one of the key instruments used in the proceedings is the preliminary injunction, which is aimed at seizing debtors’ assets beforehand, as is often the case when the rights of the creditor need to be immediately protected. In one of the recent cases, Guleryuz recalls, a Russian company entered into a takeover agreement with a Turkish one. After the deal had closed, the buyer started having financial difficulties. As a result, the buyer missed payment of several installments and the seller, represented by Guleryuz & Partners, filed for a preliminary injunction against the Russian company.

Guleryuz notes that the number of shareholder disputes has also been on the rise. He explains that these disputes, on average, take a long time to close and, more often than not, end in a settlement: “at the beginning of the year we have closed a shareholder dispute, consisting of around 120 different cases, which had been going on for about eight years.”

Finally, Guleryuz shares his thoughts about the future: “my prediction is that the amount of work is going to increase going forward, partly because of the overall global situation and partly because of our expertise in the field.”

It is a fact that international transactions – despite global disasters such as the Covid19 pandemic – continue inevitably and without slowing down. Hence, the scope of information exchange between countries on the assets of citizens and residents is also expanding, in order to ensure that the taxes are paid in the right amount to the right jurisdiction. Information exchange between countries matter not only for dual citizens but also for people who profit or make investments overseas.

With globalization, it has become difficult for countries to monitor the movement of money and as a result the loss in tax revenues has increased. This situation has led countries to share information especially on financial accounts, and various studies have been carried out on the subject under the leadership of the OECD.

Information exchange between countries is far from a brand-new idea. OECD’s model convention on the prevention of double taxation, [“Model Tax Convention on Income and Capital”] which is also adopted by Turkey, regulates information exchange in its Article 26. Other legal grounds for information exchange are bilateral information exchange agreements signed with countries often referred to as tax havens. However, while the regulations in these agreements do not provide detailed rules on the method of information exchange, information is mainly provided “on demand” and is insufficient to meet the needs of the relevant authorities.

For this reason, with the initiative of G20 countries, Convention on Mutual Administrative Assistance in Tax Matters was signed to create a common framework for all kinds of information exchange. While Turkey signed this agreement on November 3, 2011, the agreement entered into force after 6 years, when it was ratified on November 26, 2017.

This agreement sets out 3 basic methods for cooperation. Accordingly, the exchange of information between countries can be achieved by one of the following methods: 

1. Exchange of information on request
2. Spontaneous exchange of information
3. Automatic exchange of information

The focal point of the convention is automatic exchange of information. Hence, we will focus on this subject in our following explanations.

Automatic Exchange of Information

In automatic exchange of information, information on various income categories obtained in the country of origin is regularly reported to the counter-party country. The purposes of information exchange carried out by this method can be listed as follows: [i.] to maximize tax compliance, [ii.] to take all necessary security measures by creating a single global standard, [iii.] to increase tax revenues by preventing tax evasion, and [iv.] to create a database for risk analysis for local tax administrations.

Automatic exchange of information takes place in the following 6 steps:

1. The person or agency making the payment collects information from the payer and / or the person generating the information.
2. The payer or agency reports the information to the tax authorities.
3. The tax authorities of the country of origin consolidates the data for the country of residence / citizenship of the taxpayer.
4. The consolidated data is sent to the country of residence / citizenship of the taxpayer.
5. The submitted information is decrypted by the recipient country.
6. The results are analyzed, and a conformity check is carried out.

Automatic information exchange is mainly carried out in two distinct frameworks, namely “Foreign Accounts Tax Compliance Act” [“FATCA”] which is a US-specific system, and “Multilateral Competent Authority Agreement” [“CRS-MCAA”] which was formed by OECD.

FATCA

FATCA is an act enacted by the USA to create cross-border tax compliance by adopting international standards through automatic exchange of information regarding taxpayers. The act aims to increase the transparency of the information collected by the American tax authority IRS about US citizens who earn income outside the USA.

This law was enacted right after the 2008 economic crisis, and information exchange issue was regulated for the first time as an independent matter from double taxation. FATCA arranges two different model agreements, each of these two models includes two different sub-models. 

