The Technology M&A Review: Turkey
2020 has been a remarkable year for the Turkish technology M&A market and 2021, so far, is headed to surpass 2020 both in terms of deal value and deal volume. In the second half of 2020 and following the ease of covid-19 restrictions, venture capital firms and angel investors have prompted the overall technology M&A market in Turkey to pick up the suspended deal activity while private equity firms were rather slow. In 2020, around 50 per cent of the deals concluded in Turkey concerned internet and mobile services sectors. This was also the year in which Turkey experienced its first homegrown unicorn company with US mobile gaming giant Zynga acquiring the Turkish mobile game developer Peak Games with a value of US$1.8 billion.
The upward trend has continued for tech M&A deals in the first half of 2021, with Getir and Dream Games successfully reaching unicorn status and Trendyol being the first decacorn of Turkey in 2021. Thus, the number of companies valued over the US$1 billion threshold reached five – Peak Games, Getir, Trendyol, Hepsiburada and Dream Games – by the end of the second quarter of 2021.
Considering the target companies that have attracted investments during 2020 and 2021 (as at the end of the second quarter), it can be asserted that the pandemic has accelerated the investment trend in technology companies. For instance, the online gaming sector and e-commerce platform providers have been perfect showcases to demonstrate this trend, especially based on dramatic increases in their profits, as people have spent more time at home and had much more spare time than usual.
Year in review
In 2020, the most significant technology M&A deal was Zynga's acquisition of Peak Games. On 2 July 2020, Zynga announced that it acquired Turkish mobile gaming company Peak Games for US$1.8 billion. Peak Games is Turkey's first unicorn (private startup) valued over US$1 billion. Its signature games are Toon Blast and Toy Blast, both of which have been downloaded millions of times and have been among the most popular mobile games around the world in 2020.
In addition to this landmark deal, there have been 155 startup deals with an aggregate deal value of US$143.2 million. According to Turkish Startup Investments Review 2020,2 in terms of deal value, the most favoured sub-sectors within technology transactions were gaming, retail-tech, fintech, software-as-a-service (SaaS) and delivery and logistics, while SaaS and fintech sub-sectors had taken the lead in terms of deal volume.
In the first half of 2021, Getir, a Turkish delivery startup (now a unicorn with a valuation of US$7.5 billion) that offers almost instant grocery deliveries, recorded the biggest investment in 2021 so far. With two consecutive investment rounds in early 2021, Getir has received US$428 million from, inter alia, foreign investors such as Cranckstart Foundation, Sequoia Capital and Tiger Global Management.
Additionally, a Turkish online marketplace, hepsiburada.com, has publicly offered 56,740,000 shares on Nasdaq and was valued at US$3.9 billion with its price per share increasing from US$12 to US$13.43 on the first day of listing. Hepsiburada has noted that it sold shares worth US$738 million (in other words, 20 per cent of its entire share capital) in the offering. Also, Trendyol, Turkey's largest e-commerce platform with Alibaba being its majority shareholder, has raised US$1.5 billion, valuing the company at US$16.5 billion. The funding round was led by General Atlantic, Softbank Vision Fund 2, Princeville Capital, ADQ (UAE) and Qatar Investment Authority, making the company Turkey's first decacorn. Another Turkish online marketplace, n11.com, is also being prepared for a public offering in Turkey. The company has issued its prospectus recently and intends to publicly offer 33 million shares on Borsa İstanbul.
Legal and regulatory framework
The general legal framework in any business transaction (e.g., asset sale, share sale, mergers, demergers), including tech M&As, in Turkey is set out under the Turkish Commercial Code and the Turkish Code of Obligations. To the extent the target is a listed company, the Capital Markets Law would also be relevant.
As the value of technology companies and transactions that involve such companies resides primarily in their intellectual property rights, the Law on Intellectual and Artistic Works, the Industrial Property Law and secondary legislation thereof should also be considered as key laws and regulations that govern technology M&A transactions in Turkey (see Section V for the IP protection regime in Turkey).
Similar to other regulations, data protection rules are also crucial as they play a vital role in M&A deals concerning technology companies. Data protection rules are regulated under the Data Protection Law (see Section VII for further details on data protection rules).
