Private M&A 2022 in Turkey

M&A activity in Turkey started to increase again once the national lockdown was lifted in June 2020 and 304 deals were recorded in Turkey in 2020 with a total deal value of USD9 billion. According to the Deloitte Annual Turkish M&A Review, 2021 M&A volume was around US$10.1 billion, corresponding to a growth of 12% compared to 2020.

Major deals (transactions with volumes exceeding USD1 billion) in 2020 included the:

The Turkey Wealth Fund also consolidated six state-owned insurance and pension companies for a total consideration of about USD953 million. The Turkey Wealth Fund was directly responsible for over 43% of the disclosed M&A transaction volume and roughly 30% of the total estimated M&A transaction volume in Turkey in 2020.

Involvement of financial investors (venture capital firms, private equity firms, angel investors, and international financial institutions) in the Turkish M&A market expanded in 2020. According to reports issued by Deloitte and KPMG, the number of transactions involving financial investors reached an all-time high in 2020, and the volume of these transactions was about 50% of the total transaction volume.

The Turkish start-up environment also obtained investment of USD200 million in total from venture capital firms and angel investors in 2020, according to Deloitte.

Due to the challenging economic environment caused by the Covid-19 pandemic, there has been an increase in distressed M&A activity and most strategic acquirers have become accustomed to this. Currently, the market generally favours buyers, especially in private company acquisitions and in distressed M&A transactions.

In Turkey, small M&A transactions are generally not debt-financed, but bigger transactions may use debt financing (usually bank financing).

In Turkey, the most common way to structure a private M&A transaction is a share sale. Share sales can be more advantageous in terms of tax and require fewer procedural steps compared to asset sales (see Question 7). Asset sales may also be used, depending on the nature of the investment and the parties' needs.

Consideration is most commonly cash. Multiple sellers are normally paid the same type and amount of consideration, although payment of different consideration amounts or types is possible. Non-cash consideration (such as shares and loan stock) may also be used, depending on the nature of the transaction and negotiation between the parties.

Buyers may pay the price in full on closing or pay in instalments on the realisation of certain milestones or financial goals. Buyers usually prefer paying in instalments and earn-out mechanisms when it is important to keep the seller(s) in the company after closing, to ensure a smooth transaction and the company's continuous growth.

Price adjustment mechanisms are commonly used in M&A deals to determine the price and payment conditions. EBITDA multiple valuation is the most common method used, although other techniques such as discounted cash flow, comparable company analysis, and precedent transaction analysis are sometimes used. Both closing accounts and locked-boxed structures are used, although many smaller deals do not include such mechanisms. While many fund investors prefer to use locked boxes, closing accounts are generally more common in the wider market.

Share sales are the most common structure in private M&A deals. The main document in a share sale is the share purchase agreement (see Question 14).

Sellers typically give customary representations, warranties, and indemnities to buyers, consistent with international norms in form and substance, although certain Turkish law and market-specific provisions may also be included (see Question 15).

A share purchase agreement will normally include a cap on the aggregate liability of the seller which is often equal to the purchase price (or a high percentage of it). The liability of the seller is also normally limited by time, usually one to two years after closing. However, claims under fundamental warranties such as title to the shares are often not time-barred or subject to thresholds and claims under tax and social security warranties usually match the applicable statute of limitations.

Representation and warranty insurance is not commonly used (a contract between the buyer or the seller and an insurance company, where the insurance company undertakes to indemnify the buyer for loss resulting from a breach of representations and warranties).

In an asset purchase deal, Turkish law will also normally provide the buyer with certain implied representations and warranties relating to the purchased asset.

A typical private M&A transaction process in Turkey usually follows customary international practices and includes the following main steps:

The principal transaction document is typically a share purchase agreement or asset purchase agreement. If the entire company or business is not being acquired, a shareholders' agreement is also normally executed.

In deals involving non-Turkish party(ies), the language of negotiations and transaction documents is most commonly English, and the share purchase agreement and/or the shareholders agreement are generally modelled after UK and US precedents in style and content. International arbitration is usually the preferred dispute resolution method, although the jurisdiction of Turkish courts is sometimes seen. It is also not uncommon for transaction documents to be governed by the law of a foreign jurisdiction. Since the object of the transaction is in Turkey, Turkish law is increasingly the norm.

If there are multiple potential buyers, an auction process similar to that commonly conducted in jurisdictions like the UK and the US may be undertaken. There are no specific Turkish laws or regulations for private auctions.

In practice and in private acquisitions, the main companies used are joint stock companies (JSCs) and limited liability companies (LLCs).

In a JSC and an LLC, the liability of the shareholders is limited to their subscribed capital contribution, except that liability for the governmental debts in an LLC is reserved.

