A major overhaul of the Turkish commercial law regime including corporate governance standards, significant audit and reporting requirements, disclosure obligations, liability issues, and efficient board and management structures has recently been promulgated in two main pieces of legislation—the Commercial Code and the capital markets law—that affect both private and listed entities and the securities market in the country.
Turkey has become a place of interest for various investors. With the country’s extensive privatization program set in motion by The Republic of Turkey Prime Ministry Privatization Administration and regulatory changes including a reformed Turkish Commercial Code (TCC), it has become one of the fastest-growing energy markets in the world. The country has removed foreign shareholding restrictions in most sectors, eased the repatriation of profits, and removed restrictions on FX regulations. Continued investments are also being encouraged through the introduction of different incentive schemes.
New Turkish Commercial Code
Structural changes to the TCC will be effective as of July 2012. These will overshadow regulatory reforms in all other areas, including banking, corporate tax, competition, and capital markets laws. The new TCC covers everything from transparency issues to financial reporting standards to corporate governance practices. The major changes include IFRS compliance, statutory audit, and online Board of Directors and General Assembly Meetings, providing more clarity in regards to a company’s official type and composition, and a transparent system for foreign investors. The scope of new TCC amendments means that cross-border M&A opportunities in Turkey will become more attractive for foreign investors.
Higher standards are introduced for directors in the TCC, whereby at least one-fourth of the board is required to be composed of directors with university degrees. The board will be deemed to have full authority in representing the company and thus the principle of ultra vires is lifted, which held companies responsible for all actions of the board unless it was shown that a board member acted in bad faith.
A new committee for the early determination and subsequent management of risks is being introduced by the new Code, which will be mandatory for public companies and discretionary for private ones. The board will be required to prepare by-laws concerning the principles for the shareholders meeting and register them with the relevant trade registry. Joint-stock companies will be prohibited from extending loans, providing security, or becoming guarantors or sureties in favor of its directors, their relatives, or firms where at least 20% is owned by one or more of the aforementioned individuals. A novel provision under the new Code is paving the way for companies to purchase their own shares up to one-tenth of the paid-in share capital, provided that shareholding rights, such as voting at shareholders’ meetings, are not exercised.
The concept of “group companies” is introduced in the new Code. One company’s dominance over the other will be established through management control, shareholding dominance, or contractual supremacy. The new Code requires a company to disclose changes to its shareholding structure, at certain thresholds, at the trade registry and on its web site. Failure to meet such requirements temporarily suspends the usage of voting rights and other shareholding rights of the relevant shareholder. Liability is also wide reaching in a group of companies; a subsidiary’s shareholders or lenders can make a claim for damages against the parent company, and the parent can be required to indemnify the losses of its subsidiary.
Improved Shareholder Rights
Shareholders will now be able to concentrate their voting powers on an individual person or group of persons called a “corporate representative.” Under the TCC, the minority shareholders (i.e. shareholders holding at least 10% of a private company or 5% of a public company) are entitled to request at the shareholders’ meeting the appointment of a special auditor for the investigation of certain issues relating to the company, such as the material breach of laws and regulations, concerns over the articles of association, fraudulent actions, or an inaccurate balance sheet of the company. Under the new Code, this right can be enjoyed by all shareholders of a joint-stock corporation, provided that a shareholder has initially used its right to request and review information from the company. At meetings, a shareholder cannot vote on matters concerning itself, its relatives, or companies that are owned or controlled by such individuals.
Regulatory changes in individual sectors especially energy also promise to affect M&A opportunities.
Turkey has seen a rapid increase in its natural gas consumption in the last two decades following extensive urbanization and, as a result, a significant increase in industrial production. Besides proximity to natural gas production areas (such as Russia, the Caspian Sea, and the Middle East) and to consumers in southern and central Europe, Turkey will play a key role in the foreseeable future in terms of natural gas transportation through the construction of additional pipelines, of which the Nabucco pipeline project is one.
Turkey’s energy regulatory policy has changed dramatically in favor of a transparent and free-market environment, especially in the years after the late 1990s. As a result, the natural gas market has become increasingly competitive and open to local and international companies. In order to promote free market values and provide a competitive and transparent natural gas sector for both local and foreign companies, the Natural Gas Market Law was enacted in 2001, putting an end to the state-owned pipeline company BOTAŞ’ monopoly and paving the way for private investors to enter the natural gas market.