As companies active in tech business generally collect and process personal data, it should be considered whether they collect and process such data in line with the rules and principles set out under the Data Protection Law.
Furthermore, the Capital Markets Board of Turkey published the long-awaited Communiqué on Equity Crowdfunding on 3 October 2019. This Communiqué introduces the main rules for equity crowdfunding and sets forth the framework for operations of funding portals as well as entrepreneurs and investors, with a view to provide an alternative financing platform to the Turkish startup ecosystem.
Key transactional issues
i Company structures
The most common company structures, usually preferred by foreign investors, are joint stock corporations (JSCs) and limited liability companies (LLCs). These entities provide independent legal personality, which is crucial to limit shareholders' liability for doing business in Turkey. JSCs and LLCs are also typical company types used for tech M&A transactions.
A JSC or an LLC may be 100 per cent foreign-owned and controlled. Both individuals and legal entities can be shareholders of a JSC or an LLC. Shareholders of JSCs and LLCs have limited liability towards third parties. The liability of a shareholder is limited to the amount of that shareholder's capital contribution.
However, LLC shareholders may be held personally liable for public debts of the company. For example, if an LLC is unable to pay its debts to public authorities arising from public debts such as taxes, duties and charges, shareholders may ultimately be held liable, pro rata, to their shareholding in the company, for those debts if the company's assets are not sufficient to fulfil the obligations.
JSCs have a better-established corporate governance structure compared to LLCs. A JSC can be held privately as well as publicly, unlike an LLC, which cannot be held publicly. In certain tenders organised by public authorities, formation in the form of JSC might be required to qualify as a bidder.
ii Deal structures
As the Turkish tech M&A market is highly driven by startup deals and startups usually do not have the resources to go through lengthy and costly listing procedures, public tech M&A deals are not very common in Turkey.
For private companies, common structures for deals in Turkey are: (1) share acquisition; (2) asset acquisition; and (3) merger. Tech M&A deals are usually structured as share sales. An asset sale might also be preferred, depending on the value or characteristics of the target. Mergers, on the other hand, are rarely used.
Typical pros and cons of share acquisition compared to other options are:
- asset transfers are more complex as they require a series of procedural steps to pass the ownership of different assets, whereas share transfers are more straightforward;
- principally, in share transfers, the target company's assets (i.e., its licences, permits, contracts and employees) may usually be acquired by the purchaser without obtaining the consent of third parties. On the other hand, in asset transfers, such consents are typically needed for specific assets;
- shareholder approval may also be required for an asset transfer in case it amounts to sale of a substantial part of the company's assets;
- share acquisitions are more advantageous from a tax perspective because the documents regarding the share purchase transactions are exempt from stamp tax (along with certain capital gain tax exemptions), yet there are no stamp tax exemptions for asset transfers;
- the main disadvantage of a share acquisition is that all liabilities of the target are acquired, whereas asset transfers may enable the purchaser to cherry pick the transferred assets and liabilities (subject to certain legal limitations arising from the principle of 'liabilities follow the assets');
- under Turkish law, mergers can involve: (1) two or more companies merging under a newly established company; or (2) one or more companies merging into another existing company. As a result of merger, all of the assets and liabilities of the target company are automatically and legally transferred to the purchaser under the universal succession principle;
- a merger may be disadvantageous compared to an asset acquisition because of financial assistance restrictions, according to which a target company cannot advance funds, provide loans, security or guarantee to a third party to facilitate the acquisition of its own shares. As the assets of the target company cannot be used as security for the financing, mergers can be regarded as unfavourable compared to other deal structures; and
- a merger could be a preferable option for corporate investors where the corporate entity is more interested in bringing the target's assets (e.g., valuable intellectual property rights (IPR)) into its own organisation, thereby creating business synergies through this investment. In that case, the investor is most likely to encourage existing owners, founders and management to exit from the target. However, in venture capital deals, investors are usually keen to keep the founders and existing management of the company on board and do not anticipate any business synergies. As such, usually venture capital firms are more willing to inject capital into the target and acquire shares.