• Model 1: This model is signed between the tax authorities of the USA and the respective countries. Financial institutions in the party countries report the account information of their natural and legal person customers they identify as US persons to their national tax authorities, and national administrations forward them to the IRS. A Model 1A agreement is signed with the countries where the exchange of information will be carried out mutually, and a Model 1B agreement is signed with countries where the USA will unilaterally collect information.
• Model 2: In this model, the agreement is signed directly between the IRS and the foreign financial institution. The financial institutions that have signed the agreement make the notification directly to the IRS, not to their local administration. Model 2A is signed if there is no Information Exchange or Double Taxation agreement signed between the foreign financial institution’s country of residence and the United States; while Model 2B is signed if there is already such an agreement in force.

Turkey signed a FATCA Model 1A agreement on 29 July 2015. Accordingly, information on every individual living and legal entity operating in our country who is a taxpayer in the USA will be regularly reported to the Turkish Revenue Administration, and the Administration will share such information with the IRS. Despite the agreement was approved and ratified in October 2016, information exchange is still not active, as the technical infrastructure has not yet been established, according to information on the IRS official site.

Model Multilateral Competent Authority Agreement on The Automatic Exchange of Financial Account Information

Based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters, “Automatic Exchange Standards Concerning Financial Information in Tax Matters” was established by the OECD. The agreement model CRS-MCAA mentioned above is essentially included in this standard together with the Common Reporting Standard [“CRS”].

CRS-MCAA is based on the principle of reciprocity. That is to say, the countries that have signed the model agreement include a list of the countries they will carry out automatic information exchange in the annex of the agreement. Automatic exchange of information is activated between countries that are mutually included in this list. 

Turkey signed the model agreement on 21 April 2017 and committed to start automatic information exchange in 2018. However, the agreement entered into force on December 31, 2019, with a delay of two and a half years. Later on, with the Presidential Decision No. 4025 published in the Official Gazette dated June 1, 2021, the effective date of the agreement was determined as February 3, 2020, to be applied to the taxation periods starting from January 1, 2019 at the earliest.

While a communiqué on the implementation of the agreement was drafted and sent to financial institutions for their advisory opinions [namely, “General Communiqué on Automatic Exchange of Financial Account Information in Tax Matters”], this draft was later published as a guide. In this respect, our domestic legislation regarding implementation arguably remains insufficient.

As of December 2020, there are more than 4400 mutual information exchange relationships activated between more than 100 countries. In this context, Turkey has sent information to 59 countries so far and collected information from 78 countries. Considering that these numbers were only 1 in 2017 and 2 in 2018 [Norway and Latvia], the pace in which these agreements become effective becomes evident.

Key Differences Between FATCA and MCAA

The main difference between these two models is the criteria the information exchange is based on. While FATCA is based on the criterion of citizenship, MCAA is based on the criterion of residency. In other words, while information within the scope of MCAA is shared with the country of residence of the taxpayer, it is shared with the country of citizenship in FATCA.

Another important difference arises in terms of sanctions. Namely, while IRS imposes 30% withholding tax on some income items in the USA to individuals and institutions that it qualifies as noncompliant, there is no such penalty in MCAA.

It should also be added that FATCA introduces a bilateral system, while MCAA is a multilateral and reciprocal agreement model.

Conclusion

Regardless of the method, it is unquestionable that countries are increasingly cooperative in sharing financial information. With the impact of the Covid-19 pandemic, it can be predicted that the economic uncertainties in our country and the world will lead countries to further strengthen this cooperation in order to minimize tax losses. Therefore, it is imperative for those who have assets outside the country to closely follow these developments in the international arena.

By Zahide Altunbas Sancak, Partner, and I. Selin Nacar Ozturk, Associate, Guleryuz & Partners

On June 19, 2021, the Law No. 7327 Amending the Execution and Bankruptcy Law and Some Other Laws [“Amendment Law”] was published in the Official Gazette, and accordingly, significant amendments have been introduced to the Execution and Bankruptcy Law [“EBL”]. This client alert aims to outline these amendments.

Amendment to Article 241 of the EBL titled “Procedures of realization of assets”

Amendment of the 3^rd paragraph of Article 241 of the EBL enabled the sale of the assets and rights that are commercially and economically integrated and businesses possessing these rights and assets as a whole, in case the sale as a whole would be more profitable. In this respect, it is aimed to ensure the continuity of the businesses that are having financial difficulties especially during the Covid-19 pandemic. This provision also expands the application of the concept of “commercial and economic integrity”, which was mainly regulated in the legislation regarding the Savings Deposit Insurance Fund.

