Category: Uncategorized

Considering the continuing global effects of the economic downturn, Turkey’s consistent growth is a respectable victory. Turkey’s booming real estate sector has been aided by multiple legislative advances aimed at attracting both domestic and foreign investment. FDI in particular has benefitted from the abolishment of the reciprocity principle and amendment of the Land Registry Law, which have eased the process of acquisition of real estate by foreign companies and Turkish companies with foreign shareholding. This, combined with the profitability and available opportunities in the sector, has led to an increase in high value real estate transactions (in the form both of pure asset transfers and of share transfers in SPVs holding real estate).

An attractive medium for investors to take a slice of the Turkish real estate market is through real estate investment companies (“REICs”). These are special portfolio management companies incorporated solely for purposes of investing in real estate/real estate projects with a high return potential, obtaining income from sales, acquisitions, or rental. The number of REICs and their portfolio value have steadily increased, thanks, in part, to the enactment of the Communique on REICs on May 28, 2013. The Communique: (i) reduces the bureaucracy surrounding the incorporation of REICs and the conversion of ordinary companies into REICs; (ii) eliminates the requirement that share transfers not resulting in a change of control obtain the permission of the Capital Markets Board; and (iii) expands financing options by allowing REICs to issue real estate certificates. Combined with tax incentives already in place, such as an exemption from corporation tax, the allure of the REICs is anticipated to continue. 

One of the most significant trends of the past few years is the construction, sale, and/or operation of shopping malls. Istanbul alone has 91, and the forecast for 2015 is for over 350 nationwide. While the construction of shopping malls separate from other functions is probably here to stay (especially in the yet-unsaturated Anatolian cities), the residential and workplace requirements of an ever-increasing population with more disposable income has resulted in the logical step of combining shopping malls with residences/offices. 

The booming import and export sectors of a country which won the geographic lottery also has an impact. Turkey has a large portion of global markets covered by its export network, especially the Gulf states, Europe, and Northern Africa. The rising appetite of increasingly wealthy citizens for imports sets the scene for an expanding logistics sector in need of more infrastructure (ports, airports, warehouses, etc.). The current construction of the third airport in Istanbul, which is set to be the largest in the world, is a prime example. 

Turkey’s vulnerability to earthquakes had led to many years of discussions on options regarding safeguards for the country’s citizens, eventually concluding with the enactment of the Urban Development Law on May 31, 2012. The Law allows municipalities and the state-owned Collective Housing Administration to expropriate real estate that must be rebuilt. This has resulted in Turkey – and Istanbul in particular – becoming a major construction site for residential, commercial, and recreational projects. The Turkish government has pledged to rebuild/strengthen 6,500,000 existing buildings at risk of destruction from natural disasters with a budget of USD 400 billion, turning urban development into an unexpectedly lucrative business.

In line with Turkey’s policy of attracting more foreign investment and constituting the most intriguing development in the real estate sector this year, the Communique on Real Estate Investment Funds, enacted on January 3, 2014, allows the incorporation of real estate investment funds in Turkey for the first time. These funds enable the securitization of and provide liquidity to large scale real estate, increasing the access of investors to owners of real estate, may be incorporated by portfolio management companies as well as real estate portfolio management companies. As is the case with REICs, real estate investment funds are also exempt from corporation tax, making them more attractive to larger investors. As the Communique entered into force in July 2014, the first of these funds have only just begun to be incorporated. Many more are expected within 2015.

While the first half of 2015 is expected to be dominated by a wait-and-see attitude to upcoming general elections, we anticipate a year full of foreign investment, especially from foreign real estate investment funds. 

By Alican Babalioglu, Partner, CMS’ Turkish arm, Yalcin Babalioglu Attorney Partnership

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Turkey, like most emerging markets, did not adopt a Competition Law until the 1990s. The completion of the Customs Union with the EU was the main driver behind the December 12, 1994 enactment and subsequent implementation of Law no. 4054 on the Protection of Competition.

Since 2012, a number of developments have increased the importance of the Competition Law for all enterprises doing business in Turkey. First, the Turkish Competition Authority (TCA) adopted Communique no. 2012/2, which laid down admissibility rules with respect to complaints, and Communique no. 2012/3, which increased turnover thresholds for concentrations requiring prior authorization. As a result, the case load of the TCA dropped by nearly one third, enabling the Authority to concentrate on more significant issues.

Second, through a legislative amendment in 2012, the administrative courts of Ankara, Turkey’s capital, were established as first instance courts competent in appeals of decisions of the Competition Board. Previously, the competent court was the Council of State – the supreme administrative court – and this created a backlog of cases spanning many years. However, appeals at Ankara administrative courts, while significantly reducing the duration of lawsuits, has created a body of divergent jurisprudence, including some highly questionable decisions. TCA had to initiate/re-initiate investigations in several cases as the result of court rulings. This situation provides a strengthened motivation for complainants to apply to courts against unsatisfactory decisions, requiring the targeted enterprises to take part in the proceedings.