Investment banks' role starts with conducting financial valuation models concerning the target company. If the seller initiates the process by approaching the investment bank, the investment bank may either organise an auction process, as a result of which the best suited offer is determined or promote the target company individually to suitable purchasers. Following the determination of the purchaser, investment banks are also involved in the negotiation of transaction documents along with the lawyers, especially on matters regarding financial aspects of the transaction.
For venture capital deals (especially for early investments to seed or pre-seed businesses), valuation methods significantly differ from other types of tech deals because the target does not usually generate any significant turnover (e.g., because of high R&D costs) and the overall valuation heavily depends on a revenue projections-based business model, expansion strategies, etc.
iii Acquisition agreement terms
Primarily, tech M&As in Turkey are structured as share sales, so the most relevant transaction documents are share purchase agreements (SPA) which are usually accompanied by shareholders' agreements (SHA), which also contain certain terms and conditions regulating the future exit scenarios (such as call and put options, initial public offerings, etc.) of the shareholders. Certainly, asset sale agreements and merger agreements may also be relevant.
Cash payments deals are generally the preferred method for payment of the consideration in tech M&A deals in Turkey. Nevertheless, non-cash consideration (i.e., shares and loan stock) is also used depending on the nature of the transaction, especially considering the intentions of the parties to grow the business.
Depending on the nature of the transaction and the partiess' agreement, all typical purchase price mechanisms such as fixed price (more common in asset transfers and very rare in other types of tech deals), locked-box, completion accounts, deferred considerations and earn-out mechanisms are used in tech M&A transactions.
The following provisions are usually included in a typical SPA: (1) parties' representations and warranties (R&W); (2) pre- and post-completion covenants (if there is an SHA, post-completion covenants are usually included under the SHA); and (3) conditions precedent.
Sellers' (on behalf of the target) representations and warranties are crucial for purchasers' post-completion protection in technology M&A transactions, in particular for IP, technology, cybersecurity and data privacy matters. These typically focus on ownership and licensing agreements concerning key IPR (e.g., legal title to IPR or use of the same pursuant to a duly executed licensing agreement; such IPR having been only licensed to third parties on market conditions, not being party to any material disputes arising from infringement of IPR of third parties, compliance with data protection rules). The tech buyer's R&Ws, on the other hand, are usually quite limited, especially where buyers are special purpose vehicles incorporated by fund structures for the sole purpose of conducting the relevant transaction.
Typical pre- and post-closing conditions or covenants in tech M&As are:
- approvals of regulatory bodies;
- antitrust clearance;
- specific actions for compliance with applicable regulations (e.g., registry to the data controllers centralised system, amendment of customer and employment contracts, etc.);
- change of control notices and consents;
- transfer of relevant IP rights to target; and
- carve-out actions for unrelated assets.
Material adverse change (MAC) clauses are also common in technology M&A transactions and are drafted broadly to enable the acquirer to walk away in case a material adverse change occurs. Given many hot topic technology developments (e.g., autonomous cars, AI-based pricing algorithms, blockchain technology, crowd-sourced logistics) are yet be regulated or tested before the courts of Turkey, enactment of laws and regulations may also be considered as part of MAC events, if the target business operates in an area that is expected to be regulated.
Typically, indemnity provisions in technology M&A transactions cover breaches of representations and warranties in general, and specific indemnities are not very common in the Turkish technology M&A market, unless there is an identified significant risk for the target company, especially arising from regulatory sanctions, including sanctions arising from the breach of data protection rules.
Finally, if the deal is not structured as a complete buyout, tech buyers usually separately negotiate an SHA to govern their long-term relationship with the sellers as well as their exit rights. To that effect, lock-in provisions for key employees and founders, non-compete and non-solicit covenants, tag and drag-along rights, put and call options, as well as right of first refusal are heavily negotiated. Most of these provisions require extensive and cautious drafting. Therefore, engaging with a legal adviser having relevant expertise is a must to ensure enforceability of these exit mechanisms.
In Turkey, typical equity financing methods prevail in deals with relatively lower values. As the startup entities comprise the majority of the companies that are usually subject to tech M&A deals, it would be fair to state that tech M&A transactions are predominantly conducted as equity deals. Nevertheless, debt financing in tech M&A transactions may also be relevant for certain targets with a higher value.
Banks and financial institutions that provide financing in these deals usually seek certain collaterals from the acquirors (e.g., the shares they hold in the target) as well as certain financial covenants (e.g., equity ratio, dividend distribution restrictions, etc.). However, it is restricted to provide the assets of the target as collateral within the scope of the acquisition financing because of financial assistance rules.
v Tax and accounting
As a matter of Turkish practice, tax and accounting aspects of tech M&A deals are primarily considered and advised by tax and financial advisers. Therefore, at the outset of a transaction concerning a tech company, it is imperative that the parties engage these advisers to determine the most optimised tax and accounting structures.
Notable tax aspects of an M&A transaction can be summarised as follows:
- In principle, share transfer agreements relating to limited liability or capital company shares are exempt from stamp duty; however, transactions conducted based on asset transfer agreements would attract stamp duty (for most agreement types at a rate of 0.948 per cent of the highest value set out in the document, and capped for each document at 3,534,679.90 Turkish lira for 2021).
- VAT may also apply to transactions involving company shares or assets. In general, share transfers in JSCs are exempt from VAT (provided that either the shares are represented by printed share certificates or the shares have been held for at least two years by the seller before the disposal). For LLCs, only the two-year ownership exemption may apply as typically no share certificates are issued in LLCs.
- Corporate mergers and demergers may generally be conducted on a tax-free basis, provided that certain conditions set out in the Turkish Commercial Code and relevant tax laws are met. Otherwise, mergers and demergers that do not fulfil these criteria may typically attract VAT at 18 per cent (which may vary based on the relevant assets being transferred).
- The set of accounts and the accounting principles in an M&A deal are also crucial for tax considerations. Typically, Turkish companies use uniform financial statements issued as per the Tax Procedure Code for the purposes of their tax filings. However, certain companies, especially those operating in regulated sectors, are required to also issue their financials based on Turkish Financial Reporting Standards. As the interpretation of the parameters constituting the financial elements in the balance sheet may sometimes vary depending on the set of accounting rules, particular attention should be paid to avoid any inconsistency in valuation of the target company that may arise from using a different set of accounts.
vi Cross-border issues
Foreign investors can freely make direct investments in Turkey by: (1) incorporating companies; (2) opening branches; and (3) acquiring shares in Turkish companies without obtaining prior authorisation or approval. Accordingly, foreign and local investors are treated equally and there are no general restrictions on foreign investment or foreign shareholding (there are certain exceptions to this principle in specific sectors such as media, aviation and telecom).
On the other hand, for certain types of companies in regulated sectors (such as finance, energy companies acting under licence, etc.) obtaining prior authorisation or approval from the competent governmental authorities may be required to acquire shares or voting rights that reach or exceed certain thresholds. While no specific tech company type is subject to these restrictions, depending on the activities of the target, foreign investment restrictions could be triggered.
Integration of foreign investors' and target companies' IT systems might be a burdensome process for M&A transactions in certain sectors, because of the system and data localisation requirements stipulated under Turkish law. For instance, under Turkish law, electronical payment institutions must locate their primary and secondary IT systems within the borders of Turkey.
Finally, cross-border data transfer may trigger further regulatory approval requirements under Turkish law (see Section VII for further details).
Although this is not specifically related to foreign investors, transaction parties must check whether the transaction requires a merger control notification to be made to the Turkish Competition Authority (TCA). If the transaction meets merger control turnover thresholds, closing must be suspended until the TCA renders its decision about the transaction to avoid any administrative penalties or even the unwinding of the transaction, if effective competition in the relevant product market is significantly impeded.
IP rights and IP protection regimes are crucial elements that closely relate to technology M&A deals. Having their fundamental assets as intellectual products, technology companies need to seek protection of these assets to sustain their comparative advantage. The scope and the type of the available IP protection to a target's intangible assets may have a significant impact on the negotiations. Turkish IP law has detailed regulations providing broad IP protection. Also, main international treaties and arrangements for IP rights and protection are also transposed into Turkish law.
Industrial Property Law and Law on Intellectual and Artistic Works are two key pieces of legislation that regulate the IP protection regime in Turkey. While the Law on Intellectual and Artistic Works lays down the principles of copyright protection, the Industrial Property Law sets forth the protection regime applicable for trademarks, designs, patents, utility models, geographic signs and traditional goods names.
