Turkey Confidence Rock Solid

2012 / I Turkey Confidence Rock Solid t is without doubt that the world I has its eyes set on Turkey. It is out there. While governments are trying to implement austerity measures across Europe and the global markets being fragile, Turkey is maintaining an impressive economic stability in the midst of Europe and the Middle East. It is an investment safety zone, it is not only a desired holiday escape but an attractive emerging market. It is a destination of high quality but affordable production. It goes without saying that lawyers take a central role in regulating this dynamic environment because we are business lawyers. We are a growing, innovative law firm, constantly investing in our firm s growth and our fee earners, with the determination to be a legal powerhouse in the country. We have taken up new office space at our current location, Kempinski Astoria building, where we will be occupying 6 floors. Continued on page 3 Corporate 4 Audit Mechanism under the New TCC 6 Group Companies and Lawsuits arising from Group Companies under the New TCC 8 Squeezing out the Minority under the New TCC 10 Legal Aspects of Merger Transactions under the New TCC 12 Flexibility around Share Capital under the New TCC 14 Shareholder to Company Transactions Turn Debt Free with the New TCC 15 Creation of Privileged Shares under the New TCC 17 Civil and Criminal Liabilities of Executives under the New TCC 20 Capital Increase under Registered Capital System under the New TCC 22 Key Considerations for Private Equity Investors in the New TCC 24 Joint Stock Companies vs. Limited Liability Companies under the New TCC 26 Re-Buttle of AoA and Shareholders Agreement: Share Transfer Restrictions under the New TCC 28 The New CMB Communiqué on Corporate Governance 31 Corporate Governance 33 The New Investment Incentive Scheme 38 New Requirement on Corporate Boards: Independent Directors 40 Alternative Sale Methods of Renewable Energy 42 Should Mine Explorers be in Good Shape? Competition 44 Claim of Damages Arising From Competition Infringements 46 Parental Liability for Competition Law Infringements of Subsidiaries IN THIS ISSUE Finance & Projects 48 Financial Assistance under the New TCC 50 Standard Terms under the New TCO 51 Privileged Shareholders Meeting Under the New TCC 53 Surety under the New TCO 55 Effects of the New VAT exemption on the PPP Hospital Projects and BOT Projects Litigation & Arbitration 57 Turkey: International Investments and Settlement of Investment Disputes 59 Individual Application Right to the Constitutional Court 60 Construction Arbitration 62 Limits of Liability in Corporate Entities: Lifting the Corporate Veil 63 Security Obligation of Foreign Legal Entity 65 Arbitrability: What are the Limits? 67 Post-Award Remedy under Turkish Law: Setting Aside of Arbitral Awards 69 Limitations on Interest Rates 70 Lease Agreements in the New TCO 72 Draft Guide of the Visionary Tradesman in Arbitration 74 Minority Right to Request Special Audit under the New TCC Intellectual Property & Technology 76 Promotion of Unlicensed Pharmaceuticals 78 Amendments in the Pharmaceutical Pricing Communiqué 81 Trademark within Terms of Attachment and Realisation 82 Parallel Importation 84 Click-Wrap Agreements 86 Unfair Competition in the New TCC from the Consumer Protection Perspective 88 Draft Patent Law 89 Data Protection and Privacy Rights in Turkey Employment 92 Provisions of the New TCO regarding Annual Leave 94 Definite Period Employment Contracts in the light of the provisions of the New TCO 96 The New System on Compensation for Work Accidents and Occupational Illnesses 98 Home Service Agreements and Marketing Facilities Agreements determined under the New TCO 100 Controversy between the Turkish Labour Law and the New TCC with respect to Business Transfer 103 Standard Terms within the Framework of Labour Law 106 The Provisions of the New TCO regarding the Termination of Employment Contracts Real Estate 108 Turkey to Boost Foreigners Real Estate Acquisition 110 Collective Construction and Condominium Law of Turkey 111 The Recent Reform of the Legal Framework Governing Leases

No. 5 Disclaimer BÜYÜKDERE CAD. NO: 127 ASTORIA A KULE KAT: 6, 24, 26, 27 34394 ESENTEPE ISTANBUL TURKEY TELEPHONE: +90 (212) 318 05 05 TELEFAX: +90 (212) 318 05 06 E-MAIL: info@yukselkarkinkucuk.av.tr WEBSITE: www.yukselkarkinkucuk.av.tr 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) 544 58 77 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 YükselKarkınKüçük Attorney Partnership. Professional legal advice should be obtained for specific questions and concerns. 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: 6, 24, 26, 27 34394 Esentepe, Istanbul TURKEY, Fax: +90 (212) 318 05 06, www.yukselkarkinkucuk.av.tr e-mail: info@yukselkarkinkucuk.av.tr Copyright 2012, YükselKarkınKüçük Attorney Partnership. All rights reserved.

L E G A L N E W S B U L L E T I N T U R K E Y Intro Previous page to continue Whilst we continue to make lateral hires reaching a number of approximately 80 fee earners, we are setting up new focused legal departments namely, Real Estate, Criminal Law and Tax once again proving, actually going beyond our full service mantra. Chambers Europe, one of the world s leading and most reputable legal directories, has awarded our firm with the 2012 Chambers Europe Award for Excellence, making YükselKarkınKüçük the first winner of this outstanding award in Turkey as the Best Law Firm of Turkey. We are extremely proud to have served our full service law firm motto in achieving this award. It goes without saying, we take pride in ourselves to be the dealmakers. To mention the most dynamic market topic, the M&A environment, the Turkish market is hot. We have been seeing private equity backed M&A deals in the healthcare, technology (online retailers attracting venture capitalists), energy, clothing retail, and education sectors. Indeed, this is not an exhaustive list, transactions are happening in all sorts of sectors. To give an example from the top deals, we believe that the deal highlight of the year was Anadolu Efes US$ 1.9 billion strategic partnership with SABMiller in the beer market (acquiring SABMiller s beer businesses in the CIS and creating a joint venture in Turkey), being the largest acquisition completed by a Turkish investor outside of Turkey after Ülker s acquisition of Godiva. This is a significant manifestation of the power of Turkish capital which shows not only Turkey is a foreign investment attraction, but the Turkish investor is actively seeking and completing acquisitions overseas. With regards to incoming foreign direct investment, we have come to witness that foreign investors have built a trust in the Turkish legal practice and legal regime as they happen to show comfort by entering into Turkish law governed agreements. Even so where the investors wish to choose English governing law agreements, we again have the local capability and qualified team members to assist them with those. The new Turkish Commercial Code preparations are intense. As a business law firm, in order to be fully geared up for July 1st onwards, we are organising client panels, training sessions and tailor-made studies for clients in order to assist them adapt their corporate legal structures to the requirements of the new code within the relevant deadlines in the code. We have hosted a special client panel on June 11th at the Four Seasons Bosphorus honouring guest Turkish company law scholars with a focus on the new code s impact on corporate governance and liabilities. The new Turkish Commercial Code will take Turkey half a decade ahead of its time. It will become easier to obtain information on non-listed companies (which make up the majority of the market in Turkey) from their websites and online detailed registries. This will give a good head start on due diligence studies without having to directly request certain information from the company which tends to delay the process. Robust corporate governance is encouraged. Companies will need to retain IFRS audited accounts (which is still permitted but not required in most developed countries) by independent qualified auditors. The revolutionary provisions of the new Turkish Commercial Code were criticised and discussed in many platforms. Turkish council of ministers processed the lobbying and feedback of industrial organisations, businessmen and investors in relation to particularly burdensome requirements and prepared amendment proposal that was submitted to the approval of the Turkish parliament on 18 June 2012 comprising of 44 amendments. The 44 amendments are expected meliorate those concepts that were quite alien to businessmen. To the possible extent and where relevant, our articles are reflective of the amended concepts. The Turkish parliament passed the long awaited legislation enabling full real estate ownership by foreigners. The Turkish construction business have been having a blast for some time, but the new law will definitely create a real estate boom, houses on the market will meet the expected higher demand which will potentially affect the house prices. A relative development at the firm is that we have recently set up our Real Estate practice, which was previous a sub-segment of the Corporate department, with a new partner (Emre Çizioğlu) joining in to lead the practice making it a more focused practice. Over the past years, we have also become a focused firm in the hotel and leisure sector which closely relates to our real estate practice. As we have promised to make it more frequent in giving legal updates from the country, this edition of the Bulletin is our 5th successful issue rich in size and number of articles diligently prepared by the associates of the firm. You will find a special section on the new Turkish Commercial Code and the new Code of Obligations which constitute the core of company law to start with and the following sections are based on Competition, Finance and Projects, Intellectual Property and Technology, Dispute Resolution, Employment, Pensions and Benefits, and Real Estate. And there is more to come. YükselKarkınKüçük Attorney Partnership 2012/I 3

L E G A L N E W S B U L L E T I N T U R K E Y Corporate Audit Mechanism under the New Turkish Commercial Code Merve ARSLAN T The New Turkish Commercial Code ( New TCC ) has been enacted and will enter into force in July 2012. The core principle in drafting and enacting the New TCC is to address the shortfall of the previous legislation, the current Turkish Commercial Code ( TCC ), in order to ensure a clear and comprehensive regime for corporate affairs in Turkey, thereby, increasing confidence within Turkey and globally encouraging foreigners to invest in Turkey. The New TCC has also harmonised domestic laws with international standards by introducing a number of additional requirements such as the requirement for companies to he New TCC has also harmonised domestic laws with international standards by introducing a number of additional requirements such as the requirement for companies to appoint external professional and independent auditors in compliance with the International Audit Standards. appoint external professional and independent auditors in compliance with the International Audit Standards. Turkish Council of Ministers has received criticisms regarding the New TCC, and therefore passed an amendment proposal to the approval of the Turkish parliament on 18 June 2012 on various articles. The proposal sets forth new changes in the audit mechanism. This article reflects the amendments introduced by the proposal text. Under the current TCC, it is mandatory to appoint a statutory auditor as one of the mandatory bodies of all joint stock companies and limited liability companies having twenty (20) or more partners. Pursuant to the New TCC this requirement for a statutory auditor to be appointed as a mandatory body of a corporation has been abolished and audits are to be carried out on companies under the New TCC must be conducted by eligible, professional and independent auditors complying with both international standards and EU standards. The New TCC details two different types of audit, which are independent audit and special audit. 1. Independent Audit: The companies that are subject to independent audit are determined by the Council of Ministers. The independent auditor shall be appointed by the general assembly/partners assembly of the company. Following such appointment, the name of the person authorised to undertake auditing services shall be registered with the Trade Registry and announced in the Trade Registry Gazette and the web-site of the company. An auditor can be an independent auditor or a company, the shareholders of which are independent auditors, authorised by the Institution for Public Supervision, Accounting and Audit Standards in order to conduct independent auditing. The New TCC provides a more functional auditing system than the current TCC. An agreement shall be executed by and between the Board of the Company and the independent auditor with regard to the services to be provided by the independent auditor. The independent auditor shall only be replaced by a court decision, where the headquarters of such company is located (the Court ). 2012/I 4

The New TCC allows an auditor of an independent audit firm to prepare audit reports of the same company for only seven years in a tenyear period of time. After the end of the seventh year, such auditor shall be replaced with another auditor for at least three years. The New TCC does not allow the following to be appointed as an independent auditor: If the proposed person is a shareholder of the company, If he is a manager or employee of the company subject to auditing, or worked in this position during the recent three years, prior to appointment as an auditor, If he is employed in a corporation more than twenty percent of the shares of which is held by the company subject to auditing, or renders service for a real person who holds twenty percent of shares of the company where he is to be nominated as auditor, If he has contributed to any other activity besides auditing service, such as preparation of companies statutory books and financial tables etc., If he is the legal representative, proxy, employee, director, partner, owner of a real person or legal entity disqualified as auditor according to provisions of fifth paragraph due to his/its contribution to an activity besides auditing service or support in preparation of the company s statutory books or financial tables, If he performs a duty for an auditor who is disqualified due to reasons set forth in the first and sixth paragraphs, If more than thirty percent of the income gained from professional activities during the last five years is acquired from the auditing and consultancy services rendered to a company or a corporation holding more than twenty percent of the shares of the company limited by shares; and if the same income is expected also in the current year. 2. Special Auditor The New TCC prescribes a second type of audit referred to as the special audit, which is not mandatory but an absolute right of the shareholders, as opposed to the independent auditor. The appointment of a special auditor may be requested in the instances specified below: (i) If restrained or negative opinion is released by the independent auditor regarding the relations of the company with the parent company or group companies, (ii) the Board has declared that the company has encountered loss due to certain legal transactions or practices of the group, which could not be recovered. Provided that the right to information and investigation has been previously exercised, each shareholder, whenever deemed necessary, shall be entitled to request clarification of certain matters, including those outside the agenda, through special auditing, from the general assembly. If this request is approved by the general assembly, the company or each shareholder shall be entitled to apply to the Court and request the appointment of a special auditor within thirty days as of the date of general assembly approval. If such request is declined, the shareholders representing at least 10% of the company s capital or at least 5% of the capital in the publicly held joint stock companies or the shareholders the nominal value of the shares of which is at least TL 1,000,000 may directly apply to the Court with such request. Following the evaluation of the statements and claims of the applicants, the Court may appoint one or more special auditors to the company. Indeed, the New TCC has significantly reformed the auditing system applicable to the companies. The degree of compliance with the International Audit Standards has dramatically increased through the introduction of the concepts of independent and special auditor. 2012/I 5