The TCA also made a serious effort to develop competition legislation. Several guidelines as well as a new communique concerning specialization agreements were adopted. Furthermore, proposals for the amendment of Law no. 4054 and the Fining Regulation were prepared, and a proposal concerning the Motor Vehicles Block Exemption Communique is under development. These efforts aim to deepen the alignment of Turkish competition law with that of the EU – and further decrease the TCA’s workload. However they fail short of addressing certain contentious issues, such as the legality of the Fining Regulation that sets down aggravating and mitigating circumstances with respect to fines and limits the discretion of the Competition Board. Critics argue that the Fining Regulation infringes both the Constitutional principle requiring punishments to be determined through law, and that Law no. 4054 does not provide a legal basis for the restriction of the Board’s competences. 

Turning our attention to enforcement activities, the last two years witnessed the toughest ever period in the TCA’s history. Most prominently, in 2013 the Board found 12 Turkish banks – including those owned by the state – guilty of fixing interests, and levied a total of TRY 1.2 billion (approximately USD 670 million) in fines, the most in its history. In 2014 the TUPRAS Petroleum Refinery was found to have abused its dominant position by excessive pricing and was fined TRY 412 million (approximately USD 182 million), the largest fine ever imposed on an individual enterprise. The Board diverged from international practice by not taking into consideration the costs of production, and relied on comparative prices (which were determined to be decreased more slowly than global prices). However the Board did not concentrate exclusively on major cases, and also fined driving courses all over Turkey for fixing prices. Because of the size of these enterprises, in some cases the fines were probably less than the money spent by the TCA on the investigations. The Board also fined TTNET, the dominant internet service provider, TRY 15.5 million (approximately USD 8 million) because certain files were deleted from a directory being reviewed by a TCA officer during a dawn raid.

However the TCA did continue its softer policy against vertical infringements, and preferred to issue decisions calling for the amendment of agreements unless hardcore breaches were discovered.

With respect to concentrations, 2014 witnessed the most number of transactions being subject to phase-II investigations and this resulted in commitments as well as the collapse of two sizable deals. The proposed amendment in Law no. 4054 involves changing the legal test applicable to concentrations significantly lessening competition, and may result in further scrutiny of such concentrations in the future.

Summing up, recent developments in Turkish Competition Law necessitate that all enterprises doing business in Turkey be more prudent with respect to compliance issues. 

By Sena Apek, Partner, Gur Law Firm

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Despite the continuing volatility in international capital flows and an increased foreign exchange exposure stemming from persistent exchange rate depreciation, the Turkish banking sector managed to remain strong in 2014.

A considerable account deficit and inflation made the Turkish economy relatively more vulnerable and resulted in a tighter fiscal policy for the 2015 budget program. Yet, thanks to high capitalization (total assets of the banking sector increased by 15.1% in December 2014), low non-performing loans portfolios (down from 5.27% in December 2009 to 2.85% in December 2014) and good liquidity buffers, the Turkish banks stayed resilient despite a slight downturn in their expected profits (mainly due to the increase in consumer protection measures (i.e., an increase in provisioning on credit cards and limits on their ceilings and installments)). In order to maintain the sector’s strength, it appears to be essential that the Banking Regulatory and Supervision Agency (BRSA) continue imposing solid regulatory requirements on the Turkish banks to maintain their financial stability. 

Recent Regulatory Changes

In 2014, the BRSA issued a handful of new regulations and introduced amendments to existing legislation to implement the BASEL III requirements in line with the EU directives. The implementation of BASEL III requirements is expected to continue, along with other necessary actions to ensure sustainability of the banks’ strong capital structure. However, it remains to be seen whether the common criticism that the foreign exchange risk is inadequately addressed by applicable legislation will be satisfactorily resolved.

The two outstanding regulatory changes in the sector in 2014 involve liquidity coverage ratios and leverage ratio measurement and evaluation. 

Liquidity Coverage Ratios Regulation

This regulation aims to ensure that adequate levels of non-collateralized, high-quality liquid assets are preserved, so that they can be easily converted into cash to meet liquidity needs for a 30-day period. Basically, the ratio of high quality asset stock to net cash outflows should not fall below 100% for total consolidated and non-consolidated liquidity and below 80% for total consolidated and non-consolidated foreign exchange liquidity. Failure to comply with these ratios will only be tolerated a couple of times (6 for unconsolidated and 2 for consolidated) within a calendar year.

