Turkey: The Turkish Update

This is the Fourth Quarter 2009 Edition of our email news service – The Turkish Update. This edition provides concise summaries of sector-specific legal developments in Turkey through October, November and December 2009 and includes brief articles on current "Hot Topics" in Turkish law.

PART 1 - LEGAL DEVELOPMENTS

BANKING & FINANCE

New Cheque Law in Force: The new Cheque Law No: 5941 (the Law) came into effect on 19 December 2009. The Law aims to promote common use of cheques in Turkish commercial life and introduces various novelties, such as:

− distinction between personal cheques and commercial cheques;

− stricter control over bearer cheque accounts and bearer cheques;

− increased notice and audit conditions for banks; and

− changes to the criminal sanctions applicable to bounced cheque issuers

International Bank Account Numbers (IBANs):

According to the Communiqué of the Central Bank published in the Official Gazette on 10 October 2009, all Turkish-related banking transactions must use IBANs from 1 January 2010. In electronic fund transactions the use of IBAN is not compulsory as long as the client provides a statement to the bank that it is willing not to use IBAN. Capital Markets

Changes in Debt Instruments: On 25 November 2009 various amendments were made to the Communiqué Serial: II No: 22 on Principles of Registration and Sale of Debt Instruments (Communiqué). Some of the key amendments are as follows.

• Deposit and participation banks can issue bank bonds. Previously, only investment and development banks could issue such bonds.
• Private companies are in certain circumstances free from having to audit debt instruments independently. This exemption will only apply to the sale of debt instruments through private placements and on condition the total value of debt instruments does not exceed the paid-in capital of the relevant issuer private company.
• Cancellation of minimum term for financing bonds. Previously, it was at least 60 days. The maximum term limit of 360 days remains in the Communiqué.

Changes to public offer rules for Real Estate Investment Trusts: On 31 December 2009, the CMB introduced various important changes to the legal regime applicable to Real Estate Investment Trusts (REITs) by amending the Communiqué Serial: IV No: 11. Some of the key changes are as follows:

• Decrease in minimum REIT public capital. The minimum percentage of capital which a REIT must offer to public has decreased from 49 per cent to 25 per cent.
• Time limit for REITs to offer their shares to the public. All REITs have to apply to the CMB for public offering of at least 25 per cent of their shares within three months following their establishment or change into a REIT. Before this change, the time period for public offering of REIT shares was determined according to the size of the relevant REIT share capital. Existing REITs which have not offered their shares to the public will have to do so by the end of the public offering period previously granted to them by the CMB.
• Cancellation of limits on change of public companies into REITs.

COMPETITION

Cooperation Protocol between the Turkish Competition Authority (TCA) and the Public Procurement Authority (PPA): In October 2009, the TCA and the PPA signed a protocol which aims to ensure cooperation and data transfer between these two authorities. The objective of such cooperation is to ensure full competition in markets which are subject to public tenders.

Turkish Competition Board (TCB) imposes TL 36.1 million fine on Turkcell: The TCB decided on 23 December 2009 that Turkcell breached Article 6 of the Competition Act by abusing its dominant position in the GSM services and mobile marketing market. The TCB therefore imposed a TL 36.1 million fine on Turkcell for such breach.

TCB decision following the investigation in poultry market on 9 December 2010: Since its investigation against 27 companies in the poultry market, the TCB has fined nine companies for their anti-competitive behaviour resulting in breach of Article 4 of the Competition Act No: 4054. The fines for each company amount to 0.8 per cent of their turnover for 2008. In addition, the TCB imposed a fine of TL 35.2 million on the president of the Association of Poultry Industrials Union.

Minimum amount of administrative fine fixed at TL 11,446,40: The TCB announced on 25 December 2009 the minimum amount of administrative fines under Article 16 of the Competition Act is TL 11,446.40 from 1 January to 31 December 2010. Telecommunications

Regulation on Number Portability: Issued on 9 October 2009. Expands and clarifies the rules and principles applicable to number portability.

Cancellation of the Satellite Uplink Equipment Regulation: Cancelled on 7 October 2009. Therefore the Information Technologies and Communication Authority (the ITCA) has ended its practice of needing an "approval certificate" for satellite uplink equipment. This cancellation is based on the Standardisation in Foreign Trade Regulation (No: 2006/8) under which wireless and telecommunications terminal equipment (not restricted with frequencies/licences) imported from the EU shall be subject to free circulation.