The legal framework for the Turkish electricity market is based on the Electricity Market Law of 2001, and since then several important steps for the deregulation of the market have been taken. The government appears fully committed to a liberalized power market, fully in line with European standards. The market is still in the liberalization process, and the ultimate objective is to create a fully functioning and competitive market. The reforms in the market are aimed at the establishment of competitive market prices reflecting the cost of new generation required to keep pace with the growing demand. Some of the distribution companies have been privatized (the remaining regions will follow in the near future), and a competitive bilateral contract and balancing market system has been introduced. Despite the fact that public companies still have a major presence in the market, system expansion has substantially been driven by independent power producers, which currently hold a significant share of generation capacity. Electricity consumption is expected to continue to grow strongly in the future, requiring around 2,000-3,000 MW of new capacity each year over the next decade, indicating an attractive market climate for private investors. The global energy companies, mostly European, entered and continue to enter the Turkish electricity market to have a share in this growing attractive sector.
Despite macro concerns, Turkey is also going ahead with the high-profile infrastructure investments such as the Sino-Turkish “strategic partnership” high-speed rail project; the Izmit Bay Crossing and the Izmir-Istanbul highway; the Trans-Anatolian Pipeline (TANAP) the third Bosporus bridge, and hospital campus projects in various parts of the country. To realize such large-scale infrastructure investments, Turkey paved the way for the public-private-partnership (PPP) model. There is no general “PPP law” regulating the model for all segments, but the legal regime allows the relevant authorities to enter into PPP arrangements with a certain degree of flexibility.
Draft Capital Markets Board Law
The draft Capital Markets Law (“New CMB Law”) is expected to be enacted over the last half of 2012. According to the existing draft, the main amendments to the existing law are as follows:
Capital Markets Instruments & Offerings
•The system of registering securities with the Capital Markets Board (the “CMB”) will be replaced with a system of approving disclosure documents.
•Companies will be allowed to issue new shares below their nominal values.
•The content of public disclosures and the number of people obliged to make those disclosures will be expanded.
•The number of shareholders sought for a company to be treated as a public one will be increased to 500 from the existing 250.
•Publicly held companies will be able to buy back their own shares based on the principles set forth by the CMB, without being subject to the limitations set forth in the new TCC.
•Certain transactions will be defined as material, such as mergers and acquisitions and the disposal of material company assets, and the corporate actions needed to be taken for those transactions will be differentiated from other ordinary actions. Failure to comply with these requirements will be punished by the CMB.
•For the first time in Turkish legal history, shareholders will be granted the right of appraisal in the case of the realization of material events, provided that their dissent was indicated in the shareholders’ meeting.
•Sanctions for non-compliance with the mandatory tender offer rules will be strengthened and clarified. While a majority shareholder will be granted the “squeeze out” right, a minority shareholder will be granted with the right of appraisal at the end of a tender offer process.
•Privileges attached to certain shares will cease to exist for companies not distributing dividends in the preceding five years’ time.
•The authority to determine limits on debt instrument issuance will be granted to the CMB.
Capital Markets Activities & Intermediary Institutions
•The structure of the law will depart from an institution-based approach to an activity-based approach.
•Exchanges will be allowed to be incorporated in the form of joint-stock companies, rather than state-owned public entities. This amendment will also allow the Istanbul Stock Exchange to convert into a joint stock company prior to privatization.
•New capital markets institutions, namely central clearing institutions, central depositary institutions, and data depositories, will be introduced.
•The new CMB Law sets forth the establishment of fund management companies and states that funds can only be established and managed by such management companies.
•The new CMB Law defines Flexible Capital Investment Companies, which will be a combination of funds and investment companies.
Auditing & Measures
•The CMB’s supervisory and auditory powers over capital market institutions and publicly held companies will be strengthened.
•The new CMB Law sets principles for the reimbursement of funds that have been collected through unapproved public offerings.
Capital Markets Crimes & Sanctions
•New capital markets crimes have been introduced.
•The concept of “activities against the market” has been introduced. These will include activities that cannot be deemed as “market abuse,” but clearly target the internal dynamics of the market. The CMB will be granted with the authority to define these activities in detail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
TBY would like to thank Paksoy Istanbul for compiling this analysis.