L E G A L N E W S B U L L E T I N T U R K E Y Group of Companies and Lawsuits arising from Group Companies under the New Turkish Commercial Code Elifcan ARGÜN The new Turkish Commercial Code ( New TCC ) numbered 6102, which was promulgated in the Official Gazette on February 14, 2011 and expected to enter into force on July 1, 2012, is introducing many novelties into the business world through the dynamics of transparency and accountability. Accordingly, the New TCC regulates the notion of group of companies for the first time in Turkish Company Law. This regulation that enables lifting the corporate veil, having recourse to liability of the parent company, and limiting the liability of board members of subsidiary companies is also significant in order to cover a loophole in Turkish Company Law. The notion of group of companies relies on the dominance principle whereby the control of a dependent company ( subsidiary ) is granted to a controlling company ( parent company ). According to the New TCC, this dominance may be exercised through three different mechanisms: (i) actual control, (ii) contractual control, and (iii) other means of control. Firstly, actual control can be maintained, directly or indirectly, when a capital company (i) holds the majority of the voting rights of another capital company, or (ii) has the right to ensure the election of a sufficient number of members that constitute the majority in the executive body of another capital company on the basis of its articles of association, or (iii) can exercise the majority of the voting rights individually or with other shareholders besides its own voting rights in another capital company on the basis of a contract. Secondly, if there is a written agreement between two companies which set forth the terms and conditions of management of the subsidiary, contractual control may come into existence. In order for this agreement to be effective, it has to be registered with and announced in the relevant trade registry. However, invalidity of this agreement shall not prevent the application of other provisions with regard to liabilities and responsibilities on the group of companies. Thirdly, apart from the conditions set forth above, if a capital company has dominance over another capital company s financial and operating policies then the existence of dominance will be presumed. Holding majority of the shares or the privileged shares that have a decisive effect on a capital company shall be the prima facie evidence for the existence of control. The provisions pertaining to the group of companies will become applicable if one of the parent companies or subsidiaries principal places of business is located within the boundaries of the Turkish Republic. The existence of the above-mentioned conditions does suffice for application of these provisions to group companies; there is no further need to prove the actual exercise of dominant influence. When a capital company acquires directly or indirectly 5%, 10%, 20%, 25%, 33%, 50%, 67% or 100% of the capital of another company or its already owned shares decrease below these percentages, it should inform the situation in writing to the company and competent authorities within 10 days as of the completion of the relevant transaction. The 2012/I 6

T his notification shall be made in writing and registered with and announced in the relevant trade registry. All rights including the voting rights attached to the relevant shares will be suspended unless and until the registration obligation is satisfied. Acquisition or loss of shares at the percentages given above shall be written clearly under a separate heading in the annual report, audit report and specified in the announcements that will be made on the company s website. In addition, the board of the subsidiary shall draw up a report within the first three months of the fiscal year and elaborate the relationship between the companies. The New TCC sets forth certain rules prohibiting abuse in the exercise of dominance in a group of companies under certain conditions. Once the existence of a controlling relationship between two or more companies has been determined, the next step is to examine whether this control regulation that enables lifting the corporate veil, having recourse to liability of the parent company, and limiting the liability of board members of subsidiary companies is also significant in order to cover a loophole in Turkish Company Law. is being used legally or illegally. According to the New TCC, abuse of control may be realised through (i) transactions executed by the board, or (ii) important resolutions adopted by the general assembly, or (iii) loss of credibility of the group of companies. Transactions exercised by the board of the parent company that may result in financial loss to the subsidiary may be (i) transfer of business, assets, funds, personnel, receivables and debts, (ii) reduction or transfer of profits, (iii) restricting rights on assets by granting real or contractual rights to third parties, (iv) undertaking liabilities such as securities or guarantees; (v) resolutions or prohibitions such as the restriction or interruption of investments that may negatively affect productivity or activities, or prevent the progress of the subsidiary. If losses arising from the above are not set off until the end of the relevant fiscal year, then each shareholder of the affected subsidiary may file a lawsuit against and demand compensation from the parent and the responsible board members. On an equitable basis, the judge can decide either by demand or reason that shares of the claimant shall be bought by the parent company or another suitable and reasonable remedy other than compensation. If resolutions regarding alteration of legal status, merger, spin-off, dissolution, issuance of securities and amendment to the articles of association are taken by using dominant influence and there is no clear and justifiable reason for adoption of such decisions, the shareholders who have voted against the relevant resolution in the general meeting and have disclosed their objections and annotated to the minutes may request the parent company to compensate the losses or to purchase their shares over the exchange stock or actual value or another generally recognised value. In such case, the court shall decide on the purchase of the shares over the value that is considered justified among the foregoing values in view of the characteristics of the concrete incident. The case in question shall be established within one year as from the date of objection against the resolutions mentioned above and within two years under any circumstances. Lastly, if the reputation of the group reaches a level that gives confidence to the society or consumers, the parent company shall be liable for the credibility aroused by the use of this reputation. This is a culpable liability and it should be determined whether the parent company s reputation is used or how it is used in each case. Creditors of a subsidiary may also file a lawsuit against the parent company or its board members based on the losses incurred by the subsidiary arising from the acts of the parent company. However, if a parent company wholly owns a subsidiary the parent company s board may direct the subsidiary to enter into transactions that might lead to losses in the subsidiary. In addition to the above-mentioned remedies granted to shareholders of the subsidiary, if a parent company holds directly or indirectly at least 90% of the shares and voting rights in a subsidiary and if the minority hampers the functioning of the subsidiary and acts in bad faith, the parent company may purchase such shares held by the minority. In conclusion, the New TCC introduces new principles to boost transparency and investment confidence in Turkish markets. In this sense, the shareholders rights in the group of companies have been improved and shareholders position has been strengthened through new check and balance mechanisms. 2012/I 7

L E G A L N E W S B U L L E T I N T U R K E Y Squeezing out the Minority under the New Turkish Commercial Code Hazal KORKMAZ F Imagine you take over a company and you are the majority shareholder of that company (you own 90% of the total shares). Most probably, you want to control and manage your fast-growing profit-making company with your own methods, however you cannot get along with your minority shareholder. You have decided to buy-out the shares of the minority shareholder. The problem is he refused your all buy-out offers and has no interest in selling his rom July 1, it will be possible under Turkish law for the controlling shareholder (on the condition that it holds the required amount of shares) to interfere with the right of ownership of the minority shareholder(s) in its subsidiary, and in the case of mergers, for the surviving entity to buy the shares of the minority shareholder(s) of the dissolving entity, provided that the detailed requirements under the New TCC are fulfilled. shares and leaving the company. Do you have to stick with your unfriendly minority shareholder? Unlike certain jurisdictions, Turkish laws did not provide squeeze-out provisions that would enable elimination of interest of minority shareholders (10% of the joint stock companies, 5% of the listed companies). Contrary to the current Turkish Commercial Code (Law No. 6762), the new Turkish Commercial Code ( New TCC ), that will enter into force on 1 July 2012, introduces the new squeeze-out procedures in line with EU regulations by entitling the controlling block to compulsory acquisition of the Company shares held by minority shareholders, which is a big relief for the majority shareholders with minority disturbance. The New TCC sets out two occasions for squeeze-out processes as below: Mergers In the first instance, pursuant to Article 141 of the New TCC, in case of mergers, as an exception to the continuation of the shareholding of a shareholder sets out that in case a shareholder does not wish to participate to the merger process, the legal entities involved in the merger may compel the shareholder(s) of the dissolving company to sell its/their shares merely by providing compensation through payment under the merger agreement. In this case, minority shareholders of the dissolving entity will not be entitled to keep the shares in the surviving entity, but squeeze-out compensation will be paid instead. This payment can be made in cash or in assets and/or with other shares. With a view to protect minority shareholder(s) rights, the New TCC explicitly stipulates the mergers proceeds to be fair and equivalent to the real value of the shares. The article does not explicitly grant this right to minority shareholders, however reasoning of the Article attaches this article with the quorum stipulated under Article 151 (the merger agreement must be approved by dissolving entities shareholders holding 90% of the voting rights) which restricts the application of this squeeze-out procedure. 2012/I 8

Furthermore, according to reasoning of this article, squeezed-out minority shareholder(s) are not entitled to object to the general assembly s resolution to squeeze-out. By Controlling Shareholder of the Company Pursuant to Article 208 of the New TCC, the shareholder who controls the company directly or indirectly, holding 90% of the share capital and having 90% of the voting rights Controlling Shareholder has squeeze-out right. According to this provision, in case the minority shareholder(s) acts obstruct the company s operations, or in case the minority shareholder(s) act in bad faith or creates disruption in the company, or acts irresponsibly the Controlling Shareholder is entitled to use its squeeze-out right, to buy-out the shares of the minority shareholder through the competent court. However, due to the fact that the New TCC does not define the conditions of occurrence of such right, the limits for the exercise of this right and determination of concrete assessment of minority shareholder(s) bad faith or irresponsible act is not easy to do and the method of determining the behaviors and attitude will be further clarified by the precedent judgments of the courts. This article does not only elaborate the circumstances that may trigger the squeeze-out right, it also stipulates calculation of the payment method for the minority shareholder(s) shares to be purchased by the controlling shareholder. In this case, the actual amount or value or the amount determined by the competent court will be paid to the minority shareholder(s) as a purchase price. As regards to the listed joint stock companies, the purchase price of the minority shareholder(s) shares will be calculated as per the stock exchange price, if the stock exchange prices does not seem to correspond to a fair value, the actual amount or value or the amount determined by the competent court will be paid to the minority shareholder(s). Conclusion The New TCC brings a major exception to the current principle, the continuity and preservation of the shareholding of any shareholder, for the minority shareholder(s). From July 1, it will be possible under Turkish law for the controlling shareholder (on the condition that it holds the required amount of shares) to interfere with the right of ownership of the minority shareholder(s) in its subsidiary, and in the case of mergers, for the surviving entity to buy the shares of the minority shareholder(s) of the dissolving entity, provided that the detailed requirements under the New TCC are fulfilled. 2012/I 9

L E G A L N E W S B U L L E T I N T U R K E Y Legal Aspects of Merger Transactions under the New Turkish Commercial Code Özlem ALTAY T he The New Turkish Commercial Code ( New TCC ), to enter into force on 1 July 2012, regulates merger transactions in detail in comparison to the currently applicable legislation. Existing rules under the Current Turkish Commercial Code ( TCC ) are inadequate to meet the needs of the practice. The New TCC attaches importance and enforces a comprehensive legal regime for restructuring of the corporations. It introduces new principles New TCC attaches importance and enforces a comprehensive legal regime for restructuring of the corporations. concerning types of mergers and also determines liabilities of the companies that are involved in merger transactions, as well as the liabilities of their shareholders. Fundamental principles of the New TCC, with respect to merger transaction, are summarised as follows: There are two merger types defined in the New TCC: (i) merger by acquisition (ii) merger by formation of a new company. New TCC sets out which company or cooperative can merge with which company or cooperative as transferor and transferee. Merger rules regarding the companies in the process of dissolution and companies subject to insolvency has been regulated under the New TCC. According to the Current TCC, the merger of such companies is forbidden. Continuity of the Rights. Shareholding rights of the shareholders of the transferor will continue in the surviving entity in the same manner. There is a new provision concerning a compensation called equalisation payments. The shareholders of the transferor have the right to make a claim on the shares and rights in the transferee at the value that matches their existing equity shares and shareholding rights. An equalisation payment can be provided while determining the change in company shares, provided that the partnership shares assigned to the shareholders of the transferee do not exceed 1/10 th of their actual value. Compensation can be paid to shareholders in exchange for privileges that will not be preserved after the merger. The right to continue with a non-voting share in the transferee is granted, if not available, the right to acquire a share with voting rights is granted. An equivalent right is granted to the owner of the redeemed share, or the purchase of such share is stipulated. Exist and Squeeze out. In a merger agreement, entities participating in the merger can provide shareholders of the transferor with the option to choose either to have equity shares and shareholding rights in the surviv- 2012/I 10

