A YEAR OF CHANGE: WHAT S LAW GOT TO DO WITH IT?

Transcription

1 2011 / I A YEAR OF CHANGE: WHAT S LAW GOT TO DO WITH IT? This is the first Bulletin of the 2011 recently-arrived When we look back for a moment, one can say that last year was a busy year indeed. The financial turmoil swept away many enterprises throughout the world and while some countries had no choice but to apply for bail-outs, it was a breeze for Turkey. In the meantime, the Turkish economy has shown remarkable performance with steady growth while the entire world has gone through many changes politically, economically and regulatory-wise. Then came the blasting leaks to shake up the order Moving on to the facts, early this year, IMF ranked Turkey as the 15 th largest economy in the world and according to GDP figures (at PPP) and in 2009 Turkey was the 6 th largest economy when compared to EU countries. As the GDP levels increased to USD 618 billion in 2010, GDP per capita soared from USD 3,500 to USD 12,392 (2010) in 8 years and is estimated to become approximately 13,870 for Continued on page 3 Corporate 5 New Turkish Commercial Code In General 9 Joint Stock Companies under the New Commercial Code 11 Share Capital Increase in Joint Stock Companies in terms of the New Commercial Code 14 Important Innovations Regarding Incorporation of Limited Liability Companies in the New Commercial Code 16 Dos and Don ts in Shareholders Agreements 18 Exit Rights under Shareholders Agreements 21 Code of Obligations: Law to Change the Country 23 Banks in Alert: New Musts for Brand New Protection beyond Swiss Law Contracts of Surety by New Code of Obligations 25 Termination of Exclusive Distributorship Agreements 27 The Importance of International Factoring in International Trade and Applicable Law 29 A Sensational Investment: Use Permits Granted by the National Estate 31 Latest Dilemma of Private Healthcare Sector: Are Amendments to Private Hospitals Regulation Malpractice? 33 A New Era in Media 36 The New Renewable Energy Law Litigation 39 Legal Professional Privilege Rules Under Turkish Law 41 Exemptions from Public Tender Law 42 An Overview of FIDIC Silver Book IN THIS ISSUE 44 Solicitation of Employees as an Event of Unfair Competition 45 Providing GSM Services in Turkey and an Ongoing Discussion: Share Payments 47 Dispute Boards in Construction Projects 48 The United Nations Convention on Contracts for the International Sale of Goods 50 Legal Aspects of Unlicensed Software Use 52 The Liability of the State Arising from Enforcement and Bankruptcy Offices 54 Legal Implications and Importance of Control in International Joint Ventures From The Turkish Law Perspective 55 Multi-Step Dispute Resolution Clauses 56 New Claim/Counterclaim 58 Role of Local Courts in International Arbitration: Preliminary Injunctions Project and Finance: 60 Real Estate Investment Companies In Turkey 61 Recent Developments in Public Offerings 63 Banking Regulation and Supervisory Agency Control of Factoring Transactions in Turkey 64 Privatization of Motorways 66 Sukuk and Its Emergence in the Turkish Capital Market 67 The Public Offering of Foreign Capital Instruments in Turkey 69 The consolidation of the infrastructure market in Turkey and its legal framework Competition 71 Turkey Welcomes its New Merger Control Regime 73 Intellectual Property Rights versus Competition Rules: Parallel Imports IPT 75 Turkey s Signing the Convention on Cybercrime 76 Combatting Counterfeit Healthcare Products 78 Reform of the Turkish Constitution & Privacy Rights 79 Public Discounts in Reimbursement of Pharmaceutical Products 81 Clinical Trials 83 Loss Compensation Funds 84 Copyright Infringements on Internet 85 E-Commerce Gateway to The World 86 Misleading Advertising Employment 88 Obtaining Work Permits for Foreign Employees in line with Recent Changes in the Law 90 Impact of Certain Events that May Occur in the Course of Lawsuit for Reinstatement to Work 92 Disclosure of Business Malpractice (Whistleblowing) under the Turkish Labour Law & Duty of Fidelity 94 Execution of Contracts on Cessation of Employment In Light of Job Security Provisions of Turkish Labour Law 97 Recent Changes in Favour of Female Employees and Inclusion of Maternity Leave in Service Periods as Per Recent Changes in the Law

2 No. 3 Disclaimer BÜYÜKDERE CAD. NO: 127 ASTORIA A KULE KAT: 5, 6, 24, 26, ESENTEPE ISTANBUL TURKEY TELEPHONE: +90 (212) TELEFAX: +90 (212) info@yukselkarkinkucuk.av.tr WEBSITE: Legal News Bulletin Turkey YükselKarkınKüçük Adına Yayın Sahibi / Owner Cüneyt Yüksel Editör / Editor Cüneyt Yüksel Sorumlu Müdür / Responsible Gökhan Gökçe Yayın Türü / Type of Publication Yerel Süreli / Local Periodical Baskı / Printing PINARBAŞ Matbaacılık Ltd. Şti. Rami Kışla Cad. No: 88 Topçular İstanbul Tel: (212) This bulletin is designed to provide general information to the public and clients and has been prepared for educational and information purposes only. The information included herein is not for advertising purposes. The information in this bulletin is not intended to be nor does it constitute legal advice of and does not necessarily reflect the opinion of any of DLA Piper Consultancy Services Foreign Attorney Partnership and YükselKarkınKüçük Attorney Partnership. Professional legal advice should be obtained for specific questions and concerns. DLA Piper Consultancy Services Foreign Attorney Partnership and YükselKarkınKüçük Attorney Partnership will not be liable directly or undirectly for any loss that may arise from relying on the data included herein. Receiving this bulletin does not create an attorney-client relationship. Copying part or all of the contents in any form of this bulletin is prohibited and the contrary constitutes copyright infringement. For further information, contact Cüneyt Yüksel, Buyukdere Cad. No: 127 Astoria A Kule Kat: 5, 6, 24, 26, Esentepe, Istanbul TURKEY, Fax: +90 (212) , info@yukselkarkinkucuk.av.tr Copyright 2011, DLA Piper Consultancy Services Foreign Attorney Partnership and YükselKarkınKüçük Attorney Partnership. All rights reserved.

