Turkey: Public Offerings And Corporate Governance In Turkish Defense Industry

Defense industry in Turkey has received significant attention from both the government and the public itself due to developments in Turkey's foreign policy and the Middle East. With their research development activities and their export potentials, defense companies have a prominent role in Turkish economy and will continue to do so. With their unique position in Turkish economy and perception to the defense industry in Turkey, governance of corporations operating in defense industry is an important topic to discuss.

Largest companies operating in the defense industry are state-foundation corporations (owned by Turkish Armed Forces Foundation ("TAFF") and majority of them are privately held. Only few of them are publicly-held, namely, Aselsan Elektronik Sanayi ve Ticaret Anonim Şirketi ("ASELSAN"), Tümosan Motor ve Traktör Sanayi Anonim Şirketi ("TUMOSAN") and Otokar Otomotiv ve Savunma Sanayi Anonim Şirketi ("OTOKAR"). Like OTOKAR and TUMOSAN,majority of the companies operating in defense industry are privately-held.

Public Offerings and Defense Industry

With the recent secondary-public offering of ASELSAN and public offerings in companies operating in defense industry became a topic of discussion. On 17th of April 2018, ASELSAN submitted its first offering circular to Capital Markets Board ("CMB") and following the approval of CMB, offering period began on 31st of May until 1st of June 2019. Nominal value of the shares were TRY 23.35 and ASELSAN has sold 140 million shares to the public. Amidst the successful secondary public offering of ASELSAN due to high demand from investors, more defense companies may follow the suit.

As it has been mentioned above publicly-held companies in defense industry are uncommon and due to the nature of the industry, government has a profound influence over the industry. This may be also due to the fact that most of the business transactions related with the defense industry are conducted between companies and the government entities. This would also pose a challenge to the companies who intends to offer their shares to the public for the reasons that would be explained later.

Public offering legislation in Turkey does not prescribe a different process for companies operating in the defense industry. However, there are different challenges that companies would face during the offering process. Since most of the contracts signed with the government regarding defense industry are related with the national security, the due-diligence process and transparency could be an issue for the companies who have the aim to raise funds through public offerings.

Due-diligence may be difficult for the professionals conducting the process as they have to go through classified documents even with the non-disclosure agreements. For due-diligence virtual, data rooms are commonly used for efficiency of the process and used by auditors, financial entities, lawyers and other professionals for a thorough analysis required by the capital markets legislation especially for the preparation of an offering circular. However, use of virtual data rooms may be limited as a result of the existence of the classified documents and consequently the due-diligence process would take place in a physical data rooms and could only conducted by few professionals. This may be lengthen the process and may have an effect the contents of the offering circular.

Another challenge that defense industry may face is the transparency. Investors make their investment decisions based on the information provided to them. Prospective investors' decision is mostly based on economic reasons among others and would only invest in companies that would be successful in the future. Company's success could be measured by many thing such as past performance but the information contained in an offering circular is crucial for the investors. With limited information with regards to material agreements and other information that is classified and related with national security, a potential investor may be reluctant to invest. Besides the transparency, post-public offering period may also be uncertain for shareholders regarding their right to be informed stipulated in relevant legislation. Board of directors of the company may deny shareholders' such request based on the fact that the information they requested is classified.

Decision-making process in a public offering is also important for a process. Decisions taken regarding public offering usually are done through general assembly and board of directors' resolutions. However, there will be an extra-layer to decision-making in state foundation corporations because some general assembly and board of directors' resolutions have to be approved board of trustees of the TAFF. This may have an adverse impact on the process by requiring additional bureaucracy.

Considering the defense industry's unique position in Turkey, public relations management is substantial for a successful public offering. Speculative information and fabricated news may severe the public offering process. This can be observed during the ASELSAN's secondary public offering as some people, through social media, have slammed process as they thought that ASELSAN is in a process of privatization and some people claimed that more than 40 percent of the ASELSAN shares are being sold to foreigners. This heavy criticism shows how crucial is public relations and also shows the public's high regard to state foundation corporations operating in defense industry.

Overall, it can be said that few public offerings were successful in defense industry as proven by the ASELSAN's secondary public offering. This may encourage other industry giants to offer their shares to the public. This would immensely contribute to the development of the capital markets in Turkey and would be proved to be a viable and an alternative way to raise funds for the future projects and contracts.

Corporate Governance and Defense Industry

Publicly held defense industry companies, albeit a few, have to comply with the corporate governance regulation. ASELSAN, TUMOSAN and OTOKAR have similar shareholding structures post public offerings however rights they offer to shareholders and some other corporate governance features vary.

ASELSAN, TUMOSAN and OTOKAR's publicly held shares are 25.70%, 28.7% and 30% respectively. ASELSAN's public shares percentage increase was approximately 15% post-secondary public offering, thus its shareholding structure became similar to the privately held companies. Other than that, ASELSAN's majority of the shares are owned by TAFF. TUMOSAN's and OTOKAR's shareholding structure has similar patterns to other publicly held companies: (i) a pyramidal structure; (ii) wealthy families controls the firm through large shareholdings and/or through privileged shares and (iii) a concentrated ownership shareholding structure.

In both ASELSAN and TUMOSAN, in accordance with their articles of association, share groups exists. In ASELSAN, only Group A shares may nominate and elect members for the board of directors and considering that all publicly held shares are Group B, shareholders other than TAFF would not have a say in company affairs. As for the TUMOSAN, Group A shares have more voting power (15 each) and Group A shareholders are entitled to nominate half of the members of the board of directors. However, it is not stated in the articles of association that the remaining members shall be nominated by the Group B shareholders. With the voting powers and the shareholdings of the remaining shareholders, it is safe to say that Group A shareholders has the final say for board of directors memberships. There are no group shares in OTOKAR and no privileged shares exists. However, due to shareholding structure, it is likely that the majority shareholders will have the final say when electing the board members even without the voting privileges. Overall, cumulative voting is non-existent and minority shareholders which are powerless when it comes to electing members to the board of directors.

Board structure of ASELSAN, TUMOSAN and OTOKAR similar. However, TUMOSAN have to comply with different rules as ASELSAN and OTOKAR because ASELSAN and OTOKAR have higher market value. In compliance with the corporate governance legislation, TUMOSAN has two independent board members out of six (6). ASELSAN has three (3) independent board members out of 9 and OTOKAR has three (3) independent board members out of nine (9) as well. Majority of the board of ASELSAN and OTOKAR consist of non-executive board members whereas TUMOSAN has not provided information regarding such distinction. In accordance with the relevant legislation, number of TUMOSAN's non-executive board members should be four (4). In addition, TUMOSAN and OTOKAR have separate persons for the positions of general manager and board chairman. In ASELSAN however, general manager and the board chairman positions are occupied by the same person.

ASELSAN, TUMOSAN and OTOKAR have all established compulsory board committees namely, Audit Committee, Corporate Governance Committee and Risk Management Committee. All committees in these companies have independent members as chairman. None of the abovementioned companies have established non-compulsory committees, namely, Nomination Committee and Remuneration Committee.

In essence, ASELSAN, TUMOSAN and OTOKAR mostly comply with the corporate governance legislation. Nevertheless, as these companies bears similar features to the other publicly-held Turkish companies, minority shareholder protection is rather weak. They do not offer more protections to the shareholders other than the ones stipulated in relevant legislation.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions