The Mergers & Acquisitions Litigation Review: Turkey
Given the types of disputes that can be faced following M&A transactions under Turkish law, choice of law and jurisdiction provisions should be evaluated at the beginning of the process, rather than being considered as boiler plate provisions.
A significant consideration specific to Turkish commercial enterprises is drafting the agreements in M&A transactions in the Turkish language. This requirement is based on Law No. 805 on the Mandatory Use of the Turkish Language in Commercial Enterprises. The Court of Cassation has rendered several decisions indicating that a Turkish party cannot object to the court's jurisdiction based on an arbitration clause unless the arbitration clause is also drafted in Turkish.
Regarding popular venues, considering the fees and expenses of a foreign arbitration centre, local practitioners have been increasingly choosing the Istanbul Arbitration Center (ISTAC) arbitration rules, with the seat of arbitration in Istanbul, especially in small and medium-sized M&A deals, which trend is expected to continue.
Legal and regulatory background
The legal and regulatory framework governing M&A transactions includes Turkish Commercial Code No. 6102, Turkish Code of Obligations No. 6098, Civil Procedure Code No. 6100, Capital Markets Code No. 6362, Code on Protection of Competition No. 4054 and their secondary legislation.
In regulated sectors such as banking, financial services, telecommunications, insurance and energy that are also governed by legislation specific to their sectors, related governmental bodies have a range of supervisory and control powers. Parties to M&A deals in regulated sectors may be required to seek regulatory bodies' clearance or approval. Regulator bodies' decisions may be appealed before the administrative courts.
The main regulatory bodies are the Banking Regulation and Supervision Agency, the Information Technologies and Communication Agency, the General Directorate of Insurance, the Energy Markets Regulatory Agency and the Competition Board.
i Common claims and procedure
Commonly asserted claims of shareholders in relation to fiduciary duties are as follows.
Shareholders can claim damages for losses caused due to breach of legal obligations or a company's articles of association with fault against founders, members of the board of directors (BoD members), officers and liquidators. The extent of violation of obligations is interpreted narrowly, and breach of obligations stated under employment or proxy agreements that are not originated from the law or articles of association would not fall under this scope. In addition, the scope of obligations is more limited compared to duties. To exemplify, preserving a company's capital and assets and complying with the principle of equal treatment are classified as obligations, whereas management of the company as per corporate governance principles is a duty. The defendants of such a claim are not stated on a numerus clauses basis, and thus all officers actually responsible for management would fall under this scope. It would also be possible to hold responsible a BoD member who is not currently on duty.
With M&A transactions in particular, shareholders can claim for damage:
- caused by false, fraudulent, fake and untrue documents, undertakings, statements and warranties regarding mergers against officers who have prepared the related documents; and
- caused by a corruption in appraisement of the capital in kind or acquired company.
As a rule, the competent court in which to claim damages is the commercial court of first instance. The time limit is two years as of the date on which the claimant became aware of the loss and the responsible person and, in any case, within five years from the date of the act that caused the loss.
Commonly asserted claims of shareholders in relation to disclosure of information are as follows:
- the financial statements and consolidated financial accounts are kept in the company's headquarters and branches for a year for shareholders' review. Specific to mergers, each company involved in the merger is required to present the merger agreement and merger report as well as the year-end reports and annual reports of the past three years, and an interim statement, if required, 30 days prior to the general assembly resolution;
- during the general assembly meeting, shareholders can request information from auditors and BoD members. If the shareholders' right of information is not satisfied, shareholders are entitled to apply to the commercial court of first instance within 10 days in the case of an unanswered, unfairly denied, postponed information or examination request;
- shareholders can also request a special audit. At the general assembly, shareholders can ask for clarification of certain issues. To request this, a shareholder should first exercise his or her right to information and examination; and
- shareholders' rights to request information and examination transforms into the principle of public disclosure in public companies. Accordingly, public companies must publicly disclose financial tables, any material events and any other news or events required to be publicly disclosed by the Capital Markets Board.
