2015 Contributing Editor Bill Curbow

In 29 jurisdictions worldwide jurisdictions In 29 2015

Contributing editor Curbow Bill

Equity Private Private

GETTING THE DEAL THROUGH Private Equity 2015 Private Equity 2015

Contributing editor Bill Curbow Simpson Thacher & Bartlett LLP

Publisher Law The information provided in this publication is Gideon Roberton general and may not apply in a specific situation. [email protected] Business Legal advice should always be sought before taking Research any legal action based on the information provided. Subscriptions This information is not intended to create, nor does Sophie Pallier Published by receipt of it constitute, a lawyer–client relationship. [email protected] Law Business Research Ltd The publishers and authors accept no responsibility 87 Lancaster Road for any acts or omissions contained herein. Although Business development managers London, W11 1QQ, UK the information provided is accurate as of February Alan Lee Tel: +44 20 3708 4199 2015, be advised that this is a developing area. [email protected] Fax: +44 20 7229 6910

Adam Sargent © Law Business Research Ltd 2015 Printed and distributed by [email protected] No photocopying: copyright licences do not apply. Encompass Print Solutions First published 2005 Tel: 0844 2480 112 Dan White Eleventh edition [email protected] ISSN 1746-5508 CONTENTS

Global Overview 7 Peru 101 Bill Curbow, Kathryn King Sudol, Atif Azher and Peter H Gilman Roberto MacLean and Juan Luis Avendaño Simpson Thacher & Bartlett LLP Miranda & Amado

Fund Formation Singapore 106 Low Kah Keong and Felicia Marie Ng Australia 10 WongPartnership LLP Adam Laura, Deborah Johns and Peter Feros Gilbert + Tobin Spain 112 Carlos de Cárdenas, Alejandra Font and Víctor Doménech Austria 17 Alter Legal Martin Abram and Clemens Philipp Schindler Schindler Rechtsanwälte GmbH Switzerland 120 Shelby R du Pasquier and Maria Chiriaeva Brazil 23 Lenz & Staehelin Alice Cotta Dourado and Clara Gazzinelli Cruz Campos, Fialho, Canabrava, Borja, Andrade, Salles Advogados Turkey 127 Şafak Herdem Canada 30 Herdem Attorneys At Law Bryce Kraeker, Myron Dzulynsky, Alan James and Timothy Wach Gowling Lafleur Henderson LLP United Kingdom 132 Anthony McWhirter and Richard Ward Cayman Islands 36 Debevoise & Plimpton LLP Andrew Hersant, Chris Humphries and Simon Yard Stuarts Walker Hersant Humphries United States 139 Thomas H Bell, Barrie B Covit, Peter H Gilman, Jason A Herman, Chile 44 Jonathan A Karen, Glenn R Sarno and Michael W Wolitzer Simpson Thacher & Bartlett LLP Felipe Dalgalarrando H Dalgalarrando, Romero y Cía Abogados Transactions China 50 Caroline Berube Australia 149 HJM Asia Law & Co LLC Rachael Bassil, Peter Cook and Peter Feros Gilbert + Tobin Colombia 57 Jaime Trujillo Austria 156 Baker & McKenzie Florian P Cvak and Clemens Philipp Schindler Schindler Rechtsanwälte GmbH Denmark 63 Eskil Bielefeldt, Kristian Tokkesdal and Peter Bruun Nikolajsen Brazil 162 Delacour Law Firm Alice Cotta Dourado and Clara Gazzinelli Cruz Campos, Fialho, Canabrava, Borja, Andrade, Salles Advogados Germany 69 Thomas Sacher and Guido Ruegenberg Canada 168 Beiten Burkhardt Harold Chataway, Kathleen Ritchie, Daniel Lacelle and Ian Macdonald Gowling Lafleur Henderson LLP India 75 Ashwath Rau Amarchand & Mangaldas & Suresh A Shroff & Co Cayman Islands 176 Andrew Hersant, Chris Humphries and Simon Yard Stuarts Walker Hersant Humphries Japan 80 Makoto Igarashi and Yoshiharu Kawamata Nishimura & Asahi Chile 180 Felipe Dalgalarrando H Dalgalarrando, Romero y Cía Abogados Luxembourg 86 Marc Meyers Loyens & Loeff China 186 Caroline Berube HJM Asia Law & Co LLC Nigeria 95 Ajibola Dalley GRF Dalley & Partners

2 Getting the Deal Through – Private Equity 2015 CONTENTS

Colombia 194 Nigeria 259 Jaime Trujillo Tamuno Atekebo, Eberechi Okoh, Omolayo Longe and Baker & McKenzie Adebisi Sanda Streamsowers & Köhn Denmark 200 Eskil Bielefeldt, Kristian Tokkesdal and Peter Bruun Nikolajsen Peru 264 Delacour Law Firm Roberto MacLean and Nathalie Paredes Miranda & Amado Abogados France 205 Pierre Lafarge, Jean-Luc Marchand and Anne-Cécile Deville Singapore 268 Latournerie Wolfrom Avocats Ng Wai King and Jason Chua WongPartnership LLP Germany 212 Thomas Sacher and Guido Ruegenberg Slovenia 276 Beiten Burkhardt Aleš Lunder and Saša Sodja CMS Reich Rohrwig Hainz Hong Kong 218 Robert Ogilvy Watson, Chin Yeoh and Adrian Cheung Switzerland 280 Ashurst Hong Kong Andreas Rötheli, Beat Kühni, Felix Gey and Dominik Kaczmarczyk Lenz & Staehelin India 224 Rupinder Malik, Sidharrth Shankar and Shantanu Jindel J Sagar Associates Taiwan 287 Robert C Lee, Candace Chiu and Jack Chang Yangming Partners Indonesia 231 Joel Hogarth Ashurst LLP Turkey 293 Duygu Turgut and Ali Selim Demirel Esin Attorney Partnership Italy 237 Marco Gubitosi and Filippo Troisi Legance – Avvocati Associati United Kingdom 300 David Innes, Guy Lewin-Smith and Richard Ward Debevoise & Plimpton LLP Japan 243 Asa Shinkawa and Masaki Noda Nishimura & Asahi United States 305 Bill Curbow, Kathryn King Sudol and Atif Azher Simpson Thacher & Bartlett LLP Korea 249 Do Young Kim and Jong Hyun Park Kim & Chang