Protection of a patent is conditional on its registration at the Turkish Patent and Trademark Institution (TPTI). Registered patents are protected for 20 years following the date of the registration application and this 20-year term cannot be extended. During this period, typical patent protection (e.g., patent owner's permission is required for general use of the product) is provided to the patent owner.
Similar to a patent, protection of a design is also conditional on its registration with the TPTI. A registered design is protected for five years from the filing date. This protection term can be renewed for a further five years, provided that the total protection term does not exceed 25 years, during which the holder of a registered design right is entitled to take all the necessary measures to protect the design and grant a licence to third parties to use the design.
Unregistered designs are also protected if they are disclosed to the public in Turkey for the first time (i.e., first disclosure needs to occur in Turkey). The unregistered designs are protected for three years following their disclosure to the public. Additionally, unregistered designs can also be protected by copyright, provided that the required conditions are met (see below).
The owner of an unregistered design can resort to legal remedies that are akin to the remedies available for a registered rights owner; however, these remedies are rather limited in terms of their scope (i.e., proceedings can be initiated against unwarranted use of identical designs by third parties). Copyright protection is granted to any kind of intellectual and artistic product bearing the characteristics of its owner that is considered a work of science, literature, music, fine arts or cinema. Computer programs and their respective preparation designs, provided that these designs are turned into programs later on, are deemed as included under the definition of work of science pursuant to the Law on Intellectual and Artistic Works. Copyrights (other than for cinematographic and musical works) arise upon creation of the relevant artistic works or intellectual products (i.e., no registration is required to benefit from copyright protection).
The financial rights of the owner of the work include rights to (1) process, (2) duplicate, (3) publicise, (4) present and (5) broadcast, whereas the moral rights include rights to (1) disclose the work, (2) attribute (i.e., to place the owner's name on the work), and (3) prohibit any modification. Although there is no limitation as to the assignability of financial rights, the moral rights are not assignable. However, usage rights of moral rights may be licensed to third parties by the copyright holder.
Copyright owners can benefit from protection during their lifetime and for an additional 70 years following their death. Copyright protection starts from the death of the owner even if the work becomes public after their death. If there are multiple owners, protection remains in force for 70 years after the last surviving owner's death. In case the original owner is a legal entity, copyright protection lasts 70 years starting from the date when the relevant work becomes public.
International IP conventions
Turkey is party to various international conventions that facilitate cross-border IP protection. Such conventions include, among others:
- the Convention Establishing the World Intellectual Property Organization;
- the Agreement Establishing the World Trade Organisation;
- the Agreement on Trade-Related Aspects of Intellectual Property Rights;
- the European Patent Convention;
- the Paris Convention for the Protection of Industrial Property;
- the Patent Law Treaty;
- the Trademark Law Treaty;
- the Singapore Treaty on the Law of Trademarks;
- the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure;
- the Hague Agreement Concerning the International Registration of Industrial Designs (Geneva Act);
- the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks;
- the Patent Cooperation Treaty;
- the Locarno Agreement Establishing an International Classification for Industrial Designs;
- the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks;
- the Strasbourg Agreement Concerning the International Patent Classification; and
- the Vienna Agreement Establishing an International Classification of the Figurative Elements of Marks.
Restrictive covenants such as non-competition agreements, confidentiality undertakings and no-poach agreements are recognised under Turkish law.
A non-competition agreement would be deemed valid only if the relevant agreement is executed in written form. Furthermore, the term of the non-competition agreement should not exceed two years and must be geographically limited to the areas where the employer is actually conducting business activities. Also, non-compete agreements as well as confidentiality agreements will only be valid if the employee is in a position where he or she has access to critical information regarding the client portfolio, production secrets or the employer's business transactions as a result of the employment relationship.
Unless otherwise provided under the employment contract, for employee-created registrable designs, title to the design created by the employee during the course of employment as part of his or her duties and in close relation with the know-how he or she acquired from work, belongs to the employer.
For copyrightable work (e.g., software, literature work, etc.), unless otherwise provided under the employment contract, the employer shall automatically have the right to exploit the IPR of that copyright work created during the course of employment as part of the relevant employee's duties. However, the actual title to the copyright would still reside with the employee as the creator of that work. In practice, this enables the employer to commercially benefit from the copyright without any further action.