In a JSC, the company is liable for its debts up to its assets and the shareholders are liable to the company up to their subscribed capital contribution. The shareholders are not responsible for the JSC's debts in terms of their personal assets. The shareholders are not responsible for the JSC's governmental debts (such as tax or social security debts the JSC owes to the government), unless they are also a board member.

In an LLC, the shareholders are liable for the LLC's governmental debts with their personal assets according to their shareholding ratio in the company's capital (Article 35, Law on Collection Procedure of Assets No.6183). Therefore, a sole shareholder is 100% liable if a governmental debt cannot be collected from the LLC.

In a JSC, a share transfer is not subject to long procedures such as notarisation or registration, unless the company has issued bearer share certificates, which must be registered with the Central Registry Agency (Merkezi Kayıt Kuruluşu). Registered share certificates (or interim certificates) are transferred by endorsement and delivery (see Question 22).

In an LLC, share transfers must be executed in writing before a notary public and registered before the competent Trade Registry Directorate and published in the Trade Registry Gazette.

The most common way to acquire a private company is a share purchase. Share sales can be more advantageous in terms of tax and require fewer procedural steps compared to asset sales (see Question 7). A share sale only requires the execution of a share purchase agreement. In an asset sale, in addition to signing an asset sale agreement, separate transfer agreements may be needed, depending on the asset being transferred.

An asset sale might be preferred, depending on the nature of the negotiations, the parties' needs, and the investment.

A demerger is also an option, which can be done as:

However, this process may require a capital increase or decrease, and also requires securing creditor's rights and registration with the competent Trade Registry.

In a share sale, all assets and liabilities of the target company are automatically transferred to the buyer. In an asset sale, the parties can generally select which assets are sold.

On the transfer of a commercial enterprise, all assets and liabilities automatically pass to the transferee. Article 11 of the Commercial Code defines a commercial enterprise as an enterprise aiming to reach an income exceeding that of a craftsman, with activities run in a constant and independent way. Independence and consistency play a significant role in qualifying a business as a commercial enterprise. A transfer of a commercial enterprise agreement is subject to certain requirements, for example it must:

The commercial enterprise's assets (including real property) are transferred on the signing and registration of the transfer agreement. However, the parties can determine otherwise, so an asset or liability can be excluded from the purchase (Article 11(3), Commercial Code).

Transferring shares in a share sale is more straightforward, since asset transfers require a series of procedural steps and approval of/notifications to creditors. However, in LLCs, share purchase agreements must be executed before a Turkish notary public and share transfers must be registered and announced in the relevant Trade Registry Gazette (see Question 22).

In a share transfer, all the company's assets, including licences, permits, contracts and employees, are acquired without requiring third parties' consent (except for agreements with change of control clauses, which usually require third party notification or even prior consent).

In an asset sale, the Employment Law does not expressly require obtaining transferred employees' approval for the transfer. However, it is advisable to enter into a tri-partite protocol between the transferee, transferor, and the transferred employees to prevent any potential future claims of the transferred employees (see Questions 12 and 38).

In an asset or business acquisition, the buyer must notify creditors or announce it in the Trade Registry Gazette or a national newspaper (Article 202, Code of Obligations No. 6098). For the announcement, the buyer must adopt a resolution of the general assembly of shareholders which requires a simple majority and announce it in the Trade Registry Gazette. The seller is jointly and severally liable with the buyer for debts in relation to the transferred assets or business for two years from the notification/announcement date.

If the transfer of particular assets is subject to special conditions or forms (for example, a transfer of real estate, vehicles, or intellectual property rights) (see Question 13), such conditions and/or forms must be satisfied for the relevant transfers to be valid.

Shareholder approval is required for an asset transfer, as the sale of a substantial part of the company's assets requires authorisation by the general assembly of shareholders under the Commercial Code (Article 408, Commercial Code). The decision authorising the transfer requires a simple majority.

Depending on the details of the transaction, share sales can be more beneficial from a tax perspective. In particular, there are certain exemptions from tax on capital gains from a share sale if the conditions are met (see Questions 31 to 36).

Share sale agreements are exempt from stamp tax. Asset sale agreements are subject to stamp tax of 0.948% on the highest amount indicated in the agreement.

Land and building transfers are subject to title deed charges.

Merger, demerger, and share exchange transactions are tax-free under Turkish tax legislation, provided that the conditions in the legislation are fulfilled.

Sales of companies by auction are not common and there are no specific Turkish laws or regulations relating to private auctions.

Under the Enforcement and Bankruptcy Law No. 2004, attached (secured) company shares can be sold through a public auction on the creditors' request. If no one buys the attached shares or 50% of the estimated value of the shares is not achieved at the first public auction, the execution office must set up a second public auction with the same conditions. If the stated conditions are not met at the second public auction, this will result in foreclosure of the request of sale. Further details are set out under the Enforcement and Bankruptcy Law.

