An interview with Ilhanli/Baser discussing M&A in Turkey

This article is an extract from GTDT Market Intelligence M&A 2022. Click here for the full guide.

1 What trends are you seeing in overall activity levels for mergers and acquisitions in your jurisdiction during the past year or so?

The activity levels of mergers and acquisitions in Turkey returned to their normal levels in 2021 following the pandemic and post-pandemic periods, and especially after the historic dip in 2019. Owing to the number of the deals whose details are not disclosed to the public, we do not have a confirmed volume number, but it is estimated that the deal volume exceeded the US$10 billion barrier (estimated US$10.2 billion by Deloitte and US$14.3 billion by KPMG) consisting of a year-over-year increase of 12 per cent. This figure is still half of the deal volume estimated at US$22 billion in 2012, however the overall growth following the dramatic decrease in 2016 is indicating a generally positive outlook.

Mergers and acquisitions have been impacted not only by the pandemic measures but also by recent geopolitical and global developments; Turkey has been at the centre of numerous conflicts and economic crises. While the location of the country in the middle of Eurasia provides certain advantages, its economy remains uncertain because of the fluctuating economic conditions of the region. On the other hand, country-specific problems, such as the coup attempt in 2016 and the sudden decrease of the national currency’s value, have both limited and increased deal flow owing to the unique opportunities created.

Considering all the facts, 2021 and 2022 were years of recovery for mergers and acquisitions in Turkey, led by a more diverse investor portfolio, and we saw the first decacorns in Turkish start-up ecosystem following significant deal values in single transactions.

2 Which sectors have been particularly active or stagnant? What are the underlying reasons for these activity levels? What size are typical transactions?

The e-commerce sector has been particularly active: Trendyol and Getir have created a total volume exceeding US$3 billion in 2021 and 2022, bringing these two e-commerce giants to the decacorn level. Insider, operating in the software as a service (SaaS) sector, also reached the decacorn level with its last investment round in Q1 of 2022. The dominance of a ‘new’ economy has been evident in Turkey in the recent years, with e-commerce, SaaS and gaming companies receiving significant investments. The gaming sector was a leading force in 2020 with the acquisition of Peak Games by Zynga for a total value of US$1.8 billion and other smaller deals. Technology (including gaming and e-commerce) and telecommunications deals have been the driving force in these trends. While the number of transactions is quite high in these sectors, the typical sizes of transactions are still relatively small (varying usually between US$100,000 and US$5 million) except for the megadeals, such as with Trendyol and Getir, or a few deals varying between US$10 million and US$30 million. The new economy created in Turkey has been the work of by numerous entrepreneurs over many years, who have brought and adapted US and European models in the region, and created new models from scratch and exported those abroad. Following the success of Trendyol and Getir in e-commerce, Peak Games and Gram Games in gaming, and iyzico in payment systems, numerous entrepreneurs are following in their footsteps and are creating successful and global companies in e-commerce, software development, gaming and other tech-first sectors. The deal flow is constant in these sectors, and it would not be a surprise to see new megadeals in the near future.

On the other hand, the conventional sectors such as financial services, manufacturing, retail, infrastructure and energy have been active as well, and the typical size of deals exceeds US$50 million. While not being a typical merger and acquisition transaction, the highest-valued transaction in Turkey for 2021 was an infrastructure and transportation project concerning the transfer of operating rights and the construction of additional investments of Antalya Airport between 2027 and 2051 by a joint venture established by TAV (Turkey) and Fraport (Germany). This transaction was signed for a total value of US$8.2 billion, exceeding all other transactions in Turkey for 2021. Further, Elif Holding, active in manufacturing, was acquired by Huhtamaki Oyj (Finland) for almost

3 What were the recent keynote deals? What made them so significant?

The keynote deals for 2021 and 2022 to date were Trendyol and Getir. They gathered an aggregate investment amount exceeding US$3 billion and caused the e-commerce sector to lead the merger and acquisition charts by a hefty margin. The female-founded Trendyol is a success story as a result of it developing its userbase and services dramatically in recent years, following the investment of Alibaba and the last mega round of US$1.5 billion attracted investment from Softbank, General Atlantic, Princeville Capital, ADQ, Qatar Investment Authority and Chimera Investments.