Leverage Ratio Measurement and Evaluation Regulation

The principles for the maintenance of equity by the banks are stipulated in this regulation to prevent risks that may arise from exposure to leverage effects. The leverage ratio (total equity divided by total amount of risk), and the consolidated leverage ratio (total consolidated equity divided by total consolidated amount of risk), should be calculated monthly, and the average of each ratio should be maintained at a minimum of 3% for March, June, September, and December. 

Recent Market Activities

Mergers and Acquisitions

Although some European and American banks exited the Turkish banking sector during the last couple of years for reasons of their own, the strength of the sector continues to attract big international players. In 2013, the BRSA granted an operating permit to the Bank of Tokyo-Mitsubishi UFJ and authorized Rabobank International Holding B.V. to establish a deposit bank. Recently, the market witnessed the acquisition by Industrial and Commercial Bank of China Ltd. of 75.5% of Tekstilbank and by Banco Bilbao Vizcaya Argentaria of an additional 14.89% of Garanti Bank, resulting in it becoming the majority shareholder of a major Turkish bank. 

Participation Banking (Islamic Banking)

The benchmark set by the debut sukuk issuance of the Turkish Treasury in 2012 ignited sukuk issuances by the participation banks. These issuances allowed participation banks to diversify their portfolio and reach alternative fund sources, especially from Gulf countries. The participation banks in Turkey (only 4) are all in the private sector. However, the prospects for strong growth (notwithstanding the recent BRSA finding that Bank Asya had violated banking regulations on transparency in its organizational and partnership structure that resulted in the Savings Deposit Insurance Fund of Turkey taking over its control) and possible access to future diversified investors – in particular in the Gulf region – has attracted the attention of the government, and three flagship state-owned banks are expected to establish participation banks in 2015. 

By Gozde Cankaya, Counsel, and Sait Eryilmaz, Associate, Yegin Ciftci Attorney Partnership

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

To enhance the quality of public services, Turkey is striving to increase investment in areas such as transportation, energy, and healthcare through build-operate-transfer or public private partnership (“PPP”) structures. There are 16 PPP hospital projects in 14 cities in Turkey, with a total capacity of 24,000 beds, already under construction; additionally, the tender process for PPP hospital projects in the cities of Denizli, Samsun, Sanliurfa, Tekirdag, and Kutahya, approved by the High Planning Commission, will be finalized in early 2015. The ultimate goal of the Ministry of Health (“MoH”) is a total of 90,000 new beds throughout Turkey by the end of 2018.

So far, PPPs in Turkey have only been used in the healthcare sector. As there is no general PPP law in Turkey applicable to projects without regard to sector, healthcare sector PPP projects are regulated by rules enacted specifically for healthcare projects. To establish a legal basis for healthcare sector PPP projects, the Turkish Parliament amended the Health Services Basic Law (No. 3359), supported by a regulation issued on July 22, 2006. To address constitutional challenges to the law, which led to injunctions by the Council of State, the Health Services Basic Law was later reformed into the Law on Construction of Facilities, Renovation of Existing Facilities, and Purchasing Service by the Ministry of Health under a Public Private Partnership Model (No. 6428) (the “Hospital PPP Law”) issued on March 9, 2013. The implementing regulation was similarly replaced by a new regulation on May 9, 2014. 

The Hospital PPP Law and the regulation of May 9 introduced specific requirements for healthcare PPP project agreements. For example, the term of a project agreement between a project company and the MoH is limited to 30 years, plus the construction period. Furthermore, payments under the project agreement are paid out of MoH working capital and the central government’s budget, giving comfort to lenders providing finance for these projects. Other provisions intended to encourage third-party financing include permitting the parties to amend the project agreement – subject to MoH approval – including the price, in response to a force majeure event, and to reconcile contradictions between the project agreement and its annexes. 

In conjunction with the Hospital PPP Law, the Law on Public Financing and Debt Management (No. 4749) was amended to introduce debt assumption by the Turkish Treasury for healthcare PPP projects, whereby, in the case of the termination of a project agreement, the project company’s debts payable to foreign lenders can be assumed by the Treasury upon a decision of the Council of Ministers. Additionally, the Hospital PPP Law relaxed the conditions for obtaining a government guarantee for healthcare PPP projects, lowering the investment threshold to TRY 500 million from TRY 1 billion. 

The Hospital PPP Law also imposes new requirements intended to increase local content in the projects. Now, for example, at least 20% of the medical equipment installed in the projects must be domestically manufactured. The MoH, however, in the tender documentations, may specify an even higher local content requirement. 

Addressing the ever-changing and developing nature of PPP models, the Hospital PPP Law will serve to keep project agreements in effect despite any operation and financing difficulties. 