National policy on foreign investment was liberalised following amendments to the Foreign Direct Investment Law, which is the main foreign investment legislation in Turkey.

In principle, there are no foreign ownership restrictions and foreign investors, regardless of their identity or citizenship, can invest in Turkey without any approval or permission.

Legal entities established with foreign capital under Turkish law, regardless of their shareholding structure and percentage of foreign investors, are treated as domestic companies.

Foreign investors are only required to notify the General Directorate for Incentives Implementation and Foreign Capital under the Ministry of Industry and Technology of the investment type, capital investment amount, and shareholding structure (Foreign Direct Investment Law). They must also inform the Ministry each year about their investment activities relating to any capital increases or share transfers and any payments relating to them. These notifications are done through an electronic platform called the Electronic Incentive Application and Foreign Investment System (E-TUYS).

However, foreign investments in sectors such as civil aviation, insurance, banking, radio and TV broadcasting, financial advisory, and mining are subject to certain restrictions. Restrictions mainly involve establishing a local investment vehicle in Turkey that is controlled by Turkish nationals. For example, the:

Other laws apply to the control of foreign investments (including transactions) such as the Competition Law, Civil Aviation Law, Mining Law, Law on the Protection of the Value of Turkish Currency, and the Land Registry Law (see Question 20).

A letter of intent (LoI) (otherwise referred to as a term sheet or memorandum of understanding) is not specifically regulated by Turkish legislation. It outlines in writing the contract that the parties plan to formalise in future, with a non-binding statement of intention, and provides the basis for a full draft agreement.

LoIs can be used at any time. Negotiations do not have to be finished before a Lol is drawn up. There is no required layout or structure, and an LoI can be as formal or informal as the parties decide.

Typically, an LoI includes:

One requirement for an agreement to be binding is that both sides intend to be bound. Therefore, normally, an LoI is not legally binding, and is not a substitute for a full legal contract. To make sure, an LoI usually starts with "Subject to contract and without prejudice." "Subject to contract" means that none of the content is contractually binding unless it is placed in another agreement. "Without prejudice" means that the contents are not necessarily the parties last words on the matter.

Separate exclusivity agreements are not common in Turkey. Instead, parties tend to include exclusivity provisions in the letter of intent/term sheet/memorandum of understanding, which usually restrict a party from negotiating or soliciting offers from other parties.

There is no requirement in Turkish law for the enforceability of exclusivity agreements. For evidential purposes, in practice, exclusivity agreements are usually entered into in writing.

An exclusivity agreement imposes some obligations arising from good faith on the parties. If a party negotiates with a third person in breach of its exclusivity obligation, that party must compensate any damage incurred by the other party. It is common to set out a penalty for infringement of the exclusivity agreement.

Turkish law does not explicitly regulate non-disclosure agreements. They can be defined as contracts entered into by two or more parties, in which some or all of them agree that certain types of information passing from one party to the other will remain confidential.

There is no requirement in Turkish law for the enforceability of non-disclosure agreements. For evidential purposes, in practice, parties tend to enter into written non-disclosure agreements.

If the confidential information is revealed or disclosed to another individual or entity, the injured party can claim breach of contract and seek injunctive relief and monetary damages. Along with compensation of losses, it is common to set out a penalty for infringement of confidentiality.

Due diligence is conducted by the buyer to confirm the accuracy of the seller's claims. A potential M&A deal involves several types of due diligence. In M&A deals in Turkey, financial due diligence, tax due diligence, and legal due diligence are usually carried out.

In legal due diligence, the potential buyer's legal adviser usually sends a due diligence checklist to the seller, which lists the documents and information requested from the seller. The seller sets up a virtual data room and uploads the documents and information there.

The potential buyer's legal adviser asks questions about those documents and information, if any, and prepares a written due diligence report (usually a red flag report covering the most important and risky findings, and the legal adviser's recommendations) after examining all the documents and information provided by the seller.

The potential buyer examines the due diligence report. If the potential buyer decides to proceed with the transaction, the share purchase agreement is prepared (usually by the buyer's legal advisers) in light of the due diligence findings.

A legal due diligence typically includes examination and review of the following topics:

JSCs. Under the Commercial Code No. 6102, there are no statutory restrictions on a transfer of shares in JSCs. However, the articles of association can impose such restrictions, for example limiting the transferability of the company's registered shares and requiring shareholder and/or board approval for the transfer.

For evidential purposes, a board decision approving the share transfer is usually obtained.

The board can refuse to register a transfer of registered shares in the JSC's share ledger if the conditions in Articles 493(1), 493(3), or 493(4) of the Commercial Code are met (for example, regarding the JSC's shareholding structure, scope of activity, or economic independence).