3 Intro Previous page to continue Turkey is definitely expected to continue to improve during the years to come. Meanwhile, credit rating agencies such as Fitch, Moody s and S&P all gradually upgraded their credit ratings for Turkey in the last two years, but still have not satisfied the country s expectations. It is anticipated that the rating agencies must upgrade their rankings to investment grade after the general elections of June Now that transactions in Turkey have regained leverage and pace, the magnetic competition in various sectors is attracting the investors. The Turkish market is accommodating more and more investors and their deals lately. In the final quarter of 2010, the total value of 203 M&A deals in Turkey exceeded USD 30 billion. A significant portion of this amount was privatization (e.g. Başkent Gaz). The most leveraged deal of the year was the acquisition of 25% of Garanti Bank s shares by Spanish BBVA at USD 5.8 billion. After the general elections of summer 2011, Turkey is expected to attract lots of foreign investment. Most recently, Turkey entered into a memorandum of understanding with the Japanese government for constructing the controversial nuclear plant to be located in Sinop (Black Sea region). Earlier in 2010, the country had come to terms with Russia for the other nuclear plant to be built in Mersin, Akkuyu (Mediterranean region). On the privatization agenda, it was recently announced that Turkish Airlines, the 4 th largest airline company of Europe is to be privatized. The upcoming days will host debates as to whether there will be a secondary public offering or a sale. Privatization of motorways is a top transaction regarding which you will find an article in this edition. There is also the current media blast with the prospective sale of major television networks and publications where we will see the impact of the new media law allowing a higher percentage of foreign ownership going up to 50% (which was 25%) and indirectly 100%. You will find further information about it in this 3 rd issue of Bulletin Turkey. Furthermore, private equity deals in various other sectors such as health and pharmaceuticals, energy, food and beverages, IT, leisure and travel etc. are a hit this year both on the multinational and local arenas. It is worth mentioning here that we have illustrated this issue with the top legal events that keep Turkey s agenda busy. A selection of over 50 articles has been put together in a readerfriendly manner with the intention of keeping our readers busy and on full alert. To give a few other examples, new regulations introduced on public offerings, registration of capital markets instruments, health sector, and Competition Authority notification rules for M&A transactions are topics we have covered in this issue. We have written a variety of articles on dispute settlement and bankruptcy matters as well as data protection, counterfeiting and electronic communications. Popular employment law matters such as foreign work permits, job security and whistleblowing are interesting articles which you may find helpful. In the meantime, YKK not only developed its practice but it has welcomed new faces to its dynamic team and we have grown to 65 lawyers with around 40 support staff making the total more than 100. Taking up more office space in the Astoria building, we now occupy 5 floors. Although it can only be a myth that lawyers will rule the world one day, constant advice has become part of many clients daily routine which only used to be a practice followed by foreigners in the past. Now, national companies are also eager to retain these services which keep us busy. Legislative-wise, the New Year is all about change, change, change in Turkey. You can find several articles on the amendments that will be introduced in terms of corporate governance, corporate transactions and others matters in this issue of Bulletin Turkey. The major changes introduced to the Commercial Code (including the companies act) and Code of Obligations will definitely change our lives. They will enter into force in July 2012, hence giving us more than a year of transition/warm-up period and we are preparing ourselves for these changes through intense training programs. More on the changes, in order to improve the functioning and efficiency of its judiciary in line with the European standards, the law regarding judicial reform strategy was enacted on 14 February The reform was established mainly with the purpose of reducing the courts workload by making fundamental changes with regard to restructuring Constitutional Court and redefining its tasks, restructuring High Council of Judges and Prosecutors, establishment of Union of Judges and Prosecutors, providing operation of the Supreme Court in civil and criminal judiciary, merging courthouses, completing UYAP (National Judicial Network Project), enlarging the Forensic Medicine Institution, adopting the new Civil Procedure Code. The European Commission had also considered this a positive step in its progress report regarding Turkey. Furthermore, a new Bag of Laws was enacted 2011/I 3

4 on 26 February This new package amends numerous types of laws, which will radically change people s lives. As would be significant for corporations, the bag of laws provides for several types of tax amnesties enabling restructuring taxes and social security premium fees that were not paid until 31 December The Bag of Laws foresees that the two authorities, Turkish Banking and Regulation and Supervision Agency (BDDK) and the Capital Markets Board (SPK) are going to be moved to Istanbul. This is an important step in making Istanbul a financial center. Now that our Bulletin Turkey has become yours, there is no doubt that it will provide you with highlights from the top legal agenda of the country tailored in the best possible way to address your interest. Expect to receive future issues which will continue to offer you interesting insights with a business approach about new legal developments in the country. * * * Should you have any suggestions about matter you would like us to address in the next issue please contact us at bulletin@yukselkarkinkucuk. av.tr and we should be delighted to make sure that they are attended. 2011/I 4

5 Corporate New Turkish Commercial Code In General Batuhan UZEL U nder Entering into force on July 1, 2012, and comprising of 1535 articles, the New Turkish Commercial Code ( New TCC ), was ratified by the parliament on January 12, The most important changes introduced by the New TCC can be summarized as below. 1. GENERAL PROVISIONS AS TO CORPORATE LAW A. Corporate Governance The prevailing notion in the New TCC is to apply a set of corporate governance rules which are generally applied to companies listed on stock exchange to all companies to boost investor confidence. Thus, new provisions have been the New TCC, joint stock companies and limited liability companies are allowed to be incorporated by a single shareholder or partner. provided for in the New TCC concerning internal management, internal and independent audit in equity companies (joint stock and limited liability companies), in a carefully drafted and comprehendible form. The main aspects of corporate governance rules in the New TCC are as follows: transparency, fairness, accountability and responsibility. B. Websites of the Equity Companies, Information-Based Society Services and Access Rights The New TCC has introduced an obligation for equity companies to launch a website. Those equity companies that already have a website are obliged to allocate an appropriate part of their online services to render information to the public. The reason underlying the introduction of such new obligations on the part of the equity companies is to inform shareholders of limited and joint stock companies sufficiently and efficiently. The content of such web sites would be composed of information regarding the company, such as information in which the shareholders, creditors and other stakeholders have interest, General Shareholders Assembly documents and convocations, year-end and interim financial statements, balance sheets as to mergers and spin-offs, audit reports, valuation reports, tender offers for pre-emption holders, notices for liquidation, notices for annulment actions and etc. C. Joint Stock Companies and Limited Liability Companies with Single Shareholder Under the New TCC, joint stock companies and limited liability companies are allowed to be incorporated by a single shareholder or partner. In both types of company single shareholders or partners can assume the duties and responsibilities of the General Shareholders Assembly and function as such. This new amendment provides commercial undertakings operated by sole proprietor the ability to transform into corporate types in which limited liability principle is controlling. D. Holding Companies Holding companies are corporate types struc- 2011/I 5