Mexico 254 Carlos del Río, Carlos Zamarrón and Andrea Rodriguez Creel, García-Cuéllar, Aíza y Enríquez, SC

www.gettingthedealthrough.com 3 TRANSACTIONS Esin Attorney Partnership TURKEY

Turkey

Duygu Turgut and Ali Selim Demirel Esin Attorney Partnership

1 Types of private equity transactions 2 Corporate governance rules What different types of private equity transactions occur in What are the implications of corporate governance rules for your jurisdiction? What structures are commonly used in private equity transactions? Are there any advantages to going private equity investments and acquisitions? private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, Private equity transactions in Turkey usually involve buyouts. There are also a few venture capital transactions, however, these transactions are not following a private equity transaction, remain or become yet attractive to investors and rarely generate satisfactory results. In prac- public companies? tice, private equity capital is primarily used by companies facing financial One of the main problems in private equity transactions is private equity distress (but which are operationally viable) and unable to induce profita- investor representation in target companies and their subsidiaries’ corpo- ble investments due to a lack of adequate financial resources. Additionally, rate bodies. In deals involving subsidiaries, the private equity investors’ private equity capital is utilised in Turkey by non-distressed companies representatives often decline to join the subsidiaries’ boards. In order to aiming to develop their existing business and by entrepreneurs wishing to overcome this, contractual obligations are imposed on the seller’s side, exit companies they have incorporated. Following company restructuring mandating the seller to reflect in its subsidiaries those corporate govern- or a term of management over a few years, investors usually remain for two ance principles applicable to the target company. Such obligations, how- to five years and then seek high returns from a sale to a strategic buyer or a ever, are not implementable under Turkish corporate governance rules. The public offering. In some cases, private equity investors sell the target com- Capital Markets Board of Turkey (CMB) issued corporate governance rules pany to another private equity investment firm, as was the case in in NBK applicable only to listed companies (there are approximately 360 compa- Capital Equity Partners’ sale of Yudum to Afia International and Carlyle’s nies listed on the Borsa Istanbul (BIST)). While the guidelines on corporate sale of Medical Park to Turkven. governance are not strictly binding, listed companies are required either Commonly, private equity investments in Turkey are realised by to implement the rules and declare their compliance, or explain the reason acquiring the target company’s shareholding through either a share sub- for their noncompliance in their annual reports. Yet companies have shown scription or a sale of shares, or both. Share purchase agreements and share a relaxed attitude to such requirements because there are no statutory obli- subscription agreements are the main instruments for these investments. gations to apply these guidelines. These corporate governance guidelines Another significant instrument is the shareholders’ agreement to grant mostly relate to issues such as shareholder rights, duties of public disclo- rights of first refusal and tag-along and drag-along rights, or alternatively, sure and transparency issues, minority rights, independent auditing and initiating a public offering for the private equity investor. the board of directors’ duties. However, the new Communiqué (No. IV/56), Foreign interest in Turkish companies has increased significantly dated 30 December 2011 and issued by the CMB has made several guide- since 2006. Major investments by Bancroft, Pinebridge Investments (ex- lines regarding the listed companies. This Communiqué has been replaced AIG Fund), Partners in Life Science UK Ltd, Citigroup Venture Capital by a new Communiqué (No. II-17.1), issued by the CMB on 3 January 2014. International, KKR, NBGI, Carlyle Fund, Abraaj Capital, Bain Capital, NBK These Communiqués require listed companies to comply with corporate Capital, ADM Capital and Argus Capital have confirmed this trend. Since governance rules on the right of general assembly participation, board of then, even larger investments have proved how dynamic the Turkish mar- directors structure, guarantee, pledge and hypothec resolutions, commit- ket has become. Recent private equity deals include Abraaj’s acquisition of tees within a board of directors, and financial rights granted to board of Yorsan, NBK’s acquisition of Inci Mobilya (Yatsan), Turkven’s acquisition directors members. The criteria and the minimum number of independent of Medical Park, joint acquisition of UN Ro-Ro by Actera and Esas Holding directors are binding, as are all other provisions concerning independent and joint acquisition of Ziylan Magazacilik by Turkven, Gozde Girisim directors. Communiqué No. II-17.1 also requires listed companies to estab- and Bim AS. The health-care sector has become a significant area of inter- lish the following committees: est for private equity investors. Major deals in the sector include Abraaj (i) auditing committee; Capital’s acquisition of Acibadem (Abraaj succesfully exited Acıbadem (ii) corporate governance committee; by selling their shares to Integrated Healthcare Holdings Sdn.Bhd and (iii) risk determination committee; Khazanah Nasional Bhd); NBK Capital’s acquisition of Dunya Goz (NBK (iv) nomination committee; and exited Dunya Goz by selling their shares back to the existing shareholders (v) salary committee. after three years); Carlyle Fund’s acquisition of Medical Park (Carlyle suc- cessfully exited Medical Park by selling its shares to Turkven) and Argus However, if the committees under (iii), (iv) and (v) cannot be established Capital and QFIB’s investment in Memorial. There is also a strong interest due to the organisation of the board of directors, the duties of such com- in public entities, which has coupled Turkish companies and foreign funds. mittees will be fulfilled by the corporate governance committee. Teaming up with a local company for participation in tenders has become Under the New Turkish Commercial Code, effective as of July 2012 customary in Turkish privatisations such as the partnership of TüvSüd, (the TCC), various clauses reflecting corporate governance rules are statu- Dogus and Bridgepoint in vehicle test centres or the partnership of Koc torily binding: those concerning announcements for general assembly Holding, Gozde Girisim and UEM Group Berhad for the privatisation of meetings and publishing corporate information such as shareholder struc- highways and bridges (the tender for this privatisation has been , however, ture and voting rights prior to general assembly meetings. cancelled due to the pricing being considered low.)