In relation to private companies, remedies available to shareholders are as follows:
- in a merger agreement, companies participating in the merger can provide shareholders with the option to choose either to be a shareholder in the transferee or to receive a squeeze-out compensation equal to the actual value of the company shares to be acquired. The parties to the merger are also entitled to force the shareholders of the dissolving company to sell their shares, in consideration of a squeeze-out compensation;
- in a merger, if a shareholder is not given the right to maintain as a shareholder and squeeze-out compensation is not adequate, the shareholder is entitled to a compensation payment within two months of the announcement of the resolution to merge by appealing to the commercial court of first instance. Should the legal provisions regarding the merger have been violated, the shareholders who have not cast positive votes for the merger resolution, and who have recorded this in the meeting minutes, can file an action for cancellation of this resolution within two months. This action can also be filed in the event the resolution is adopted by a management body rather than a general assembly; and
- any shareholder can request the court to declare the board decision void. The same article sets forth examples of void board decisions such as decisions:
- violating the principle of equality;
- conflicting with the essential character of the company and the principle of maintenance of capital;
- violating or limiting the exercise of the fundamental rights of the shareholders; and
- violating non-assignable powers of other corporate bodies.
In relation to public companies, remedies available to shareholders are as follows:
- in public companies, shareholders who have attended the general assembly meeting regarding mergers and acquisitions and had their dissention recorded in the meeting minutes shall have an appraisal right. Upon the exercise of appraisal rights, the public company must purchase the said rights at a price equal to the average of the daily weighted average market price of the shares within the 30 days before the public disclosure date of the merger;
- in a purchase of a public company's shares where the buyer acquires control of the public company, the buyer must make a mandatory tender offer to other shareholders to acquire their shares. The price should not be less than the adjusted arithmetic average of the daily weighted average market price of the shares in the six-month period preceding the public disclosure of the share purchase agreement. It should also not be less than the highest price paid for the same class of shares by the offeror in the six-month period before the offer was made; and
- in the event that shares acquired as a result of takeover reach or surpass a ratio of the voting rights, the persons holding these shares shall gain the right to squeeze out the minority shareholders. In cases where a squeeze-out right arises, minority shareholders shall have a sell-out right.
Directors and officers are obliged to act with the due care of a prudent director and to protect a company's interests in accordance with the good faith principle.
In this context, in relation to fiduciary duties, defences available to directors and officers are as follows:
- directors or officers facing allegations of a breach of the duty of care can argue that they have acted as a prudent director;
- directors and officers can argue that their decisions in relation to M&A transactions fall under the business judgement rule, and hence, decisions rendered with good faith based on reasonable grounds cannot result in liability of the directors and officers; and
- apart from the non-assignable authorities, BoD members can transfer the management authority and liability to certain BoD members or third parties and thus limit their own liabilities. Unless it is proven that the BoD member assigning his or her authorities has not appointed the assignee with reasonable diligence, the delegating member cannot be held liable.
In relation to disclosure of information, a defence available to directors and officers is rejection of shareholders' requests for information due to risk of disclosure of company secrets or any other risk jeopardising company benefits.
iv Advisers and third parties
Shareholders are entitled to bring claims against advisers and other third parties that are, in M&A transactions, arguing that contractual obligations have been breached, or based on the tortious acts of advisers or other third parties.
In addition, advisers or third parties who have prepared false, fraudulent, fake and untrue M&A documents or have made false undertakings, statements and warranties regarding M&A documents or who have participated in the aforementioned, will be held liable. Advisers or third parties who have participated in corruption in the appraisement of the capital in kind or acquired company will also be held liable.
In practice, it is rare to see claims against advisers and third parties as the concept of professional negligence has not developed in Turkey.
v Class and collective actions
Under Turkish law, class and collective actions are not permissible. A similar concept, a group action, enables associations and other legal entities to file actions on their own behalf to protect the rights of their members or the group they represent. As this is a recourse limited to legal entities, shareholders cannot benefit from it.
vi Insurance and indemnification
It is common that BoD members and officers are covered by directors' and officers' liability insurances. Insurances covering M&A-related liabilities will enable the use of insurance companies.