LLCs. In an LLC, the board of managers' approval (or, if there is only one manager and no board, the manager's approval) is not required for share transfers. A written share transfer agreement is signed before a Turkish notary public and the shareholders' general assembly must approve the share transfer (see below, Shareholder Approval).

In JSCs and LLCs, the authors' commonly see share transfer restrictions (for example, lock-up periods, call option, drag-along and tag-along rights) where foreign investors only acquire some of the shares, to prevent the remaining Turkish shareholders from freely transferring their shares to third parties.

In an LLC, a share transfer must be approved by a resolution of the shareholders' general assembly, which must be approved by shareholders holding more than 50% of the share capital, unless a higher majority is required by the articles of association. The articles of association can also prohibit share transfers. A right to refuse or a prohibition of share transfers can also be agreed by the shareholders in the shareholders' agreement, which binds all the shareholders.

Shareholder approval is required for an asset transfer, as the sale of a substantial part of the company's assets requires authorisation by the general assembly under the Commercial Code (see Question 7, Complexity of the Transaction).

Creditors' consent is not required but an asset sale must be announced in the Trade Registry Gazette or notified to creditors (see Question 7).

However, if the transferred agreements require approval of the counterparties to be assigned, such approval must be obtained before proceeding with the asset transfer.

Most agreements have provisions on transfer and assignment. For example, that the parties cannot assign the agreement, nor assign any receivables arising from the agreement without the other party's express written consent, except for assignments to the parties' affiliates.

However, the Code of Obligations states that a transfer of an agreement should be done either:

Also, under the Code of Obligations, the agreement should be in a form which can be transferred. Therefore, it is advisable to obtain the counterparties' approval before the assignment of each agreement, even if the transferred agreement does not require this.

In general, mergers and acquisitions are subject to the Commercial Code and related Turkish legislation. Some sectors are subject to specific rules, especially in banking, energy, insurance, telecoms, and similar sectors. Permission may be required from authorities such as the Banking Regulation and Supervision Agency, the Energy Market Regulatory Authority, the Competition Authority (see Question 40), the Capital Markets Board, or the General Directorate of Civil Aviation.

The buyer generally prepares the first drafts in an acquisition.

In a share sale, the main document is the share purchase agreement. If the buyer does not buy all the shares in a company, a shareholders' agreement is usually signed along with the share purchase agreement to regulate the relationship among the shareholders, or the share purchase agreement may include provisions normally covered by a shareholders' agreement.

In addition, employment agreements, consultancy agreements, disclosure letters, and consent letters (if the agreements signed by the target company require counterparty's consent to a change of control) are common in share transfers.

If the target is an LLC, a shorter and less detailed version of the share purchase agreement is usually prepared, to be notarised, registered, and announced in the Trade Registry Gazette.

In an asset sale, an asset sale agreement is prepared. Closing an asset sale transaction is usually more complex since the assets must be transferred individually. Separate procedural steps and additional transfer agreements may be needed based on the asset being transferred. For example:

The main clauses in a share purchase agreement are:

Provisions in an asset purchase agreement are similar. In addition, the following may be included:

Warranties and indemnities are typically included in a share purchase agreement and an asset transfer agreement, and usually relate to:

In an asset sale agreement, more detailed warranties relating to the assets being transferred may be included in the agreement.

The parties can agree a monetary cap on liability, depending on the negotiations between them. The monetary cap is generally determined as the aggregate amount of the sale price payable by the buyer.

There are usually no de minimis levels before claims can be made.

The parties can also limit their liabilities with disclosures included/attached to the acquisition agreement. If a matter is disclosed to the buyer and the buyer is aware of the disclosure during the transfer of the shares/assets, it is not possible to claim in relation to the warranties to the extent of the disclosure.

The parties usually agree that the seller will indemnify/compensate the buyer for damage or loss the buyer incurs due to the seller breaching the warranties.

Tax warranties are mostly limited by the statute of limitations, which is five years.

Claims under other warranties are usually limited to one to two years. Depending on the findings of the due diligence, longer periods can be determined.

Conditions precedent in a share purchase agreement commonly include:

The primary document executed on signing is the share purchase or asset purchase agreement and its annexes (including the closing documents in agreed form).

Signing relates to the process of contractually agreeing the terms and conditions of the transaction. The buyer and the seller usually sign a share purchase or asset agreement, setting out the terms of the deal and the rights and obligations accompanying the ownership transfer.

Signing itself does not necessarily result in the actual transfer of ownership, as there might be certain conditions to be met. Closing conditions are agreed in the purchase agreement and must be met before the ownership rights are transferred from the seller to the buyer.

