Turkey is a dynamic and interesting territory to practice law in there is always something new going on in the market which we strive to acclimatise to, thus keeping our practice at pace. During the past few years as a result of legislative changes, most of us have had to significantly refresh our knowledge of law and adapt that to practice. Companies have particularly gone through a transformation to implement new corporate governance rules to their daily life, which has meant employing a lot of resources and effort to comply with the new rules. One can see that it has gone smoothly so far and companies are happy with the results.
On the M&A front, we are proud to have played a role in the milestone deals of the year 2014, namely for Yıldız Holding on whose behalf we acted in the acquisition of United Biscuits in a deal worth of over £2 billion. We also acted for Anadolu Holding in the acquisition of shares in Migros, which is a supermarket chain with a market cap of circa TRY 3.660 billion. In this context, YükselKarkınKüçük was ranked by Mergermarket as #1 in terms of deal count (26 deals) and #1 in terms of deal value ($5.169 billion) in the Turkey law firm league tables.
Moving onto 2015, while M&A activity continued in the first half of the year, during which we have so far taken part in 20 signed/closed deals, including the recently announced 325m acquisition by Demirören of Total gas stations and the $1.3billion sale of SOCAR Enerji minority stake to Goldman Sachs. Meanwhile, some investors (generally sponsored ones) preferred to take the wait-and-see approach in anticipation of the general (parliamentary) elections which took place in June, 2015 and subsequently to be held again in November, 2015. The market is currently waiting for the results of the new vote, since a government was not formed at the initial elections, but business is as usual, although there has been some impact on the economy, in particular to the Turkish currency, which has been depreciating for a while against the US Dollar. Nevertheless practice continues to be exciting for us in all of our practice areas, as the Turkish market is accustomed to political changes and events, these having been a part of the country's history, and Turkey has proven to have a track record of swift adaption to political environment.
Our law firm and practice has continued to grow in the meantime. YükselKarkınKüçük is now ranked by Chambers Europe as Tier 1 in Corporate/M&A, Tier 1 in Dispute Resolution, Tier 1 in Projects & Energy, Tier 1 in Real Estate, Tier 1 in Employment, Tier 2 in Intellectual Property, Tier 2 in Capital Markets, Tier 2 in Banking & Finance and Tier 3 in Technology Media and Telecoms. With these results, YükselKarkınKüçük is the highest ranked Turkish law firm in terms of both the number of rankings and the level of rankings. The results in Legal 500 and IFLR are no less notable and we are designated by these directories as a Top Ranked or Highly Recommended Law Firm in Turkey. By virtue of these results, we won the "National Award for Turkey" at the IFLR European Awards 2015, in April 2015. We also won the "Turkey Legal Adviser Award" at the Mergermarket European M&A Awards in December 2014.
We have been quite active in terms of events, as we sponsored the "2nd Annual Turkey and ME International Arbitration Summit" held in September 2015 at the Grand Hyatt Istanbul with the participation of Mr. Murat Kakın as the speaker. We held the "Fraud Investigation and Legal Risks Panel" in which Seteney Nur Arslan and Yasemin Antakyalıoğlu Kastowski participated as speakers along with the PwC TR Fraud Forum, again in September 2015. We held the "FX Market Update Seminar" with Bank of Tokyo Mitsubishi-UFJ in June 2015 at the Hilton Kozyatağı where Ms. Işıl Ökten evaluated recent developments in FX Markets from a legal perspective and referred to the significance of hedging as a solution for those companies having foreign currency debt to be protected from exchange rate fluctuations. Mr. Gökhan Gökçe, Partner and Head of IPT, participated as a speaker at the "Fraud Risks in Pharma Sector Panel" in June 2015 at the Hilton Bomonti, which was organised by ACFE Turkey - Association of Certified Fraud Examiners and the PwC TR Fraud Forum. Associates Mr. Ahmet Öztürk and Mrs. Ferhan Yamakoğlu participated as speakers at the "SunPower Utility Solar Conference" at the Grand Tarabya Hotel in March 2015. Mr. Murat Karkın, Co-Managing Partner and Head of Dispute Resolution, participated as a lecturer at the "Arbitration Law Training" events held in January-February 2015 with the cooperation of the International Chamber of Commerce (ICC) Turkey National Committee and the ICC YAF Turkey. Mr. Karkın also participated as a speaker at the ICC 12th International Arbitration Seminar in December 2014, held at Bilgi University. As a team, we try to be active in events and seminars as much as we can which not only helps us share our experience with others, but keeps us up to date with the latest legal developments.
Speaking of events, we held our annual Firm Outing with the participation of all lawyers at the beautiful Mandarin Oriental, Bodrum, in October 2015 with special guest speaker Mehmet Göçmen, President of Sabancı Energy Group, who delivered an excellent and inspiring speech on success and professional life. Also, we welcomed Mr. Cem Yılmaz, who shared his life story about achieving success in the Turkish entertainment and comedy world and it was a blast having him participate at our event.
By virtue of the Bulletin, we aim to reach and share our experience with our clients, acquaintances, legal practitioners, and businesspeople as often as possible. With this Bulletin, which one could consider the biggest periodical published by a Turkish law firm, we offer you articles from 78 lawyers on a wide range of topics touching on many areas of practice.
NEW TRENDS IN LIMITING POST-COMPLETION LIABILITY IN M&A TRANSACTIONS FROM A PRIVATE EQUITY PERSPECTIVE
Private equities (PE) aim at maximising their income on completion and seek to avoid or otherwise minimise any possible post-completion liability. Ideally, they want a "clean" exit so as to distribute the proceeds to their investors as soon as possible without the prospect of having to request compensation to meet subsequent claims. However, this is not cast in stone and PEs move away from this approach where necessary in order to move deals forward.
I. General approach
If the share sale and purchase agreement provides for any type of post-completion risk or liability on a PE vendor (i.e. by way of representation & warranty (R&W), indemnity, price adjustment, retention or other post completion liability) then it is essential that it will be:
- finally determinable within a defined period, to be as short as possible;
- preferably dealt with by way of retention and further payment of consideration in due course (rather than requiring repayment of sums to the PEs which they may well have paid out to investors); and
- possible and permissible in accordance with the constitution or other material corporate documents of the PE and the funds it represents.
II. "Gap" in representation and R&W cover
It remains standard practice in Turkey for PEs not to give R&Ws, other than pertinent to title to their shares and their capacity and depending on the scope of activity; fundamental R&Ws including licences and compliance with law. The purchaser expects management vendors to give R&Ws with a financial limit capped at the consideration they receive. Typically, management vendors do not want to put all their exit proceeds at risk, and will thus seek a lower cap. Additionally, if any management vendors are rolling over on a secondary buyout, it is difficult for the PE to argue that the value of the consideration rolled over to the purchaser should not be deducted from the financial limit on liability. Hence, as the PE typically has a majority or significant minority shareholding, the purchaser is left with a "gap" in its financial cover for the R&Ws (i.e. the difference between the full price paid and the amount of the R&W cover obtained from management vendors).
The purchaser will need to explore ways of addressing all or some of the R&W cover "gap" as follows:
2.1 Risk assessment
A purchaser is often prepared to proceed without full financial cover on the R&Ws, taking the scope of the R&Ws being given into account (which on an auction sale may be limited), the results of its due diligence and/or, on a secondary buyout, its assessment of the risk being taken by those management vendors rolling over all or part of their exit proceeds.
2.2 R&W and indemnity insurance
A preferable mechanism is for the PE to limit its post-completion liabilities by the use of R&W and indemnity insurance (W&I Insurance). Indeed, on exits by way of auction, PEs may obtain indicative insurance quotes and draft policy wording, making such available to prospective bidders. However, the below issues should be borne in mind:
- W&I Insurance is not inexpensive. The issue of who bears the cost must be addressed (i.e. by the vendors pro rata to their shareholdings or exit proceeds, the PE only, or the purchaser);
- W&I Insurance will not cover all types of R&W liabilities - policies typically exclude certain areas and will be subject to excesses and exclusions/limitations, so the purchaser may seek alternative protection in that regard (such as retentions); and
- while W&I Insurance is seen by PE buyers as an acceptable solution, many trade buyers unfamiliar with W&I Insurance are unwilling to proceed on such basis, and seek other methods of financial recourse (see paragraphs 1.2.3 and 1.2.4).
2.3 Contributions from PE
This is an alternative for management vendors offering R&Ws with a higher cap, but with the PEs effectively picking up the economic consequences of the increase. This can be done either:
- behind the scenes via a deed of contribution between the management vendors and the PE; or
- by way of a retention, whereby on completion all vendors (including the PEs) contribute to a retention which is held to settle claims under the management vendors' R&Ws. Where the R&W cover "gap" is significant (i.e. due to the management having a small stake or where the company has underperformed and shareholder debt/equity swaps mean that management is earning severely limited proceeds). Typically, claims are capped at the amount held in the retention.
2.4 R&Ws by the PE itself
Although still rare, PEs may actually give the commercial R&Ws to the purchaser, with recourse being limited to an agreed amount retained and held in escrow on completion. In these instances, the R&W cover "gap" is rather significant and the relevant trade buyer is not prepared to proceed on the basis of W&I Insurance.
III. Specific indemnities and post-closing covenants
The purchaser ideally wants the PEs (along with management vendors) to participate in any specific indemnities or covenants to pay (including the tax covenant) in the share sale and purchase agreement. Unsurprisingly, this is strongly resisted by PEs, but there are some circumstances where PEs may be willing to concede the point:
3.1 Locked box mechanism
Where the deal is priced on a locked box basis, a PE will pledge to pay back any funds it, and sometimes its related parties, have received in breach of the locked box provisions. This is because it is part of the pricing mechanism and the PE can verify its compliance with these locked box provisions.
3.2 Identified problems during due diligence of the purchaser
Where indemnity is sought for a specific problem identified in due diligence, PEs may be prepared to contribute part of their sale proceeds (on a pro rata basis with management vendors) into a retention account to meet indemnity claims. Typically, it is still only management that divests the specific indemnity, but as the purchaser has recourse to the retention to meet claims after completion, the PE bears its pro rata proportion; and
3.3 Tax covenant
Where it is conceded that the R&W cover "gap" is too significant, such that the PE is prepared to contribute towards an appropriate retention to meet management warranty claims, this will also typically extend to any tax covenant given by the management vendors.
IV. Liability between management vendors
Management vendors will need to consider the arrangements between themselves. It will generally be possible to negotiate "several" and "proportionate" liability as between them, with individual caps for R&Ws and indemnities.
V. Restrictive covenants
The PEs will generally not give restrictive covenants or otherwise fetter their ability to conduct their business in the future. However, in practice PEs generally give:
- a non-compete and non-solicitations undertaking of generally up to 2/3 years after completion (in full-exit sales);
- a confidentiality undertaking for a limited period in relation to the target's confidential information (with usual carve-outs); and
- an undertaking to cease using the trade name/ logos of the target after a specified period following completion.
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.