Turkish M&A market with numbers
Despite the economic uncertainties around the Covid-19 outbreak, the Turkish M&A market bounced back from the low deal activity of 2019. According to the Deloitte Annual Turkish M&A Review, the deal volume reached up to USD9 billion in 2020, with a drastic 70% increase compared to 2019, while there has been a 30% growth in terms of deal number. For the last years, the main driver of the Turkish M&A market has been the technology and mobile services sectors followed by financial services, manufacturing, infrastructure and energy, whereas the tourism and retail sectors have recently become less attractive due to the pandemic. Traditionally, with occasional big-ticket deals, the Turkish M&A market is dominated by small to medium-sized transactions and has been experiencing a systematic increase in venture capital and investor-backed deals in recent years, while private equity activity has usually been slow. With the increasing market share of technology deals and early-stage investments in tech start-ups, IP law has recently become more important in the Turkish M&A practice.
Impact of Covid-19 on corporate and M&A activity
The coronavirus outbreak hit the Turkish economy hard in the first quarter of 2020 when the IPO market suddenly stopped, and M&A deals were either delayed or cancelled. However, the market picked up again in the second half of 2020. In an effort to mitigate the unfavourable economic consequences of the pandemic, the Turkish legislature prohibited the termination of employment contracts by employers, restricted dividend distribution to shareholders and changed the trading rules on the stock market. Therefore, reviewing the target companies' compliance with these pandemic-specific rules became a regular part of the legal due diligence ("DD") reviews. Furthermore, buyers are now in a growing trend to complete the financial DD first and possibly seek restructuring of the target's debts before proceeding to other customary legal DD items. With special commercial and corporate rules in place, target companies facing unprecedented economic events adopted special measures to mitigate their risks and damages which resulted in the sellers' failure to comply with their covenants to manage the company in the ordinary course of business and in line with the past practice under the SPAs. Consequently, the technique of drafting covenants under the SPAs, as well as the contents of force majeure and material adverse change ("MAC") clauses, have changed to better address the extraordinary circumstances of the pandemic. As the sellers would not be willing to simply agree on a lower valuation and price, the key focus is on whether the parties can agree on a purchase price mechanism that gives sufficient certainty and protection on both sides. Assuming a split signing and completion, the buyers generally push for a later valuation date, ultimately seeking protection by way of a completion accounts mechanism, so that negative impacts on the business in that period may be factored into the purchase price. Moreover, in order to bridge the even wider valuation gap between deal parties under the circumstances of the pandemic, there has been a growing trend to use deferred consideration and earn-out mechanisms allowing a portion of the consideration for the shares to be calculated and/or paid at a future date, subject to the target's post-acquisition performance.
Highlights from legislative amendments
In addition to the pandemic-specific legislation, several new laws and regulations were adopted in 2020, with a particular focus on capital markets legislation. As a starting point in January 2020, the Capital Markets Board (the "CMB") introduced revocation of privileged shares in public companies that entitle their holders to have preferred voting rights or the right to be represented on the board of directors, if such public companies have been incurring losses for five consecutive years. Furthermore, comprehensive amendments were introduced to the Capital Markets Law (Law No. 6362) (the "CML") in February 2020, including, among others, expanding the scope of crowdfunding from equity instruments to borrowing and limiting the scope of material transactions, exit rights and shareholders who can tender their shares as part of a mandatory tender offer. Later in June, the CMB started to transpose the changes in the CML into the secondary legislation and, with a new Communiqué on Material Transactions and Exit Rights (II-23.3), excluded certain structural transactions of public companies such as certain merger and spin-off transactions, de-listing decisions or dissolution of public companies from the scope of material transactions and limited the scope of shareholders who can exercise exit rights as a result of material transactions and revised the calculation method of the exit price. The efforts to implement the amendments to the CML in secondary legislation continued with a new Squeeze-Out and Sell-Out Rights Communiqué (II-27.3) later during the year, which among others introduced a new calculation method for the squeeze-out and sell-out price applicable in the same way to both of these rights and addressed the uncertainties in the practice by regulating that when squeeze-out and sell-out rights arise simultaneously with a mandatory tender offer requirement, the latter will not be applicable. The CMB also took the first step in 2020 to follow the growing environmental, social and governance ("ESG") trend among global regulators, and adopted the Sustainability Principles Compliance Framework containing sustainability principles. While these principles are not of a binding nature, as of 2021 public companies will nonetheless need to disclose whether they choose to comply with them or not, and if not, the reasons for not doing so.
In 2020, the Turkish legislator also amended the antitrust laws to further harmonise them with the EU legislation and thus authorised the Turkish Competition Authority (the "TCA") to ban concentrations even when they do not create or reinforce a dominant position to the extent that there is a "significant impediment of effective competition". Moreover, with the recent amendments, the companies may propose a commitment during the pre-investigation phase to avoid a full investigation and sanctions by the TCA and benefit from a new settlement mechanism, while the TCA may choose not to investigate certain competitively restrictive agreements, concerted practices and decisions if they are below a certain market share or revenue threshold.
Moreover, the Turkish Commercial Code, the key law for the Turkish corporate/M&A practice, was amended to introduce a new notification system for bearer shares entering into force on 1 April 2021, according to which holders of bearer shares and their future purchasers will only be able to exercise their shareholder rights if their ownership or acquisition is notified to the Central Securities Depository of Turkey, and will face administrative fines if they fail to do so. The new legislative amendment also authorised the Ministry of Trade to make it mandatory for companies to keep their share ledgers and board of directors and general assembly resolution books on an electronic platform, which paves the way for further use of technology in the corporate practice.
M&A market outlook 2021
It is anticipated that the ascending trend in the Turkish M&A market will continue with the expected recovery from the Covid-19 pandemic after the first quarter. Several big-ticket deals are expected in the energy and infrastructure sectors, while small to mid-sized deals will continue to lead the market, with an increased focus on tech start-ups, pharmaceuticals/medical and other sectors which can adapt to the post-Covid era.
Also, even though it is not yet regulated, the use of warranty and indemnity insurance has been increasing in the Turkish M&A practice recently and is expected to become more widespread in 2021.