ing entity or to receive squeeze-out compensation equal to the actual value of the company shares to be acquired. In such a case, the minority shareholders of the dissolving entity will not be entitled to obtain shares in the surviving entity, however, they will be paid squeeze-out compensation. The compensation amount and the reasons as to why only compensation is paid, instead of granting equity and shareholding rights, must be stated in the merger report. Pursuant to Article 151 of the New TCC if the minority shareholder(s) of the dissolving entity is forced to accept the squeeze-out compensation payment in the merger agreement, shareholders holding 90% of the voting rights of such dissolving entity must approve the merger agreement Merger Agreement and Merger Report. The merger agreement and merger report has been regulated under the New TCC in detail. The merger agreement shall be in writing and it is signed by the management of the entities participated in the merger and approved by the general assembly. The merger report is prepared by the managing bodies of the entities participating in the merger individually or jointly to set forth the purpose of the merger and its consequences. Transaction auditor. The merger agreement, merger report and the balance sheet must be audited by the transaction auditor. Inspection Right. The merger agreement or merger report, annual activity report, audit report and financial statements for the last three years, including financial interim reports if necessary, shall be submitted to the review of the shareholders, owners of the redeemed share and bearers of securities for their inspection, in addition to the partners of the partnerships taking part in the merger. Registration. Mergers enter into force with the registration in the trade registry. Upon registry, the full succession is realised. Protection of Creditors. The Creditors are entitled to request collaterals within the threemonth period following the announcement of the merger in the Trade Registry Gazette if it is determined in the transaction auditor s report that there is a risk for the creditors arising from merger and collaterals are necessary. Different from the Current TCC, the merger procedure will not be delayed and it will be possible to continue the merger process by giving collaterals to the creditors. Facilitated merger. Facilitated merger has been introduced with the New TCC. Facilitated merger will be applicable for (i) merger of two small sized companies, (ii) merger of the controlling shareholders with a fully owned subsidiary, (iii) merger of the controlling shareholder with a subsidiary that owns 90% of shares. In these three situations there is no need to realise all the formalities. The Lawsuits. In a merger, if company shares or rights are not protected properly or squeeze out compensation is not adequate each partner/shareholder may demand compensation within two months following the announcement of the resolution to merge. It is possible to initiate a lawsuit for the cancellation of a general assembly decision pertaining to the merger. The merger is not suspended upon such claim. Liability. All persons including the transaction auditors, in some way involved in the merger process, are liable for the damage that they give to the companies, partners/shareholders and creditors resulting from their negligence. Personal liabilities of Shareholders. Shareholders who were liable for the debts of the transferee company prior to the merger continue to be liable after the merger, provided that these debts were incurred prior to the announcement date of the merger resolution, or reasons causing these debts have occurred prior to that date. The statute of limitations for personal liability of the shareholders is three years from the announcement date of the merger resolution. If receivables become due after the announcement date, the period of limitation begins as of the maturity date. This limitation of personal liability does not apply to the liabilities of the shareholders who a personally liable for the debts of the transferee. The existing merger rules were inadequate to meet the growing requirements of today s legal world. Therefore, the New TCC introduces detailed regulations on merger transactions in order to find solutions for today s problems. With the enactment of the New TCC, all rules applied to the merger transactions will be set out in detail and further merger procedures, for which the current law is silent, will be introduced. 2012/I 11

L E G A L N E W S B U L L E T I N T U R K E Y Flexibility around Share Capital under the New Turkish Commercial Code Berat HAMZAOĞLU The new Turkish Commercial Code ( New TCC ) gives Turkish joint stock companies much more flexibility in terms of what they can do with their share capital when compared to the current code which is to be abolished in July 2012 ( TCC ). Under the New TCC, a private joint stock company may buy back up to 20% of its share capital; or implement a conditional capital increase (which seems to enable for example debt equity swaps by the general assembly. The period of this authorisation cannot exceed 5 years. In this authorisation, the total nominal value of the shares to be acquired and the minimum and maximum consideration that may be paid to these shares must be stated. A company may not acquire its own shares in return for a consideration that exceeds, or will exceed, as a result of a transaction, 10% of its basic or issued capital. T he New TCC has also introduced particular new provisions which have made capital increase and capital reduction process easier compared to the previous TCC. Share buybacks must not cause a reduction in the company s net assets under the sum of: (i) the company s reserves that are not allowed to be distributed according to law and the company s articles of association; and (ii) the company s basic or issued capital, calculated after the cost of the shares to be acquired are deducted from the company s net assets. and employee share option schemes). The New TCC has also introduced particular new provisions which have made capital increase and capital reduction process easier compared to the previous TCC. Within the context stated herein, we have summarised and analysed the key changes brought in by the New TCC below. Share Buybacks Under the previous TCC, except for certain circumstances, the companies are prohibited from acquiring their own shares. However, under the New TCC, share buybacks are permitted provided that certain conditions are fulfilled. These conditions may be summarised as follows: The board of directors should be authorized Share buybacks are allowed only for shares of which the amounts have been fully paid. The above conditions apply also in the event of an acquisition of a parent company by its subsidiary. The company may acquire its own shares without the authorisation of the board of directors by the general assembly in order to protect the company from suffering a serious loss. In such a case the board must inform the general assembly with regard to reason and purpose of the buyback, the number of the acquired shares, total nominal value of these shares and the percentage they represent in the share capital of the company along with the consideration and payment terms. 2012/I 12

T hrough It is also important to note that in the below circumstances the company must dispose of the acquired shares unless the total amount of these shares owned by the company and the subsidiary company exceeds 10% of the company s basic or issued capital. Buyback is made as a result of complete succession (külli halefiyet); Buyback is made with a purpose to collect the receivables of the company by execution proceeding provided that the relevant shares are fully paid; Buyback is gratuitous provided that the relevant shares are fully paid. Conditional Capital Increase The New TCC has introduced a new method for capital increase namely conditional capital increase ( CCI ). Through CCI, the company will increase its share capital by making the holders of debt securities and its employees the shareholders of the company. The capital will be increased at the time and to the extent the right to CCI, the company will increase its share capital by making the holders of debt securities and its employees the shareholders of the company. acquire or exchange is exercised and the capital subscription (sermaye borcu) is paid or exchanged. The holder of debt security and the employee may only exercise their right to acquire or exchange with a written statement addressed to the company and a reference must be made to the relevant article of the articles of association of the company. In order for conditional capital increase to take place: CCI must be explicitly stated in the articles of association of the company. A general article relating to CCI is not sufficient. A specific CCI article should be established for each instance of CCI. A resolution must be passed by the general assembly of the company It is also important to underline that the share capital to be increased at each instance of CCI may not exceed 50% of the company s total share capital. The legislator has also protected the rights of the shareholders and has stipulated that in the event of issuance of certificates that contain the right to exchange or acquire, these certificates first must be proposed to the current shareholders. Capital Increase and Capital Reduction The New TCC has introduced certain provisions which have simplified the process of capital increase and capital reduction process when compared to the previous TCC. Regarding capital increase, the previous TCC has a requirement that the entire share capital of the company must be fully paid in before the capital increase. On the other hand, the New TCC has provided more flexibility and stated that if certain amounts are not paid and if these amounts are not considered as significant when compared to the entire share capital, the company may still increase its share capital. Changes regarding capital decrease may be summarised as follows: The report for capital reduction is prepared by the transaction auditor appointed by the general assembly instead of an expert which is appointed by a court judgment. The transaction auditor s report must state that the company holds sufficient assets to satisfy the rights of the creditors of the company despite the capital reduction. Otherwise, the general assembly cannot approve the transaction auditor s report. Parallel to the transparency principle of the EU Directive, the reasons, purpose and method of capital reduction must be stated in the published board resolution calling for the general assembly and relevant notification published in the website of the company. Further, the board is obliged to present a report to the general assembly. The report must be approved by the general assembly and then announced in the Trade Registry Gazette. 2012/I 13

L E G A L N E W S B U L L E T I N T U R K E Y Shareholder to Company Transactions Turn Debt Free with the New Turkish Commercial Code Gizem GÖKER T aking Among many others, the new Turkish Commercial Code ( New TCC ) brings a significant change into shareholders lives and forces them to let go of old habits. The criticised new rule restricting shareholder/ director to company transactions by way of restricting shareholders/directors from becoming indebted against their companies used to be rather strict, but the real intention being to get in the way of shareholders habit of withdrawing cash from company accounts is expected to serve its purpose. Due to the criticisms, Turkish council of ministers into account potential approval of the 44 amendments by the parliament, it is expected that shareholders, only at times the company is not solvent and directors relatives will be banned from borrowing from companies, while a director of the board will be able to with the approval of the shareholders. prepared and passed an amendment proposal to the approval of the Turkish parliament on 18 June 2012 comprising of 44 amendments. The draft proposes to get rid of the restrictions against borrowings by directors, banning their relatives only. Taking into account potential approval of the 44 amendments by the parliament, it is expected that (1) shareholders, only at times the company is not solvent and (2) directors relatives will be banned from borrowing from companies, while a director of the board will be able to with the approval of the shareholders. 1) What does the New TCC bring with regards to shareholder-company dealings that give rise to shareholder debts against the company? Article 358 of the New TCC restricts shareholders of a company to become indebted against the company except for capital subscriptions, unless the shareholders have paid their due capital subscriptions; and the company s profits together with free reserves are at a sufficient level to meet previous year s losses. [1] This rule should not interfere with the regular course of usual commercial transactions, as long as the financial standing of the company is at a sufficient levels. 2) What does the New TCC bring in relation to inter director-company dealings? Unless permitted by the general assembly (i.e. a shareholders meeting), a director of the board cannot enter into a transaction with the company on his or others behalf according to Article 395/1 of the New TCC. Otherwise, the company may claim annulment of the transaction (whereas the other party to the transaction cannot). In any event, directors relatives are prohibited from incurring debt in form of cash or in kind (i.e. non-cash assets) against the company, neither can the company guarantee or secure the obligations of, take over liabilities of nor take on [1] Before the 44 amendments, this used to be unless the debt: has arisen from a transaction necessitated by (1) the company's area of business and (2) the shareholder's business; and is at arm's length terms. 2012/I 14

liabilities for these persons. [2] This is governed under Article 395/2 of the New TCC. Otherwise, the creditors of these transactions may pursue these persons directly for the relevant amounts owed by the company. 3) Which type of companies does the rule apply to? The rule applies to joint stock and limited liability companies. 4) What sort of companies are exempt from this restriction? (a) Group companies. Provided that the parent company does not cause losses to the subsidiary in exercising control thereupon, intra group [3] surety and guarantees are permitted. (b) Banks. This rule will not prejudice the special provisions of Banking Law. 5) Is there a timing to comply with this rule and is there a transition period for existing debts? The rule goes live on 1 July 2012 with the New TCC s entry into force. As for existing debts, shareholders have until 1 July 2015 to fully repay their debts to the company accounts in cash. [2] This restriction was extremely criticised because it used to also prohibit the directors of the board and companies in which a director holds at least 20% shares from borrowing from the company, but is now being amended by the Turkish parliament. [3] The New TCC has also introduced the concept of "group" to company law for the first time in Turkey with a similar definition to EC merger regulation control definition in controlling a subsidiary. Persons failing to repay the owed amounts until this deadline will be sanctioned in accordance with the section 6 below as if they have created the obligations after 1 July 2012. 6) What are the sanctions in implementing the debt restriction? Persons breaching the no-debt rule or failing to repay their existing debts to the company in cash may face judicial fines [4], these are namely (1) persons lending money to the shareholders against Article 358 [5] and (2) persons breaching the provisions of Article 395/2 [6] (these can be the directors relatives borrowing from the company and representatives of the company lending to them). * * * As expected to be meliorated by the 44 amendments, we believe that the main intention in introducing this restriction is to protect company accounts. The implementation of the rule will tell us more about this when there is comparable practice in the near future. Although it may be challenging to get accustomed to this rule (which I would expect to be deeply felt in family owned businesses), in the long run it should be quite useful in maintaining the equity standing of companies. [4] At least 300 days multiplied by the daily regulatory fine [5] This originally was persons borrowing money and is now being amended by the parliament. [6] This originally was persons borrowing money and is now being amended by the parliament. Creation of Privileged Shares under the New Turkish Commercial Code Nihan PALTA Under Turkish Law Joint-stock companies, forerunners of modern corporations, differentiates from other types of companies as they suitability for a considerable amount of participants, permitting significant growth of capital by combining small investment amounts which would not be significant individually. Privileged shares which grant superior rights to its holders in the articles of associations is a method used to attract such small investments. Since the principle of equality of shares remains for the shares of the same nature and there is no absolute equality among the shares under Turkish Law, there are no legal 2012/I 15