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The TCC also provides for new steps toward professional manage- 4 Disclosure issues ment, whereas several provisions concerning company boards of directors Are there heightened disclosure issues in connection with introduce new concepts and fundamental changes, while others fill gaps going-private transactions or other private equity transactions? evident in the repealed code. These include: • allowing non-shareholders and legal entities to become board Disclosure requirements under the Turkish securities law are determined members; by two Communiqués: the Communiqué on the Principles Regarding TRANSACTIONS • reducing the mandatory number of board members to one; Public Disclosure of Material Events, Series VIII, No. 54 (Communiqué No. • introducing online board meetings; 54), applicable to listed companies; and the Communiqué on the Principles • creating a clear distinction between a company’s management and Regarding Public Disclosure of Material Events of the Corporations Whose representation, enabling transferring the ‘authority to manage’ a com- Offered Securities are Non-Listed in a Stock Exchange, Series VIII, No. 57 pany to one or more board members or third parties; and (Communiqué No. 57), applicable to other public companies (ie, joint-stock • reformulating board members’ liability – introducing the ‘business companies that have over 250 shareholders but whose securities are not judgment’ rule to replace the former ‘prudent merchant’ criteria. listed). Both Communiqués require that all events affecting the value of the capital markets instrument or the investors’ decision to buy or sell such an 3 Issues facing public company boards instrument be disclosed to the public. Communiqué No. 54 also introduces What are the issues facing boards of directors of public the right to postpone disclosure obligations in favour of listed companies. companies considering entering into a going-private or private 5 Timing considerations equity transaction? What procedural safeguards, if any, do public companies use when considering transactions? What What are the timing considerations for a going-private or other is the role of a special committee in such a transaction where private equity transaction? senior management, members of the board or significant There are no specific timing considerations for private equity investments shareholders are participating or have an interest in the in Turkey. Typical aspects of a mergers and acquisition transaction also transaction? apply to private equity transactions. In general, the due diligence, drafting, and negotiation phases take no less than two months. Under Communiqué Squeeze-out was not possible in Turkey until 2010. In a 30 July 2010 deci- 2010/4, the requirement for notification to the Competition Authority is sion, however, the Capital Markets Board of Turkey (CMB) set out princi- triggered under two circumstances. However, the Turkish Competition ples and procedures for the voluntary delisting of public companies. Authority (TCA) issued a new Communiqué (Communiqué No. 2012/3) On the other hand, the new Capital Markets Law entered into force on on 31 December 2012 revising article 7 of the current Communiqué, which 30 December 2012 and introduced new mechanisms, substantially chang- regulates the threshold test. Under these new changes, companies should ing Turkish capital markets legislation. The CML also regulated the major- notify the TCA regarding their merger when: ity shareholder squeeze-out right, but left it to a Communiqué to explain • the combined Turkish turnover of the transaction parties exceeds 100 how to exercise the right. In this respect a communique entered into force million Turkish lira and the Turkish turnover of each of at least two of on 1 July 2014 which was then amended with the changes introduced on 12 the transaction parties separately exceeds 30 million Turkish lira; or November 2014. • the Turkish turnover of the asset or the activity to be acquired in acqui- Under the revised system, a shareholder acting alone or in concert sitions and of at least one of the transaction parties in mergers exceeds with others holding 98 per cent or more of the total votes of a public com- 30 million Turkish lira and the worldwide turnover of at least one of pany can exercise the squeeze-out right to purchase the shares of minority the other transaction parties exceeds 500 million Turkish lira. shareholders. Once the majority shareholder becomes eligible to squeeze-out the Therefore, if a notification threshold is met, a filing must be carried out minority shareholders, the minority shareholders will have the right to put and TCA approval must be obtained prior to the proposed transaction’s their shares to the majority shareholder within three months. If there are implementation. any minority shares not sold during the three-month period, the majority Preparation for notification takes one to four weeks, depending on the shareholder can call the shares. complexity of the transaction and the volume of the required translation; The minority sell-out price is the highest of: the TCA typically decides within four to six weeks. Therefore, the parties • the weighted average trading price of the shares for the last 30 days should envisage a period of two months between signing and closing in prior to the majority shareholder’s disclosure of its intent to exercise which to obtain TCA approval. The notification must include the signed its squeeze-out right; or current version of the transaction agreement. A transaction document • the amount specified in an independent valuation determining the indicating the agreed general structure of the deal (memorandum of value of each class or group of shares; understanding, letter of intent, term sheet, etc) may also be submitted, • the share price used in transactions such as a tender offer or merger in provided the clearance is obtained prior to the transaction’s signing phase. the last year prior to the majority shareholder’s disclosure of its intent Depending on the nature of the transaction and target, other regula- to exercise its squeeze-out right; and tors or types of regulators can have jurisdiction over the transaction, such • the weighted average of the weighted average trading price of the as the Banking Regulation and Supervision Agency for banks and cer- shares: tain other financial institutions; the Capital Markets Board for brokerage • for the last 180 days; houses; portfolio management companies and other companies that are • the last year; and active in the capital markets; the Treasury for insurance and pension com- • the five years prior to the majority shareholder’s disclosure of its panies; the Energy Market Regulatory Authority for energy distribution intent to exercise its squeeze-out right. and generation companies; and the Radio and Television Supreme Council for broadcasting companies. Furthermore according to Communiqué No. 54 of the CMB, if an individual, a legal entity, or a group of individuals or legal entities acting in 6 Dissenting shareholders’ rights concert directly or indirectly acquire the management control of a public company, they must make a tender offer to acquire the remaining shares. What rights do shareholders have to dissent or object to a Management control is deemed to be achieved when: going-private transaction? How may dissenting shareholders • the share capital or voting rights of the acquirer directly or indirectly challenge a going-private transaction? How do acquirers reach 50 per cent or more; or address the risks associated with shareholder dissent? • privileged rights entitling the acquirer to appoint or nominate the majority of the directors are acquired. In principle, shareholders do not have statutory consent or approval rights in straightforward mergers and acquisitions transactions. However, shareholders may have contractual consent or approval rights deriving from a shareholders’ agreement or a joint venture agreement executed between them. In these cases, if all the shareholders possessing these contractual