6 tured to control multiple subsidiary companies in reliance of the procedures and guidelines set out by the management in the holding company. It is the first time that holding companies are regulated under Turkish legislation. The New TCC has clarified definitions such as what constitutes a controlling company, affiliated company and subsidiary company. It has also clarified the distinctions between such corporate structures and their relations. In order to bolster the transparency principle, the New TCC requires the controlling and subsidiary companies to disclose the relationships between them. Furthermore, controlling and subsidiary companies are under a duty to annually report their relationship to the public. E. Changes in Corporate Structures Mergers, spin-offs and change of corporate types are widely regulated by the New TCC, with the majority of provisions being related to the position of the creditors of target companies, and safeguarding the rights and benefits of employees. Different kinds of protection in terms of right of actions are provided in the New TCC for the benefit of specific persons in case of the mentioned types of restructuring. F. Turkish Accounting Standards Identical to IFRS, New Standards in Commercial Book Keeping and Accounting Standards Commission of Turkey The New TCC has introduced radical changes in relation to commercial books, and financial statements of equity companies and holding companies and annual reports of the board of directors. The provisions regarding mandatory book keeping, inventory records, initial balances, financial statements, principles applicable to balance sheets, non-capitalization, provisions, periodic accounts, valuation and record keeping and submission of records introduce the new requirements set forth by the New TCC. G. Audit in Equity Companies One of the aims of the enactment of the New TCC is to establish confidence in the corporate arena within Turkey as well as globally, and to change Turkey s vision and view on matters related to the corporate landscape in Turkey. With such legislative mindset, the audits to be carried out from now on under the New TCC should be conducted by independent, professional, diligent auditors in compliance with the International Audit Standards, abiding by the ethic rules in the sector, in a transparent manner with due attention. 2. JOINT STOCK COMPANY A. Incorporation In the first instance, the New TCC has abolished the system of incorporating joint stock companies through public offerings as set out under the current TCC, which was dysfunctional. Hence, the New TCC introduced a simple, applicable and effective system of incorporation through public offerings. Going a step further and removing the barriers faced during the incorporation of joint stock companies, self-administrative governmental authorities have been stripped of their authority in terms of intervening in the incorporation and capital increase of joint stock companies. Another amendment introduced in relation to incorporation is the founders statement and self-policing mechanism, giving effect and functionality to liability arising from incorporation of the company. Under the New TCC, incorporation of joint stock companies should be audited by an ad-hoc auditor. Ad-hoc auditors should inspect the increases and decreases in share capital, mergers, spin-offs, changes of corporate type, and issuance of securities. B. Private, Public and Listed Joint Stock Companies While the majority of the provisions in the current TCC are applicable only to private joint stock companies, the New TCC has introduced provisions to be applied to public joint stock companies and joint stock companies listed on stock exchanges. The intention behind the introduction of the mentioned provision with respect to capital markets is to abolish differences between the TCC and capital markets legislation in Turkey, bringing these two legislations into harmony. C. Share Capital and Shares Whether public or private, the New TCC stipulates two share capital systems in joint stock companies--ordinary share capital system and registered capital system. Prior to the New TCC, registered capital system was applicable only to companies regulated under capital markets legislation, which are not private companies. Details as to the adoption of registered capital system and exiting from such system should be further regulated by the regulations to be put into force 2011/I 6

7 by the Ministry of Industry and Trade. Shares in joint stock companies can be issued in consideration of cash or assets. There is no lock-up period provided for in New TCC, whereas under the current TCC a lock-up period of two years for shares issued in exchange of assets exists. Under the New TCC, it is set out that the minimum nominal value of shares could be TL 0,001. As per the provisions of the New TCC the issuance of preferred shares in joint stock companies is permitted. However, further restrictions are stipulated for preference in voting and consequently, shares having preference in voting are not capable of preventing share capital increases under the New TCC. The reason behind this amendment is to mitigate the blocking effect of preferred shares in the functioning of companies. In comparison with the current TCC boundaries of privileges attached to preferred shares in convocation and meeting of General Shareholders Assembly and adoption of decisions in General Shareholders Assembly are clearly delineated and narrowed. D. Repurchase of Shares from Shareholders by the Company In terms of the current TCC, the creation of treasury shares is strictly prohibited. In other words, a joint stock company is neither allowed to repurchase nor take as collateral its own shares from its shareholders. However, this strict prohibition has been relaxed to a great extent under the New TCC for the sake of bringing Turkish commercial legislation into alignment with EU legislation. Thus, listed companies are protected against manipulative practices and also private companies would not have to bear the burden of useless statutory restrictions. Such restriction remaining in force and being applicable even in the event that subsidiary companies acquire the shares of their parents, several exemptions are set out in the New TCC, in which case such repurchase by the companies is allowed. E. Board Amending qualifications for being a board member, the New TCC has abolished the precondition of being a shareholder in the company. Moreover, legal entities can become board members under the New TCC in contrast to the current TCC. The said amendments are so vital that they pave the way for the introduction of professionalized boards in companies. Election of board members outside the company, requirements as to the education levels of the board members are such provisions that serve to professionalize management in companies. F. General Shareholder s Assembly In a succinct and restrictive manner, the New TCC defines the duties which cannot be delegated to third parties and are solely ascribed to the General Shareholders Assembly. However, exemptions are regulated such as share capital increases in the public joint stock companies or issuance of securities. The New TCC has also introduced amendments as to who can convene the General Shareholders Assembly for meetings. Moreover, the statutory auditor is no longer authorized to make calls for General Shareholders Assembly meetings. Furthermore, minority shareholders are subject to shorter periods to make calls for General Shareholders Assembly meetings. In addition to that, joint stock companies are under an obligation to set out and put into force their internal regulation regarding the conduct of General Shareholders Assembly meetings. G. Share Capital Increase Having maintained the current methods in share capital increase, the New TCC introduces certain new methods in share capital increase, to bring more functionality to joint stock companies. In addition to the share capital increase via subscription by shareholders, registered capital system and transformation of assets into share capital are newly introduced methods for share capital increase in joint stock companies. Another alternative under the New TCC is increasing the amount of share capital through issuance of convertible bonds and bonds with warrants. Under this newly introduced method by the New TCC, joint stock companies have the option of issuing convertible bonds and bonds with warrants (hybrid securities), the exercise of which would lead to increases in the share capital. The terms and conditions relating to the issuance of convertible bonds and bonds with warrants are to be set out in the articles of association of the companies. H. Liability The New TCC stipulates provisions imposing legal and criminal liability applicable to certain 2011/I 7

8 resolutions, statements or documents of joint stock companies. Issues which may lead to legal or criminal liability under the New TCC can be summarized as the following: Illegality in documents and statements False representations on share capital and known insolvencies in terms payment of share capital subscriptions Valuation Raising of funds from public Liability attached to founding shareholders, board members, managers and receivers Liability attached to the performance and activities of the auditors 3. LIMITED LIABILITY COMPANY The New TCC has introduced various amendments into the system set under the current TCC for limited liability companies, transforming limited liability companies into small-sized joint stock companies. Under the New TCC the minimum amount of share capital is 25,000 TL and each partner can hold multiple interests in the company instead of a single interest in the company as mandated under the existing TCC. Transfer of interests has been facilitated and relaxed, partners being able to regulate the procedure on transfer of interests in the articles of association of the company at their own discretion. A. Incorporation The New TCC has introduced limited liability companies with single partner and incorporation has been simplified. In the articles of association, partners can set out provisions as to repurchase rights and pre-emption rights on interests in the company. Giving veto rights and superior voting rights to preferred partners, the New TCC has made it possible for partners to depart from the statutory provisions on voting and distribution of dividends. B. Financial Soundness The position of creditors and economic strength of limited liability companies has been solidified under the New TCC. In this context, payments of share capital should be made at once and in single payments, meaning that incorporation of limited liability companies cannot be consummated without share capital being paid in full. Financial statements to be prepared in accordance with IFRS and to be audited as per the IAS are issues mandated under the New TCC, in order for the financial situation of the limited liability companies to gather strength. 2011/I 8