Draft Regulation on Service Quality in Electronic Communications Market: Announced on the website of the Information Technologies and Communication Authority, but it is not clear when it will come into effect.

PHARMACEUTICALS

Biocidal Products Regulation: Published by the Ministry of Health on 31 December 2009. Sets out principles on producing biocides to comply with human and environmental health. It also introduces rules about importing and registering biocidal products.

Legislation reducing medicine prices: On 3 December 2009, the Council of Ministers introduced through a new Decree (which amended the Decree On Pricing of Human Medicine) new calculation rates for pharmacists to decide medicine sale prices. On 4 December 2009, the Social Security Institution published a Communiqué (amending the Social Security Institution Health Application Communiqué) underlining new rules for calculating and collecting "patient participation fees". Together these changes mean a significant decrease in medicine prices and therefore many pharmacists have protested against these changes.

INSURANCE

Coastal facilities must hold insurance against potential marine pollution: Under Article 8 of the Law on Principles of Emergency Response and Compensation for Damages in Pollution of Marine Environment by Oil and Other Harmful Substances (No: 5312 Date: 3 March 2005) coastal facilities must hold financial liability insurance against marine pollution damages. The Communiqué On Tariffs and Instructions of Marine Pollution Compulsory Financial Liability Insurance of Coastal Facilities, which was published on 6 November 2009, brings this into effect on 1 January 2010. This Communiqué also sets out tariffs and instructions which will be relevant to this insurance.

REAL ESTATE

New Regulation for official deeds issued by Land Registry Offices: Came into effect on 10 November 2009. Governs the procedures and principles for official deeds that Land Registry offices issue. The main contents are as follows:

• the form of official deeds and the duties of land registry officers;
• applicable procedures for issuing official deeds;
• transactions which need participation of witnesses;
• audit mechanisms; and
• specific conditions about certain types of official deeds such as deeds of real estate mortgage.

ENERGY

Storage of energy products: new legislative controls: The Turkish Energy Market Regulatory Authority (EMRA) amended the Regulation on the Petroleum Market Information System in December 2009 (effective 1 January 2009). The amendment introduces certain new duties for storage licence holders and warehouse operators, as follows:

• licence holders should report the sources of their stored products to EMRA yearly;
• licence holders and warehouse operators should provide EMRA with monthly notices stating the total amount of their stored products; and
• licence holders and warehouse operators will have to make a special report if they grant any portion of their storage capacities to a third party.

One other novelty introduced by the amendments is the duty to serve the official notices via electronic signature under the Turkish Electronic Signature Act No: 5070. This amendment aims to make reporting convenient for the reporting parties. With this legislation EMRA wishes to receive more solid and frequent information from licences and control the traffic of stored products in a more comprehensive way.

New Communiqués re fines: EMRA issued several communiqués on fines in 2010 (Official Gazette Date: 5 December 2009, No: 27423) in the Electricity, Natural Gas and Oil markets.

Extension of deadline for renewable energy incentives: The Council of Ministers decided (on 17 December 2009) to extend the deadline stipulated in Article 6 of the Renewable Law. Article 6 intoduced certain incentives for RER-certified generators that are set up before 31 December 2011 and have been producing for less than 10 years. The decision extended the deadline for establishment to 31 December 2013.

Amendment to Electricity Market Customer Services Regulation: Amended on 31 December 2009. The amendment calls for an extension of one year to the date when the electricity retail companies will be allowed to sell electricity or capacity to non-eligible customers. The amendment extended the date to 1 January 2011.

MINING/ENVIRONMENT

Parliamentary Mining Investigation Commission set up: The Turkish Parliament decided to set up a new investigation commission on 3 December 2009. The commission will examine the problems experienced in the mining industry and will aim to find applicable resolutions. The commission will comprise 16 members and will work for three months.

Support for Boron Research: The Regulation on Principles of Project Support by the National Boron Research Institute came into effect on 22 October 2009. It identifies the research projects eligible for support by the National Boron Research Institute and sets out evaluation and audit procedures for supported projects.

Cancellation of Environmental Impact Assessment exemption: A cancellation decision of the Turkish Constitutional Court of 21 December 2009 will enter force in January 2010. This decision is mainly about the exemption from environmental impact assessment that Turkish Environmental Law grants to parties that are exploring petroleum, geothermal resources and mines. The legislators created this exemption to encourage exploration by removing the burdens of making an environmental impact assessment filing. The Constitutional Court cancelled this exemption, having decided that it was contrary to the Turkish Constitution because the state has a duty to protect the environment. Following the cancellation decision, the Ministry of Environment and Forestry amended the relevant section of the Environmental Impact Assessment Regulation by this decision.