For patentable inventions, there is no automatic transfer and a detailed procedure should be followed for the employer to claim title to patentable employee inventions.
If an employee creates a patentable invention during the course of his or her employment and at the workplace, the employee should give immediate written notice of the invention to the employer. The employer may assert a partial or full right over the invention and then should notify the employee in writing of his or her assertion of right over the invention within four months of the employee's notice. All rights related to that invention are transferred to the employer automatically at the time the employee is notified by the employer regarding the assertion of full rights over the invention. If partial rights are asserted over the invention, the employer may use the invention based on his or her partial rights. However, if the employer's use of the invention makes it difficult for the employee to access his or her invention to a significant extent, the employee may request that the employer either (1) acquires full right over the invention within two months or (2) abandons all rights to the invention. Any transfer of rights over the invention by the employee to third parties prior to the assertion of a right by the employer would be deemed invalid to the extent that such transfer violates the employer's rights to the invention.
If the employer asserts a right over the invention, the employee is entitled to a payment from the employer. In determining the amount of the payment, exploitability of the invention, the duty and position of the employee within the enterprise and the contribution of the enterprise to the creation of the invention are taken into consideration.
If an invention is developed outside the workplace but during the term of employment, the employee must give his or her employer immediate notice of that invention. If the employer wishes to assert that such an invention is an employment invention, the employer must do so within three months of the employee's notice. The employee does not have to give notice to his or her employer if it is evident that the invention cannot be exploited within the employer's field of activity.
Disputes between the employer and the employee concerning ownership of employee inventions are quite common and a detailed due diligence should be conducted in relation to such disputes.
Data protection is regulated under the Data Protection Law (DPL). Pursuant to the DPL, entities that process personal data in Turkey by non-automated means as part of a filing system or by automatic means fall within the scope of the DPL. As such, both data controller and data processor entities are within the scope of the DPL. Under the DPL, data controllers are defined as individuals or entities (either public or private) that determine the purposes and means of processing personal data and are responsible for establishment and management of a data recording system.
In principle, the DPL is applicable where (1) personal data (belonging to either a Turkish resident or non-Turkish resident) is processed within the borders of Turkey (i.e., principle of territoriality) or (2) a Turkish-resident person's data is processed outside Turkey, irrespective of citizenship of the person or place of data controller (i.e., principle of extra-territoriality).
The definitions of personal data, sensitive data and general principles concerning data processing are akin to the General Data Protection Regulation (GDPR) (e.g., data processing must be accurate and up to date, specific, clear and based on a legitimate purpose).
In principle, personal data cannot be processed or transferred to third parties within Turkey without the express consent of the individual subject to certain exceptions (e.g., when data processing is necessary to process the data of the parties to a contract, provided that the processing is directly related to the execution or performance of the contract; or when it is imperative for the data controller to fulfil their legal obligations).
On the other hand, transferring data outside of Turkey would trigger some further regulatory approval requirements under Turkish law. As a general rule under the DPL, personal data may not be transferred outside Turkey without explicit consent of the data subject. Direct or indirect transfer of personal data to foreign countries without the individual's consent would only be possible if the data subject's explicit consent is not required under local law and either (1) there is an adequate level of data protection in the foreign country or (2) the data processor obtains a written undertaking in respect of safeguarding the data from the receiving offshore data processor and the Data Protection Authority approves such transfer.
Overall, employees' personal data are also subject to the above-mentioned data processing and transfer rules. As such, within the context of an M&A transaction, the target's employees' personal data can only be shared with potential buyers based on the employees' explicit consent to such transfer or without the employees' consent in case such transfer falls into specific categories of exemptions laid down under the DPL (and for foreign data transfers, the above-specified conditions are met). That is why, usually, employee data is redacted when sharing information at pre-closing stage.
Turkey adopted new incentive programmes that allow foreign investors to benefit from new incentive schemes under equal conditions with Turkish companies that have domestic investors. This incentive programme recognises various different incentive schemes (incentives granted based on location, subject matter and scope of investments) that offer a combination of different incentive instruments including VAT exemption, customs duty exemption, tax deduction, social security premium support and income tax withholding support.