If there is a delay between exchange and closing, a material adverse change clause is advantageous for the buyer, which entitles the buyer to rescind the agreement in the event of significant adverse effects on business operations (for example, a drop in sales or the loss of a key customer). On the other hand, the seller may insist on a down payment at signing. In that case, if the buyer refuses to complete the transaction (that is, fails to pay the sale price), the seller is entitled to rescind the agreement and retain the down payment as a penalty.

Closing refers to the completion of a transaction and the transfer of ownership. It is the date from which the buyer has actual control over the assets or the business. Once a deal is signed, the parties must undertake all actions required to consummate the deal. Conditions precedent are defined by both parties before signing and may rely on country-specific regulations. In many cases, obtaining antitrust clearance is the sole or the most relevant condition. Other non-legally required conditions are at the parties' discretion and largely depend on their negotiation power.

Further, the parties agree a closing date, in the sale contract or shortly after signing when the date of meeting all conditions is foreseeable. Usually, the purchase price only becomes due when all requirements are satisfied.

In a share transfer, the following are usually executed on closing:

In an asset sale, separate procedural steps and additional transfer agreements may be needed, based on the asset being transferred (see Question 13).

A share purchase agreement to transfer LLC shares must be signed before a Turkish notary public, registered by the competent Trade Registry, and announced in the Trade Registry Gazette (see Question 22).

There are no additional legal formalities for the signature of share or asset purchase agreements by foreign companies. However, the parties' signatories usually give a power of attorney to their legal counsel to sign the agreement on behalf of the relevant party and handle the closing transactions. If a power of attorney is issued in Turkey, the person giving the power of attorney should attend a notary public to issue the document. If a power of attorney is issued abroad, it should be notarised and apostilled in the country where the person signing the power of attorney is located.

For instance, to sign an LLC share transfer agreement, if the authorised signatory of a foreign company is not in Turkey to sign the agreement before a Turkish notary public, the foreign company must grant a notarised and apostilled power of attorney (if the power of attorney is signed abroad) to a person who can sign the agreement in Turkey on the foreign company's behalf.

Certain documents and transactions may require different procedures. For example, to buy real estate in Turkey, the seller and buyer must obtain prior approval for the sale from the local Land Registry Office where the real estate is registered. This procedure applies to both foreign and Turkish buyers/sellers. When applying for approval, the seller and buyer must supply a range of documents and pay certain fees. They can submit these documents together or separately. The buyer and the seller (or their proxies) must also attend the relevant Land Registry Office to complete the sale. If either party authorises a proxy to act on their behalf in the sale, the proxy must be issued by a notary public in the form required by law.

Under Law No. 5070 on Electronic Signatures, e-signatures are recognised, binding, and enforceable as evidence of execution under Turkish law, with the same effect as a handwritten signature. E-signatures can be used in electronic contracts, which allow the parties to sign the contract with their secure e-signatures or mobile e-signatures. However, e-signatures cannot be used for transactions that by law must be concluded in a mandatory or official form or other special proceeding, such as the purchase and sale of real estate or bail contracts.

In a JSC, a share transfer is usually made through a share purchase agreement between the seller and buyer and recording the transfer in the company's share ledger.

If the shares are issued as registered share certificates, the certificates must be endorsed in the buyer's name and delivered to the buyer.

If the shares are issued as bearer share certificates, title passes with possession of the certificates and registration of the transfer with the Central Registry Agency.

A transfer of shares in a JSC does not require notarisation or registration with the relevant Trade Registry. However, if the JSC has become a sole shareholder company, registration is required with the relevant Trade Registry.

Although not required by law, buyers also tend to request a resolution from the target's board of directors approving the share transfer.

In an LLC, a share transfer requires both:

The shareholders' resolution approving the share transfer must be registered with the competent Trade Registry, along with the other relevant share transfer documents (for example, a copy of the share purchase agreement), and announced in the Trade Registry Gazette.

The transfer must also be registered in the LLC's share ledger.

The effective date of the transfer is approval of the transfer by the shareholders.

There is no transfer tax on share transfer agreements in JSCs and LLCs.

In a share purchase agreement, the seller generally warrants that it will sell the full legal and beneficial ownership of the shares free from encumbrances, and with all the rights attaching to the shares (including rights to unpaid or undeclared dividends and distributions).

The seller also usually undertakes to waive (and procure waiver by any other person of) all pre-emption rights over the shares.

Sellers are normally liable for pre-contractual misrepresentation, misleading statements, or similar matters if the agreement is made by deceiving the buyer and/or committing a tortious act.

Advisers cannot normally be liable under the share transfer agreement, but they can be liable to the buyer due to a tortious act or material fault.