By Daniel Matthews, Managing Partner, Baker & McKenzie (Istanbul), and Batuhan Uzel, Associate, Esin Attorney Partnership

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Montenegrin Parliament recently enacted the new Law on Tax on Coffee and amendments to the Law on Value Added Tax, the Law on Real Estate Tax, the Law on Tax Administration and the Law on Mandatory Social Security. The purpose of these changes is to clarify existing provisions of these tax laws in order to improve their enforcement and to better control the tax liabilities of non-resident taxpayers. Changes to the Law on Real Estate Tax have introduced higher taxes, but also tax benefits aimed at stimulating the development of high-end tourism in Montenegro.

Law on Value Added Tax Amended

A key change to the Law on Value Added Tax is the introduction of a new assessment basis for tax VAT in cases where a supplier grants the customer a discount. Under the new rule, discounts which reduce the sale price below the price at which the supplier acquired the goods will not be recognized for purposes of assessment of tax base. The effect of this rule is to require suppliers to pay VAT on the acquisition price of all goods, irrespective of the price at which those goods are sold. This deviates significantly from basic VAT standards incorporated in EU VAT Directives by shifting the cost of VAT to the supplier, instead of the customer.

Amendments to the Law on Real Property Tax

The amendments to the Law on Real Property Tax increase the minimum rates of property tax from the current 0.10% to 0.25%. As a result, the rates of property tax which may be prescribed by Montenegrin municipalities can now range from 0.25% to 1.00% of the property market value.

Amendments introduce the possibility of decreasing prescribed tax rates for hotels in primary tourist zones up to 30% for 4 star hotels, and up to 70% for hotels which have more than 4 stars.

Construction companies are exempt from paying real estate tax on facilities under construction which are intended for further sale. The tax exemption is available for maximum period of three years starting from the issuance of the construction permit. The amendments also introduce the right of municipalities to exempt companies involved in agricultural production, including processing, packing or finishing of agricultural goods produced in Montenegro from paying real estate tax. 

Amendments allow for the higher taxation of hotels which are not used in line with the planning documentation, agricultural land that is not being cultivated, and illegally constructed facilities.

The prescribed fines for failure to pay tax or to submit a tax return range from EUR 2,000 to EUR 20,000 for companies, and from EUR 250 to EUR 2,000 for natural persons. Fines are also imposed on public notaries and officials in competent state authorities who fail to inform the Tax Authority about the transfer of real property.

The amendments to the Law on Real Property Tax will be applied as of 1 January 2016.

Amendments to the Law on Contributions for Mandatory Social Security

Increased rates of contributions for health insurance have been introduced as follows:

• For employees, members of corporate boards, seconded persons, and foreign citizens employed in Montenegro, the rate of contributions borne by the employers has been increased from 3.8% to 4.3%, increasing the overall rate from 12.3% to 13.8%.
• For Montenegrin citizens employed abroad, entrepreneurs, persons engaged under service agreements, farmers and owners of agricultural land, priests, and employees on unpaid leave for more than 30 days, the rate has increased from 12.3% to 12.8%.
• For persons receiving compensation in line with the labour laws, unemployed persons, war veterans, and social protection beneficiaries, the rate has increased from 3.8% to 4.3%.

The prescribed rates for pension, disability and unemployment insurance contributions remain unchanged.

Amendments to the Law on Contributions for Mandatory Social Insurance entered into force on 28 February 2015.

Amendments to the Law on Tax Administration

An obligation of non-residents to appoint a tax representative if they generate income or own property in Montenegro, if their permanent establishment or permanent residence is not in Montenegro has been introduced. Non-residents must appoint a tax representative within 10 days from the date when they generated income or acquired property in Montenegro and must inform the Tax Administration of such appointment. An exception to this rule applies if the non-resident generates income which is subject to the withholding tax.

The law prescribes a maximum fine of EUR 15,000 for a non-resident who fails to appoint a tax representative.

The amendments have extended the statute of limitations for the payment of tax from three to five years. Also, the amendments prescribe that the statute limitations for a refund of tax credit is one year after deletion of a taxpayer from taxpayers register. The statute of limitations for tax misdemeanours is three years starting from the date when the tax misdemeanour was committed.

The amendments introduce an obligation on the Tax Administration to refuse tax registration of a company if the founder of such company has unsettled tax liabilities.

The Tax Administration is now authorized to impose tax on persons who conduct unregistered business activities. In such cases the Tax Administration is authorized to assess tax on the basis of taxable income of companies which perform similar business activities, without the deduction of standard expenses.

The amendments specify that a taxpayer can amend a submitted tax return a maximum two times. However, the amended tax return cannot be submitted if the Tax Administration had already initiated a tax audit.