9 Joint Stock Companies under the New Commercial Code Ceren Berispek The New Code introduces new regulation for joint stock companies ( JSC ) which constitute a significant part of commercial life in Turkey. paid in 3 years from the same date. According to the New Code, the timeframe for paying the remaining ¾ capital has been decreased from 36 months to 24 months. T he Incorporation of a JSC: With regards to the incorporation of a JSC, the New Code makes it possible for a JSC to be incorporated with one or more Shareholders, whereas the TCC requires at least five Shareholders in order to incorporate a JSC. In addition, the New Code introduces the obligation for founding shareholders to submit an undertaking regarding the incorporation of a JSC. Another new requirement for incorporation is that an auditor s report with respect to the aforementioned provision should be submitted. New Code abolishes the requirement that the Board should consist of at least three members and renders it possible that the Board may also consist of one member since it is possible to incorporate a JSC with one shareholder. Moreover, the New Code allows the registered capital system for privately held (nonpublic) JSCs having an initial capital of more than TL 100,000 whereas the TCC permits the registered capital system only for publicly held companies. Under the New Code, it is possible to increase the share capital of the JSCs subject to the registered capital system without a general assembly ( GA ) resolution, but through a Board resolution. The Board: The New Code abolishes the requirement that the Board should consist of at least three members and renders it possible that the Board may also consist of one member since it is possible to incorporate a JSC with one shareholder. In this context, the sole shareholder may be able to use all powers within the General Assembly ( GA ). Even where the Board may consist of one director, at least one director should be of Turkish nationality and be a resident in the Republic of Turkey. Significantly, the New Code abolishes the requirement for the members of the Board to be a shareholder in the JSC and enables nonshareholders and the legal entities to become members of the Board in the JSC by eliminating the previous requirement in the TCC. Capital: The New Code clearly stipulates that all transferable, cash valuable assets that are not limited with any real right, encumbrance or injunction, including intellectual property rights and cyber space can be invested as capital in a JSC. Under the TCC, ¼ of the share capital contributed by shareholders to a JSC may be paid within 3 months of registration with the trade registry, and the remaining amount may be Another requirement concerning directors is that half of the number of directors should have earned a bachelor degree and in terms of a one-director Board or legal entity such director should have a bachelor degree. 2011/I 9

10 S ignificantly, the New Code abolishes the requirement for the members of the Board to be a shareholder in the JSC and enables non-shareholders and the legal entities to become members of the Board in the JSC According to the New Code, the Board may authorize a director or directors or a third party with the authority to manage, whereas the TCC does not allow third parties to take over the authority of management. The New Code states that the Board should draft an internal regulation concerning the principals and procedures of the GA, the grounds of which shall be determined by the Ministry of Industry and Commerce. In order to avoid a conflict of powers between the administrative bodies of a JSC, the New Code has clearly stated the non-transferable powers of the Board which are, inter alia, establishing company organization, giving instructions to the upper management, establishing financial planning system, appointment of directors, recording the share ledger and activity report. Meeting Quorum for Board Resolutions: The New Code alters the meeting quorum required for Board Meetings and stipulates that the Board shall convene with the presence of the majority of the Directors of a JSC whereas the TCC requires the presence of one more than half of the number of the Directors. Such amendment will result in a difference in terms of the Boards of the JSCs having a total of odd and even numbered Directors. Also, Board Meetings may be held on-line. Number of Statutory Auditors: According to the TCC a minimum of one and a maximum of five statutory auditors are mandatory for a JSC, whereas the New Code precludes that a JSC should appoint one independent auditing company as statutory auditor. However, under the New Code it is sufficient for small JSCs to employ at least two independent financial advisors. GA: Although no amendment has been made by the New Code with respect to meeting and decision quorum for a GA, for the amendments to the Articles of Association of a JSC, the New Code requires majority vote of the participants in the GA who represent at least half of the JSC capital. In order to avoid conflict of powers between the administrative bodies of a JSC, the New Code has clearly stated the nontransferable powers of the which are, inter alia, amendment of the Articles, appointment of Directors, determination of their terms of duty and salaries, their release, appointment and release of statutory auditors, rendering resolutions concerning dividends, reserve funds and financial reports, and the dissolution of the JSC. Meeting and Decision Quorum for GA Meeting Resolution: The New Code provides that for the issues that do not require weighted quorums, the meeting quorum is the presence of the shareholders holding ¼ of the capital and the decision quorum is the majority of the affirmative votes of the present shareholders. These quorums apply to capital increase, change of form, and resolutions concerning mergers and spin-offs. Whereas except for the latter, the aforementioned are subject to a meeting quorum which requires the presence of the Shareholders holding 2/3 of the capital and a decision quorum of the majority of the affirmative present votes. In addition, according to the New Code, changing the subject of activity of a JSC requires the affirmative votes of the Shareholders holding at least 75% of the company shares. But, the TCC requires the affirmative votes of the majority of the Shareholders holding at least 2/3 of share capital. Online Corporate Information: The New Code aims to secure transparency which is required for the corporate governance. Therefore under the New Code, JSCs are required to maintain a corporate website where they will publish official corporate announcements, important explanations for shareholders, audit reports and financial statements. 2011/I 10

11 Share Capital Increase in Joint Stock Companies in terms of the New Commercial Code Batuhan UZEL I ntroducing Under the current provisions and principles of the Turkish Commercial Code ( TCC ), two basic rules are stipulated in relation to share capital of joint stock companies and these have survived the amendments to be made in the TCC (which are expected to be voted and approved in the upcoming months in the Turkish Parliament and referred to as the New TCC or the new law in this article). Accordingly, the amount of the share capital and division of the share capital into equity shares to be held by the shareholders of a joint stock company should be determined and stated in a provision in the articles of association ( AoA ) of the company. So, in such context, radical changes into Turkish commercial law and practice, these amendments should bring joint stock companies into alignment with the international standards in terms of corporate finance and governance. shareholders rights and obligations stem from the equity shares they hold as participation of shareholders to the rights and obligations in the company are determined and defined pro rata to their shareholding in the share capital of the company. Due to such critical function of the share capital in joint stock companies, increase in the amount of share capital is regulated in a very detailed manner and subject to certain procedures under the current TCC as well as the New TCC. Having maintained the current methods in share capital increase, the New TCC introduces certain new methods in share capital increase and such changes have been introduced to bring more functionality to joint stock companies. As is in the current TCC provisions, the New TCC also requires any change in the amount of share capital to be made through an amendment in the AoA of the company. Consequently, in principle, share capital increases should be consummated by a general shareholders assembly decision amending the provision of the AoA in relation to the share capital of the company. Additionally, the New TCC also makes increases in share capital possible with a board of directors resolution through a newly introduced system (registered capital system), which is explained in detail below. However, as a restrictive precondition to the increase in share capital, the New TCC has preserved the provisions of the current TCC that require all shareholders to have fully paid their contribution of the share capital prior to an increase in the share capital. This article aims to explain the methods in increasing share capital of joint stock companies in accordance with provisions of the New TCC and below detailed information have been provided in relation to three main methods of share capital increase in joint stock companies, as outlined under the New TCC. Increase In Share Capital Via Subscription: As per the provisions of the New TCC, under this method, ordinary share capital system and registered capital system are the share capital systems applicable to joint stock companies. Ordinary share capital system is currently ap- 2011/I 11