In principle, Turkish law allows agreements with a foreign element (for example, a foreign party) to include a choice of foreign law. There is no general rule that the acquisition of shares or assets in a company or a business is governed by Turkish law. Parties can agree that a law of a foreign jurisdiction will govern an acquisition or part of it (and sometimes do) and for disputes relating to an acquisition to be resolved through arbitration (and often do).

Recently, the authors have seen Turkish law starting to be preferred more in share purchase agreements, which is reasonable since the target company is in Turkey. However, this gives rise to concerns about the validity of exit provisions such as drag-along and tag along clauses, as well as the speed and perceived lack of relevant experience of Turkish courts. Therefore, even if the governing law is chosen as Turkish law, parties tend to choose arbitration as the dispute resolution method instead of local courts.

While the parties are free to choose a foreign law and agree on arbitration, certain Turkish law provisions always bind the parties and the target company, for example, formalities for share transfers, statutory minority rights, and corporate governance.

Choosing arbitration as the dispute resolution method is common in private M&A documents, due to concerns about the validity of exit-provisions and the speed and experience of Turkish courts (see above, Choice of Law).

The parties can choose to include an arbitration clause in the main contract or sign a separate arbitration agreement.

Foreign judgments (including arbitral awards) in civil law matters are enforceable in Turkey as long as they are final under the laws of the foreign country. When examining an enforcement request, Turkish courts can only determine whether the arbitral award and/or arbitral proceedings meet the enforcement conditions stipulated under the Turkish International Private and Civil Procedure Law 5718 (TIPCPL), which is the main arbitration legislation in Turkey, or the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958. This limited examination of the courts is also known as prohibition of the revision au fond.

Turkey is a party to the New York Convention.

The following substantive requirements must be fulfilled for an arbitration agreement/provision to be valid:

In terms of formal requirements, an arbitration agreement must be in writing. An arbitration agreement is deemed to exist where:

In a share sale, the most common type of consideration is cash. Non-cash consideration (for example, other securities and loan notes) can also be used (see Question 2).

Factors such as liquidity, retaining a continuing interest in the target business or assets, and tax are factors in the choice of consideration.

See Question 2.

See Question 2. In M&A transactions, earn-out mechanisms are common, particularly if the buyer is a private equity fund. Holdback provisions are also preferred, especially in industrial companies where delivery of pipeline revenues and project profitability may be important in the investment decision and valuation.

Deposits are not very common. However, escrow arrangements are commonly used as security for claims relating to representations and warranties.

The most straightforward way to fund an acquisition by issuing new shares is to increase the company's capital. Under the Commercial Code, the capital increase can be made in cash or as a conditional capital increase.

For a capital increase in cash, a resolution must be obtained from the general assembly of shareholders to amend the articles of association and increase the share capital.

In a JSC, unless a higher quorum is required by the articles of association, at least 50% of the company's share capital must be represented at the meeting. Decisions must be passed by the majority of those attending the meeting.

In an LLC, unless a higher quorum is required by the articles of association, the majority of the company's share capital must be represented at the meeting. An affirmative vote of shareholders representing at least two thirds of the shares is required to pass a capital increase resolution. The resolution must be registered in the relevant Trade Registry with the accompanying documents. The previous capital must be fully paid.

In a conditional capital increase, the company grants a right to acquire its shares to its creditors and employees, provided that both:

Capital can also be increased from internal sources. The following can be converted into capital:

In a public offering scenario through a capital increase, private companies can choose to restrict the pre-emptive rights of current shareholders fully or partially. In any event, all of the issued capital must first be paid.

Depending on the nature and sector of the company, approval from the Capital Markets Board and relevant regulatory authorities may be required.

Before applying to the Capital Markets Boards for a public offering, the following procedures must be completed:

All transactions relating to granting an advance, loan, or security entered into by a company with a third person wishing to purchase that company's shares are invalid (Article 380, Commercial Code).

Further, a company cannot acquire or give assistance to a potential buyer for transactions that would result in the company acquiring more than 10% of its shares.

The above restrictions do not apply if the transaction either:

However, these exemptions are not available if they reduce or adversely affect the company's capital reserves, as defined under Articles 519 and 520 of the Commercial Code.

Additionally, a company can acquire its own shares regardless of the restrictions in Article 379 and 380 of the Commercial Code in the following circumstances (Article 382, Commercial Code):

Share sales are exempt from stamp tax according to the Stamp Tax Law numbered 488.

As per the Stamp Tax Law numbered 488, stamp tax must be paid on asset sale agreements that include a monetary amount.

The current stamp tax rate is 0.948%, calculated on the highest amount of all undertakings in the agreement. However, the maximum stamp tax payable on a document is capped at TRY4,814,234 for 2022.

Land and building transfers are subject to title deed charges.