Amendment to Article 308 of the EBL titled “The failure to approve the concordat and the bankruptcy of the debtor”

Perhaps the most striking provision of the Amendment Law was the one altering the 4^th paragraph of Article 308/c of the EBL. Pursuant to this amendment, assumed debts, including loans granted by credit institutions, as per the permission of the concordat commissioner after the decision of temporary respite, will be paid immediately after the pledged receivables and before all other receivables registered at the bankrupt’s assets, including receivables arising from employment laws.

Amendment to Article 223 of the EBL titled “The bankruptcy administration and the duties of the bankruptcy office”

The Amendment Law modifies Article 223 of the EBL on the qualifications and selection procedures of the bankruptcy administrative officers who will take part in the bankruptcy administration. According to the relevant provision, bankruptcy administrative officers will be selected from the list of bankruptcy administrative officers formed by the regional expert boards. One of these officers selected is required to be a certified public accountant, and another to be a lawyer. On the other hand, it is forbidden for a bankruptcy administrative officer to take charge in more than five cases at the same time.

Amendment to Article 295 of the EBL titled “Consequences of the final respite for the pledged creditors”

Amendment of Article 295 of the EBL will make it possible to convert the pledged property into cash in accordance with the procedure in the second paragraph of Article 297, if it is not stipulated in the concordat plan that the pledged property will be used by the business, or if its value will decrease or its preservation will be costly. From the sales proceeds, the pledgee will be paid as much as the pledge amount. With this amendment it is aimed to prevent possible losses the pledged creditor may suffer.

Amendment to Article 296 of the EBL titled “Consequences of final respite for contracts”

The Amendment Law adds the phrase that the obligations arising from contracts that continue during the temporary and final respite will be mutually fulfilled to Article 296 of the EBL. Accordingly, parties will have to fulfill their obligations under the agreements, which they are party to, during the temporary and final respite. With the addition, the Legislator clearly demonstrated its will to keep the contracts alive even in the case of concordat.

Amendment to Article 297 of the EBL titled “Consequences of the final deadline for the debtor”

With the Amendment Law, Article 297 of the EBL has been amended and it is now become obligatory for the court to obtain the consent of the concordat commissioner and the board of creditors when allowing the debtor who declared concordat to establish a pledge, to be a surety, to make gratuitous dispositions, to make transactions such as transferring and restraining real estates or movables that are important for the continuation of the business operations after the respite decision.

Amendment to Article 308 of the EBL titled “The failure to approve the concordat and the bankruptcy of the debtor”

Amendment Law adds the following provision to Article 308 of the EBL: “If the concordat process ends in bankruptcy, the court that issued the bankruptcy decision will decide that the liquidation will be carried out according to the simple or ordinary liquidation procedure and that the ordinary liquidation will be carried out by the commissioners when necessary. In this case, the duties and powers of the bankruptcy administration will be exercised by the commissioners.”. 

Provisional Article 17 of the EBL

The following provisional article has been added to the EBL: “In accordance with the sixth paragraph of Article 223, until the list of bankruptcy administrative officers is formed, bankruptcy administrative officers will be appointed from the list without considering the assignment procedure. In order to prevent a person from serving as an officer in more than five cases simultaneously, the appointed bankruptcy administrative officers are notified to the regional expert board of the regional court of appeal to which the enforcement court is affiliated.”. Pursuant to this provisional article, procedures for the appointment of bankruptcy administrative officers have been determined until the formation of the “bankruptcy administrative officers list”, which is newly introduced as per the above-mentioned provision of the Amendment Law altering Article 223 of the EBL.

By M. Tarik Guleryuz, Partner, and Ulas Ege Parkin, Legal Intern, Guleryuz & Partners

The use of representation and warranty insurance, also known as M&A insurance and warranty and indemnity insurance [“R&W Insurance”], has grown in recent years to the stage where it has now become a standard feature of the cross- border M&A landscape. Estimates suggest that in the United States, the product was used in around 50% of the private acquisitions last year. Also, statistics pertaining to the year of 2019 indicate that the R&W Insurance was purchased in 49% of large deals having a value more than 100 million Euros in the European market. As is seen, R&W Insurance is frequently being used in M&A transactions and, in many respects, is now a mainstream.