Getir is a Turkish powerhouse that introduced fast delivery to many markets in Europe. While they are criticised by many for their depot systems and pressure for the fastest delivery possible, they are disrupting numerous developed markets and the established retail sector. Their investment rounds in 2021 (for an aggregate of US$850 million) and in 2022 (for an aggregate of US$768 million) attracted significant players such as Sequoia Capital, Tiger Global Management, Silver Lake Partners, Goodwater Capital and Mubadala. These deals are important not only for their significant size but also for these companies’ primary activity being in Turkey.

These deals also mark the return of General Atlantic and Tiger Global to the Turkish market, where they exited previous investments with significant multipliers, and the entry of Softbank for the first time. Sequoia Capital is known for investing in another Turkish and female-founded company, Insider, and we can still see the influence of Middle Eastern private and state funds in the Turkish ecosystem. Insider reached decacorn level with an investment round of US$121 million by international and local investors such as Sequoia, 212 and Qatar Investment Authority.

4 In your experience, what consideration do shareholders in a target tend to prefer? Are mergers and acquisitions in your jurisdiction primarily cash or share transactions? Are shareholders generally willing to accept shares issued by a foreign acquirer?

The primary preference for the consideration in merger and acquisition deals in the Turkish market is a cash consideration. However, while transactions based solely on share considerations are rare, this does not exclude mixed transactions where the shareholders get a part of the consideration in cash and the remaining in shares. Mixed considerations are usually used in higher-level transactions where the consideration amount is higher, the acquirer is a public company and the shareholders have the possibility to ensure a share value defined by the market rather than a valuation based on the last investment round. However, we may also encounter share-per-share mergers in smaller entities where neither of the merging companies has the financial force to acquire the counterparty but where they feel obliged to proceed with a merger to survive in a difficult market. Due to some famous precedents where the share value of the acquirer decreased dramatically shortly after the closing of an acquisition, there is significant awareness of the shareholders in the market for share value protection mechanisms. Hence, in transactions where there is a share-based consideration, we may expect to see these mechanisms heavily negotiated in Turkey. In our experience, shareholders’ willingness to accept shares does not depend on nationality or location but mostly on the economic status (and the shareholding structure) of the acquirer. We may speak of a widely accepted and developed foreign investment in Turkey and, as long as the shareholders receive adequate assurances, there would not be a specific problem if the acquirer is foreign based. As many entrepreneurs opt to flip up their companies in the US or Europe, there is a significant number of share exchange agreements and similar structures that might resemble share-per-share deals and that may appear as a false indicator in the statistics.

5 How has the legal and regulatory landscape for mergers and acquisitions changed during the past few years in your jurisdiction?

Turkish legislation has been subject to harmonisation processes for the European Union, amended numerous times and readied for foreign investments. The Turkish Commercial Code and the Code of Obligations, which are adapted from Swiss Code of Obligations, were renewed in 2011. The law on direct foreign investments of 2003 replaced the precedent law dated 1954, and the law on industrial property (trademarks, patents and designs) was enacted on 2o16. Further, a regulation on Turkish data protection has been enacted following the General Data Protection Regulation. In substance, foreign investments are possible – even as a sole shareholder or sole administrator – and are protected as per the law on development finance institutions (DFIs). In addition, share transfers are not subject to prior government authorisation, except for licensed activities such as financial services (banks, payment systems, etc).

An important aspect in mergers and acquisitions in Turkey is compliance with competition law and, more specifically, with merger control regulations. Communiqué No. 2010/4 on mergers and acquisitions subject to the authorisation of the Competition Authority provides that transactions resulting in a definitive change of control are subject to the Competition Authority’s authorisation if:

  • the transaction parties’ aggregate turnover in Turkey exceeds 750 million Turkish lira and, separately, (at least of two parties) 250 million Turkish lira; or
  • at least one party’s turnover in Turkey exceeds 250 million Turkish lira and at least another party’s global turnover exceeds 3 billion Turkish lira.

The Communiqué was amended on 4 March 2022 to provide a stricter regime for tech companies. As per amended article 7 of the Communiqué, the threshold of 250 million Turkish lira stated above is not sought for transactions related to the acquisition of the technology companies operating or conducting research and development activities in the Turkish market or providing services to the users in Turkey. Further, ‘technology companies’ is defined as: undertakings or related entities operating in the fields of digital platforms, software and gaming software, financial technology, biotechnology, pharmacology, agricultural chemicals and health technology. The direct result of this amendment is the potential prolongment of transactions owing to the requirement of requesting the Competition Authority’s authorisation in the case of an acquisition of a Turkish technology company even if the turnover criteria set forth in the article is not met. Therefore, it became quite important to plan the transaction accordingly by taking into consideration the obligation of such authorisation even in relatively small transactions if a Turkish technology company is involved.

Another important aspect to be considered in acquisitions is the latest amendment made with the Communiqué to Decree No. 32 on the Protection of the Value of the Turkish Currency. Article 8 of the Communiqué limits the transactions that may be completed in foreign currencies. Although the Turkish legal system does not impede foreign currency contracts, following the decrease of the Turkish lira’s value against foreign currencies, the Turkish Ministry of Treasury and Finance created exceptions for such transactions and prohibited the use of foreign currency in those transactions if the parties were Turkish citizens or residents in Turkey. The sale of movables except for the vehicles were not listed among these exceptions; therefore, the transactions related to acquisitions of shares could be made in foreign currencies. In accordance with the amendment made on 19 April 2022, transactions related to the sale of movables, including the shares, are made subject to a restriction where the value of the acquisition may be determined in a foreign currency, but the payment must be made in Turkish lira. This restriction is valid if all parties involved in the transaction are persons or entities resident in Turkey; if one of parties is not considered resident in Turkey, this specific exception would not be applicable..

6 Describe recent developments in the commercial landscape. Are buyers from outside your jurisdiction common?

Developments in the commercial landscape are mostly shaped by the geopolitical developments in Turkey. As of 2022, the economic structure is under the influence of the low interest rate-high inflation model applied by the government, the conflict in Ukraine and soaring immigration from Syria and other conflict zones (including Ukraine and Russia). However, the neutral position of the country provides a safer position in the energy crisis, and therefore, especially the manufacturing industry, helped also by the low currency, is gaining momentum for production and exportation. Consequently, developments usually occur in conventional sectors such as industrial manufacturing, transportation and logistics. On the other hand, tech-first sectors such as gaming and software development are expected to lead with the number of deals, while e-commerce deals might be slowing down owing to the rapid expansion and decrease in turnover following the pandemic. As of Q1 and Q2 of 2022, foreign investors accelerated their sell positions in the Turkish stock markets; however, merger and acquisition transactions still involve numerous foreign investors. The acquisitions and investments in the Turkish companies are predominantly made by buyers outside the Turkish jurisdiction.

7 Are shareholder activists part of the corporate scene? How have they influenced M&A?

Although the Turkish Commercial Code does not regulate shareholder activism in a specific way, it grants certain rights to the shareholders regardless of their share ratios and further rights to shareholders exceeding predefined thresholds.

As each share grants at least one voting right in Turkish companies, except where organised otherwise in publicly traded companies, and voting rights cannot be suspended or cancelled unless for a reason specifically provided in legislation, each shareholder, even with a non-significant share ratio, is entitled to participate in a shareholders’ meeting, cast their vote and make their reserve, and consequently file a lawsuit for the cancellation of a shareholders’ resolution. The voting right per share may also be increased in the articles of association for certain share groups, entitling their holders a further right for steering the company. In addition, shareholders are entitled to receive detailed information on the company, unless the disclosure might constitute a material risk for the company’s interests, and to request an audit if deemed necessary.