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© Law Business Research Ltd 2015 TRANSACTIONS Esin Attorney Partnership TURKEY rights are not cooperative regarding the mergers and acquisitions transac- against the company and, failing this, the seller agrees to fully indemnify tion at hand, issues and complications may arise. the company and its shareholders). To strengthen protecting the private Shareholders have a statutory pre-emptive right pro rata to their share- equity investor, the parties may agree that the investor’s due diligence does holding regarding shares issued under a capital increase. This should be not limit the seller’s liability. In practice, however, sellers often challenge considered in share subscription deals. This pre-emptive right can be this. In such cases, another approach places the due diligence documents restricted or revoked only based on valid grounds and by a general assem- on a DVD attached to the share purchase agreement as an addendum. bly resolution with an aggravated quorum. With respect to public targets, Generally, sellers are increasingly convinced of the need for material investors should be mindful of the close supervision of the CMB and law- adverse change clauses (MACs), but still attempt to quantify or otherwise suits that may be filed by the minority investors. limit them. In secondary buyouts where the seller is also a private equity On the other hand, for going-private transactions there are a number firm, indemnification provisions may involve an amount in escrow. As a of options for the purchasers and the shareholders as follows: private equity fund may be wound up, investors are keen to secure a portion Once the majority shareholder becomes eligible to squeeze-out the of the seller’s potential liability with an escrow account. Typically, reach- minority shareholders (as explained in question 3), the minority shareholding agreement on this amount is a lengthy, difficult process. In most cases, ers will have the right to put their shares to the majority shareholder within total liability is limited to a percentage of the purchase price. Remaining three months. issues, such as representations and warranties in private equity invest- The minority sell-out price is the highest of: ments, share the characteristics of other types of mergers and acquisitions. • the weighted average trading price of the shares for the last 30 days prior to the majority shareholder’s disclosure of its intent to exercise 8 Participation of target company management its squeeze-out right; How can management of the target company participate in a • the amount specified in an independent valuation determining the going-private transaction? What are the principal executive value of each class or group of shares; compensation issues? Are there timing considerations of • the share price used in transactions such as a tender offer or merger in the last year prior to the majority shareholder’s disclosure of its intent when a private equity sponsor should discuss management to exercise its squeeze-out right; and participation following the completion of a going-private • the weighted average of the weighted average trading price of the transaction? shares: A significant portion of companies listed in Turkey are managed by a • for the last 180 days; founding family, and consequently, management participation may be • the last year; and comparatively limited. In cases where the family members play a signifi- • the five years prior to the majority shareholder’s disclosure of its cant role in the business or there are any key employees for the business, intent to exercise its squeeze-out right. the investors are ready to offer attractive compensation packages, including equity-based incentives or exit bonuses to facilitate retention of family Furthermore according to Communiqué No. 54 of the CMB, if an indi- members or key employees at least for a certain transition period. vidual, a legal entity, or a group of individuals or legal entities acting in Another important development is the conditional capital increase concert directly or indirectly acquire the management control of a public system, a new procedure introduced by the TCC. In line with this new company, they must make a tender offer to acquire the remaining shares. method, a company’s general assembly may decide, by amending the Management control is deemed to be achieved when: AoA (or by drafting the AoA in such manner during the incorporation), to • the share capital or voting rights of the acquirer directly or indirectly conditionally increase company share capital to enable holders of newly reach 50 per cent or more; or issued convertible bonds and similar debt instruments (ie, company credi- • privileged rights entitling the acquirer to appoint or nominate the tors) to exercise their exchange rights, or to enable employees to exercise majority of the directors are acquired. their stock purchase options, giving them the right to hold shares in the company. The practical impact will be that the conditional capital increase The shareholders also have a sell-out right in case of occurrence of mate- will allow the creation of a legal structure for employee stock option plans. rial events listed in the relevant communiqué of the CMB. A stock option mechanism was much desired by investors and, with the adoption of this mechanism under the TCC, stock option plans will be 7 Purchase agreements easier to realise. What purchase agreement provisions are specific to private equity transactions? 9 Tax issues Representations and warranties are of central importance as they deter- What are the basic tax issues involved in private equity mine the framework of the seller’s liability to the private equity investor. transactions? Give details regarding the tax status of a target, Under Turkish law, a share transfer is deemed a sale of shares (rights) deductibility of interest based on the form of financing and exclusively, and is not considered a sale and transfer of the enterprise. tax issues related to executive compensation. Can share Therefore, the seller’s liability is limited to the respective shares and can- acquisitions be classified as asset acquisitions for tax purposes? not be extended to the enterprise automatically. Representation and warranties are used to extend this liability. However, the provisions themselves There are primary tax considerations. As a general rule, the gain the share- do not achieve this. To protect private equity investors against any breach holder of the target company earns from the sale of its shares is subject of representations and warranties regarding the enterprise, the legal char- to corporate income tax (CIT) at the standard rate of 20 per cent if the acter of the representations and warranties must be carefully crafted. shareholder is a legal entity. However, if the shareholder has been holding There are several ways to structure the legal character of representations printed share certificates representing its shares for at least two years, 75 and warranties; however in Turkish legal practice, the legal character of the per cent of the gain from the sale of its shares is exempt from CIT, provided representations and warranties is often not defined. In our view, the seller’s certain conditions are met. These conditions are the following: representations and warranties can be structured as the seller’s primary • the sale price is received before the end of the second calendar year obligations. Although a debtor’s primary obligations depend on the debt- following the year on which the sale occurred; or’s fault under Turkish law, parties may agree otherwise. In this respect, • that portion of the gain benefiting from the exemption is maintained structuring of the representations and warranties as the seller’s primary in a special reserve account on the balance sheet for five years; and obligation is insufficient without also including the seller’s liability for its • the selling company’s business is not the trading of securities. representations and warranties independent of the seller’s fault in the parties’ agreement. To overcome challenges arising from Turkish law provi- If the shareholder of the target company is a real person, then the gain sions regulating the sale of goods, the seller should also guarantee against derived from the sale of his or her shares will be 100 per cent exempt from negative action by third parties, such as governmental authorities and income tax on the condition the real person shareholder holds the printed other third parties, regarding certain matters (namely, the seller should share certificates representing his or her shares for at least two years. guarantee that no tax authority will file any legal or criminal complaint