Share sales are exempt from stamp tax.

There are no stamp tax exemptions in an asset transfer.

Turkish-resident company seller. According to the Corporate Tax Law numbered 5520, if the Turkish-resident company has held the shares (JSC or LLC) for more than two years, 75% of the capital gain is exempt from tax and the remaining 25% is subject to corporate income tax at 20%.

For a seller to benefit from this exemption:

If the holding period is less than two years, the capital gain is subject to corporate income tax at 20%.

Seller is an individual. In a JSC, if the seller has held share certificates issued by the JSC for more than two years, there is no tax on the capital gain. Otherwise, the capital gain is subject to tax as per the tariff in the Income Tax Code (from 15% to 35%).

In an LLC, the capital gain is subject to tax as per the tariff in the Income Tax Code (an LLC does not issue share certificates).

Seller company not resident in Turkey. If the buyer is also not resident in Turkey, there is no tax in Turkey. Taxation is in the country where the seller is resident. If there is a double tax treaty between Turkey and the country where the seller is resident, the treaty applies.

A capital gain on a sale of assets is subject to 20% corporate income tax.

According to the Corporate Tax Law numbered 5520, 75% of the gains from the sale of any real estate assets that have been held for at least two years may be exempt from corporate income tax subject to certain conditions.

See Question 33.

Merger, demerger, and share exchange transactions are tax-free under Turkish tax legislation, provided that the conditions in the legislation are met.

See Question 33.

Under the Value Added Tax Law numbered 3065, a sale of shares (except to individuals) in Turkey is subject to VAT at 18%.

A full VAT exemption applies if the shares have been held for more than two years at the time of the sale (JSCs and LLCs) or share certificates have been issued before the share sale (JSCs only).

There is also an opinion that if the transfer is between two non-residents and does not take place in Turkey, the transfer should not be subject to VAT in Turkey (even though there is no specific exemption).

If payable, VAT is paid by the buyer to the seller, and is input VAT for the buyer and carried forward until it is offset against output VAT. The seller pays the VAT to the tax authority with its monthly VAT return.

Asset transfers are mainly subject to VAT at 18%, including goodwill.

A sale of immovable assets (for example, a factory building and land) can be exempt from VAT, if the transferred assets are held for more than two years.

Under Turkish law, all entities are liable for their own taxes, even if they are in the same group of companies. Therefore, Turkish law does not allow group companies to surrender losses between them.

Parties are not obliged to inform or consult employees or their representatives or obtain employee consent to an asset sale. However, in a spin-off transaction, employees transferred to the buyer can object to the transfer (Article 178, Commercial Code). In this case, the employment agreement with the employees objecting to the spin-off will terminate at the end of the time period determined under the Labour Law No. 4857.

Employment contracts are made between the employees and the target company employer. A share sale does not change the employer and employment contracts remain in force.

In a transfer of a commercial enterprise (see Question 7) or one of its divisions, the employment contracts automatically transfer to the transferee employer, with all rights and obligations of the transferring employees (Article 6, Labour Law No. 4857). The transferor and transferee are jointly and severally liable to the employees for all rights and claims of the employees as of the date of the transfer. This liability of the transferor is limited to two years from the date of the transfer.

When employment contracts are transferred to a new employer, the transferor employer and the transferee employer cannot terminate the employment contracts of the transferring employees, that is, the transfer is not a just cause for termination of the employment contracts. In the event of such termination, the employees can claim notice and severance payments.

A share sale does not change the employer and employment contracts remain in force. The employer and the employees cannot terminate the employment contract due to the share sale. Any unfair dismissals are subject to general protection under the Labour Law, for example, termination must be for just cause and is subject to notice and severance payments.

Most employees participate in government pension schemes, although most global companies operating in Turkey offer private pension schemes to their employees.

Employees under the age of 45 are automatically enrolled in a private pension plan, with a pension agreement between the employer and a pension company under the Private Pension Savings and Investment System Act. The employee's contribution to the plan is 3% of their average earnings, in addition to social security premiums, and the employer must pay this amount into the plan on the day following payment of the employee's salary (at the latest). An employee can request a higher percentage contribution to the plan from their employer.

In a business transfer (see Question 38), private pension agreements automatically transfer to the transferee, with all rights and liabilities together with the employment agreements.

Under the Communiqué on Mergers and Acquisitions Requiring Authorisation of the Competition Board (Communiqué), a transaction must be notified and cleared where either:

(Article 7, Communiqué.)

In calculating turnover, the average buying rate of exchange of the Central Bank of Turkey for the financial year in which the turnover is generated must be used as the rate of exchange (Article 8(6), Communiqué).

Turnover, in accordance with the uniform accounting plan, consists of the net sales generated as of the end of the financial year preceding the date of the notification or, if this cannot be calculated, those generated as of the end of the financial year closest to the date of notification.