Effective date of Environmental Regulation delayed: The Ministry of Environment and Forestry amended the Regulation on the Permits and Licences that are Necessary under the Environment Law dated 29 April 2009. The key amendment postponed the effective date until 1 April 2010.

DEBT RESTRUCTURING/ARBITRATION

Hague Convention on Taking of Evidence Abroad in Civil or Commercial Matters: Turkey consented on 4 November 2009 to the following countries entering the Hague Convention on taking of evidence abroad in civil or commercial matters:

PART 2 - "HOT TOPICS"

• Investment opportunities in Turkey for 2010
• Buy-back of shares introduced to the Turkish capital markets
• New era for Turkish Tender Offers

INVESTMENT OPPORTUNITIES IN TURKEY FOR 2010

BUY-BACK OF SHARES INTRODUCED TO THE TURKISH CAPITAL MARKETS

The limits the Turkish Commercial Code imposes on the buy-back of shares by Turkish companies have been criticised for some time now as being unresponsive towards the current needs of the Turkish market. Taking this criticism into account, the current Draft Turkish Commercial Code (DTCC) contains several rules enabling Turkish companies to repurchase their own shares if they satisfy certain conditions.

While discussions on the DTCC continue at the Turkish Parliament, the Capital Markets Board of Turkey (CMB) has taken an anticipatory step in this direction by enabling listed brokerage companies and investment trusts to buy back their own shares. The CMB announced this in its Weekly Bulletin numbered 2009/39 and this announcement describes in detail the procedures and principles which apply to such buy-back transactions.

The announcement only currently allows listed brokerage companies and investment trusts (each a Relevant Company) to buy back their shares. However, any buybacks by a Relevant Company may inform future buybacks by unlisted Turkish companies (once the DTCC is in force) and any future extension of the announcement by the CMB to other listed Turkish companies.

We summarise below the key rules and conditions that a Relevant Company must follow if it wishes to buy-back its shares:

1. "Buy-back Programme" and its Authorisation

• A Relevant Company must buy back its shares through a "Buy-back Programme" that its Board of Directors prepares and its General Assembly of Shareholders approves.
• The "Buy-back Programme" must clearly identify:
• • the purpose of and the funds granted for the proposed buy-back;
  • minimum and maximum purchase price limits;
  • the person(s) allowed to carry out the buy-back;
  • the buy-back period that will be sought from the General Assembly (the maximum allowed period being 18 months); and
  • the outcome of any previous buy-back.
• The Board of Directors must publish the proposed "Buy-back Programme" on the Relevant Company's web site at least 15 days before the date of the General Assembly meeting which will discuss that programme.
• If there are immediate needs, a Relevant Company may carry out a buy-back transaction without the consent of the General Assembly. However, in this case the Relevant Company must comply with certain other public disclosure rules and tell the General Assembly about the buy-back at the next General Assembly meeting.

2. Relevant Companies May Only Buy Back Listed Shares

• Turkish public companies may have certain portions of their shares which are privately held and other portions which are listed on the Istanbul Stock Exchange (ISE). The CMB announcement provides that a Relevant Company may only buy back its shares traded on the ISE.

3. Buy-Back Limits

• A Relevant Company may not buy back shares:
• • if the cumulative maximum portion of shares bought back has a total nominal value that exceeds 20 per cent of the value of that company's entire issued share capital, and in this case the company must dispose of any excess within six months;
  • if this would prejudice the "net active capital" mentioned in the latest financial statements of the Companies;
  • if that company has postponed disclosure of any insider information as allowed under the relevant communiqués of the CMB;
  • between the resolution and completion dates of a capital increase.

4. Buy-Backs Must Comply With Other Specific Rules

• Besides applicable ISE exchange rules, a Relevant Company must also comply with other specific rules during buy-back transactions, for example the rules about transaction period, placement of purchase orders, daily purchase limits and working with a single brokerage company on each transaction day.

5. Cannot Use Voting Rights

• A Relevant Company cannot use the voting rights associated with the bought-back shares.

6. Reflection of Buy-Back in Financial Statements

• The financial statements of a Relevant Company shall reflect the bought-back shares as a deduction item under equity according to the Turkish Accounting Standard numbered 32. The income statement of the Relevant Company cannot reflect revenues and losses arising from disposal of these shares.