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Second, regarding stamp tax, the parties to an agreement are required agreements. A second issue that may arise concerns the target’s collateral to pay 0.948 per cent of the highest amount in the paper (purchase price, and other security for existing indebtedness. insurance coverage, and indemnity amounts are to be taken into consider- The target company often requests the buyer private equity company ation while determining the stamp tax basis) and with respect to each copy to share the risk of security provided by the target company. In practice, of an executed agreement. Stamp tax per copy is capped at 1,545,852.40 private equity investors are not willing to provide or share the risk of such Turkish lira for the year 2014. For permanent taxpayers, stamp duty should security. TRANSACTIONS be declared until the 23rd day of the following month and should be paid by the 26th day of the same month of declaration. For the non-permanent tax- 11 Debt and equity financing provisions payers (ie, not registered as a permanent stamp duty payer in Turkey), the What provisions relating to debt and equity financing are stamp duty should be paid within 15 days of the signing of the document. typically found in a going-private transaction? What other For the acquirer, interest payments made for financing a transaction documents set out the expected financing? can be deducted from the tax base. These interest payments must be in compliance with the thin capitalisation and transfer pricing regulations. The regular financing documentation for a private equity buyout usually Finally, there is no regulation that would classify a share acquisition as consists of a loan agreement and the security documentation. Security an asset acquisition for tax purposes. documentation principally involves share pledges and – depending on the complexity of the transaction – assignment of dividend receivables, com- 10 Debt financing structures mercial enterprise pledges, usufruct rights over the shares, deposit pledge What types of debt are used to finance going-private or agreements, mortgages over real estate, or pledges over the goods of the private equity transactions? What issues are raised by target and escrow agreements. These broad security requests are rarely accepted by international private equity firms, but are more common in existing indebtedness at a potential target of a private equity acquisition finance by Turkish companies. transaction? Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt 12 Fraudulent conveyance and other bankruptcy issues financing or granting of security interests? Do private equity transactions involving leverage raise Banks prefer senior (secured) debt for leveraged buyouts. Additionally, a ‘fraudulent conveyance’ or other bankruptcy issues? How are number of mezzanine credit facilities can be seen in the market as well. these issues typically handled in a going-private transaction? There are no margin loan restrictions under Turkish law, and banks are usually willing to provide credit for financing a target’s acquisition. The Theoretically, in the event of the target’s bankruptcy, the target’s directors New Commercial Code, however, imposes new restrictions on financial may be accused of fraudulent conveyance where the target’s assets secure assistance, potentially affecting the financing of leveraged buyouts. The the acquirer’s financing. No precedent, however, exists in Turkey for this New Commercial Code does not allow shareholders of joint-stock com- type of fraud. Furthermore, the TCC has significantly limited the applica- panies to be indebted to their own companies unless the shareholder has tion of leveraged buyouts under Turkish law and therefore the occurrence fulfilled its capital contribution commitment in full and company profits possibility of such issues becomes even more remote. cover the preceding year’s losses. Additionally, joint-stock companies may no longer provide an advance, loan, or security (eg, share pledge, assign- 13 Shareholders’ agreements and shareholder rights ment of receivables) for acquisition of its own shares by a third party. The What are the key provisions in shareholders’ agreements former code did not recognise or restrict financial assistance, and thus, pri- entered into in connection with minority investments or vate equities could obtain loans from banks to purchase company shares investments made by two or more private equity firms? Are and in return provide the bank collateral of the target company’s shares there any statutory or other legal protections for minority and assets. Under the TCC, legal transactions breaching this rule will be deemed null and void. The two exceptions are transactions concluded by shareholders? banks and other financial institutions in their ordinary course of business Standard provisions of a shareholders’ agreement such as transfer restric- (where the target itself is a bank or another financial institution) and trans- tions, board representation, veto rights and option rights, are common actions concluded by the company’s employees (eg, management buyout) features in Turkey. As investors stay for a short time and later exit the com- or one of its subsidiaries. pany, exit mechanisms such as tag-along and drag-along rights, right of How the financial assistance prohibition will apply to limited liability first offer, right of first refusal or the initiation of a public offering, which companies under the TCC has yet to be clarified. Provisions for joint-stock can be major ‘deal breaker’ issues, are also regulated by shareholders’ companies that apply by reference to limited liability companies are indi- agreements. cated under the TCC; however, the financial assistance prohibition is not Specific performance of certain provisions such as the transfer listed. The answer remains unclear about whether choosing a limited lia- restrictions and drag-along rights may be too cumbersome, unavailable bility company will allow private equity funds to freely take share pledges under conventional structures, or only achievable after long and arduous from target companies. Moreover, this solution will not be possible for tar- proceedings. Such provisions are set forth both in the articles of associa- gets operating in regulated industries, which must be organised as joint- tion and shareholders’ agreements. Where identical provisions appear in stock companies. These sectors include banking, debit and credit cards, both the shareholders’ agreement and the articles of association, paral- financial leasing, factoring, consumer finance, asset management, foreign lel proceedings are initiated. This is because, shareholders’ agreements exchange dealing, brokerage, portfolio management, investment advisory and articles of associations are often subject to different laws and dispute services, insurance, auditing, and agricultural and public warehousing. resolution mechanisms, such as local litigation and international arbitra- Another financial assistance model may be considered as the TCC tion. Parallel proceedings further complicate and prolong any resolution allows centralised cash management and cash pooling in intra-group com- of a dispute. Another typical exit provision in shareholders’ agreements panies. Intra-group companies can pool their excess cash under the parent for private equity investments in non-public companies is the right to exit company or in an intra-group financing company to be established for this through an IPO, whereby the private equity investor has a preferential right purpose, provided such intra-group companies pooling their excess cash to sell its shares. For listed companies, some actions or provisions bear the are entitled to request balancing from the parent. In that sense, the pooled risk of being deemed unfair to small investors. With the enactment of the cash can be used by the acquiring intra-group company requiring financial TCC, companies no longer have as much flexibility when entering into assistance. shareholders’ agreements granting special rights to majority shareholders. There are no further restrictions on debt financing for private equity Under the TCC, shareholders representing at least 10 per cent of a transactions. company’s share capital are deemed minority shareholders, benefiting In the event of a change of control in a target company, the permis- from a number of rights. As for public companies, a five per cent share- sion of the target company’s creditors (banks, financial institutions, and holding is deemed a minority shareholding under the Capital Markets Law. third parties) is often required under the agreements executed between Minority shareholders have the right to: the creditors and the target company. The parties to the transaction often • prevent the release of liability for board members or auditors, or both; require this permission as a condition precedent to the share purchase • request appointment of a special auditor;