As for public companies, if the damage is insured at a price exceeding 25 per cent of the company's total share capital and the company is secured, this must be announced in the Capital Markets Board bulletin.
As of 1 January 2019, commercial disputes where the subject matter is a debt or indemnity claim requiring the payment of a sum of money are subject to mandatory commercial mediation. This is introduced by Code No. 7155 amending the Turkish Commercial Code. The mediation process should be completed within six weeks as of the assignment of the mediator. This period of time can be extended for a maximum of two weeks by the mediator.
In terms of actions initiated for the cancellation of general assembly resolutions, the defendant would be the company itself and not the other shareholders. Cancellation of general assembly resolutions is related to public policy; therefore, it would not be possible to settle such claims, or arbitrate or mediate them. However, the aforementioned does not prevent the plaintiff shareholder from withdrawing the claim.
i Common claims and procedure
Commonly asserted counterparty claims, namely claims that buyers and sellers may bring against one another, arise mainly from share purchase agreements and shareholders' agreements.
In terms of post-closing claims, share price adjustment and earn-out claims are of special importance. Regarding earn-out claims, if the seller will manage the business in accordance with the relevant M&A agreement, the buyer may be concerned with the seller's manipulation of the earn-out calculation by way of either overstating revenue or understating or minimising expenses. On the other hand, if the buyer will manage the business, the seller may be concerned with the buyer's mismanagement, which may cause the target corporation to miss targets. The same concerns may also be valid in share price adjustment claims.
In relation to necessary elements of a successful claim, as a rule, the shareholder filing the claim has the burden of proof, whereas where the claim relates to payment of an undisputed amount, such as the purchase price, the burden of proof is on the defendant to prove payment.
It is of particular importance, especially in complex litigation, to explain the claim systematically and in detail, to the extent necessary, and to establish the links between the claim, legislation and evidence clearly, especially to help the busy judge of a state court not to lose sight of the road between the claim and the desired judgment.
Claims are typically supported by independent expert opinions by prominent academics.
Under Turkish law, synallagmatic agreements, such as share purchase and shareholders' agreements, in addition to the general consequences of default, entitle the non-defaulting party to the following additional optional rights, among which the non-defaulting party shall make a choice. The non-defaulting party may:
- claim the specific performance of the obligation and the compensation for the delay;
- waive the right to claim specific performance, and claim compensation for positive damages; or
- withdraw from the agreement and claim compensation for negative damages.
The most common remedies available for buyers and sellers are indemnification, termination and post-closing adjustments, whereas the common legal grounds in M&A disputes include representations and warranties, purchase price adjustments, earn-out clauses and material adverse change clauses.
Regarding the covid-19 epidemic, if the relevant agreement lists epidemics as force majeure, as a rule, covid-19 shall be considered as force majeure and provisions and consequences of force majeure shall apply.
If epidemics are not listed as force majeure, covid-19 shall not be considered as a force majeure categorically, and the effects of covid-19 on the agreement and the obligations regarding thereto should be evaluated considering the externality, unavoidability and unforeseeable nature of force majeure.
Under Turkish law, force majeure and hardship are different concepts. In force majeure, performance of the obligation becomes impossible, whereas in hardship, performance of the obligation does not become impossible, but becomes quite difficult. In hardship, provided that relevant conditions are met, the party claiming hardship may first request from the court the adaptation of the agreement in accordance with the changed circumstances and, if the adaptation is not possible, may revoke the agreement.
Disputes arising between the counterparties to an international M&A transaction or to an M&A transaction of considerable value are often resolved through arbitration as most parties prefer arbitration to state court proceedings. However, challenges against shareholder resolutions must be brought before state courts at the seat of the corporation as such disputes are considered non-arbitrable under Turkish law. As a result of the above, in the case of a large-scale conflict, parties apply to both arbitration and state court proceedings in Turkish practice.
v Other issues
Although parties to a share purchase agreement are buyers and sellers, and parties to a shareholders' agreement are shareholders, by the nature of the aforementioned agreements, M&A practitioners prefer that target corporations also become parties, together with buyers and sellers, or shareholders, as the case may be. The idea is to force the target corporation, in addition to the counterparty, to act in accordance with the aforementioned agreements to the extent possible.