L E G A L N E W S B U L L E T I N T U R K E Y S obstacles that may prevent certain shareholders to be treated differently in a way to grant certain privileges to shares held by them and therefore, issuance of privileged shares is not contrary to the equal treatment principle. This instrument is frequently used in order to grant superior rights to financial investors or private equity companies aiming to protect management control while financing the companies. Legal concept The current Turkish Commercial Code ( TCC ) and the new Turkish Commercial Code ( New TCC ) enable creation of privileged shares without specifying any limitations. A privileged share is created by granting certain superiorities and different rights to a share as compared to other ordinary shares, the content and the limit is explicitly stipulated in the articles of association. ince the principle of equality of shares remains for the shares of the same nature and there is no absolute equality among the shares under Turkish Law, there are no legal obstacles that may prevent certain shareholders to be treated differently in a way to grant certain privileges to shares held by them and therefore, issuance of privileged shares is not contrary to the equal treatment principle. Article 401 of the TCC stipulates that, The articles of association may grant preferential rights concerning dividends or the distribution of the assets of the company in case of winding up and other privileges to certain classes of share certificates. without providing a definition for the privileged share. Even though the text of the Article states that privileges can be granted to share certificates, it can be understood that the Article grants privilege to shares since the share certificate does not have a constitutive character on the issuance of shares and establishment of shareholding rights and obligations. In the New TCC, this confusion and the lack of definition for privileged share has been corrected. Article 478, paragraph 1 of the New TCC stipulates that Privilege may be granted to certain shares in the initial or amended articles of association and privilege has been defined in Article 478, paragraph 2 of the New TCC as follows: The privilege is either a superior right granted to the share concerning the dividend, liquidation share, preemptive and voting rights or a new shareholder s right not set forth in the Code. Thus, the New TCC permits a privilege to be created by granting a superior right in comparison with another share and also by granting a right not set forth in the New TCC. Issuance of privileges to groups As acknowledged by the Court of Appeal, a privilege is not only granted to a share but also to a share group. Privileges granted to certain share groups must be exercised together. In other words, the privileged rights accorded to shares held by the same group are not individually conferred, contrary to a privilege being granted to only one share. This means that a privileged right may be granted to a group as a whole, and the group may be obliged to exercise this right together, subject to certain quorums with respect to decisions to be adopted in special meetings for holders of such privileged shares. Method of issuing privilege While the underlying issuance method as to whether it is possible to issue privileged shares other than foreseeing the same in the initial articles of association is subject to discussion in the doctrine, the Court of Appeal has accepted that this may also be done through an amendment to the articles of association. The New TCC has clarified this issue by stipulating that issuance of privileged shares can be made through an amendment to the articles of association requiring a general assembly to adopt a resolution with the affirmative votes of the shareholders representing at least seventy-five per cent of the shares of the company. In case a quorum is not reached at the first meeting, the same quorum must be reached in the subsequent meetings as specified in Article 421, paragraph 3 of the New TCC. Types of privileges Pursuant to Article 401 of the TCC, privilege can be granted to dividends, distribution of liquidation proceeds and other cases. The third situation mentions that there is no such exhaustive list. Similarly, Article 478/2 of the New TCC enumerates in non-restrictive way cases where privilege can be granted stipulating specific wordings for privilege to pre-emptive and voting rights. Moreover, the New TCC foresees in Article 360 that privilege can also be granted concerning the right to be represented on the board of directors. In relation to the amendments to be intro- 2012/I 16

duced with the New TCC, voting rights are subject to certain restrictions. Pursuant to Article 479 of the New TCC, privilege in voting rights may be granted to shares with equal nominal value by conferring different number of voting rights which is contrary to the current legislation giving the possibility to also grant privilege in voting by conferring equal number of voting rights to shares having a different nominal value. On the other hand, while there is no limitation to the number of voting rights that may be granted to shares in the TCC; a maximum of five voting rights may be granted to one share in accordance with Article 479, paragraph 2 of the New TCC. Upon the request for the removal of such restriction due to institutionalisation or a just cause, the commercial court of first instance, where the registered address of the headquarters of the company is located, may decide to exclude such limitation upon review of just cause or institutionalisation project that the applicant is based upon. Any change to be made on the institutionalisation project is subject to court approval and the court decision for exception may be withdrawn if and when it is understood that the project cannot be realised or just cause ceases to exist. With respect to privileged rights to nominate candidates for the board of directors or the auditing committee, this right is considered as a group privilege according to the Court of Appeal s precedents. For the purposes of terminating discussions, Article 360, paragraph 1 of the New TCC envisages that the articles of association may foresee representation of certain groups in the board of directors meetings. Accordingly, in case such groups are granted the right to nominate candidates for the board of directors or auditing committees, such shares are deemed to be privileged. Civil and Criminal Liabilities of Executives under the New Turkish Commercial Code Merve ÇIKRIKÇIOĞLU- Oya UĞUR Turkey is on the verge of a new era with the enactment of the new Turkish Commercial Code ( New TCC ). Focusing on transparency and institutionalisation of commercial enterprises, the New TCC establishes new rules on corporate governance. Corporate governance is in fact a major concept introduced by the New TCC. In this respect, the New TCC also provides a systematic structure on the liability of executives. The liability concept is regulated under two sections: (i) Civil Liability and (ii) Criminal Liability. This article aims to present a framework of the amendments and modernisation brought under the New TCC in relation to the liabilities of executives. The provisions regarding civil and criminal liability of executives are separately regulated under the New TCC, which apply to both joint stock and limited liability companies. The board of directors is the key managing body in a joint stock company, whereas a limited liability company is administered by a manager or group of managers appointed by the shareholders. Accordingly, these rules regarding liability of executives mainly relate to board of directors in a joint stock company and managers in a limited liability company. However, although board of directors is the main managing body in a joint 2012/I 17

L E G A L N E W S B U L L E T I N T U R K E Y N ew stock company, the corporate reality shows that it is not the only managing body. In this respect, the New TCC identifies the distinction between the board of directors and management and introduces the concept of organisational internal regulation. As board of directors are entitled to delegate its authorities to certain board members of third parties, these liability provisions are not exclusive to board members in a joint stock company, and the persons who are responsible for the management of a company may be subject to civil or criminal liability, as the case may be. (i) Civil liability The New TCC provides a list of instances which will trigger the civil liability of executives. These instances are as follows: - Unlawful documentations and declarations: The liability arises from inaccurate and misleading documentations and declarations with respect to incorporation of a company, capital increase and decrease, mergers, spinoffs, conversions and issuance of securities. TCC identifies the distinction between the board of directors and management and introduces the concept of organisational internal regulation - Misrepresentation on the share capital and being aware of incapability to satisfy capital commitment: The liability arises from false declarations with regard to subscription and payment of share capital. - Fraudulent valuation of capital in kind: The liability originates from irregularity in valuation of capital in kind. - Collection of capital from the public: Save for the Capital Markets Board legislation, the liability emerges from collecting money from the public for purposes of incorporation of a company or increasing share capital of a company or promising to do so. - Breach of duty arising from laws and articles of association and lack of diligence in delegation of authority: The liability originates from breach of obligations of board members and executives arising from the laws and articles of association as well as from lack of diligence in case of delegation of authority. The New TCC stipulates various penalties for the persons who are held liable for these actions. The penalties vary between monetary fines and 3-month to 3-year imprisonments. However, in order for persons to be held liable for these actions, they need to act in negligence (kusurlu). If the relevant person proves that they have not acted negligently, they will not be held liable. The New TCC further states that if the management function is partially or completely delegated (for example, to a third party), such board member delegating the management function will not be held liable unless proved that he/she/it did not act diligently while delegating his/her/its authority to such other person. Extent of liability. The New TCC makes a remarkable amendment with respect to the extent of liability. In this regard, the New TCC introduces the concept of differentiated solidarity (farklılaştırılmış teselsül). Differentiated solidarity means that if more than one party is obliged to indemnify the same damage, each one will be held liable based on the degree of their fault and the circumstances of such instance. In this regard, where more than one board member is liable for compensation of damages incurred by the company, each board member will be liable pro rata to the degree of their negligence. Accordingly, a board member may not be held liable if no fault can be attributed to him/her, and the ones who are negligent will be held liable in proportion to the degree of their negligence. Discharge of liability. The general assembly may discharge the relevant executive(s) for such actions by obtaining a resolution with respect to a certain act or instance giving rise to liability. The shareholders who discharge a board member with their affirmative votes cannot initiate a lawsuit against such board member. The remaining shareholders who did not give affirmative votes may initiate a lawsuit provided that it is filed within 6 months following the release of such board member. It should be noted that a discharge of liability granted by a general assembly resolution cannot be rescinded by another general assembly decision. The New TCC provides an exception to this rule with regard to liabilities arising from incorporation of a company or share capital increase. In this respect, the board members cannot be discharged from their liability arising from the foregoing, unless a term of 4 years pass from the date of registration of the relevant company. Statute of limitations. Both the company and shareholders are entitled to request compensation for the foregoing instances. However, the 2012/I 18

action for compensation shall be brought within two years after becoming aware of the damages and the person to be held liable, and in any case within five years following the date of action that has given rise to damages. (ii) Criminal liability A major change brought under the New TCC is the criminal liability of the executives. The New TCC sets forth a list of penalties for breach of certain obligations stipulated under the laws. Below is a list of actions which trigger criminal liability of the executive. Please note that these crimes are subject to ex officio prosecution. The persons liable for the following actions will be imposed administrative fine of TL 4.000: - Board members and other executives failing to comply with the duty to keep books; - Board members and other executives to preserve copies of all kinds of documentation; - Board members and other executives failing to notarise the books at the opening and closing; - Board members and other executives failing to keep commercial books; - Those issuing fraudulent inventories; - Those failing to submit the documentation kept in electronic media; The persons liable for the following actions will be sentenced to judicial fine which shall not be less than 200 days: - Board members of an affiliate failing to comply with the reporting obligation with regard to relation with the parent company and affiliates; - Board members of an affiliate failing to submit the necessary information for the preparation of the report by the board of directors of the parent company. The persons liable for the following actions will be imposed a judicial fine which shall not be less than 300 days: - Relatives of the Board members up to certain degree breaching the prohibition to become indebted to the company in cash. - The Board members for whom the company grants surety, guaranty or any kind of security. - The persons who fail to provide (in part or in whole) the books, records, documents and information regarding thereto despite being requested by the authorized persons. - The persons who fail to keep the commercial books in line with the New TCC. The persons liable for the following actions will be imposed an administrative fine varying from 100 days to 300 days: - Board members and managers in a limited liability company failing to comply with their obligation to disclose information on the internet. The persons who breach the confidentiality obligation will be sentenced to imprisonment from one year to three years and also imposed a judicial fine up to five thousand days. Conclusion The New TCC sets forth the liabilities of executives thoroughly and systematically. Introduction of new corporate governance rules will enable companies to be represented and administered in a more professional manner. Enforcement of the New TCC will lead to transparency in management function, which will play a significant role in the protection of shareholders. Accordingly, the number of investors becoming shareholders in companies will increase in due course. 2012/I 19

L E G A L N E W S B U L L E T I N T U R K E Y Capital Increase under Registered Capital System under the New Turkish Commercial Code Ayşegül SOLMAZ As is known, the New Turkish Commercial Code ( New TCC ) will be effective from 1 July 2012 with the introduction of fundamental changes regulating the Turkish company rules and regulations. Within the framework of the New TCC, one of the sections subject to fundamental changes is, without any doubt, commercial companies. Changes in current provisions and principles of the Turkish Commercial Code ( TCC ) concerning commercial companies are enabling joint stock companies to adopt the registered capital system. (New TCC Article 332 paragraph 1) Please note that, the amended provisions do not make any change in the application of capital markets legislation and Capital Markets Board ( CMB ) regulations with respect to share capital increase. Capital markets legislation will continue to be applied to companies to launch IPOs or public companies, in addition to the New TCC provisions. As per the amended provisions, non-public joint stock companies are also able to benefit from the opportunity of flexible capital increase introduced by the registered capital system. This possibility would have a positive effect, considering the fact that the allocation of the registered capital system to publicly held joint stock companies does not have any theoretical base and the efforts of reducing the differences between publicly held and non-public joint stock companies. Opportunity to privately held companies for adopting registered capital system. According to Article 332 which enables joint stock companies to adopt the registered capital system, the basic capital representing the entire capital subscribed in the articles of association ( AoA ) may not be less than TL 50,000 and in case of an increase of the capital, the initial capital may not be less than TL 100,000 in privately held joint stock companies which have adopted the registered capital system disclosing the authorisation cap given to the board of directors. This minimum capital amount may be increased by the Council of Ministers. As a restrictive precondition to the increase in share capital, the essential principle in the TCC has been preserved by the New TCC where no new share could be issued unless the issued shares are sold in full and their amounts are paid except internal source transfers. Pursuant to the said article, paragraph 2, the initial capital in joint stock companies, which adopted the registered capital system, is the mandatory capital which must be possessed at stage of incorporation and when initially adopting the system; whereas the issued capital is the capital which represents the total of nominal values of the entire shares issued. Increasing the company s capital without convening a general assembly Another flexibility which is presented in the New TCC is increasing the company s capital without convening a general assembly. Pursuant to Article 460 of the New TCC, in the event 2012/I 20