296 Getting the Deal Through – Private Equity 2015

• summon an extraordinary meeting and add additional items to the another shareholder or a third party at a price to be determined by a court agenda; as fair value. This provision has been established under the TCC and pre- • postpone discussions on the balance sheet in a general assembly meet- sents a significant problem for minority shareholders in Turkish joint stock ing for one month; companies. • demand the winding up of the company; Representations and warranties are designed for the benefit of the • demand the issuance of share certificates; buyer, to define the target enterprise and determine the seller’s liability • nominate members to the board of directors; and where the target enterprise is not as represented. Representations and war- • demand the replacement of the independent auditor. ranties in a share purchase agreement may be structured to serve as contractual penalties to compensate for any shortfall in the buyer’s expected 14 Acquisitions of controlling stakes benefit from the transaction, and particularly in the event of a seller’s Are there any requirements that may impact the ability of a breach of representation and warranty or its obligations under call or put options. private equity firm to acquire control of a public or private An alternative mechanism, escrow, is required when part of the shares company? or consideration must be set aside for a certain period of time under put, With respect to the private companies no requirement exists. According call and other share purchase options or as a security for potential repre- to Communiqué No. 54, if an individual, a legal entity, or a group of indi- sentation and warranty breaches. The escrow agreement should be drafted viduals or legal entities acting in concert directly or indirectly acquire the under Turkish law, whereby an escrow agent is the parties’ representative management control of a public company, they must make a tender offer who holds these assets on their behalf. Escrow is typically not a substitute to acquire the remaining shares. Management control is deemed to be for a pledge; sometimes, however, the escrow agent’s authority is elevated achieved when: to the level of a pledge. • the share capital or voting rights of the acquirer directly or indirectly reach 50 per cent or more; or 16 Portfolio company IPOs • privileged rights entitling the acquirer to appoint or nominate the What governance rights and other rights and restrictions majority of the directors are acquired. typically included in a shareholders’ agreement are permitted to survive an IPO? What types of lock-up restrictions typically In this respect, an application must be made to the CMB within six busi- apply in connection with an IPO? What are common methods ness days following the acquisition of the shares transferring management control in order to launch a mandatory tender offer. The mandatory tender for private equity sponsors to dispose of their stock in a offer must be initiated within 45 business days following the acquisition, portfolio company following its IPO? and must remain open for between 10 and 20 days. The most common way to enable an IPO exit is through standard share- The value of the mandatory tender offer must not be less than the high- holders’ agreement provisions, such as board appointment rights, veto est price paid for the company’s shares by the acquirer within six months rights and transfer restrictions. Another useful provision imposes obliga- prior to the acquisition that causes the tender offer requirement; such pay- tions to support and vote in favour of the IPO process. With the enactment ments include the acquisition that causes the tender offer obligation. Price of the New Commercial Code, such provisions cannot be contained in adjustment mechanisms, additional payment options, and other elements the target’s articles of association, but rather in the shareholders’ agree- that increase the purchase price of the shares that cause the tender offer ment. Further to the New Commercial Code, the heightened protection obligation are also taken into consideration. of minority rights and shareholders’ agreements may not harm or limit minority rights in any way. 15 Exit strategies Under the Capital Markets Law, all capital market instruments that will What are the key limitations on the ability of a private equity be publicly offered or issued must be registered with the CMB. Therefore, firm to sell its stake in a portfolio company or conduct an IPO shares cannot be offered or sold prior to registration. In the event of a viola- of a