In cases where the share purchase agreement sets out a clause regarding a post-closing purchase price adjustment, it is general practice to secure the aforementioned purchase price adjustment by a bank letter of guarantee, the terms of which are of great importance to avoid any complication when trying to liquidate the bank letter of guarantee. There are cases where the seller takes a preliminary injunction decision from the court suspending the liquidation of the bank letter of guarantee, which eliminates the guarantee concept aimed at by way of a bank letter of guarantee, setting out that the amount will be paid on the first demand irrespective of any dispute.
i Choice of law
Under Turkish law, as a rule, parties to an agreement (e.g., a share purchase agreement) may designate the law governing the agreement. However, considering that the seat of the target corporation will be in Turkey and further that many aspects of the transaction will relate to Turkey and Turkish law, in practice, in many cases parties designate Turkish law as the governing law.
In cases where a foreign law is designated to govern the agreement, parties may decide that the designated law shall be applied totally or partially to the agreement. However, where different laws are designated to govern parts of the agreement, as Turkey is a civil law country, the choice of law of different law systems (i.e., civil and common law systems) may cause incongruities.
If the provision of a designated foreign law is evidently contrary to Turkish public policy, that provision is not applied, and Turkish law is applied in cases where deemed necessary. Similarly, the directly applied rules of Turkish law, which are of an administrative and public nature (e.g., customs and foreign exchange regimes), are applied even if a foreign law is designated to govern the agreement.
ii Security payment
Foreign natural persons and legal entities who file a lawsuit before a Turkish court shall be required to provide a security, the amount of which shall be determined by the court, to cover the expenses of the legal procedures and proceedings as well as damages or losses of the other party. The court may exempt the plaintiff from providing a security on the condition of reciprocity.
Year in review
i M&A market
Following a recovery period from its 2016 dip, due to geopolitical and macroeconomic difficulties, the Turkish M&A market saw a considerable fall in 2019 – the lowest annual deal volume since 2009 (the global financial crisis). In 2020, both deal value and deal numbers increased, and around 304 transactions, most of which were small or mid-sized transactions, were closed corresponding to a total value of US$9 billion, to which foreign investors contributed more than half of the total annual deal volume. The acquisition of the mobile game company Peak Games was the first unicorn deal in Turkey.
ii Mandatory commercial mediation
Mandatory commercial mediation before initiating a lawsuit has become a precondition in commercial cases where the subject matter of the dispute is the payment of a certain amount of money, for example, claims for receivables and compensation.
iii Turkcell case
Turkcell, a Turkish telecommunication and technology services provider, more than 40 per cent of the shares of which have been traded on the Istanbul and New York stock exchanges, is the 16th biggest corporation in Turkey and suffered from intensive M&A litigation among its indirect shareholders, TeliaSonera, Alfa Telecom and Cukurova Group.
In 2020, shares held by TeliaSonera and Cukurova Group were acquired by the Turkish Wealth Fund (a development fund owned by Turkey that manages publicly owned assets), which brought an end to the most prominent M&A litigation in Turkey, which had gone on for almost 20 years.
Outlook and conclusions
i Warranty and indemnity insurance
The practice of warranty and indemnity insurance is still limited in the Turkish market due to the lack of a specific legal framework, and recently insurance policies have been taken out by foreign parties through foreign insurance companies. Having said that, it is clear that warranty and indemnity insurance will become popular following the global trends in private M&A transactions.
Turkey is facing threats of sanctions from some of its Western allies, including the US, as a result of which sanction-related terms and disputes may become more common in M&A agreements and litigation.
Covid-19 has seriously affected and will continue to affect M&A transactions, and in this context force majeure clauses have become more important than ever.
1 Ural Ozbek is a partner at Cetinkaya.