12 plicable to joint stock companies under the TCC provisions and has been kept by the new law as well. Under the ordinary share capital system, share capital increases are consummated by contributions from current and/or new shareholders. Such contributions are made either in form of AoA amendments or undertakings undersigned by the shareholders. Under the TCC, the registered capital system was only applied to companies subject to capital markets legislation and Capital Markets Boards ( CMB ) regulations. However, under the New TCC the registered capital system is now also applicable to privately held companies. Under this system, the board of directors in a privately held company shall be authorized by a provision in the AoA of the company to increase the amount of the share capital up to a predetermined amount, by simply taking a board of directors` resolution without any need to convene a general shareholders` assembly to amend the AoA of the company. Such authority can be entrusted to the board of directors for a maximum period of 5 years. Having been duly authorized in the AoA, the board of directors can restrict preemption rights and issue premium shares and preferred shares in increasing the amount of the share capital of the company in registered capital system. The provisions brought by the amendments do not make any change in the application of capital markets legislation and CMB regulations with respect to share capital increase. Capital markets legislation will continue to be applied to public companies or companies to launch IPOs, in addition to the New TCC provisions. Capital markets legislation and CMB regulations aim to regulate the offerings through increase in share capital conducted by public and privately held companies launching IPOs. As per the current system set forth under the capital markets legislation, private companies can launch IPOs after having amended their AoA and increased the share capital accordingly upon getting relevant approvals from CMB for such increase and the IPO. In the alternative, private companies to launch IPOs are allowed to change to the registered capital system with the approval of CMB before launching their IPOs. Companies which already have public floatation are allowed to change to the registered capital system from the ordinary share capital system under the current capital markets legislation and CMB regulations following the approval of CMB to do so. However, these companies may elect to stay with the ordinary share capital system. So, the New TCC does not repeal any authority entrusted to official agencies under capital markets regulations. Consequently, public companies and private companies to launch public offerings may change to the registered capital system from ordinary share capital system, only after acquiring the approval of CMB for such change, whereas ordinary private companies may change to registered capital system with an amendment in their AoA in terms of the New TCC, as capital markets legislation is not applied to these companies. Summarizing the foregoing, companies subject to capital markets legislation which have not changed to the registered capital system and are functioning under the ordinary share capital system shall be subject to the provisions of the New TCC when increasing their share capital with an AoA amendment; however, any offering launched by these companies should be regulated by the capital markets legislation. Companies subject to capital markets legislation and having changed to the registered capital system are regulated by the provisions of capital markets regulation, in which case the New TCC should not be applied to such. So, the New TCC is to be applied to ordinary private companies with respect to the registered capital system without the provisions of capital market legislation being applied, which means that no CMB approval is required. Transforming assets into share capital: This method has been introduced as a new method for share capital increases under the New TCC. Accordingly, secondary reserves and part of the statutory reserves which are allowed to be disposed of under the TCC and certain funds on the asset side of the balance sheet of the company can be added to the existing share capital of the company in order to increase the share capital. Depending on the system adopted by the company, the ordinary share capital or registered capital, the general shareholders assembly decision or the board of directors resolution regarding the increase and the amended version of the AoA of the company need be registered with the Trade Registry for the consummation of the increase in share capital under this method. Simultaneously with the registration, existing shareholders in the company become entitled to acquire the ownership of the new shares without paying any consideration, pro rata to their shareholding in the share capital of the company. The right to acquire such new no-par shares can neither be restricted by the company nor relinquished by the shareholders. 2011/I 12

13 Increase in share capital through issuance of convertible bonds and bonds with warrants: Under this newly introduced method by the New TCC, joint stock companies do have the option to issue convertible bonds and bonds with warrants (hybrid securities), the exercise of which would lead to increases in the share capital. the holders of the bonds cannot be rendered dysfunctional due to the transfer restrictions imposed on registered shares of the company. Convertible bonds and bonds with warrants cannot be eroded with further increases in share capital and issuance of new conversion rights and call options. In this respect, joint stock companies can issue convertible bonds and bonds with warrants to compensate their funding needs. So, the holders of such bonds are entitled to exercise conversion and call option rights attached to these bonds. Under this method, in case these rights are exercised by the holders, the share capital of the company would automatically increase at the same time as these rights are exercised and relevant amounts for the acquisition of new shares have been paid by the bondholders without any further action. As a result of the exercise of these rights, either the bonds would be converted into equity shares in the company or the exercising bondholder would receive equity shares in the company through the exercised call options, in both cases upon the payment of considerations to be paid by the holders for the acquisition of equity shares in the company. There are certain safeguards set out in the New TCC for increase in share capital through issuance of hybrid securities as summarized below: The amount of share capital increase to be made through issuance of convertibles and bonds with warrants is limited by half the amount of share capital of the company. Existing shareholders at the time of the issuance of these hybrid securities are entitled to pre-emption rights to acquire such. However, only in the presence of justified reasons, the pre-emption rights could be subject to restriction. Unless stated otherwise in the AoA of the company, in case registered shares are underlying securities in hybrid securities, rights of Preemption Rights: As per the New TCC, existing shareholders at the time of the issuance of new shares resulting from increases in share capital are entitled to acquire these new shares pro rata to their shareholding in the share capital of the company. Under the New TCC i pre-emption rights can be restricted only in the presence of justified reasons and with the affirmative vote of the shareholders representing 60%of the share capital of the company in the general shareholders assembly. What constitutes a justified reason has not been confined to a limited number of cases in the new law, but public offering and acquisition of subsidiaries have been illustrated as what could be a justified reason. Stipulating clearly the conditions required for the restriction of preemption rights, the New TCC put an end to this contentious issue leading to disputes under the current TCC. Conclusion: Having preserved the current methods for share capital increase, the New TCC has brought new methods to increase share capital of joint stock companies, which can facilitate and expedite the functioning of joint stock companies. So, introducing radical changes into Turkish commercial law and practice, these amendments should bring joint stock companies into alignment with the international standards in terms of corporate finance and governance. In addition, with the new concepts and institutions introduced, Turkish commercial law and practice has been also updated in light of the EU law and legislations. 2011/I 13