portfolio company? In connection with a sale of a portfolio tion, the CMB may impose an injunction on the issued shares and sue to company, how do private equity firms typically address any annul an unauthorised issuance. A lock-up period is commonly included to prevent shareholders from post-closing recourse for the benefit of a buyer? Does the trading shares for 90 to 180 days following the first day of trading after an answer change if a private equity firm sells a portfolio company IPO, to protect the post-IPO value of the shares. Unlike the European mar- to another private equity firm? kets, exits from portfolio companies through an IPO is not common under The exit options are generally regulated by means of a combination of put Turkish practice, therefore there is no established practice in this respect. options, call options, tag-along rights, drag-along rights, right of first offer (ROFO) or right of first refusal (ROFR). Since the specific performance is 17 Target companies and industries not recognised under the Turkish law, the enforcement of these options What types of companies or industries have typically been is generally secured with conventional penalties or other security mecha- the targets of going-private transactions? Has there been any nisms such as escrow or share pledge. change in focus in recent years? Do industry-specific regulatory Tag-along rights, drag-along rights, ROFOs and ROFRs and their schemes limit the potential targets of private equity firms? pricing and mechanism are substantially similar to international market practice. With respect to put and call options, either an automatic right Private equity transactions have not focused on any particular industry or is granted upon the lapse of a specific period of time (eg, expiry of lock- type of company. Investments vary from food and beverages (Yorsan, Mey up period) or the options are triggered with events of default (defined Icki and Yudum), the health sector (Acibadem, Dunya Goz, Medical Park, as ‘material breaches of contract’) listed on an item-by-item basis in the Universal Hospital, Kent Hospital and Memorial Hospitals), retail (Ziylan, shareholders’ agreements. Put and call options triggered in the event of Penti, Koton, Yargıcı and Migros), transportation (UN Ro-Ro and Kamil default mainly have cure periods and purchase prices designed in a man- Koc), media (Digiturk), pharmaceuticals, IT and real estate. There appears, ner to penalise the material default of the defaulting party (eg, lower fair however, to be a lack of interest or suitable targets in Turkey’s three main market value for call options or higher fair market value for put options). industries: financial services (especially banking), textiles and tourism. An IPO must be channelled through a joint-stock company. With the There are no specific regulatory provisions preventing private equity enactment of the TCC, as transfer restrictions cannot be included in the firms from entering any sector. Investment in certain sectors, such as the articles of associations of joint-stock companies, it is expected that most financial services sector, energy, and media, however, require disclosure private equity investors will prefer to invest through limited liability com- of the ultimate beneficial owners of the shareholders. Therefore, private panies. Therefore, private equity companies will likely establish a limited equity firms may have difficulties in explaining their fund structure. There liability company that will later be reorganised into a joint-stock company are also certain thresholds regarding foreign ownership in certain indus- before an IPO is launched. tries, such as radio and television. Private equity firms have attempted to One other issue that should be kept in mind is joint stock compa- overcome these thresholds by establishing trust relationships with Turkish nies’ right to to ask that the shares are not transferred to the third party individuals (yet compliance with the regulations may still be an issue). This purchaser that is the intended transferee, but to the target company itself, approach may not be practical under private equity firms’ charters, which www.gettingthedealthrough.com 297

Update and trends The Venture Capital Companies Communiqué (the Communiqué), With this Communiqué, the venture capital companies under Turkish which entered into force on 9 October 2013, is a part of the initiative to law become much more aligned with the international private equity make venture capital companies more attractive for international and model. Although there are certain restrictive provisions such as the