The amendments now allow for taxpayers whose bank accounts are blocked in enforced collection proceedings to settle their mutual monetary obligations through contractual arrangements, such as change of creditor or change of debtor. This possibility is available only for the purpose of fulfilment of tax liabilities. 

The possibility of forcibly collecting tax from non-monetary receivables of taxpayers, their salary or pension, has also been introduced by the amendments.

The amendments have introduced, for the first time, the concept of “secondary tax liability”, whereby one person may be held liable for the unpaid taxes of another person. The list of persons who may have secondary tax liability include the statutory representative of a company for unpaid taxes of the company, persons who assist other persons in the evasion of tax, and responsible persons in the company for unpaid withholding tax by the company. In addition, secondary tax liability may be imposed on all shareholders who hold at least 10% of shares in a company. These persons may be held liable for a company’s tax liabilities if they receive payment or assets from the company without consideration or for a price below market in the period of three years before the company’s tax liability became due.

The amendments increase fines for certain specific misdemeanours, including failure to register with the Tax Administration and failure to submit a withholding tax return within the prescribed deadlines.

Circumstances under which the tax authority is allowed to seize a taxpayer’s assets in the course of a tax audit (e.g. goods acquired without payment of tax, supplied by an unregistered entity, or transported without proper supporting documentation, etc.) have been defined in greater detail. The amendments also prescribe cases in which the Tax Administration is authorized to prohibit a taxpayer from performing business activities (e.g. if the taxpayer engages workers without an employment agreement in order to evade tax and social security contributions, if the taxpayer does not use the fiscal cash register, etc.).

Minor improvements to the provisions governing the payment of tax in bankruptcy, liquidation or corporate status change proceedings have also been introduced.

Amendments to the Law on Tax Administration entered into force on 28 February 2015.

New Tax on Coffee Introduced

A new system for the taxation of coffee has been introduced by the Law on the Tax on Coffee. Instead of excise tax being payable only on the import of coffee, the new law introduces a special tax on coffee which will be payable on both the production and import of coffee. The system of calculation of tax has also changed: the new tax will be paid in fixed amounts, instead of 20% of the customs value of coffee, as was previously the case. The new tax ranges from EUR 0.80 to EUR 2.50 per kg of coffee, depending on the type of coffee in question. Tax on coffee becomes due at the moment of import, or at the moment of supply of coffee. Tax has to be paid by the 15th of the month for coffee supplied/imported in the previous month.

The new law introduces an obligation on companies engaged in the production and import of coffee to apply to the Customs Authority for registration in the Registry of Coffee Taxpayers within certain prescribed deadlines.

Misdemeanour fines for failure to submit a tax return, to pay tax or to register with the competent authorities within the prescribed deadlines range from EUR 1,000 to EUR 15,000 for companies, and from EUR 100 to EUR 1,000 for responsible persons in a company.

The new Law on Tax on Coffee entered into force on 28 February 2015.

By Tanja Unguran, Partner and Branimir Rajsic, Senior Consultant, Karanovic & Nikolic

If a rising tide lifts all boats, what happens when the tide goes out?

Turkish lawyers continue to complain about the “unsustainable” pressure to lower fees. But who’s to blame for the phenomenon, and what’s to be done, are unclear. And is the problem even real, or just a natural by-product of healthy competition?

Shrinking Elbow Room

The past decade has seen the sleepy Turkish legal market come to life, as the four international law firms with long-established presences (White & Case, Gide Loyrette Nouel, Salans, and Denton Wilde Sapte (the latter two of which merged in 2013)) have been joined by over 10 more since 2009 alone. CMS, the most recent arrival, opened its office in 2013.

But the boom may be over. Not only was 2014 the first year in many in which no new ILFs arrived on the shores of the Bosphorus, but the number of international law firms in Turkey actually shrank for the first time ever, as DLA Piper ended its formal association with Yuksel Karkin Kucuk (YKK) and allowed its Foreign Attorney Partnership in Turkey to expire. (It doesn’t appear DLA Piper is planning to return anytime soon, either, as the firm has allowed its foreign lawyers in Turkey – Partners Jonathan Clarke and Tamsyn Mileham – to transfer over to YKK).

While some Turkish lawyers believe the arrival of more ILFs is inevitable, Eda Cerrahoglu Balssen, a Partner at the long-established Cerrahoglu Law Firm, says that “as far as I know, the foreign firms that have entered the market recently – not the old ones – they have not really found what they’re looking for, or met their expectations from a few years ago. For various reasons. One is the pricing in the market, which is pretty different than what European law firms are used to. The clients are cost conscious. So that’s one area that is disappointing for the foreign firms.”