14 Important Innovations Regarding Incorporation of Limited Liability Companies in the New Commercial Code Berat HAMZAOĞLU - Merve ÇIKRIKÇIOĞLU I t Turkey is on the eve of a new era in the field of Company Law pursuant to new regulations which recently entered into force with the new Commercial Code ( New TCC ). The previous Turkish Commercial Code ( TCC ), which has been drafted by Prof. Hirsch has been in force for more than 50 years. Now, considering Turkey s position as the Negotiating State for full membership of the EU, technological developments, Turkey s critical role and wish to become an important part in the international trade market; it is clear that a new commercial code is in need to blend in with the new order of the trade market. In this appears that upon the enactment of the new TCC, the incorporation of LLCs will be subject to strict control. article, innovations and amendments in the field of limited liability companies ( LLC ), more specifically incorporation of LLCs according to New TCC will be thoroughly examined and discussed. To begin with the most significant change in the incorporation of LLCs is that the New TCC allows LLCs to be incorporated with a single founder unlike the previous TCC which requires at least 2 founders. Therefore, pursuant to the New TCC Article 504/1, LLCs may be incorporated with only one real person or legal entity. The one man company system has been designated in order to comply with EU s 12. Council Company Law Directive 89/667/EEC of 21 December The purpose of this regulation is to protect small and medium size enterprises ( SME ). Thus SME s will be able to break through from unlimited liability as a single-member company. However, as in the previous TCC, the New TCC has also limited the number of members. Accordingly, a LLC may have a maximum of 50 members. One other issue is that the New TCC sets forth that registered capital shall be a minimum of TL 25,000. This registered capital may be raised by the Council of Ministers up to 10 times of this amount. (Article.580/ 2) One of the most significant amendments in this regard is that the previous system which did not allow registered capital share to be represented by certificates has been abandoned. Instead, it has been stated in the New TCC that registered share certificates may be issued. It has been stipulated in Article 583 of the New TCC that the certificates to be issued shall be at least in the value of TL 25. The New TCC lists the documents required for the incorporation of LLCs as application petition, articles of association, founders declaration, report of the operational auditor (işlem denetçisi raporu), nomination of the auditor and a document which provides the names and domicile addresses of the persons authorized to represent the company. It appears that upon the enactment of the New TCC, the incorporation of LLCs will be subject to strict control. 2011/I 14

15 Another amendment that needs to be mentioned is the obligation to own a website. The New TCC requires the LLCs to have a website and stipulates certain sanctions in the event of non-compliance with such requirement. The New TCC lays down certain rules with respect to auditing of the LLCs by independent auditors. Accordingly, the financial charts and annual activities of the companies will be audited by an auditor pursuant to international auditing standards. Moreover, various activities of the LLCs such as the incorporation thereof will be audited by an operational auditor. Apart from these amendments, the scope of criminal and legal liability under the previous TCC is extended under the New TCC. The directors will be subject to strict liability in this sense. On the other hand, expenses made during the incorporation of the LLC will be covered by the LLC only if they are approved by the company. Otherwise, these expenses will be covered by the founders. The founders may demand these expenses from the company, but if the company does not accept such claim, the founders cannot seek recourse from the other partners. In the event the LLC is not incorporated in accordance with the TCC, it will not be considered null and void. The Ministry of Industry and Commerce, the company manager, shareholders or the relevant creditor may only file for dissolution of the company before the commercial courts of first instance in the case the benefits of the shareholders, creditors or the public are in severe danger or breached,. Such filing is made before the commercial courts of first instance where the company s registered office is located The dissolution of the LLCs upon the request of one of its partners based on just cause is regulated under the previous TCC. The New TCC also recognizes this issue. It sets forth that in the event of such request, instead of dissolving the company, the court may rule for the payment of the current value of the claimant partner s shares and removal of the partner from the company, or it may rule for another appropriate and acceptable decision. The lack of regulation under the previous TCC prevents the court from making an alternative decision. Therefore, if the court is not satisfied with the grounds asserted by the claimant to dissolve the LLC, it simply dismisses the partner s claim. Fortunately, under the New TCC the court may use its broad discretion to rule for a reasonable solution. Accordingly, the court will not consider the dismissal of such claim as the last resort. As stated above, the main purpose of the New TCC is to integrate modern corporate governance rules into Turkish commercial life. The New TCC prescribes major amendments as to the governance and structure of the LLCs. It is possible to conclude that the New Code will be the key regulation for LLCs with respect to the current needs of the legal and commercial environment. 2011/I 15

16 Dos and Don ts in Shareholders Agreements Gizem GÖKER I n M&A transactions in Turkey are regaining speed with the opening of They have started to gain leverage compared to the previous year which was rather big on acquiring small enterprises. In acquiring a certain stake in a company or in merger transactions, the share purchase agreement or the merger agreement takes the leading role. However, the terms and conditions on the target company s control and governance are mainly subject to the shareholders agreement ( SHA ) (same applies to joint other words, the future is governed by the SHA. Therefore, it is essential to enter into a comprehensive SHA in order to establish the grounds of a wellgoverned partnership and to avoid any doubts on control issues in the future. venture agreements). In other words, the future is governed by the SHA. Therefore, it is essential to enter into a comprehensive SHA in order to establish the grounds of a well-governed partnership and to avoid any doubts on control issues in the future. In Turkey, companies are governed by their articles of association which is a registered and publicly available document. The practice allows for a major part of the SHA to be reflected in the articles of association or in certain cases the SHA remains contractual where the parties choose to draft a simpler version of the articles of association either for non-disclosure purposes or for other corporate matters. This article aims to offer preliminary guidance on what points to consider in negotiating an SHA. DO display a solid corporate governance portrait. In determining control of an enterprise corporate governance provisions are key. In Turkey, joint stock companies are governed by a board of directors, whereas limited liability partnerships only have a partners assembly (equivalent to a shareholders assembly in joint stock companies and corporate decisions are taken at this level). However, limited liability partnerships may also establish a supervisory or management committee to which the corporate decision making process is delegated (subject to the approval of the partners assembly). For instance, where a party appoints the majority of the directors of the board such shareholder can render any decisions by itself at board level. However, should the minorities have strategic veto rights (to give a few examples, appointing the CEO, CFO, approving the budget or business plan are considered strategic board matters), then this may mean that there is joint control regardless of the board composition or the shareholding percentage. One should make sure that general matters, reserved matters or strategic matters are specifically identified under the SHA (such as how the signatories will be appointed, taking in financing and loans, increasing the capital, carrying out related party transactions, approving the business plan and budget etc.) DO consider the legal identity of your counter parties. An SHA may be between legal entities or individuals or a mixture of both. One should pay attention in drafting provisions tailored to the personality of the relevant shareholder. For instance, a termination clause al- 2011/I 16