C hanges that the authority to increase the capital up to the authorised shares capital is granted to the Board of Directors ( BoD ) in a non-public joint stock company. The BoD is entitled to take decisions on the subjects of issuing shares over the privileged and nominal value and limiting the right of the shareholders, to increase the capital up to the registered capital ceiling in compliance with the relevant regulations and the Company s AoA. The authority of the BoD to increase the capital up to the registered capital ceiling is restricted with 5 years by justice commission s suggestion while drafting the New TCC and according to such suggestion the authority of the BoD may not be more than for five years. Beyond any doubt, the precondition of increasing share capital in accordance with the registered capital system is to indicate specifically that registered capital system was adopted by the joint stock Company in its AoA. in current provisions and principles of the Turkish Commercial Code ( TCC ) concerning commercial companies are enabling joint stock companies to adopt the registered capital system. Procedures regarding capital increase under registered capital system for privately held companies As per this system, first of all the BoD will take a decision regarding increasing the capital up to the registered capital ceiling and within the framework of this decision, proceedings will be initiated regarding capital increase. For this purpose, the BoD will (i) draft the amendment of the AoA, (ii) and if necessary, provide the Ministry s approval in relation to such amendment in the AoA, (iii) announce the BoD resolution in order to inform the shareholders regarding capital increase in accordance with the procedure laid down in the AoA (iv) publish in the Company s website. Information about the amount of increased capital, nominal value, number and class of newly issued shares, whether these shares are premium shares or privileged shares and information about whether the right of first refusal is restricted or not and usage periods and conditions of this right of first refusal of the shareholders regarding these shares and other points to be considered pursuant to the public disclosure principle should be included under the board resolution concerning capital increase. After completion of these procedures on capital increase, the BoD will register and announce- the capital provision amendment of the AoA which will show newly issued shares with the Trade Registry. (Article 460 paragraph 6). Other new concepts in capital increase New concepts in addition to the above are (i) transforming assets into share capital (ii) increasing in share capital through issuance of convertible bonds and bonds with warrants. The procedures of transforming assets into share capital involves a general assembly decision or the board of directors resolution regarding the increase and amending AoA of the Company and registry of this amended version of AoA with the Trade Registry. Simultaneously with the registration, existing shareholders in the company become entitled to acquire the ownership of the new shares without paying any consideration. Secondly, another new method; increase in share capital through issuance of convertible bonds and bonds with warrants which provides an option to joint stock companies to issue convertible bonds and bonds with warrants the exercise of which would lead to increases in the share capital. Conclusion: Having preserved the current methods in share capital increase, the new concepts have been regulated under the New TCC in share capital increase and such changes have been introduced to bring more functionality especially to the joint stock companies. With all these fundamental changes, Turkish Commercial Law is aligned with international standards of corporate finance and governance. 2012/I 21

L E G A L N E W S B U L L E T I N T U R K E Y Key Considerations for Private Equity Investors in the New Turkish Commercial Code Jonathan CLARKE Introduction From 1 July 2012 the New Turkish Commercial Code ( New TCC ) will enter into force and dramatically change the legislative landscape in which Turkish private equity investments are conducted. On the whole, this change will be for the betterbringing in consistency, transparency and alignment with international legislative and accounting standards. However, naturally some Articles will require clarification in secondary legislation. We set out below five key changes brought in by the New TCC that private equity investors should consider when doing Turkish deals or managing and exiting from Turkish portfolio companies. Key considerations 1. More precise constitutional structure at shareholder and director level The New TCC contains an exhaustive list of what can be put in the Articles of Association of a Turkish joint stock company. Somewhat controversially, it also limits the content of Articles to what is expressly permitted in the New TCC. This may mean that private equity investors will not be able to put more complex share transfer rights and restrictions (e.g. drag/tag and put/ call) in the Articles of portfolio companies (and will instead have to rely on shareholders agreements). Further, in practice, all existing Articles of portfolio companies will need to be amended to ensure compliance with the New TCC. The New TCC enables Turkish joint stock companies for the first time to clarify and separate the roles and liabilities of their directors through a separate corporate regulation (under the previous regime directors had joint and several liability). It also permits corporate entity directors in Turkish joint stock companies for the first time. These developments should benefit private equity investors who want to ringfence the liability of their directors. 2. Simplification and transparency of corporate bodies and groups The New TCC allows for corporate groups to be simplified with single director and shareholder companies a possibility for the first time. Within a private equity context, this will enable existing portfolio groups to be more simply structured and will ease deal structuring. Private equity investors will also benefit from having more transparent corporate groups to diligence under the New TCC thanks to more extensive IFRS and IAAS accounting and auditing requirements and various company website disclosure requirements. Conversely, portfolio companies will now have to comply with these more onerous requirements. The New TCC seeks to prevent parent companies from prejudicing their subsidiaries through the requirement that parent companies should not inflict losses on subsidiaries (unless such losses are compensated by the end of the relevant accounting period). This will make corporate groups more straightforward to diligence but to a certain extent limits what private equity investors are able to do with portfolio groups. It also (when taken together with the ban in 2012/I 22

O n the New TCC on loans from companies to their shareholders) threatens to outlaw financial assistance from a subsidiary to its parent which is necessary for acquisition financing of private equity deals. Turkish banks have structuring solutions to this (through for example enforced mergers or partial loans to both a parent and relevant subsidiaries) but it will be interesting to see whether the secondary legislation to the New TCC provides any clarity here. Similarly, the New TCC permits online board and shareholder meetings executed by electronic signatures. This seems to make such meetings to be easier to hold and administer (something that will cheer funds who hold shares through offshore companies and require foreign directors). However, there is currently no legislative clarity as to how this will work in practice. the whole, this change will be for the better- bringing in consistency, transparency and alignment with international legislative and accounting standards. However, naturally some Articles will require clarification in secondary legislation. 3. Better minority shareholder and squeeze out rights A minority shareholder which owns more than 10% of the shares in a Turkish joint stock company has much better rights under the New TCC. These include greater information rights and the right to request a special audit of the company (and apply to the court to enforce this request). Such shareholders may also request a shareholders meeting and determine its agenda or adjourn it for one month; substitute an external auditor in certain circumstances; and seek a court order for the winding up of the company based on just cause. In the private equity context this will reassure minority investors but mean that majority investors will have to be careful to understand the rights that they are giving to management team shareholders for example. By way of balance, the New TCC enables 90% shareholders to, for the first time, squeeze out a minority shareholder if it obstructs the company s operations or acts in bad faith or with recklessness (although it stops short of providing unilateral squeeze out rights except in the case of a merger). 4. A majority board is less able to block share transfers Under the previous Turkish company law regime a majority board could theoretically reject a share transfer for any reason. Under the New TCC a majority board can only reject a share transfer for certain important reasons prescribed in a company s Articles. However, the New TCC does enable a majority board to reject a share transfer and instead require that the company, majority shareholders, or a third party buys the shares at a fair value (to be set by a court). It will be interesting to see whether secondary legislation provides any clarity on this last point; but, until there is such clarity, minority private equity investors will still have to be careful to safeguard share transfer rights as much as is possible in Turkish deals. 5. Intriguing transaction structuring possibilities The New TCC clarifies and simplifies merger procedures (there is no need to apply to the court as under the previous regime); and allows for mergers between different types of companies, expedited merger procedures in certain circumstances, and asymmetric demerger. This together with the unilateral minority squeeze out provisions for 90% shareholders will mean that mergers may be considered more often in private equity deal structuring (particularly where there is leveraged financing in place and the banks want a holdco to merge into its subsidiary). Joint stock companies also have more flexibility as to what they can do with share capital under the New TCC. Companies can buy back up to 20% of their shares (which will enable partial exits for private equity investors) and can more easily decrease share capital. Also a conditional capital increase is possible under the New TCC which seems to allow for debt/equity instruments and share option schemes to incentivise management- both of which would be an attractive structuring tool on private equity deals. However, the provisions of the New TCC around conditional capital increase (such as the requirements for the conditions to be stated in a company s articles of association) may again require further clarification in secondary legislation. 2012/I 23

L E G A L N E W S B U L L E T I N T U R K E Y Joint Stock Companies vs. Limited Liability Companies under the New Turkish Commercial Code Feriha Ferhan KARADENİZ T he The New Turkish Commercial Law No. 6102 ( New TCC ) which will enter into force on July 01, 2012 aims to customise the Turkish commercial practice with the EU regulations by adopting correlative provisions to the ones being used in the EU legislation. The New TCC redefines the rules of commercial life with its modern approach by offering an important opportunity to investors for institutionalisation and establishment of public confidence and transparency as well as it facilitates the daily business of companies. One of the most important headings of the novelties brought by the New TCC pertains to the establishment and operation of Limited Liability Companies ( LLC ) and Joint Stock Companies ( JSC ). New TCC does not only bring significant changes to the way these companies are governed but it also reorganises their auditing mechanisms, minimum capital requirements which are expected to regenerate the Turkish commercial life. In view of the fact that, compared to other types of companies, LLCs and JSCs are often preferred by the investors for setting up a business in Turkey, changes related to these are of great importance for the investors. The New TCC does not only bring significant changes to the way these companies are governed but it also reorganises their auditing mechanisms, minimum capital requirements which are expected to regenerate the Turkish commercial life. We set out some of the headline changes for both company types below. The New TCC has changed the minimum capital requirement of LLCs by increasing the minimum capital from TRY 5.000 to TRY 10.000. The capital must be fully paid in cash upon establishment. On the other hand, the minimum capital requirement for JSCs remained as TRY 50.000; however, it has been determined as TRY 100.000 for non-public JSCs with the registered capital system. A significant change brought about by the New TCC relates to the number of minimum shareholders in both JSCs and LLCs. Either company may be established by one shareholder instead of five and two, respectively. In case the number of shareholders is decreased to one, this must be notified in writing to the manager(s) of the company. The managers, after having been notified thereof, must apply to the trade registry for the registration and announcement of the company s new structure, indicating the name, residence and nationality of the sole shareholder. In case of failure to do so, the company management will be liable. The novelty relating to the possibility of incorporating the companies with sole shareholder introduces many advantages. The foreign investors no longer need to enter mandatory partnerships to establish a JSC or an LLC. The New TCC also opens the way for legal entities to be board members provided that a person is designated to represent the legal entity. It should also be noted that it is not possible to appoint more than one person on the board of directors representing the legal entity. Besides, the board of directors may consist of a single mem- 2012/I 24

T he ber and board members are no longer required to be a shareholder in the JSC. With the New TCC, intellectual property rights will be investable as capital in kind. According to the New TCC, this term covers, among others, trade names, designs, patents and geographical signs. The New TCC specifies the rights of shareholders to attend, bring proposals, declare opinions and vote at the general assembly of JSCs through electronic means. With regard to those novelty relating to the possibility of incorporating the companies with sole shareholder introduces many advantages. The foreign investors no longer need to enter mandatory partnerships to establish a JSC or an LLC. companies whose shares are floated on the stock exchange, application of such system is obligatory. The New TCC also enables the board members to attend and to vote in meetings via transfer of image and voice according to the provisions of the articles of association of the company. The New TCC also smoothes the way for performance of activities out of the scope of activity stipulated in the articles of association of JSCs. It also ensures the execution of transactions outside of the scope of activity of the company by the board of directors. A novelty with regard to the LLCs related to the commercial books. The LLC should keep a share ledger reflecting the following; names/titles and addresses of the shareholders, number of shares held by each shareholder, share transfer details, nominal value of shares, class of shares, encumbrances over the shares and the names/titles and addresses of beneficiaries of such encumbrances created over the shares. The LLC is also obliged to keep commercial books indicating the commercial transactions and asset structure of the company. The LLC shall observe and apply Turkish Accounting Standards as announced by the Turkish Accounting Standards Board, including the conceptual framework of accounting principles and interpretations while keeping its commercial books. An important change however, is that the compulsory accounting standards will adopt International Financial Reporting Standards (IFRS). The opening and closing of the books must be certified by a notary public. [1] In conclusion, the New TCC is a crucial step in the harmonisation process of Turkish Law with the EU legislations. It replaces outdated provisions with practical ones by focusing especially on the issues such as establishment, corporate governance, transparency and accounting. In order to be prepared for the New TCC, the companies should use the transition period wisely by adapting their organisations to these novelties. [1] http://www.mondaq.com/x/171338/directors+office rs+executives+shareholders/company+formation+ Under+The+New+Turkish+Commercial+Code 2012/I 25