For example, research and development incentives support R&D activities to provide corporate tax exemption, income tax exemption, social security premium support as well as VAT exemption. This incentive scheme is laid down under the Law on Technology Development Zones. This piece of legislation was enacted specifically to enable coordination between universities, research centres and industry players to improve the Turkish economy via exploitable technological developments that could also attract foreign investors and contribute to export levels. The same law not only provides for monetary support to entrepreneurs but also regulates establishment of incubation centres within universities or other eligible institutions who would provide relevant expertise and know-how to eligible entrepreneurs.
These incentives usually continue to apply for beneficiary entities who sustain the qualifying conditions. Hence, are not immediately 'unwound' as a result of an acquisition.
Where the target is a tech company holding important IPR, buyers typically scrutinise the target's title to and usage rights for IPR, including seeking broad warranty protection. As such, ownership and usage rights concerning vital IPR constitute a material aspect of the due diligence exercise in tech transactions. In this regard, the relevant regulations on employee inventions (see Section XI) become crucial in assessing legal risks when conducting the due diligence process.
However, tech buyers typically also get broad representations and warranties from sellers to balance and compensate risks related to ownership and usage rights of IPR.
Under Turkish law, trademarks, patents, designs, domain names and utility models are registerable IPR. Thus, acquirers conduct public searches to investigate ownership rights over these IPR during the due diligence process. On the other hand, it is not possible to conduct public searches in relation to unregistered IP rights (such as copyrights). Therefore, a more strict approach should be taken when conducting due diligence concerning unregistered IP rights to seek tangible evidence of the ownership.
For employee-created copyrights, due diligence process is usually limited to assessing whether the copyrighted work was created within the course of employment, as part of the employee's standard duties and based on the company's know-how and whether there is any specific provision under the employee contracts concerning IPR transfer.
On the other hand, copyrights created by contractors can only be transferred with a written assignment agreement. Therefore, when conducting due diligence regarding copyrights created by contractors, the written assignment agreement should also be reviewed. Future assignment of IPR is not directly enforceable and only grants the transferee with a compensation claim on the grounds of breach of contract. Therefore, when conducting due diligence, timing of assignment should also be checked.
Parties generally tend to select international arbitration in M&A deals in Turkey, especially if one of the parties to the transaction is a non-Turkish entity. Arbitration is generally deemed more convenient for resolving complex deals and more efficient (i.e., faster). Arbitral tribunals may be better suited to resolve complex cases that involve rather peculiar aspects such as transfer restrictions, exit rights, dividend allocation etc. Therefore, expertise of arbitrators is also an attracting factor when choosing the dispute resolution method for technology M&A transactions, as such deals require specialisation.
Foreign judgments and arbitral awards regarding civil law matters are enforceable if they are final under the laws of the foreign country. Turkey is a party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). When reviewing the enforcement request, Turkish courts can only decide on whether the arbitral award or the arbitral proceedings meet the conditions for enforcement under Turkish law and the New York Convention, without going into the merits of the case.
As described above in detail, the rise of tech startups has boosted the Turkish technology M&A market in recent years and it is expected that the interest in Turkish startups will continue to increase in the near future.
Considering the tendency of the Turkish governmental bodies to digitalise the financial sector, it is expected that the sector will be transformed and will be subject to substantive legal changes. As being one of the most heavily regulated sectors in Turkey, the financial sector will evolve along with the developments in fintech. In this direction, new regulations on cybersecurity will be introduced and the existing ones will be amended with the aim of ensuring data security and eliminating cybersecurity-related risks in the sector.
On the other hand, there are still certain emerging technologies with no specific regulations under Turkish law. For example, artificial intelligence, autonomous driving and use of drones are not extensively regulated in Turkey. Therefore, such areas may become more prone to regulatory interference and scrutiny in the near future.
1 Itır Çiftçi is an office managing partner, Umut Özdoğan is a senior associate and Aslı Kural is an associate at Çiftçi Attorney Partnership.
2 Turkish Startup Investments Review 2020 report by KPMG Turkey https://assets.kpmg/content/dam/kpmg/tr/pdf/2021/03/turkish-startup-investments-review-2020-q4.pdf.