17 Deadlocks mainly occur (i) where board decisions cannot be adopted due to split votes between the directors; (ii) where board meetings or shareholders meetings (general assembly) cannot be convened due to absence of quorum (mainly occurs when a shareholder intentionally refrains from discussing the subject) and (iii) where a decision at shareholder (general assembly) level cannot be reached due to split votes between the shareholders or due to a minority shareholder exercising its veto right. Depending on the complexity of the deadlock, the parties may first attempt to resolve the issue by (i) appointing mediators or senior management, (ii) referring the matter to an arbitrator, (iii) shoot-out (where the shareholder who offers the highest price will buy the shares of the other shareholders and they will be obliged to sell to such highest bidder), or, (iv) Russian Roulette where one shareholder can require other members to choose whether to sell their shares of the first shareholder or buy the shares of the first shareholder at a price and on terms offered by the first shareholder. Since the first shareholder does not know what the other shareholders will elect (i.e., buy or sell), it will have to specify a reasonable price and terms. Even as a final resort, windlowing for termination should there be a liquidity event or winding up would not work for an individual. Whereas, an individual who is a merchant may file for bankruptcy, bankruptcy protection (meaning that the person is about to go into bankruptcy but is trying to survive) as a result of which a supervisory or administrator trustee would be appointed to control his assets. Furthermore, a change of control clause (meaning that should one shareholder sell the control in his company to a third party share transfers and transferring voting rights above 50% or granting veto rights to other persons that result in a shift of control, etc.) would be applicable for a legal entity. DON T forget the change of control scenario. You are taking a partner (where the partner is a legal entity) who is very well known to you. Should there be a major change in the shareholding structure of that entity, you would want to be informed and prepared in advance. Suppose you have signed a SHA and established a partnership with an Incorporated Limited and the next day the majority of the shares of Incorporated Limited are sold to an Alien PLC which belongs to a corporate group that is known to be laundering money or a major competitor. There has been an indirect change of shareholding in the partnership to which you have made a commitment. Therefore, a change of control clause triggering a default event is definitely a recommended clause in a SHA in order to avoid any surprises. DO determine your exit strategy. Knowing your way out in advance is a quite strategic in transactions. Aside aiming for achieving certain economic goals, the legal consequences of an exit should also be regarded primarily. There could be a lot of reasons (voluntary or otherwise) leading to an exit. In exiting a company, it is important to make sure that you are welcoming the new investor to a desirable environment. Therefore, in drafting the SHA certain points must be considered, for instance, whether (i) the new investor will be forced to sign a joinder agreement or not; (ii) the minority shareholders will retain their major rights such as veto rights, etc.; (iii) exit is likely to be achieved via either a transfer of the partnership shares or the shareholder s shares itself (in what percentage) or an IPO of the partnership shares; and, (iv) a certain portion of shares be sold and so on if there is a shift in control. DON T allow for uncontrolled share transfers. Share transfer restrictions as well as rights of first refusal or rights of first offer should be carefully addressed. In this respect, tag along (right to sell with the selling party) and drag along (right to force another shareholder to sell with you) rights are also strategic. It is essential that no share transfers take place without offering those shares to an existing shareholder first. Tagging onto a sale is a benefit for a minority shareholder and dragging along is a benefit for the majority shareholder. Furthermore, if your partner is a strategic one for the business (which is the case in many JVs) the parties may consider locking in share transfers for a certain period of time for sustainability. DO negotiate your way to dilute a nonparticipating shareholder in case of a capital increase. A well-funded shareholder aims to contribute to capitalization of the company and its financial improvement. Unless there is an appropriately determined mechanism in the agreement, capital increases can be approved by the shareholders easily, but afterwards a contributing shareholder may default in paying such capital. In such cases, it is a very long process to expatriate a defaulting shareholder. For avoidance of such unwanted circumstances, a persuasive mechanism for capital increases could possibly be governed under the SHA. DON T render a useless deadlock resolution mechanism. 2011/I 17

18 ing up a company is not a recommended considering how long it takes to wind up a company in Turkey (about a year). Remember that such buy/sell mechanisms can be tricky when it comes to bidding. The shareholder with the biggest financial strength can take over the company or insider information can cause having to sell the shares. Harsh solution methods (such as winding up) can be intimidating thus forcing the parties to act consciously in order to avoid any unwanted obstruction. DO take into account the near future and the new Turkish Commercial Code. The renowned Turkish Commercial Code amendment that has been on the agenda for years was recently ratified by the Turkish parlia- ment and is to come into force in July While entering into a contract today, you should envisage the changes that could affect your contractual relationship or that may render certain provisions useless and hence should be taken into careful consideration. * * * This article sets out a selection of shareholder matters. There are of course many other important aspects of a shareholding relationship to consider. There is no doubt that a concretely established and strong legal partnership founds the grounds of a successful future and business. We, corporate lawyers are always here to efficiently guide you to success. Exit Rights under Shareholders Agreements Nihan PALTA Most financial and strategic investors main objective in a company acquisition is taking over absolute control of the target company with minimum liability. In share purchase deals where ownership of all shares of the target company is transferred from the seller to the purchaser, the purchaser steps into the seller s shoes and the legal entity s operation continues in an uninterrupted manner. Unless specifically agreed through representation and warranty clauses and/or specific indemnity clauses inserted in the share purchase agreement, subsequent to the share transfer, the seller has no ongoing interest or obligation with respect to the assets, liabilities or operations of the legal entity in question. On the other hand, in share purchase deals where less than 100% of the shares are acquired, apart from the share purchase agreement, the seller and the purchaser execute a shareholders agreement for the purpose of recording their mutual agreement concerning the shareholding, financing, operation and management of the company and their mutual rights and obligations relating to the company. The purchaser/ investor s main concern should be to enable the purchaser/investor to cash out of the investment to be made in the target company at the end of a prescribed term with maximum profit and under the best conditions. For that purpose, new business terms and instrument models in corporate law (emanated from common law system) have been created so as to facilitate the investor to exit their portfolio company investment by exercising certain rights inserted in the shareholders agreements. Even though these are not statutorily implemented under the current Turkish Commercial Code numbered 6762 or the new Turkish Commercial Code numbered 6102 which has been approved on 13 January 2011 and will be entered into force on 1 July 2012, they are commonly used in practice in Turkey while drafting shareholders agreements especially when the purchaser is a private equity investor. Exit rights are related to two most important exit channels: 2011/I 18