L E G A L N E W S B U L L E T I N T U R K E Y Re-Buttle of Articles of Association and Shareholders Agreement: Share Transfer Restrictions under the New Turkish Commercial Code Dilek NAZİKOĞLU The articles of association ( AoA ) is an agreement drafted in line with the principles and obligatory terms governing commercial companies under Turkish laws and executed by the founder shareholders at the time of the incorporation. The AoA regulates the institution of the company, powers and duties of the company s organs and rights and obligations attributed to the ownership of shares. On the contrary to common-law jurisdictions, the Turkish law does not openly refer to shareholders agreement ( SHA ) in commercial companies. Other than the mandatory AoA, Turkish commercial companies became familiar with the concept of SHA, as an individually executed agreement among shareholders in the last decade. Against all odds within the mandatory provisions of the Previous Turkish Commercial Code ( Previous Code ), AoAs are started to be executed in a manner to regulate issues especially like share transfer restrictions, which would preferably be a subject of an SHA. As a result of extensively executed AoAs, a differentiation is made among the provisions of this instrument. At one hand, the mandatory provisions of the Previous Code provide that the one and the only obligation of a commercial company s shareholder is to make the contribution payment to the capital of the company pro rata its subscription. Such framed obligation results a dramatic restriction in attaching shareholders with further obligations on share transfer restrictions. On the other hand, SHAs reflected in the AoAs bring further obligations for shareholders. In this respect, the provisions of an AoA which comply with the mere obligation idea of the legislation will bind the founders, existing and prospective shareholders of the relevant commercial company as well as its branches, whereas the rights and obligations derived from the provisions of an AoA, the regulation of which the Previous Code does not mandate (i.e. a reflection of the SHA, especially the provisions referring to restrictions on share transfers; obligations/limitations such as pre-emptive purchase rights or call option rights will not bind the company, its branches or the existing/prospective shareholders since they are deemed as against the rationale behind the obligations approach of the Previous Code. Thus, even though such provisions are included in the AoAs, they cannot be enforced against the company or third parties. The provisions that the legislation do not call for can only consequence contractual commitments between the shareholders, the terms of which are agreed by the parties as per the Code of Obligations. In this respect, SHAs can be defined as agreements concluded by and between shareholders in accordance with the principles of the Code of Obligations. Under the principle of freedom of contract set forth in the Code of Obligations, matters that cannot be enforced within the AoA, such as, inter alia, call/put options, share sale and/or purchase obligations, and tag/drag along rights may be regulated in an SHA. The concerned enforceability blockage before third parties under the Previous Code is not likely to be eliminated with the adoption of New Turkish Commercial Code ( New Code ) for joint stock companies. Similar to the Previous 2012/I 26

S imilar Code, the New Code also lists the items that must be provided in the AoA of joint stock companies and states that the AoA is basically prohibited to deviate from such list. The SHAs will continue to be legal instruments implemented by the investors who will be the new shareholders of the target formed as a joint stock company and wish to bind the existing shareholders with obligations that commonly met in practice (i.e. share transfer restrictions, establishment of management mechanisms for operation of target companies). to the Previous Code, the New Code also lists the items that must be provided in the AoA of joint stock companies and states that the AoA is basically prohibited to deviate from such list. Preserving the concept that the shareholders sole obligation against the company is the payment of the capital contribution that they subscribed, the New Code, however explicitly refers to rights such as put options and call options. The New Code makes the issue clear for limited liability companies by plainly providing that rights such as put option, call option, tag along and drag along can be regulated in AoAs which will be entirely binding and enforceable before the relevant limited liability companies. However, even though the New Code recognizes rights restricting share transfers in limited liability companies, the preference ratio of limited liability companies is likely to be low for many investment structures as major tax disadvantages remain. In general, the New Code embraces the principle of free transferability share transfers in joint stock companies. The board of directors cannot refuse to register a share transfer unless they can demonstrate that their reason for doing so relies on the AoA, except by the instance that the share transfer is proposed to be made to the company, the majority shareholders or a third party. Overall, it is reasonable to argue that it will not be possible to enforce share transfer restrictions such as put/call options, or tag along/drag along rights in the AoAs of joint stock companies when the New Code comes into effect. The shareholders however will still be allowed to include such provisions in SHAs, reflect them in the AoA to some extent and ensure their performance through penalty clauses, blank endorsements or escrow mechanisms. It will still be possible to establish these rights in an SPV provided that such an SPV is incorporated in a jurisdiction that fully recognizes these rights. Under this framework, the SPV company would own the Turkish operating company. In addition, a Turkish limited liability SPV could also be considered. However, it must be borne in mind that the amount of tax that would be incurred upon transfer of share in such limited liability SPV would render this option quiet impracticable. Share transfer restrictions such as put/call option and tag along provisions and the like shall continue to form an essential part of SHAs, providing the investors with the possibility of facilitating and accommodating different characteristics of each transaction. 2012/I 27

L E G A L N E W S B U L L E T I N T U R K E Y The New CMB Communiqué on Corporate Governance Ceren BERİSPEK The Capital Markets Board of Turkey ( CMB ) has been authorised by Decree Law No. 654 (published in the Official Gazette dated October 11, 2011 and numbered 28081) to determine and publish corporate governance principles applicable for the capital markets. Based on this authorisation the CMB published the Communiqué Serial: IV, No: 54 on the Determination and Implementation of Corporate Governance Principles (published in the Official Gazette dated October 11, 2011 and numbered 28081) ( Previous Communiqué ). Just 80 days after the Previous Communiqué has, the CMB has revised corporate governance principles once again and introduced Communiqué Serial: IV, No: 56 on the Determination and Implementation of Corporate Governance Principles ( New Communiqué ) (published in the Official Gazette dated December 30, 2011 and numbered 28158) had been enacted. Further, the CMB has made another set of revisions in the New Communiqué due the concerns raised by ISE Companies and introduced Communiqué Serial: IV, No:57 (published in the Official Gazette dated February 11,2012 and 28201). The Previous Communiqué covered only companies (excluding banks) within the ISE-30 index. Therefore, the CMB has introduced the New Communiqué on the same matter in order to increase the scope. As a result, all companies listed on the Istanbul Stock Exchange ( ISE Companies ) are obliged to be in accordance with certain mandatory and non-mandatory principles determined by the New Communiqué. 1. Scope of the New Communiqué The New Communiqué classifies ISE Companies in three categories based on their systematic importance, market value and the value of the free-float shares. Accordingly, the ISE Companies are subject to different mandatory corporate governance principles depending on their categories. (i) First Category: ISE Companies with market value exceeding TL 3,000,000,000 and free float value exceeding TL 750,000,000; (ii) Second Category: ISE Companies with market value exceeding TL 1,000,000,000 and free float value exceeding TL 250,000,000, and, (iii) Third Category: All other ISE Companies which do not fall under (i) and (ii) above, and those traded at the Emerging Companies Market and Watch-list Companies Market. According to the New Communiqué, the ISE Companies under the First Category are required to comply with all mandatory corporate governance principles, whereas ISE Companies under the Second Category and/or Third Category are exempt from certain sections of the compulsory principles. 2. Transition Period and Timing According to the New Communiqué, ISE Companies are required to adapt their articles of association and restructure their boards to reflect compliance with the New Communiqué in their 2012/I 28

I SE first general assembly, which shall be convened no later than 30 June 2012. Further, New Communiqué shall be applicable for ISE Companies as from 30 December 2011. However banks listed at the ISE will be subject to the provisions of the New Communiqué following 30 December 2012. 3. Compulsory Principles Under the New Communiqué, the categories of the companies which must abide by compulsory principles are extended to include all ISE Companies. Below are the new compulsory principles to be applied by ISE Companies under the First Category, and which are applicable with certain exemptions for ISE Companies under the Second and Third Category: a) Call for the General Assembly Announcements for the general assembly meetings shall be made at least three weeks prior to the meeting date through any communication means. Companies are required to adapt their articles of association and restructure their boards to reflect compliance with the New Communiqué in their first general assembly, which shall be convened no later than 30 June 2012. Along with the call for the general assembly, certain matters have to be disclosed to the shareholders through the website of the ISE Company. b) Conflict of Interest For transactions which may lead to conflict of interest or competition with the ISE Companies and controlling shareholders, board members, high level executives and their up to second degree relatives, a prior approval of the general assembly is required. Further, the general assembly is also required to be informed of these transactions and competitive activities. c) Requirement to Have General Assembly Resolution for Certain Matters According to the New Communiqué, certain material transactions namely the lease or transfer of all or significant portion of ISE Company s assets, or establishment of rights in rem over all or significant portion of ISE Company s assets, acquire or lease a material asset, establishing privileges or changes in the scope of current privileges and delisting from the ISE can directly be executed by the Board if majority of independent directors provide their consent. However if the majority of independent directors do not approve those material transactions and the Board insists on the execution, the approval of the general assembly is required for the execution of those material transactions. In such a case, reasons behind the dissenting votes of independent directors shall be disclosed to the public, notified to the CMB and shall be presented to the general assembly convened for the approval of the relevant material transaction. Further if the material transaction fall under the category of related party transactions, such related parties shall not vote at the relevant general assembly. There is no meeting quorum for these meetings and the resolution is adopted by majority of the present votes. d) Composition of the Board and Independent Board Directors The Board of Directors ( Board ) should be composed of at least five members consisting of both executive and non-executive members. The majority of the Board should consist of non-executive directors. Among the non-executive directors, the Board shall include independent directors. The number of independent directors shall not be less than one third of the Board. In any case, the number of independent Board members shall not be less than two. However, this principle shall not apply to ISE Companies under Category III and, under certain conditions, for jointly managed companies. It is sufficient for those companies to have only two independent directors in their Boards. Independent directors shall be appointed for a period up to three years and can be re-elected, provided that they do not serve as board members for more than six years within the last ten years. The New Communiqué provides certain criteria to be applied for a director to be deemed as an independent director. The New Communiqué introduces a new system for the evaluation of the independency of the nominees. Firstly the Nomination Committee will assess the independency of the nominee based on the independency criteria applied under the New Communiqué 2012/I 29

L E G A L N E W S B U L L E T I N T U R K E Y and report this matter to the Board. Then the Board should prepare a list of independent members in the light of this report. Such list should be submitted to the CMB at least 60 days prior to the proposed general assembly meeting. If the positive opinion of CMB shall not be obtained with regard to an independent director nominee, such nominee cannot be nominated at the general assembly of the company. Please note that for ISE Companies under the Second Category and Third Category, the independent board membership nominee list is not required to be sent to the CMB for approval. Board resolutions regarding related party transactions or granting any guarantee, pledge, mortgage in favour of third parties require affirmative vote of the majority of independent board members. If the majority of independent board members shall not approve the relevant board resolutions, then such matters will be referred to the general assembly. committee; (iv) early risk determination committee; (v) remuneration committee. In case of failure to establish a nomination committee, early risk determination committee or remuneration committee, the corporate governance committee shall carry out the tasks of such committees. All members of the audit committee and the chairman for other committees should be elected from among independent members of the Board. The chief executive officer and/or the general manager of the company cannot be member of a committee. It is recommended that a board member is not appointed to more than one committee. f) Remuneration of Board Members According to the New Communiqué, remuneration principles must be in writing and remuneration policy should be published on the website of the ISE Company. e) Board Committees According to the New Communiqué, the following committees should be established in order to enable the Board to execute its tasks in an efficient manner: (i) audit committee; (ii) corporate governance committee; (iii) nomination Remuneration of the independent board members should be provided at a level to sustain independence. The independent board members cannot receive stock options or performance based payment plans. 2012/I 30

Corporate Governance: The Balance between Transparency and Onerous Reporting Requirements Günel RZAYEVA T he The reform on the Turkish Commercial Code aims to position our commercial law in harmony with European Union directives. In this context, the main concept of the New Turkish Commercial Code ( New TCC ), which will be effective from 1 July 2012, is to adopt corporate governance principles for transparency and information society. The provisions regarding corporate governance no longer denotes a system of rules applicable only to publicly traded companies; the new regulations will apply to all types of companies. The main aim of these provisions is to inspire investor confidence and ensure sustainable development. corporate governance elements which are formed in the New TCC can be classified under three pillars: transparency, fairness, and accountability and responsibility. The corporate governance elements which are formed in the New TCC can be classified under three pillars: transparency, fairness, and accountability and responsibility. The titles of the provisions with regard to transparency of the company are as follows; - Website - Annual reports - Independent audit - Comprehensive disclosure of transactions with group companies - Corporate Governance report to be published by public companies - Public Surveillance, Accounting and Auditing Standards ( Standards ) identical to International Standards ( IS ) and announcement of the audited accounts through web sites. The main benefit of the provisions regarding the accountability standards is to ensure financial reports are understandable universally and comparable with all global companies due to IS and to gain confidence with the transparency of the company. These accountability standards are applied in approximately 70 countries in the world, particularly in European Union countries and now with the New TCC, these standards will also apply to Turkish companies. The provisions reforming the commercial books of the company which are financial statements of capital stock companies and group of companies and the annual report of the Board of Directors are the most remarkable changes introduced regarding transparency in corporate governance. The provisions that require the audit of capital stock companies to be made in accordance with Standards, which are in line with 2012/I 31