7. Disposal of Bought-Back Shares

• When? A Relevant Company may freely decide on the period in which it will hold the bought-back shares but this period shall not exceed three years. If a Relevant Company does not dispose of all its bought-back shares during such period, it must cancel such shares by a capital decrease.
• How? A Relevant company must dispose of its bought-back shares by sale on the ISE.

8. Public Disclosure of a Buy-Back

• Disclosures before buy-back. A Relevant Company must make a public disclosure two business days before starting a buy-back transaction which states:
• • the start date of the transaction; and
  • the appointed brokerage company (and commissions payable to it).
• Disclosure on day 1 following buy-back. A Relevant Company must make a disclosure on the first business day following the date of each buy-back transaction which identifies:
• • the nominal value and purchase price of the bought-back shares;
  • the ratio of the total nominal value of bought-back shares to the value of that company's entire issued share capital; and
  • the privileges associated with the bought-back shares (if any).
• Disclosure on day 5 following completion of the "Buy-back Programme". A Relevant Company must make a disclosure within five business days after completing a "Buy-back Programme". This disclosure must detail of the individual buy-back transactions carried out during the term of that program. The Board of Directors shall also present this information to the General Assembly at the first General Assembly Meeting following completion of the "Buy-back Programme".
• A Relevant Company must also make a public disclosure if its General Assembly amends:
• • the first "Buy-back Programme" proposed by the Board of Directors; or
  • a "Buy-back Programme" which it has previously approved.

NEW ERA FOR TURKISH TENDER OFFERS

Part 1 - Introduction and Key Differences Between Old Legislation and New Legislation

Buying public company shares through voluntary and compulsory tender offers has experienced fast and significant development in global capital markets.

The Capital Markets Board of Turkey (CMB) introduced tender offers to the Turkish capital markets in 1994 with Communiqué Serial: IV No: 8 (the Old Legislation). The CMB published a new Communiqué Serial: IV No: 44 (the New Legislation) on 2 September 2009 which supersedes the Old Legislation². The broad aim of this New Legislation was to bring Turkish legislation in line with EU standards and make the Turkish Capital Markets more attractive to investors.

We compare the Old Legislation to the New Legislation in Part 2 below and comment on the differences.

Some of the key differences are as follows:

1. Precise definition of "management control". In the New Legislation the key trigger for a compulsory tender offer is a change in "management control". The New Legislation defines "management control" in detail, which will make it easier for a potential buyer of shares in a public company to understand whether a compulsory tender offer is necessary.
2. Abolition of 25 per cent threshold. Under the Old Legislation a compulsory tender offer must be made if a person held 25 per cent or more of the share capital and voting rights of a Turkish public company. The New Legislation in its definition of "management control" changes this threshold to 50 per cent, which will help to promote strategic partnerships in Turkish public companies.
3. It is clear what does not trigger a compulsory tender offer. The New Legislation sets out a clear set of circumstances where a compulsory tender does not need to be made (despite there being a change in management control). This again gives greater clarity for potential buyers.
4. No "General Assembly" exemption to a compulsory tender offer. The New Legislation removes the controversial exemption from a compulsory tender offer in the Old Legislation if 2/3 of the shareholders of a company approve it in a General Assembly. This change protects minority investors.
5. Clarification of compulsory tender offer timeline, price and disclosure principles. The New Legislation: clarifies the compulsory tender offer timeline; contains detailed rules about calculating compulsory tender offer price; and clarifies what public disclosures should be made in a compulsory tender offer. Again these amendments aim to create greater market certainty.
6. Partial voluntary tender offers. Under the New Legislation partial voluntary tender offers are possible (for example a tender offer directed at a specific share group of the target public company). This allows potential investors greater flexibility.

Therefore the changes introduced by the New Legislation encourage potential investors to invest in Turkish public companies by introducing certainty and flexibility. The New Legislation also protects minority investors by abolishing the "General Assembly" exemption and setting out detailed disclosure rules.

Part 2 - Detailed Comparison Between Old Legislation and New Legislation and Comments

Footnotes

1. Note: these 2010 timetables should not be seen as definitive. They are based on the most recent statements by either the Turkish Finance Minister or the Privatisation Authority.

2. Please note that aspects of Communiqué Serial: IV No: 8 which do not relate to tender offers are still in force so this Communiqué has not become entirely extant.

Guner Law Office was established in 1996 and has since grown into one of the major corporate, M&A, banking, litigation, energy and TMT practices in Turkey. Guner Law Office is headed by Ece Guner and works with international law firm Denton Wilde Sapte.

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.