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The New TCC And Its Effect On Structuring M&A Deals In Turkey
THE NEW TURKISH COMMERCIAL CODE
THE new Turkish Commercial Code (the new TCC), which came into effect on 1 July 2012, constitutes an important improvement to and modernization of Turkish company law. This contribution will focus on the more fundamental amendments that are likely to have a significant effect on the process of M&A deal structuring in Turkey.
INCREASED TRANSPARENCY AND NEW ACCOUNTING STANDARDS
First of all, the new TCC brings a major focus on transparency. Until today, non-listed Turkish companies were pretty much utter closed-boxes. The new TCC brings a web-site requirement for some companies to reveal certain information on their web-site.
Another helpful improvement brought by the new TCC is the alignment of Turkish accounting standards with the IFRS as of January 2013, and the need for the accounts to be audited. This will make Turkish accounts more understandable to international investors. Also, a very strong role is given to audit firms on a broad range of issues throughout the new TCC such as accounts auditing, control/special audits of certain corporate decisions (like capital increases, mergers etc.) and control of intra-group company dealings. All these rules apply without distinction to both public and private companies under the new TCC.
Both the increased transparency and new accounting standards should strongly help the transaction environment.
MERGER TRANSACTIONS AND CORPORATE GOVERNANCE
The merger process has been defined more clearly and the flexibility of this process has been increased. Further, the possibility of a squeeze-out has been introduced. If it is specifically set out under the merger agreement and 90% of the merging company's shareholders vote as such, it will be possible to squeeze out the minority shareholders (the remaining 10%) by paying the value of their respective shares. Furthermore, the courts involvement has been replaced by an Auditor Report.
Furthermore, certain simple but important flexibilities are introduced into the ways in which companies were governed and organized until recently. For example, single shareholder companies are now permitted. Similarly, a Board composed of only 1 Board member will also be permitted. Legal entities will also be allowed to be Board members themselves; allowing them to replace their representative with a simple letter to the company, without the need for a general assembly or a Board meeting.
STRUCTURING SHARE OPTIONS
The new TCC explicitly states that it is possible to include put option, call option, tag along and drag along provisions in the Articles of Association (Articles) of limited liability companies. The new TCC does not contain any of these provisions for joint stock companies. It furthermore lists the issues that will be included in the Articles of joint stock companies and provides that the Articles will basically not be allowed to deviate from such list. As a result, it will be prudent to assume that it will not be possible to include put/call options, or tag along/drag along rights in the Articles of joint stock companies. It will, however, still be possible to include such provisions in shareholders agreements and to secure their compliance through penalty clauses, blank endorsements or escrow mechanisms (albeit there are theoretical debates regarding the validity of the latter two under Turkish Law). Alternatively of course, it will still be possible to establish these rights at the level of a HoldCo/SPV that is set up in a jurisdiction fully recognizing these rights. Such an SPV company would own the Turkish operating company.
It is important to note that for share transfers in joint stock companies, the legislator has taken the approach that the fundamental principle should be freedom of transfer. The new TCC requires the Board to demonstrate an important reason set out in the Articles of the company to refuse to register/accept a share transfer. Alternatively, the Board may refuse to register a share transfer if it proposes that the company, the majority shareholders or even a third party buys at their true value the shares that are proposed to be transferred. This should generally reduce the risk of a Board resisting a share transfer and not offering an alternative solution to the minority shareholders wishing to exit the company.
Until recently, it was possible to adopt the registered share capital system only in public companies. The new TCC allows this for private joint stock companies, too. Accordingly, it will be possible to set a registered capital ceiling and the Board will be allowed to increase the share capital up to such ceiling.
Another interesting novelty is the introduction of the conditional capital increase concept which basically sets forth the possibility of equity kickers and debt-to-equity swaps. This should allow some interesting new structuring possibilities.
PE investors often request (or desire), as a possible exit mechanism, that companies they invest in are able to buy their own shares. Until recently, this was not possible for Turkish companies. The new TCC allows this to a certain level: up to 10% in joint stock companies and 20% in limited liability companies. Although the thresholds are low, we see this as an improvement for minority PE investments. Furthermore, the general assembly can give a 5-year authorization to the Board to implement this instrument, and in certain situations, the Board can implement it directly even without being subject to such an authorization.
THE PROHIBITION OF FINANCIAL ASSISTANCE
With the enactment of the new TCC, a prohibition with respect to financial assistance has been introduced into Turkish law for the first time. Article 380 of the new TCC prohibits the provision of an advance, loan or security by a company for the purpose of the acquisition of its own shares by a third party. The new TCC brings only two exceptions to this prohibition. It will not apply to transactions performed by banks or financial institutions in their ordinary course of business; and it will not apply to transactions effected for share acquisition by the employees of the company or the employees of a subsidiary company. If, however, these exempted transactions may have the effect of reducing the reserves of a company below certain levels, even such transactions may result in being null and void.
It is certain that this will prevent direct financial assistance; provision of loan, advance or security by the OpCo. But the question whether it also prohibits certain structures like the merger of the holding company (HoldCo) with the OpCo is more of a grey area. There is no consensus amongst academicians and other interested parties.
Overall, the new TCC will have a positive effect on the process of M&A deal structuring in Turkey. The modernized company law will no doubt facilitate foreign investment.