A transaction party means the economic entity in which an undertaking concerned is included. An undertaking concerned means a person or economic unit that is directly a party to a merger or an acquisition. Since there may be more than one firm in both the acquiring party and the acquired party in acquisitions, generally, each of those firms is considered an undertaking concerned.

In transactions where an undertaking acquires full control of another undertaking, undertakings concerned are the acquiring undertaking and the undertaking being acquired.

In case of acquisitions by a group through one of its companies, the undertakings concerned are the acquiring firm and the undertaking being acquired, except where the acquiring firm is established as an instrument for acquisition.

If a transaction exceeds the thresholds, notification must be made to the Competition Authority for review and clearance of the transaction. The transaction is not valid until the Competition Authority gives a clearance decision.

Notification must be made by one of the parties, all the parties together, or their authorised representatives.

On receipt of the notification form, the file is assigned to a case handler, who must complete a preliminary examination within 15 calendar days of notification and refer it to the Competition Authority for a decision. In practice, a clearance decision can take around six to eight weeks, due to additional information that may be required.

The Competition Authority assesses whether there is a dominant position, to clarify whether the transaction causes a significant lessening of competition in a market for goods or services in Turkey.

Under the Environmental Law numbered 2872, the owner of immovable property is liable for any contamination on it.

Liability and risk therefore pass to the buyer in an asset sale (and indirectly through ownership of the target in a share sale), unless a specific compensation clause is included in the transfer agreement.

Under environment law, a polluter must clean up the contamination and/or pay costs incurred by the state for such clean-up.

Additionally, an entity's representatives who caused the contamination are directly liable for fines imposed on the entity, in accordance with the rules on directors' and officers' liability set out in the Commercial Code.

Environmental, social, and governance due diligence is becoming increasingly common, in-line with the increasing interest of international finance institutions and development finance institutions in the Turkish M&A market.

Bearer shares and bearer shareholders in JSCs must be notified and registered with the Central Registry Agency (Law on Prevention of Distribution and Financing of Weapons of Mass Destruction No. 7262, published in the Official Gazette 31 December 2020). This intends to enhance transparency by recording the information and transfer process for bearer shares.

JSCs that issue bearer share certificates must notify the Central Registry Agency of the owners of such certificates and their shares before they are distributed to the relevant shareholders. Owners of bearer share certificates can only exercise their shareholder rights against the JSC if they prove their possession of the certificates and the Central Registry Agency has been notified of the owners and their shares.

A transfer of bearer share certificates is only valid if the transferee notifies the Central Registry Agency of the transfer. The date of notification to the Central Registry Agency is the basis for claiming rights arising from holding bearer shares (Article 489, Commercial Code).

In addition to suspending shareholding rights and invalidating share transfers using bearer share certificates, those who fail to fulfil application and notification obligations are subject to administrative fines from TRY5,000 to TRY20,000.

To prevent tax evasion and ensure financial transparency, the Revenue Administration under the Ministry of Treasury and Finance has issued General Communiqué No. 529 on Tax Procedure Law (published in the Official Gazette on 13 July 2021) (Communiqué).

This obliges a wide range of entities to make an ultimate beneficial ownership declaration, notably corporate taxpayers. All companies must therefore declare their ultimate beneficial owners.

In case of any change in the information submitted (for example, due to a share transfer), the relevant entity must notify the Revenue Administration of the change, within one month following the date of the change.

In 2022, angel investors and venture capital firms may continue to invest in Turkish gaming and technology companies and media, technology, and telecoms are expected to retain their positions as the leading sectors in the Turkish M&A market.

The automotive industry is again expected to be an important sector in M&A activity in Turkey in 2022. Given the efforts to produce Turkey's first local car, Togg, there could be increased demand in the automotive supply industry. The Togg project is estimated to contribute USD50 billion to Turkey's national GDP in the 15-year period from 2022, providing various investment opportunities in the Turkish automotive industry.

The Turkey Wealth Fund has long been expected to privatise its horse racing licence. The Turkey Wealth Fund has reportedly retained financial and legal advisers to work on it.

With the healthcare industry on the rise and the aviation industry having taken a big hit from the pandemic, there may be investment opportunities in the portfolio of Turkish public private partnership projects, which include projects in both sectors. Based on reports of additional incentives being granted to these projects to mitigate the adverse effects of the pandemic, particularly in the aviation sector, the government seems to be providing full support to these projects, which were already appealing to many investors.

With Turkey's continuing vaccination programme, and Turkey being a viable alternative for multinational companies due to its geopolitical position and high manufacturing capacity, there are reasons to be optimistic for M&A activity in Turkey in 2022 and 2023.