One partner at an international law firm (as he requested to remain anonymous, we’ll call him “Partner 1”) disagrees. He says, “I think there are good opportunities for international firms. The difficulty for them is finding the right partner. It’s a slower game; it’s not an overnight success, but if you look at what Allen & Overy are beginning to build, you can see that, if you find the right partners, you can make a success out of the Turkish market. You can still be very, very profitable, because the fee pressure may be more severe in certain sectors, but the cost base is still relatively low, and you don’t have to pay people exorbitant amounts.”

And Partner 1 thinks the future for international firms is bright. “I think a new generation of lawyers is coming through. People are a lot more savvy, a lot more Western-oriented, and that again represents an opportunity for the international firms … and I think clients are beginning to understand that they need to use them, and not go to the gray-haired guy with 50-years of experience.” In his opinion, the fight is over, the battle won: “the banks are rarely using Verdi, Yazici, any more, compared to White & Case, Clifford Chance, and Allen & Overy.” Thus, he concludes, “the international firms are taking a market share, even if that market is not so massive at the moment because of the fee pressure.”

Ah, the fee pressure.

Fee Pressure Remains Intense – or Does It?

If the battle is over, it appears the news hasn’t filtered through the market yet, as long-established Turkish firms and an ever-increasing number of spin-offs – smaller offices started by partners with ILF experience – continue to jostle for space with their newer international law firm neighbors. As a result, complaints about the pressure on fees resulting from what many believe to be an unsustainable number of firms are a common feature of any conversation with lawyers.

As is true so often in Turkey, however, everybody characterizes the problem, and assigns the blame, differently. The “spin-offs” are often accused of undermining the traditional fee structure by offering subpar services at unsustainable rates. One managing partner at a top tier law firm (“MP 1”) notes that, “of course when it comes to important and critical legal matters, clients still look for quality, but most of the time they want to pay very low fees, and they are happy with mediocre legal service they get from law firms, and that of course makes those split-off law firms survive.”

Hakki Geddik, who in 2012 split off from market-leading Herguner Bilge Ozeke with colleague Gokhan Eraksoy and a team to tie up with Allen & Overy, describes a similar phenomenon. In Geddik’s opinion, Turkish clients can be divided into two groups: those who make their decision about external counsel primarily on price, and the “growing number of more sophisticated Turkish clients” who factor in other relevant criteria. “Whenever I go into an RFP I try to anticipate whether the client falls into the first or the second category,” Geddik says. He sighs, “Many Turkish clients fall into the first category.”

A foreign partner at an international law firm suggests that the pressure to cut fees is especially acute in the Project Finance field, “because the international law firms that are here are mainly focusing on that area.” He admits to concern: “I don’t really know where that’s going to go, because there comes a low point where you can’t charge any less.” 

Another common complaint is that many firms “buy” client work at unsustainable levels as part of a long-term strategy that smaller firms can’t match. Like the other proposed causes, there’s obviously a basis in fact. One well-established managing partner in the market complained that: “I don’t want to give a name, but I know an international law firm that’s making a 70% discount on the rates of one of its named partners. It’s incredible. It’s lower than a mid-level associate, just to get the premium work.” 

And it’s not just the international firms, of course. A managing partner at a well-known local firm (“MP 2”) refers to the rankings produced by the legal directories (see page 26) in conceding that, “since our position is in the second tier, this year we decided to give huge discounts to get huge projects.” 

“The Game”

To some extent, however, the constant pointing to fee pressures has – after all these years – itself become a cliché. Erim Bener, for one, says with a smile that fee pressure has always been an issue in Turkey, perhaps with the exception of the early 2000s, and that “this is part of the game in Turkey.”

In response to complaints about deliberate “buying” of deals, one managing partner at an international law firm in Istanbul laughed that there’s nothing new under the sun – and pointed out that a number of now-strong Turkish firms originally elbowed their way to the top of the market by doing just that. He said, “and so the culture is very familiar with working up the ranks, even if at times that means buying deals, so I can say, this is nothing new for us.”

It’s also been suggested that some of those complaining the loudest may be confusing a global problem for a local one. Selin Ozbek Cittone, the Managing Partner at Ozbek Attorneys at Law, refers to the global financial crisis that hit all European legal markets back in 2007/2008. According to Cittone, fee pressure is “a problem,” in Turkey as everywhere else, but “somehow everyone has gotten used to the fact that you have to cap budgets, and things like that, since 2008. This is a habit not only for lawyers in Turkey, but also in Europe.” Ultimately, Cittone says, the market has more or less adapted to the new reality, and “we’ve gotten used to the idea that we need to somehow rationalize our fee, and reasonably explain why we need to charge a certain amount of Euros or dollars for certain projects.”

And in any event, not everyone identifies fee pressure as the defining characteristic of the market. Geddik says, “I don’t think the challenge is really on the pricing side. I think the challenge of the Turkish market is on the service-level side.” He believes that many partners at local firms focus exclusively on the generation of the work, leaving its execution to the associates. “So,” he says, “I really think that the main challenge that we as Turkish lawyers face is the need to convince clients that even seasoned practitioners are still willing to fight the battle in the trenches and do not see themselves as managers sitting in the office behind the desk and having junior lawyers doing the actual work.”

Other lawyers believe that they see signs that clients are beginning to notice the difference. Several partners at international law firms described what they see as a “slide towards quality” in the market. Partner 1 elaborated that, “for the first time you’re beginning to see the big Turkish industrialist groups looking for international law firm capability, rather than the old Turkish guard, so you’re seeing a decline in my view of the traditional Turkish firms, and a rise of the more savvy international law firms.”

It Takes Two to Tango

Regardless of who’s to blame, many believe that firm mergers are inevitable. Levent Celepci, Managing Partner at the CTK Law Office – the firm tied up with Schoenherr – calls consolidation “the obvious answer” to the “huge increase in competition we’ve seen within a short period of time.”

And right on time, 2014 witnessed the first-ever merger of two Turkish firms, as former White & Case Partner Cem Davutoglu agreed to subsume his eponymous firm into the larger Bener Law Office, which as a result grew to over 50 fee earners. Although both Erim Bener and Davutoglu describe the merger as a remarkable success, no other firms have followed suit so far.

Is consolidation the answer? Well, it wouldn’t hurt. More elbow room means higher fees. But of course nobody suggests that they themselves are considering merging with another firm – the suggestion is always that others should sacrifice their personal and professional goals for the betterment of the market as a whole.

In fact, it appears that many of the Turkish lawyers who call for others to merge may be remembering the “golden days” when competition wasn’t as fierce. On the other hand, competition is the familiar by-product of dynamic and bustling markets, and few Turkish lawyers wish to see those markets dry up. 

So can lawyers look forward to a time when Turkey will remain as popular with investors as it is today, but fees will be back where they were 10 years ago? As Jake Barnes responded in Hemingway’s The Sun Also Rises: “Isn’t it pretty to think so?” 

Thanks also to Tolga Ismen, Serhan Kocakli, and Begum Ozaydin for their help in the preparation of this article none of whom were quoted anonymously in this story.

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

“It’s B.S. … when we were an international firm, we were a tier 1 firm. The year after we became a local brand, despite having the same team and continuing to work on the same types of projects, we dropped two tiers, only because we no longer had an international-sounding name,” a Hungarian Partner at a leading law firm complained to us recently.

Our curiosity piqued, CEE Legal Matters decided to explore a well-known but sometimes controversial element of the process by which external counsel is selected: The legal directories.

The Story In The Numbers

First, we looked at Legal 500 and Chambers & Partners, to see if evidence supported the Hungarian partner’s implicit allegation of bias. We considered three practice areas, to make sure we captured those in which international firms are traditionally strongest and those in which local firms are often assumed to have an edge: Corporate/M&A (Table 1); Litigation/Dispute Resolution (Table 2); and Banking/Finance (Table 3).

And some of the numbers, while not completely unexpected, jump out. For instance, 100 per cent of the firms ranked in Banking/Finance in both Russia and Poland are regional or international in Chambers (95% and 91% in Legal 500, respectively).

On a regional basis, in the Corporate/M&A practice, in 14 of 22 covered CEE jurisdictions, 50 per cent or more of the firms listed by Chambers & Partners were regional or international brands, and 9 out of 15 CEE jurisdictions covered by Legal500 had the same characteristic. In Litigation/Dispute Resolution, 8 out of 20 for Chambers & Partners and 7 out of 14 for Legal 500 listed 50 per cent or more regional and international firms, while in Banking/Finance the numbers were 12 out of 17 for Chambers & Partners and 7 out of 14 for Legal 500. 

But The Numbers Don’t Tell The Whole Story

We reached out to Matthew James, Deputy Editor of Chamber & Partners, and Mike Nash, Editor – The Legal 500 EMEA, to better understand the reason why international firms – which, for the purposes of our conversations with them, include those firms we consider “regional” – make up such a large part of their listings.

Not surprisingly, both Nash and James expressly rejected the suggestion that, in evaluating the submissions, there was any bias towards international firms. Nash was emphatic: “I would say no. In fact, we make it very much a point to train our researchers to coax the best information out of local firms even if the submission is poor (or there is no submission at all), and we make an effort to seek out and emphasize good local law firms wherever possible because they are usually able to provide services at a good price point, which is attractive to many clients.”