L E G A L N E W S B U L L E T I N T U R K E Y T he international standards on auditing and financial reporting standards and announcement of the audited accounts through web sites is the dominant concept of the transparency. The New TCC enforces modern accounting rules for financial statements which have to be prepared in conformity with Standards published by the Standards Board which have been and will be further enforced according to IS. Therefore, all of the stock companies and group companies have to change their accounting systems in order to keep their commercial books in accordance with Standards. The concepts introduced with the Standards are the control principle, consistent application of uniform accounting policies, elimination of intra-group transactions, minority interest, and acquisition and disposal subsidiaries. The internationally accepted reporting standards are applicable to the companies which are not required to publicly publish their financial statements and which publish general purpose financial statements for related legal and real personalities. provisions reforming the commercial books of the company which are financial statements of capital stock companies and group of companies and the annual report of the Board of Directors are the most remarkable changes introduced regarding transparency in corporate governance. Within this framework, a further obligation has also been introduced regarding the preparation of consolidated financial statements. Preparation of financial statements in accordance with IS and independent audits in line with International Auditing Standards will necessitate adoption of many international standards in matters such as internal controls, internal audit and risk management, all of which are requirements for corporate governance under Turkish standards and which make change obligatory. As per Article 64/2 of the New TCC enterprises shall document and file all of its commercial transactions, if necessary electronically, which means that electronic registry mechanisms shall be integrated within the accounting system of a company. The New TCC intends to harmonise financial information prepared in accordance with IS with the international markets by introducing a uniform application and principles to accounting and reporting practices. Concepts like materiality, comparability, substance over form and true and fair view, which previously did not have a significant role, will be included in the conceptual framework of Standards in line with IS. The responsibility of joint stock companies to prepare financial statements, notes to financial statements, annual report of Board of Directors as included Standards are prepared and presented to the general assembly within 3 months subsequent to the balance sheet date. The declaration in the Turkish Trade Registry Gazette and on the website shall be made within 6 months subsequent to the balance sheet date. The New TCC regulates the detailed provisions regarding the enforcement of the application of Standards. The provisions with regard to the enforcement of related provisions regarding Standards in line with IS will be effective as of 1 January 2013. The Standards Board has already published and will publish the principles regarding the same. On the other hand, Article 1524 of the New TCC stipulates that the capital stock companies which are subject to be audited shall create a web site and publish the matters specified under the New TCC. According to this provision the capital stock companies which are established subsequent to entry into force of the New TCC shall create a web site within 3 months following its registration to the Trade Registry. The companies which have already established shall create a web site and publish the information within 3 months on their web site. Where the New TCC did not specify duration for publication of the information that the companies shall publish on the web site, the companies shall publish these information within 5 days following such transaction. As per Article 1524 of the New TCC, these provisions are not obligatory for the companies which are not subject to be audited. These provisions will be implemented through secondary legislation. Since the closed joint stock companies are not in favour of this provision, they voice their criticism, trying to limit the scope of the secondary legislation which is yet to be enacted. In consequence, with implementation of these provisions in the New TCC, regarding the accountability standards, the financial reports of the companies will be at an efficient quality standard to realise public offerings at any time in Turkey and around the world. The companies commercial books will be kept in transparency. 2012/I 32

The New Investment Incentive Scheme Sena Nur ÇELİK T he Turkey has been restructuring its economy along the lines of a more liberal economic policy since the 1980s. An important component of Turkish policy is providing fiscal incentives to channel domestic and foreign investments for industrial development and rural-urban integration. These tax and non-tax incentives are available to investors for the promotion of private investment activities in selected sectors and regions depending on the scale of investment. The investors can benefit from these incentives through an Investment Incentive Certificate ( IIC ) that is granted by The Foreign Investment Department of the Treasury for projects where foreign investment is involved. New Scheme allows the private sector to benefit from public support at the investment stage, which will significantly ease the burden of financing on the investors. 1. The Reforms Introduced by the New Scheme Compared to the previous scheme, the New Scheme expands the incentive instruments and the scope of the incentives granted in order to fulfil the objectives explained above. According to the New Scheme, provinces are ranked in terms of social-economic development and divided into six groups in terms of priority of incentives. The provinces in the sixth group, mostly consisting of poorer eastern and south-eastern provinces, will receive the highest support. The new incentives turn the sixth group into the most competitive region in terms of labour cost. Under the New Scheme, the minimum investment requirements for an investment to qualify as a large-scale investment are decreased remarkably in order to enhance the number of investments in industries such as production of pharmaceutical products, production of chemicals, production of motor-vehicles, investments in seaports and port services and investments in electronic industry. The fundamentals of the New Incentive Scheme for Turkey ( New Scheme ) were declared on 05 April 2012, followed by an announcement on 06 April 2012. Subsequently, the New Scheme was implemented on 19 June 2012 by the Council of Ministers Decision No. 2012/3305, published at the Official Gazette No. 28328. The objective of the New Scheme is to reduce the current account deficit, increase the added value of production, ensure development in the least developed regions, increase the efficiency of support instruments, overcome regional disparities, and support clustering and high technology investments to improve global competitiveness of Turkey. The first section of this article emphasises the most significant reforms introduced by the New Scheme and the second section provides a short overview of its details. For the first time the New Scheme introduces the concept of strategic investments and prioritises investments in industries such as defence, automotive, aerospace and aviation, rail and sea transport, pharmaceuticals, education, tourism and mining. Strategic incentives will receive a very high degree of support. As opposed to the previous investment incentive scheme, the new package provides very generous incentives to promote investments in Organised Industrial Zones ( OIZ ) in order to ensure a more regular and environment-friendly industrialisation around the city. Another important reform introduced by the New Scheme is that investors are allowed to benefit from tax reduction within the invest- 2012/I 33

L E G A L N E W S B U L L E T I N T U R K E Y ment period and apply tax reduction support to all of the revenues obtained during the period of the supported investment. In other words, investors can deduct a certain percentage of the cost of an investment from revenues obtained in any other businesses, hence gaining additional financial source for the investment. In all of the previous incentive systems, incentives were granted during the operation stage, at the end of the investment stage. This practice was criticised harshly by the private sector since it made it much more difficult for the investors to finance their investment. The New Scheme allows the private sector to benefit from public support at the investment stage, which will significantly ease the burden of financing on the investors. As the level of development of the investment region increases, the proportion of the amount of total support to be granted during the investment phase will increase. In other words, the scheme makes it more attractive to invest in the underdeveloped regions in order to decrease tax obligations resulting from the activities in more developed regions. 2. The Details of the New Scheme The new investment incentives package consists of four different schemes: General Investment Incentive Scheme Regional Investment Incentive Scheme Large Scale Investment Incentive Scheme Strategic Investment Incentive Scheme 3. Support Measures The support measures provided within the scope of these schemes are summarised in the table below: SUPPORT MEASURES General Investment Incentive Scheme Regional Investment Incentive Scheme Large Scale Investment Incentive Scheme Strategic Investment Incentive Scheme VAT Exemption Customs Duty Exemption Tax Reduction Social Security Premium Support (Employer s Share) Income Tax Withholding Support* Social Security Premium Support (Employee s Share)* Interest Support** Land Allocation VAT Refund *Provided that the investment is made in Region 6 **Provided that the investment is made in Regions 3, 4, 5 or 6 under the scope of the Regional Investment Incentive Scheme VAT Exemption: VAT is not paid for imported and/or domestically provided machinery and equipment within the scope of the IIC. Customs Duty Exemption: Customs duty is not paid for the machinery and equipment imported from abroad within the scope of the IIC. Tax Reduction: Calculation of income or corporate tax with reduced rates until the total value reaches to the amount of contribution to the investment according to envisaged rate of contribution. Social Security Premium Support (Employer s Share): The social security contributions paid by employers for the premium amount calculated over the minimum wage will be covered by the state for a certain period of time. Income Tax Withholding Allowance: The income tax regarding the additional employment generated by the investment within the scope of the IIC will not be liable to withholding. Social Security Premium Support (Employee s Share): The employee contribution to insurance premiums calculated over the minimum wage will not be paid for 10 years for the employment provided by investments in the 6 th Region. Interest Support: Interest support is provided for the loans obtained in relation to IICs with a term of at least one year. A certain portion of the interest/profit share regarding the loan equivalent of at most 70% of the fixed investment amount registered in the certificate will be covered by the Ministry. 2012/I 34

Land Allocation: Allocation of land regarding the investments with IICs will be determined by the Ministry of Finance. VAT Refund: VAT collected on the building and construction expenses made within the scope of strategic investments with a fixed investment amount of TL 500.000.000 will be rebated. 4. Regions and Classification of Provinces The New Scheme increases the number of regions from four to six and differentiates the incentive amounts so that the least developed regions benefit to the highest degree. The following table demonstrates the classification of provinces for the purpose of implementing the new investment incentive scheme. 1st Region 2nd Region 3rd Region 4th Region 5th Region 6th Region Ankara Adana Balıkesir Afyonkarahisar Adıyaman Ağrı Antalya Aydın Bilecik Amasya Aksaray Ardahan Bursa Bolu Burdur Artvin Bayburt Batman Eskişehir Çanakkale Gaziantep Bartın Çankırı Bingöl İstanbul Denizli Karabük Çorum Erzurum Bitlis İzmir Edirne Karaman Düzce Giresun Diyarbakır Kocaeli Isparta Manisa Elazığ Gümüşhane Hakkari Muğla Kayseri Mersin Erzincan Kahramanmaraş Iğdır Kırklareli Samsun Hatay Kilis Kars Konya Trabzon Kastamonu Niğde Mardin Sakarya Uşak Kırıkkale Ordu Muş Tekirdağ Zonguldak Kırşehir Osmaniye Siirt Yalova Kütahya Sinop Şanlıurfa Malatya Tokat Şırnak Nevşehir Tunceli Van Rize Yozgat 8 provinces 13 provinces 12 provinces 17 provinces 16 provinces 15 provinces Sivas W hen compared to the previous investment incentive packages, it is possible to foresee that the reforms introduced by the New Scheme will make a large contribution to increase the amount of manufacturing industry investments in different regions of Turkey, especially the underdeveloped regions. 5. General Investment Incentive Scheme Regardless of in which region an investment is made all projects that meet conditions of specific capacity and the following minimum fixed investment amount will be supported under the scope of the General Investment Incentives Scheme. The amount of minimum fixed investment is TL 1.000.000 in region 1 and 2 and TL 500.000 in regions 3, 4, 5 and 6. The investment projects that fall under the scope of the General Investment Incentives Scheme only will benefit from customs duty and VAT exemptions on their machinery and equipment expenditures. 6. Regional Investment Incentive Scheme The sectors to be supported in each province are determined in accordance with potentials of the provinces and the economies of scale and the intensity of the support measures are differentiated in line with the development level of the regions. The amount of minimum fixed investment is defined separately for each sector and each region, the lowest amount being TL 1.000.000 in regions 1 and 2, and TL 500.000 in the remaining regions. The terms and rates of supports within the Regional Investment Incentives Scheme are summarised in the Table below: 2012/I 35

L E G A L N E W S B U L L E T I N T U R K E Y INCENTIVE MEASURES REGIONS I II III IV V VI VAT Exemptions YES YES YES YES YES YES Customs Duty Exemption YES YES YES YES YES YES Tax Reduction Rate of Contribution to Investment (%) Out of OIZ 15 20 25 30 10 50 Within OIZ 20 25 30 40 50 55 Social Security Premium Support (Employer s Share)* Support Period Out of OIZ Within OIZ 2 years 3 years 3 years 5 years 5 years 6 years 6 years 7 years 7 years 10 years 10 years 12 years Land Allocation YES YES YES YES YES YES Interest Support Local Loans N/A N/A Foreign Exchange / FX denominated loans N/A N/A 3 points 1 point 4 points 1 point 5 points 2 points 7 points 2 points Social Security Premium Support (Employee s Share) N/A N/A N/A N/A N/A 10 years Income Tax Withholding Support N/A N/A N/A N/A N/A 10 years *For investments starting before 31 December 2013 7. Large Scale Investment Incentive Scheme The investment categories demonstrated in the table below are supported by the measures of Large Scale Investment Incentive Scheme: INVESTMENT ACTIVITY AREA Minimum Fixed Investment Amount (Million TL) Production of Chemical Products 200 Production of Refined Petroleum Products 1,000 Transportation Services via Transit Pipeline 50 Main Industry Investments in Land-based Motor Vehicles 200 Supply Industry Investments in Land-based Motor Vehicles 50 Manufacturing of Railway and Tram Locomotives and/or Wagons 50 Port and Port Services Investments 200 Electronics Industry Investments 50 Manufacturing of Medical Devices and Precision and Optical Devices 50 Drug Production 50 Manufacturing of Air and Space Vehicles and/or Components 50 Manufacturing of Machinery (Including Electric Machines and Devices) 50 Metal Production: Investments for production of final metals out of ore and/or concentrate of IV/c group metallic mines specified in the Mining Law. 50 The terms and rates of support measures provided within the Large Scale Investment Incen- tive Scheme are summarised in the table below: 2012/I 36