TRANSACTIONS local investors, by aligning them with international standards of private requirement for CMB approval for transfers involving more than 10 per equity. cent of shares of a venture capital company and strict criteria for the Among others, the Communiqué enables the sale of venture capital approval of the acquiring entities, the Communiqué is a step forward companies’ shares to qualified investors without public offering, allows for the Turkish private equity market, and we expect an increase in the venture capital companies to provide financing through a mixture of number of venture capital companies operating in the market and the debt and capital finance (ie, mezzanine finance) and eases portfolio use of these companies for conventional private equity investments. restrictions applicable to venture capital companies.

may prevent a firm from acquiring shares exceeding the statutory limit. As a second option, real property may be acquired by a Turkish SPV There are also several restrictions on foreign ownership of real estate and with 100 per cent domestic capital (namely, with Turkish shareholders). vessels, which complicate certain investments. After the acquisition, the private equity investor acquires the shares of the Turkish SPV, and thus indirectly acquires ownership of the real property. In 18 Cross-border transactions this case, a procedure similar to that of the first option is followed. Unlike What are the issues unique to structuring and financing a the first option, however, the procedure commences after acquiring real property. Therefore, this procedure leads to post-acquisition approval, cross-border going-private or private equity transaction? rather than approval as a condition precedent to the acquisition. The trans- Dividend payments to certain offshore jurisdictions popular for fund man- feree company serves notice to the Treasury Undersecretariat, indicating agement, such as Jersey, are subject to a 30 per cent withholding tax in the company’s shareholding structure has changed and a foreign person addition to the 15 per cent tax applied to all Turkish dividend payments. has become a shareholder. The Treasury Undersecretariat then notifies Even though no specific regulatory provision prevents foreign private the land registry. The land registry follows the same procedure used for firms’ entry into any line of business in Turkey, disclosure to public authori- Turkish subsidiaries with a foreign shareholding (as explained in the first ties is required as to the ultimate (direct and indirect) beneficial owners option) and confirms with the regional governorship and other authorities of the shares in companies conducting certain business activities, such as that the real property is not in any military zone. The restriction on acquir- financial services, telecommunications, energy, and media. ing real property by foreign entities plays an important role, especially for In complying with these regulations, private equity investors may have private equity firms investing in manufacturing and retail because of the difficulty explaining their fund structures. Moreover, in some industries, facilities and premises held by the target companies. such as radio and television, there are certain upper limits on foreign ownership. These thresholds might be overcome by establishing trust relation- 19 Club and group deals ships with Turkish individuals. What are the special considerations when more than one Foreign individuals and legal entities are also partially restricted in private equity firm (or one or more private equity firms and a the direct and indirect ownership of real property. Foreign entities may strategic partner) is participating in a club or group deal? purchase real property in limited circumstances under special legislative acts, primarily the Law on Promotion of Tourism, the Petroleum Law, and Club deals are common in Turkey (the most recent ones are the acquisi- the Law on Organised Industrial Zones. These limitations can be avoided tion of Ziylan by Turkven, Gozde Girisim and BİM and the acquisition of through the establishment of a Turkish legal entity (SPV) in Turkey, which UN Ro-Ro by Actera and Esas Holding. Although the largest acquisition in may even have 100 per cent foreign shareholders. Using a Turkish SPV to the Turkish market so far was a group deal (BC Partners, DeA Capital and purchase property in Turkey is usually realised in one of two ways. Under Turkven’s acquisition of Migros), there are no specific regulations regard- the first option, the private equity company incorporates a Turkish SPV, ing private equity firm club or group deals. The terms of a club agreement which acquires the real property after obtaining special permission from should be carefully drafted to comply with local competition law. This risk the regional governorship and other authorities to ensure the property is increases if the target has a concession from the government or enjoys not in a military zone, special security zone or strategic zone. This proce- a natural monopoly. In these cases, in the absence of competition in the dure is usually completed within one to two months. Once cleared, there market, any pre-offer deals may be deemed restrictive by the Competition are no obstacles to acquiring the real property indirectly through a Turkish Authority. SPV. If property is acquired without complying with this procedure, the Ministry of Finance may request liquidation of the property. If the company does not liquidate the real property within the time allowed, the ministry will be entitled to liquidate the property itself.

Duygu Turgut [email protected] Ali Selim Demirel [email protected]

Ebulula Mardin Cad., Gül Sok. No. 2 Tel: +90 212 376 64 00 Maya Park Tower 2, Akatlar – Beşiktaş Fax: +90 212 376 64 64 34335 Istanbul www.esin.av.tr Turkey

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20 Issues related to certainty of closing includes no subjective conditions precedent solely for the private equity What are the key issues that arise between a seller and a private buyer’s benefit. Another complication that arises in certain private equity deals is the equity buyer related to certainty of closing? How are these seller’s tendency to renegotiate the financial terms before or after sign- issues typically resolved? ing. In such cases, the private equity buyer invests in the target jointly with Private equity buyers tend to include vague provisions to their benefit in another investor, walks away from the deal, or negotiates with the seller to share purchase agreements that entitle them to easily walk away, such as reach financial terms acceptable to both parties. a condition precedent requiring the private equity buyer obtain all internal To ensure a successful closing, private equity buyers include termina- approvals. Given the many private equity deals in the Turkish market, sell- tion fees in share purchase agreements, whereby the sellers must pay ter- ers are well aware that a private equity buyer may decline to close the trans- mination fees to the private equity buyer if they fail to close the deal. action, and sellers often seek to ensure that the share purchase agreement

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