In addition to the rights mentioned above, the Turkish Commercial Code defines shareholders holding at least 10 per cent of a company’s share capital (5 per cent in the case of a publicly traded company) as a minority and grants further rights, such as requesting additional agenda items in the general assembly meetings, appointment of a board member if granted as a minority right in the articles of association, requesting postponement of the approval of the balance sheet and dissolution of the company.

Accordingly, a shareholder activist has numerous tools in hand, but shareholder activism is not very common practice in Turkey. While there are numerous litigious cases involving a group of shareholders against other shareholders, these are mostly related to family-owned companies and rarely caused by shareholder activists. Further, the articles of association of the companies may be redacted to grant certain share groups superior rights (in the form of preferences) to avoid shareholder activism to a certain degree. Another protection is the squeeze-out right provided to the majority of 90 per cent if that is not used widely but taken into consideration by the shareholders as a possible tool for majority protection.

8 Take us through the typical stages of a transaction in your jurisdiction.

The typical stages of a merger and acquisition transaction in Turkey are similar to those in continental European transactions. Depending on the necessities and volume, contact may be initiated by one of the numerous international and local M&A consultants or, in certain cases, it may also be initiated between CEOs. Another typical first contact is initiated by an investor of one of the parties to the CEO or an investor of the counterparty. This pattern is significantly visible in start-up deals where many angel investors or venture capital firms invest and create synergy between two companies or different investors.

Following first contact, the next usual step is drafting and executing a term sheet (or letter of intent, memorandum of understanding, etc) between the parties to summarise the terms and create an exclusive period, if any. The term sheet, if the parties do not wish to execute a binding document, may in any case constitute a step creating a culpa in contrahendo liability deriving from the Code of Obligations; hence, it should be taken into consideration with due care.

The usual second step in the transaction is the due diligence process, where the acquirer conducts a thorough examination of the seller side’s records – which is usually conducted on a red-flag-only basis. While the findings in a due diligence process may potentially have an effect on the valuation, it also has a significant effect on:

  • the evaluation of material adverse effects and change of control clauses in the seller side’s agreements;
  • the liabilities on defects of the seller;
  • the assumption of liability in the case of asset transfer;
  • assumption of liability on public debts by the acquirer or the administrators appointed by the acquirer; and
  • assumption of liabilities on the administrative and criminal charges for, for example, data privacy and employee-related matters.

Owing to the nature of the different records, the process must be carried by legal and fiscal advisers to evaluate records and findings and, depending on the nature and volume of the transaction, further advisers for technical processes may be involved. We usually recommend sealing a copy of the data room provided by the seller side to be used in the case of controversy and, if the case will be heard by a Turkish court, a signed copy of the medium would have more effect as a proof.

The third stage of the transaction is the drafting and negotiation of the transaction documentation. Except for the share transfers in limited liability companies, the notary’s involvement is not required. Hence, the transaction documentation may be freely drafted and signed between the parties. Share transfer agreements in Turkey provide the usual clauses, such as the mechanism of the closing, representations and warranties, indemnification, and choice of law and forum. Turkish legislation recognises the national or international arbitration or different laws and forums for share transfer agreements; hence, the selection of a foreign jurisdiction and court or arbitration is possible. Considering the fact that most of the disputes arising out of a share transfer are related to the qualities of the company or transferred shares or breach of the seller side’s obligations, a local forum and legislation is usually preferrable for a swifter action, and the Istanbul Arbitration Centre provides an international arbitration procedure that is increasingly attractive for the merger and acquisition transactions.