Despite the low number of established practices in Turkey, this trend is expected to gain popularity as many more cross- border deals involving Turkey develop in the market. We expect that as the product further matures in Turkey, the M&A market and deal advisers will continue to adapt their processes and become increasingly sophisticated users of the product. 

What is a R&W Insurance?

R&W Insurance is in general described as an alternative remedy for the parties to the potential deal in connection with M&A transactions. It is used primarily to protect the insured party from financial losses incurred in case of breach of representations and warranties contained in an acquisition agreement. The insurance can be used both in share deals and asset deals. For the determination of the major function of R&W Insurance, it is important to define the term of “representation and warranty” set forth in the acquisition agreements.

Accordingly, a “representation” is defined as the statement of fact associated with the company as well as its business, assets, liabilities, and financial position, whereas a “warranty” refers to a contractual promise that an assertion of fact is true, supported by an implied promise of indemnity if the assertion is false. Having said that, in Turkish legal system as well as in some other continental European legal systems, like Germany and Switzerland, the term representation and the term warranty have similar meanings and lead to same remedies unless otherwise is agreed in the agreement. Regardless of how transaction is structured and what is the type of business of the target company, the parties rely on the function of representations and warranties disclosed in the acquisition agreements. By providing representations and warranties in the agreement, the seller assumes the risk relating to the matters covered thereunder and promises to indemnify the buyer in case of a breach. So, representations and warranties allow the parties to allocate the risk of liability with respect to various matters associated with the target company.

Conversely, the R&W Insurance reallocates the risk from the insured party [either buyer or seller] to the insurer by replacing or supplementing indemnity provisions in acquisition agreements. R&W Insurance thus is a useful alternative to the traditional methods of risk allocation, the most common being indemnifications backing representations and warranties, which are in turn supported by an escrow account or a purchase price retention arrangement where a portion of purchase price is deposited.

Sell-side Policy vs. Buy-side Policy: What is the Difference?

R&W Insurance policy can be obtained in favor of either the buyer or the seller. Each policy is tailored to meet the specific needs of transaction.

In sell-side policies, the seller is a policy holder and insuring his/her liability against the injured third party. In this type, the buyer would make an indemnity claim against the seller directly in case of breach of representation and warranties and the seller would then compensate that claim and file a claim with the insurer for any insurable loss. Alternatively, sell-side policy can be designated as a third-party liability insurance where seller’s policy will indemnify third party injured buyer against the loss and damages that s/he will suffer as a result of breach of representations and warranties. In third- party liability insurance policies, the commencement of claim procedure going along with the resort of seller to the insurer for the compensation of third-party beneficiary buyer. However, this type of policy does not provide protection in case of the willful misrepresentations and fraudulent behavior of the seller while giving the representations and warranties in the acquisition agreement. 

On the other hand, in buy-side policies, the buyer, as the insured party, will directly resort the insurance company for the losses and damages arising from the seller’s breach of representations and warranties. This type of the R&W Insurance policies currently constitutes the vast majority. Their key difference from sell-side policies is that they provide the fraud coverage which is not available in sell-side policies. That is to say, if the seller commits a fraud or misrepresents the fact during contract negotiations, then the policy would still pay out.

General Policy Terms

Coverage: Coverage limits in deals are generally upwards of 10% of the purchase price. In addition, larger coverage can be arranged on a case-by-case basis.

Retention: Policies usually include a retention amount is about 1% to 3% of the purchase price. Retention is referred basically an amount of money an insured person becomes responsible for. In other words, insurer will become liable only for the claims exceeding the retention amount. 

Policy Period: The duration of coverage differs between a buy-side policy and sell-side policy. While a sell-side policy matches the indemnity survival periods in the underlying acquisition agreement, a buy-side policy can be issued longer, even for the breaches that become apparent after these survival periods have lapsed. Policy periods will last 12 [twelve] months to 7 [seven] years. In tax related representations and warranties, the policy period is often set as the respective statute of limitation, which is 5 [five] years in Turkey.

