How to Protect a Cross-Border Investment in Turkey via Shareholders’ Agreements

Much like the rest of the world, the impact of the COVID-19 pandemic on the investment landscape in Turkey receded in 2022 and was overtaken by that of the Russian–Ukrainian war, rising interest rates and inflation, and the risk of a global recession – not to mention energy security and supply chain concerns. Despite the dampening impact of such factors, Turkey saw sustained interest in 2022 from strategic investors looking to benefit from the long-term opportunities presented by the Turkish market.

Additional interest was shown by financial investors (mostly comprising venture capital and angel investors) looking to benefit from the rapid growth of the Turkish start-up ecosystem – particularly in online games, fintech, and other technology sectors. Foreign investors have reportedly taken up about half of the total deal volume in 2022 (estimated at between USD6.5 billion and USD11.5 billion by different public reports) and account for 25% to 30% of the deal numbers.

It is advisable in such a context for foreign investors in Turkey to utilise contractual instruments to protect their investments according to global best practices – in addition to the standard legal protections afforded to shareholders in the Turkish legal system. The best tool in an investor’s toolbox when investing in a Turkish target company with more than one shareholder is a shareholders’ agreement signed by and between the shareholders of the company in order to determine:

In contrast with a company’s articles of association, which is a standard legal document submitted to the relevant local trade registry during the establishment procedure and publicly announced in the trade registry gazette upon incorporation, a shareholders’ agreement constitutes a confidential agreement among shareholders. Such agreements typically contain provisions that are more detailed, flexible, and specific to the relevant company and the relevant shareholding structure.

Conclusion of a shareholders’ agreement is not a legal requirement in Turkey. Nonetheless, shareholders’ agreements are strongly recommended and widely used in most M&A deals, owing to the following protections they provide investors.

Under Turkish law, most corporate resolutions are taken at the general assembly meetings via affirmative votes from the simple majority of the shareholders present. There are limited exceptions – for example, amendments to articles of association placing the shareholders under liability or secondary liability to cover balance sheet losses requires unanimous consent of the shareholders – and minority shareholders would have the ability to block the general assembly resolution only in such cases.

However, with a shareholders’ agreement, minority shareholders – especially financial investors motivated by regular dividend whose focus is to maximise their profit on their investment – can be protected from being outvoted by way of expanding the list of resolutions that require unanimous consent from all shareholders (ie, resolutions pertaining directly to the financing and business of the company).

A well-drafted shareholders’ agreement also protects minority investors against majority shareholders wishing to sell their shares to a third party. Tag-along provisions can be put in place that entitle each minority investor to sell its shares to the same third party on the same commercial terms and conditions as the majority shareholders.    

Investors naturally prefer to resolve shareholder disputes via quick and inexpensive means –and, if possible, to avoid the occurrence of a shareholder dispute in advance. The preparation phase of a shareholders’ agreement requires shareholders to discuss and evaluate potential matters that may create a deadlock at either the board of directors or general assembly level in the future and consider mechanisms to resolve such problems.

This preparation stage itself eliminates or minimises the possibility of a deadlock occurring in the future or at least allows investing shareholders to know that deadlock would be resolved via the mechanisms set forth in the agreement. Such mechanisms would include:

In addition, a well-drafted shareholders’ agreement also provides exit/divorce strategies for shareholders whose interests are no longer aligned. Agreeing on such divorce/exit provisions in advance avoids the need for lengthy, expensive and disruptive exit negotiations between shareholders in the future as well.

For investors investing in small businesses where the know-how and/or the personal contacts of the existing shareholders play an important role, protection of the existing shareholder composition of the company is critical. In such companies, a shareholders’ agreement with right of first refusal provisions obliging the shareholder who wishes to exit the company to first offer its shares to the remaining shareholders can be used to:

A shareholders’ agreement with confidentiality and non-compete provisions also provides reassurances for new investors by preventing the exiting key shareholder from using the company’s know-how, clientele, or trade secrets to engage in competition with the company. Such provisions address new investors’ concerns about exiting shareholders establishing a competing business and proceeding to diminish the value of the acquisition.