As per the closing, the transfer of the share certificate (if it has been issued), the approval of the board of directors and registration of the transfer in a company’s share ledger is essential for a successful transfer in a joint stock company; hence, advance preparation for the closing might be necessary in certain transactions. For limited liability companies, a share transfer agreement executed before a notary public, a shareholders’ resolution approving the transfer and the registration of the share transfer before the relevant trade register constitute a condition for validity of the transfer. As the parties may wish to keep certain aspects of the transaction confidential, common practice is the execution of a share transfer agreement, including the financial conditions of the transfer before a notary public and a second intra-party agreement for specific terms and conditions. The closing procedure for the financing rounds based on the capital increase require a shareholders’ meeting to convene and resolve on the capital increase, and if a full quorum (100 per cent) is not met, all shareholders shall be called for a meeting and then for their pre-emption rights (if the pre-emption right has not been limited by the articles of association and legislation). This call for a meeting and pre-emption right may require planning the closing four to five weeks prior; the transaction documentation may need to include interim period clauses if the signing and closing will not be simultaneous. Finally, the obligation to request the authorisation of the Competition Authority shall be evaluated and made if deemed necessary for a due closing. Even if the Competition Authority accepted pre-final documents in the past, the final and executed agreement might be required for releasing the necessary authorisation – it is also crucial to check these aspects with a competition law expert prior to planning for a closing.

9 Are there any legal or commercial changes anticipated in the near future that will materially affect practice or activity in your jurisdiction?

The legal framework has recently been amended and renewed in Turkey, meaning we do not expect material changes in this regard. However, Turkey is a fast moving and always changing country, and we can always expect new regulations and amendments when necessary (such as for the protection of Turkish currency). A foreseeable future change in legislation is related to the amendment of the Law on the Protection of Competition, for which a draft has been published. As this competition law was substantially amended in 2020 and a major merger control was established for technology companies in April 2022, the new amendment is not expected to have a major effect on most sectors but to provide more details on digital platforms and e-commerce activities. The Turkish Ministry of Commerce enacted significant legislation on e-commerce, and the amendment of the above competition law is expected to close the circle.

10 What does the future hold? What activity levels do you expect for the next year? Which sectors will be the most active? Do you foresee any particular geopolitical or macroeconomic developments that will affect deal sizes and activity?

While there has not been an official call for general elections, Turkey has entered in election period that is expected to be concluded in May or June 2023. This election period, as usual, creates an expected decrease in merger and acquisition transactions until the new president and members of the parliament are elected. We expect a significant increase in transactions in the infrastructure, financial services and transportation sectors following the conclusion of the elections and a strong DFI flow in Turkish capital markets and private investments. However, should Turkey continue to stay neutral in the Ukraine-Russia conflict, we may also expect an increase in defence and infrastructure-related transactions in the short to medium term. Another historically strong sector in Turkey that might be regaining traction is the construction sector, and related companies may have a strong demand for numerous projects and investments during restructuring in conflict zones when the conflicts end.

The Inside Track

What factors make mergers and acquisitions practice in your jurisdiction unique?

The M&A transactions in Turkey are usually familiar and comfortable for foreign investors and their legal advisors since the deal structure, documentation and legislation are similar to continental European countries. The transactions where foreign investors are involved are drafted and negotiated in English and there are also numerous Turkish lawyers fluent in other languages such as Italian, French, German and Chinese. While being similar, an acquirer should seek an a tailored advisory service to have a better understanding of the risks and benefits in Turkey in a comprehensible way.

What three things should a client consider when choosing counsel for a complex transaction in your jurisdiction?

A client should consider a counsel who can conduct a thorough examination and planning of all matters arising out of the transaction, who has a competent, diverse and agile team with different expertise areas to cover the transaction in a holistic way and who has a specific knowledge of the sector related to the transaction.

What is the most interesting or unusual matter you have recently worked on, and why?

Each project in an M&A transaction is unique and interesting putting together parties from different countries, cultures and investment backgrounds. Primus inter pares, one of the most interesting deals that we recently worked was related to a flip-up of a Turkish start-up to USA while receiving investment from investors based in 5 countries spread in 3 continents.


Leave a Reply

Your email address will not be published. Required fields are marked *