19 F or (i) trade sales (including drag-along rights, tagalong rights and right of first refusal/right of first offer) and (ii) initial public offerings (including demand rights and piggy back rights). It should be stressed that the most important clauses which are commonly subject to discussion and negotiation are drag-along rights and tag-along rights clauses. A drag-along right gives its holder the right to force all other shareholders in the company to sell their shares to a (outsider) buyer at the same price at which the right holder sells his shares. The tag-along right allows the holder to include his shares in a sale at the same price as all other shareholders. Thus these rights possess option-type characteristics. that purpose, new business terms and instrument models in corporate law (emanated from common law system) have been created so as to facilitate the investor to exit their portfolio company investment by exercising certain rights inserted in the shareholders agreements. Right of first refusal/right of first offer Right of first refusal ( ROFR ) allows the right holder to force any selling shareholder to firstly offer all or a portion of the shares to the right holders (other shareholder(s) in the company) at a price offered by the intended transferee. In brief, the right of first refusal is similar in concept to a call option. In general, a written notification is sent by the relevant selling shareholder to other shareholder(s) so as to inform them on the number of shares subject to transfer, the proposed offer price and name, identity and description of the intended transferee. This avoids a shareholder selling his/her shares to an unwanted third party which may alter the balance of power in the company. Unfortunately, since a ROFR is a contractual right, if there is no contractual penalty determined under the contract the right holder s remedies for breach are typically limited to compensation for damages. In other words, if the selling shareholder transfers his/her shares to a third party without offering the holder the opportunity to purchase it first, the holder can then sue the selling shareholder for damages, but may have a difficult time obtaining a court order to stop or reverse the sale. The right of first offer ( ROFO ) differs from ROFR as ROFO merely obliges the owner to undergo exclusive good faith negotiations with the right holders before negotiating with other parties. A ROFR is an option to enter a transaction on exact or approximate transaction terms. In other words a ROFO is merely an agreement to negotiate. Drag-along clauses If a deal has been struck with a buyer, dragalong rights enable the right holder to force all other shareholders to sell their shares under the same conditions to the buyer and join the sale of company s shares in question. This avoids an exit being prevented by one party who is unwilling to transfer his/her shares. Since these clauses are generally inserted to the advantage of the majority shareholder so as to ensure an exit channel, this right is exercised for all the shares held by such shareholder via dragging all the shares held by other shareholders. Please also note that especially in fifty-fifty partnerships, a floor price for dragged shares may also be stipulated with reference to a formula agreed by the parties. It should be noted that if structured and implemented properly, drag-along clauses can provide important protection for the private equity investors when it is time to exit portfolio company investments. Tag-along clauses Tag-along clauses preclude that one of the parties transfers his/her shares to an outside investor without giving the right holder the chance to follow suit. It gives right holder the right to include his/her shares in the sale at the same price as offered to the intended transferee. Thus, the tag-along clause constitutes a put right for the right holder enabling him/her to transfer the shares at a price determined in the negotiation between the selling shareholder(s) and a third party. A tag-along clause may avoid one party being excluded from a value-increasing sale of the company to a buyer who only acquires a portion of the shares. Value increases may be caused, for example, by synergies created or by a sale to a direct competitor and the associated increase in market power. In addition, it denies the other party the ability to sell company s shares to a third party who has the ability and incentive to undertake measures to reduce the value of the company, i.e. via asset-stripping or transfer-pricing, without compensating the other shareholders. These first three rights are directed towards 2011/I 19

20 the possibility of a trade sale as an exit channel. The following two exit rights are especially important in the course of an initial public offering being used as the main exit channel for the initial owners of the company. Piggy-back rights Piggy-back rights allow each party to include their shares in an initial public offering pro rata to their company s shares. Thereby, the exclusion from an IPO can be avoided. This right avoids that some shareholders can threaten to exclude other shareholders from the IPO. The right holder can sell his/her shares at the same price as all other parties whose shares are sold via an IPO. It is in this sense that piggy-back rights constitute a put option with the IPO price being the endogenous strike price. Thereby, the close similarities between the piggy-back rights and the tag-along rights which both constitute a put option with endogenous strike prices become obvious. The main difference lies in the exit channel, whereas piggy-back rights become effective with an IPO, tag-along rights refer to situation in which the company is sold to a trade buyer. Demand rights Demand rights allow the right holder to force other shareholders to agree to join the public offering. Thereby, denying other shareholders the chance to prevent or threaten to prevent a valueincreasing IPO. Preventing shareholders that threaten to block a value-increasing IPO reduces ex-post bargaining power and therefore the ability to capture a larger share of the entire payoff. This reduction in the bargaining power is also present in the case of drag-along clauses. Both rights are call options with endogenous strike prices. The difference is, once again, the exit channel; demand rights are associated with IPOs, while the drag-along clause is directed towards the trade sale. It should be underlined that even if exit rights ensure a certain degree of comfort to both majority and minority shareholders, in case of breach of these clauses, their enforceability may only be alleged before arbitration, if contractually agreed, or court. In other words, if no mechanism is sought in order to compensate one party s damages in case of breach of these clauses, the non-breaching party should claim his/her negative and/or positive damages by proving (i) contractual breach, (ii) occurrence of damage and (iii) a causal link between the damage and contractual breach. Therefore, until the arbitration court or national court renders its decision, he/she may not be compensated for his/her damages. Apart from the damages, especially due to contractual breaches by local shareholders and breach of drag-along clauses by the local shareholders, investors cannot exit their portfolio and evaluate a bona fide offer of a third party until the final decision is awarded by the arbitration or the court. In order to save time and create an efficient solution to the exit of the investor, in practice, there are certain mechanisms such as payment of a penalty amount or appointment of an escrow agent to keep the shares that will be dragged or tagged by the investor. Penalty clauses are regulated in a manner so as to enable one party to request a certain penalty (generally in daily basis) from the other party, when the latter breaches provisions of the agreement, starting from the date of breach. These clauses are merely sought for drag and tag along clauses as well as put and call option rights and aim to force shareholders to comply with their obligations inserted in the agreement in relation to procedural process such as sending the notifications or delivering the shares to a third party offeror. The second mechanism being appointment of an escrow agent is not a mechanism usually come across, however, the aim here is to enable the right holder to request (i) the other shareholder to deliver its shares to the escrow agent (to be dragged or tagged) and (ii) the escrow agent to deliver the shares that he/she is required to keep when the right holder requests the delivery. Therefore, the escrow agent is a third party protecting ownership of shares in its possession under the terms and conditions and until the time inserted in the escrow agreement. To sum up, it is obvious that the market which is growing day by day is signalling investors to give more emphasis to insert exit rights in the shareholders agreements in the most structured manner. Since certain exit rights as well as mechanisms aiming to facilitate their enforceability are only dedicated to protect one party s interest, they can create deal-breaks during the negotiation process. Therefore, it is crucial the right advice is sought from the right lawyer to ensure balance while inserting these clauses by taking into consideration general common practice and the party s real interests in the transaction. 2011/I 20