Submissions Are Critical – Especially For Local Firms 

While both James and Nash emphasized that their rankings are not solely based on law firm submissions, they clearly represent a major part of the calculus. Nash said that the Legal500 rankings are made “on the merits of available evidence,” and although he explained that Chambers also ranks firms that do not make submissions, he pointed out that in CEE markets, “local firms often do not have much information in the public domain, particularly in markets where websites are not really used as a tool by law firms.” For his part, James pointed to submissions to Chambers, “as a form of hard evidence of work,” described client feedback as “the critical component,” and noted that it can be difficult to obtain that feedback without a submission. 

Nash explained that, “the single most important point from this is that any law firm which makes a submission immediately enhances its potential to be ranked because it provides data that is not available in the public domain or through third parties such as clients.” Indeed, local bar regulations in many CEE jurisdictions prevent domestic firms from advertising client work – even with client permission – which can make it even more difficult to get information from sources other than submissions. This presumably at least partially accounts for Nash’s suggestion that the positive effect of providing a submission “is probably bigger for local firms than it is for international firms” (which can more easily advertise completed client matters in other places and fora). 

Difference In Numbers?

Despite the greater need to provide the rankings with the evidence of their work in the form of submissions, James highlighted that, “while in overall terms the number of submissions from local firms would be higher, a greater proportion of the international firms in any given market will probably submit than will local firms.” (Nash also asserted that “definitely the majority of submissions are from local firms if you look at pure numbers, but his is simply because there are fewer international firms”). 

When asked to explain why local firms do not make submissions at the same level as the international firms, James referred to fewer resources available to local firms, both in terms of smaller budgets and the fact that many do not have dedicated marketing teams to assist those lawyers who “out of habit” might still be keeping track of their work.

Both Nash and James rejected the suggestion, however, that ignorance of the directories themselves was the cause. James noted that CEE markets had a number of “strong local spin-offs from international firms who have retained their awareness and practice of making submissions,” and Nash said about Legal500 that “we’ve been researching CEE for 25 years and firms know of our existence by now.” 

James also drew attention to the fact that, while international firms have the “marketing institutions in place” to enter submissions across the board, many local firms, for reasons of their own, limit their submissions to those practice areas where the international firms are particularly strong. He elaborated: “Since the assessment is done on a practice area individually, it is unfortunate that many [local firms] choose to focus on Corporate/M&A, which is a highly competitive field with international firms tending to be better positioned in it.” By implication, then, if more local firms made a point of submitting their work in litigation, or labor/employment, or other fields which many offices of international firms tend to ignore, more of them might appear in the rankings.

Difference In Quality?

Nash at Legal500 described the need for attention to detail and thoroughness: “The difference in quality comes down to the time devoted to the submission, language capability, familiarity with the research process, and modernity of the lawyers to appreciate the value in participating in good independent directories.” 

James at Chambers provided the general rule about the difference between international firms and local firms, saying that “international firms will almost always provide all of the information that we ask for, as will a number of local firms, but some other local firms who are less familiar with our process might not be as thorough.”

Nash, then, completing the exercise, explained the exceptions to the rule: “Some local law firms provide excellent submissions while some international firms fail to make submissions. International law firms usually have bigger business-development teams to make submissions, but it does not always mean that the submissions have higher quality. A local firm with an interested partner can produce excellent submissions. Smaller law firms can struggle to provide up-to-date information if they have not been involved in a particular type of matter recently, but that in itself is a useful differentiator.” 

Nature of the firms and the directories

Finally, of course, the target audience of the directories themselves may affect their findings, and cross-border competency is therefore of particular importance. James noted that “we do emphasize cross-border work in the Global guide, and a cross-section of domestic and international work in Europe.” Nash elaborated: “The Legal500 Guide is mainly aimed at an international audience coming into a market, so that cross-border element can be important. A Hungarian company is less likely to read the Legal500 in English to decide which law firm to instruct but a company going into Hungary is going to want a neutral opinion. Some of the local firms will suit the need of a US company but the company’s international policies are going to mean that international law firms are likely to be attractive. Some Hungarian firms will be attractive too, but only if they meet certain standards of size, quality, code of ethics, and other criteria.” 

Accordingly, Nash suggested, those local firms that appear in the rankings should be particularly proud. “I would say it is a credit to local law firms that so many are ranked,” he said, “because local firms are usually smaller and do not easily gain access to the international clients that international firms enter the market with.” 

Conclusion

Was the Hungarian Partner who made the accusation about bias correct? Who knows? Certainly James and Nash reject the suggestion out of hand, and without information about the thoroughness and quality of the firm’s submissions (and other evidence of successful client service) there’s no way of knowing for sure. 

But one thing is clear: In this highly competitive profession, where the fight for clients is fierce and the criteria employed by those clients in selecting outside counsel so opaque, every detail counts. The upshot will surprise no one: Firms should take the submission process seriously, and be thorough, complete, and comprehensive in their submissions.

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.