Mostly because of the experience Turkey gained by its domestic financial crisis in 2001, and also due to the strong legal and financial system created afterwards, the global financial crisis did not affect the financial markets of Turkey as it did the rest of the world. This evidence of its strong financials, coupled with Turkey’s return on investment ratio and time rates are much more higher compared to its competitors, caused a significant increase in investments by private equity firms and interest in the country.
Within the Turkish market practice, private equity capital is primarily sought by companies that are financially distressed but operationally viable and unable to process profitable investments due to lack of adequate financial resources; as well as by non-distressed companies aiming to develop their existing business, or entrepreneurs who wish to exit from the companies they have incorporated. Investors usually stay two to seven years in a company and after restructuring and management of the company for a few years, the investor exits through selling its shares to a strategic buyer, taking the company public with high returns or by selling the target company to another private equity firm.
Although Turkish shareholders traditionally have sceptical opinions towards private equity firms, Turkish companies are more open to the idea of private equity today. The concept is sometimes misunderstood and it is a common idea that an investor’s motive is always to get hold of the joint control of the firm through minority shareholding. This belief causes a mismatch between the shareholders of the target and private equity firms. In fact, private equity investments aim to obtain significant control of a (usually private) company in the hopes of earning a high return. Control is sometimes achieved through acquisition of a majority stake in the company or through certain voting and/or management rights granted to the investor which has acquired a minority shareholding in the target company.
Observing the history and background of private equity acquisitions in Turkey, it is clear that no specific industry or type of company has typically been the targets of the private equity transactions. The interests of investors range from food and beverage (Mey Içki and Yudum), retail (Beymen, For You and Migros), transportation (UN Ro-Ro) and media (Digiturk), to the health sector (Acibadem, Medical Park and Memorial Hospitals), pharmaceuticals, IT and real estate. However, there happens to be an evident lack of interest or suitable targets in three main industries: financial services (especially banking), textiles and tourism.
Furthermore, significant private equity firms such as Pinebridge (AIG), NBK, NBGI, Global Investment House, Bancroft Group, Qatar First Investment Bank, Bridgepoint, Carlyle Group are showing their interest in the Turkish market by establishing their liaison offices in Turkey. Moreover, Turkey based funds such as Turkven Private Equity are growing their fund sizes.
General legal structuring of PE investments
Due to the lack of specific legislation regulating private equity investments, they are governed by agreements that are comprehensively drafted and negotiated by the parties. Since private equity investments in Turkey are generally realised by acquiring the target companies’ shareholding, and such acquisition is realised through participating to a capital increase and/or a sale of shares; the main instruments that are used for such acquisitions are share purchase agreements or share subscription agreements. The parties of these agreements may agree to govern these agreements by a law other than Turkish law. However, in Turkish legal practice, local parties prefer to govern the agreements by Turkish law. Turkish law is a modern, solution-based and flexible legal system. On the other hand, the flexibility provided under Turkish law is not unlimited and certain provisions should be drafted in the agreements to ensure their enforceability. Swiss law is also preferred as the governing law since the legal fundamentals of Turkish law are reflected in Swiss law.
In addition to the importance of choice of law in share purchase agreements or share subscription agreements, representation and warranty items are the provisions which are of central importance, since the framework of the liability of the seller towards the private equity investor is determined through these provisions. Under Turkish law, share transfer is considered as a sale of shares (rights) exclusively and is not considered as the sale and transfer of the enterprise in general. Therefore, the liability of the seller is limited with the qualifications of the shares and cannot be extended to the qualifications of the enterprise automatically. In order to extend this liability, representation and warranty provisions are used in agreements. However, not the representation and warranty items themselves provide this extension. The legal character of representations and warranties should be carefully determined.
The second important instrument used in private equity investments is the shareholder agreement. Standard provisions of a shareholder agreement such as transfer restrictions, board representations, and veto rights of the investor are common features in Turkey as well. Furthermore, as the investors stay with the company for a short period of time and then prefer to exit from the company that they invested in, exit mechanisms such as tag-along, drag along rights or initiation of a public offering, which can be the major deal breaker issues, are also regulated under shareholder agreements.
With its innovative and dynamic legal approach, Esin Law Firm has played and is playing the protagonista within the legal practice of private equity transactions of Turkey with its six partners and 31 associates. The firm has a strong practice in mergers and acquisitions, real estate, corporate law, dispute resolution and competition law as it was awarded the best M&A, best Real Estate and best Dispute Resolution Law Firm by the 2011 World Finance Legal Awards. Esin Law Firm’s diversified and talented team covers all aspects of M&A transactions and provides high quality and efficient services for private equity firms as well as local shareholders and has a reputation for satisfying both the needs of complex foreign investors and local shareholders.
For more information www.esin.av.tr