Premium: Premiums would often range from 1% to 2% of overall transaction value in recent years as the insurance industry has become more familiar with the product and competition has increased between the insurers. However, as the risk factors significantly increases in Covid-19 outbreak, the premiums become higher, and exclusions broader. 

Policy Exclusions: What is not covered under the policy?

In cross-border transactions, circumstances are easily changeable depending on the law system, or government regime of the target country. Therefore, the exclusions in cross-border transactions must be carefully negotiated and worded in the insurance policies.

Generally, R&W Insurance policies provide a blanket coverage. At the same time, exclusions are carved out for several items, including (1) breaches that were known to certain individuals, (2) fines and penalties, (3) purchase price adjustments and forward-looking statements, (4) profit milestones, (5) revenue projections, and (6) breaches of certain “fundamental” representations and warranties [i.e., that buyer would not conclude the deal were it known that a fundamental representation and warranty was untrue].

A typical R&W Insurance policy will also exclude liabilities specific to the policyholder’s [seller or buyer] particular situation, such as outstanding litigation or other known potential risks discovered during due diligence. It is once again important to note that as opposed to sell-side policies, buy-side policies can include coverage for seller’s fraud.

Furthermore, insurance companies are also keen to add deal-specific exclusions to the policies to exclude issues that do not constitute an insurable interest of the policyholder [e.g., product warranty and bodily injury]. Ultimately, the deal- specific exclusions are either (i) a product of issues discovered during the due diligence [e.g., sales and use tax liability], or (ii) as a result of failing to diligence or insufficiently diligence a material aspect of the target.

Motivations of the Parties in Obtaining R&W Insurance Policy

Parties may have various motivations in purchasing a R&W Insurance policy, and those motivations may differ in each transaction depending on the specifics of the deal. Typical motivations of the parties can be listed as follows:

1. The structure of providing parties with effective remedies and to shift the risk of compensating indemnities and financial loss to the third parties may give certainty to the success and growth of M&As in emerging
2. R&W Insurance is used as an effective tool for facilitating the negotiations and closing stages of complicated transactions.
3. R&W Insurance gives an opportunity to the seller to have a clean exit from the target company and to retain good relationship with the buyer if the seller stays in the company, for instance, as a key employee following the closing.
4. Buyers use R&W Insurance to compensate for lower indemnification caps and shorter survival periods and to make their bid more competitive in auctions.
5. R&W Insurance policies can meet with the expectations of the parties and cover their loss and damages under the policy coverage. Especially in distressed M&As where the target has financial difficulties and seller is not willing to provide sufficient remedies in the event of breach of representations and warranties, R&W Insurance will provide an alternative remedy for the protection of the policyholder’s financial
6. R&W Insurance helps buyer a clear understanding of target company’s business and feeling safe after the post- closing stage of the
7. The seller could have paid the entire purchase price without depositing it to an escrow account or in another retention and could be safe for the further claims of buyer in the

In a nutshell, having implemented the use of R&W Insurance will thus strengthen the parties’ position over the course of negotiations as well as in the post-closing stage of the deal.

R&W Insurance under Turkish Law

The R&W Insurance is relatively new to the Turkish market, and the number of M&A projects involving the insurance is still quite low. 

There are multiple reasons for that. The most prominent one is the lack of regulations. Turkish legislation does not explicitly regulate any legal framework for the instrument, and there is no existing local insurer directly offering the R&W Insurance in the Turkish insurance market. Therefore, parties need to obtain the insurance policy from foreign insurance companies. Second, premium amounts are relatively high in Turkey given that there is no competition in the market. As no local insurer can issue the policy, there are only few foreign insurers interested in the market, and foreign insurers tend to request higher premium amounts in Turkey due to instability in the economy and regional security issues. For these reasons, the warranty insurance is not effectively recognized in Turkey yet.

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

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Paksoy’s team was led by Partner Omer Collak and included Senior Associate Nazli Tonuk Capan.

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Financial details were not disclosed.

Turunc’s team included Managing Partner Kerem Turunc and Attorneys Gozde Kiran and Ecem Kutukculer.

Ilhanli Baser’s team was led by Partner Benan Ilhanli.