INCENTIVE MEASURES REGIONS I II III IV V VI VAT Exemptions YES YES YES YES YES YES Customs Duty Exemption YES YES YES YES YES YES Tax Reduction Social Security Premium Support (Employer s Share) Rate of Contribution to Investment (%) Support Period Out of OIZ 25 30 35 40 50 60 Within OIZ 30 35 40 50 60 65 Out of OIZ 2 years 3 years 5 years 6 years 7 years 10 years Within OIZ 3 years 5 years 6 years 7 years 10 12 years years Land Allocation YES YES YES YES YES YES Social Security Premium Support (Employee s Share) N/A N/A N/A N/A N/A 10 years Income Tax Withholding Support N/A N/A N/A N/A N/A 10 years *For investments starting before 31 December 2013 I Indeed, The following categories of investments within the Regional and Large Scale Investment Incentives Schemes will be supported by more beneficial one level up regional rates and terms: Investments in Organised Industrial Zones; Joint investments to be made by at least 5 companies operating in the same sector with the purpose of integrating these companies horizontally or vertically to this joint investment; 8. Strategic Investment Incentive Scheme Strategic Investment Incentive Scheme is introduced for the first time by the new investment package. On the basis of the Input Supply the New Scheme can be considered as the most comprehensive and technicallyaccurate incentive package so far. Strategy, the objective of this scheme is to support production of intermediate and final products with high import dependence with a view to reduce the current account deficit. Regardless of the province in which the strategic investment is made, all strategic investments will receive incentives at the level granted to the investments in the fifth province as specified in the table on Regional Investment Incentive Scheme above. In order fall under the scope of Strategic Investment Incentive Scheme, investments shall: (i) be made for the production of intermediate and final goods with high import dependence of which more than 50% of these goods are supplied by imports (ii) have a minimum investment amount of 50 Million TL (iii) create minimum 40% added value and (iv) have an import amount of at least $50 Million for goods to be produced in the last one year period (this condition is not applicable to goods with no domestic production). Investments prioritised within the scope of strategic investments include: (i) tourism investments in cultural and touristic preservation and development regions (ii) mining investment (iii) railroad and maritime transportation investments (iv) specific pharmaceutical investments and defence industry investments with minimum investment amounts of TL 20.000.000 (v) test facilities, wind tunnel and similar investments made for automotive, space or defence industries and (vi) primary, middle and high school investments by the private sector (vii) International investments in exhibitions within a roofed area exceeding 50.000 m2 and (viii) investments made to produce products developed by an R&D Project which is supported by The Scientific and Technological Research Council of Turkey, TÜBiTAK. 9. Conclusion Of the aforementioned support measures in the New Scheme, while VAT exemption and customs duty exemption will be available for all investments regardless of region or industry, other support measures (i) differ by region and industrial categories (ii) offer higher rates for large-scale investments and strategic investments (iii) can provide better incentive conditions for investments in organised industrial zones that will be made jointly by firms operating in the same industry as well as for investments relating to manufacturing of products developed from an R&D project. 2012/I 37

L E G A L N E W S B U L L E T I N T U R K E Y When compared to the previous investment incentive packages, it is possible to foresee that the reforms introduced by the New Scheme will make a large contribution to increase the amount of manufacturing industry investments in different regions of Turkey, especially the underdeveloped regions. The New Scheme seems to satisfy a wide array of demands and views from several sectors and is expected to significantly contribute to industrialisation. Indeed, the New Scheme can be considered as the most comprehensive and technically-accurate incentive package so far. However, it must be emphasised that the reforms introduced by the New Scheme requires amendments to some laws such as Corporate Tax Law and VAT Law, which will be made in the near future in line with the relevant Council of Ministers Decision. Thus, before making a final analysis, the enactment of all the required legal reforms shall be waited for. New Requirement on Corporate Boards: Independent Directors Zeynep ŞENER Why is corporate governance so important for our corporations? Why do the legislators take the corporate governance principles more seriously than ever? Here is a straightforward answer: Globalisation increased the scale of trade and the size and complexity of corporations who are considered as mini-states in terms of functioning need more regulation. However, trying to regulate every aspect of a corporation is practically impossible. Therefore, the legislator, by emphasising on the importance of internal regulation (as it became increasingly difficult to regulate externally) implemented more rules to extend the applicability of corporate governance principles. In Turkey, the Turkish Commercial Code ( TCC ) provides the regulatory framework for corporate governance. The TCC will be abolished by the new Turkish Commercial Code ( New TCC ), which will enter into force on 1 July 2012. The New TCC will introduce important new rules and concepts to the corporate governance principles in Turkey including the concept of independent auditors which is a pillar of corporate governance. Furthermore, the competent authority in Turkey has been provided with exclusive authority to regulate corporate governance under the New TCC. The competent authority to regulate on corporate governance in Turkey is the Capital Markets Board ( CMB ). Public corporations in Turkey are subject to regulations enacted by the CMB. Public corporations are defined as companies whose shares have been offered to public or which are considered to have been offered to public. The shares of public corporations with more than 250 shareholders are considered to have been offered to the public and such companies are subject to the provisions applicable to public corporations. The CMB, with the issuance of new rules, has moved away from comply 2012/I 38

T he or explain approach to a greater extent. In accordance with the new rules adopted for public companies, Istanbul Stock Exchange Listed Public Companies (ISE Companies) are required to hire independent directors and grants those directors a prominent role on the board level decision making process. Independent directors shall bear the following qualifications under the new Communiqué on Application of Corporate Governance Principles (Serial IV, No 56; 30/12/2011): i. The director and/or his up to third degree relatives shall not have a direct or indirect employment, shareholding or significant commercial relationship with the company, related parties of the company or entities related to the persons controlling directly or indirectly more than 5% of the company s share capital within the last five years, ii. The director shall not have worked for firms, including audit, rating and consultancy firms, undertaking whole or a certain portion question arises then if this really works in the real world. The new Communiqué puts emphasis on the financial criteria when determining whether a director is independent. What about the subtle ways to compromise independence? of the company s activities and organisation, and also shall not have been appointed as board members to those firms within the last five years, iii. The director shall not have worked for or shall not have been a shareholder or a board member of a firm which is a significant supplier or service provider to the company within the last five years, iv. If the director is a shareholder due to its board membership, the percentage of his shareholding shall not exceed 1% of the company s share capital and the shares shall not be in the form of privileged shares, v. The director shall have the necessary educational background, information and experience for fulfilling independent director duties, vi. The director shall not be a full time worker in a governmental/public institution, vii. The director shall be deemed as resident in Turkey as per the provisions of the Revenue Tax Law (The director shall either be domiciled in Turkey or shall stay in Turkey for more than six months in a calendar year), viii. The director shall have the ethical standards, reputation and experience enabling him to contribute to company activities, protect his impartiality with regard to conflict of interest that may arise among shareholders, make independent decisions by taking into account the rights of stakeholders. The general assembly may appoint persons who do not bear one or several of the above qualifications as independent directors provided that there is a reasonable ground for such appointment and CMB provides its consent. Such type of appointment may only be made for a temporary period of time which shall not exceed one year. In the current state of affairs, with the new Communiqué, CMB aims to enhance shareholder value by requiring public corporations to elect independent auditors who are supposed to provide independent appraisal and expertise to fulfil their fiduciary duties. Thus, the infamous principle of separation of ownership and management for the sake of better governance of corporations is implemented in the laws. The question arises then if this really works in the real world. The new Communiqué puts emphasis on the financial criteria when determining whether a director is independent. What about the subtle ways to compromise independence? An independent director in terms of the new Communiqué may compromise his or her independence if he or she acts in a way where his or her judgment is affected not by financial means but by other concerns. All in all, although the new Communiqué is a step forward to establish corporate governance principles, one should not forget that independence of judgment is a key quality for the assurance of sound governance. 2012/I 39

L E G A L N E W S B U L L E T I N T U R K E Y Alternative Sale Methods of Renewable Energy Ahmet ÖZTÜRK T he The Turkish Renewable Energy Law No. 5346 provides a Renewable Energy Support Scheme ( RES Support ) which covers different incentives and benefits for renewable energy projects including feed-in tariffs (fixed minimum electricity sale prices). Since 2005, Turkey has had a feed-in tariff policy for renewable resources. The 2010 amendment to the Renewable Energy Law has increased the guaranteed purchase price and implemented local equipment bonuses for using specific parts manufactured in Turkey during the construction and erection of power plants. generator would determine the correct sale method by considering the prices at Day Ahead Market, spot market and the feed-in-tariffs under RES Support. In this article, we will focus on the alternative sale methods for renewable energy and the benefits of RES Support. A renewable energy generator has mainly three options to sell its electricity: (i) sale via bilateral agreements without resorting to RES Support; (ii) Sale to Day Ahead Market; and (iii) Sale to Day Ahead Market under RES Support. The generator would determine the correct sale method by considering the prices at Day Ahead Market, spot market and the feed-intariffs under RES Support. i. Sale via bilateral agreements: The renewable energy generator may sell the generated electricity through a bilateral agreement to a distribution company, wholesale licensee or an eligible customer. The eligible consumer limit for 2012 is 30.000 kwh/year. The price could be freely determined between the parties. The generator needs to notify such transaction to Turkish Market Financial Settlement Centre ( PMUM ) until 4 pm each day. In this option, the wind energy generator is responsible for any kind of imbalances. Such imbalance is settled by the Balancing Power Market at the system marginal price. Furthermore, the generator is obliged to provide the guarantees stated below to PMUM. The total guarantee is composed of (i) the guarantee for the day ahead balancing (the amount depends on the system purchase price and quantity of electricity traded in the Day Ahead Market) and (ii) the guarantee for imbalances (the amount depends on the highest system marginal price within the last six months and the highest amount of imbalance quantity). The guarantees could be either cash (TRY, USD or EUR) or noncash (e.g. letter of guarantee, treasury and state bonds). In any case, the minimum guarantee amount could not be less than: TL 200,000, for generation licensees with a capacity more than 1,000 MW; 200 TL/MW, for generation licensees with a capacity between 50 and 1,000 MW; TL 10,000 for generation licensees with a capacity below 50 MW. ii. Sale to Day Ahead Market: The generator may sell the generated electricity to Day Ahead Market. It needs to notify its generation forecast and its offer (in terms of sale 2012/I 40

price) to PMUM until 11.30 am each day. The sale price would be the market clearing price calculated by PMUM. In this option, the wind energy generator is responsible for any kind of imbalances. Such imbalance is settled by the Balancing Power Market at the system marginal price and the generator is obliged to provide the guarantees stated above to PMUM. iii. Sale to Day Ahead Market under RES Support: The generator may sell its electricity to PMUM under RES Support mechanism. In this option, the renewable energy generator will submit its generation forecast to PMUM until 9 am. The generation forecast will not include any price offer. PMUM will collect all generation forecasts from all renewable energy generators under a RES Support portfolio and submit this RES Support portfolio as a collective offer of the RES Support participants. Each RES Support participant is paid by PMUM for the actual electricity delivered by them. The sale price is determined separately for each generator pursuant to feed in tariffs and local content bonuses under Annex 1 and 2 of Renewable Energy Law. Furthermore, RES Support participants are not responsible for the imbalances between their generation forecast and actual delivery to the system. Finally, they are not obliged to provide the guarantees stated above to PMUM. Please, however, note that a renewable energy generator could attend the RES Support mechanism by applying to EMRA until 31 October each year. Membership to RES Support mechanism is valid for one year starting from 1 January each year and the RES Support participant could not leave RES Support mechanism before its expiry. Furthermore, a RES Support participant is obliged to sell all electricity generated to RES Support and is not allowed to sell certain portion of the electricity through other alternative sale methods. 2012/I 41

L E G A L N E W S B U L L E T I N T U R K E Y Should Mine Explorers be in Good Shape? Feriha Ferhan Karadeniz Prior to the amendment on the Mining Law No: 3213 ( Mining Law ) in June 2010, those who were willing to explore mines were granted mining exploration licenses without being subject to an elimination criteria as to their financial status. With the amendment brought by the Law No. 5995 to the Mining Law in June 2010, investors are now required to make investments for each license and prove their financial capability. The minimum amount of investment and financial capability differ depending on the category of the mine. The General Directorate of Mining Affairs ( Authority ) every year makes an announcement and categorises the minimum investment amounts and financial capability amounts for each group of mine. On the one hand, small scale enterprises have complained of being alienated from the sector as they would not be able to make the required investments from the very beginning of their exploration activities. On the other hand, it is supported that if all investors enter into the market without being subject to any pre-requirements, this would result in the inefficient use of mineral reserves, in other words, leaving these crucial projects to the hands of unprofessional entrepreneurs would mean sacrifice of an essential source of wealth. It is a fact that the complex geologic and tectonic structure of Turkey makes it more difficult for mine exploration and mining facilities. In spite of this fact, Turkey, one the few countries which can provide most of their raw materials, is the world s leading producer of boron mineral, pumice, barite, chrome ore, lignite and magnesite. It was stated in the Commission Report of the Turkish Parliament in 2010 that according to the surface area of the world, the country with the most mining licences and the least risk capital spent for each licence is Turkey. Considering these facts, it would not be wrong to say that making an elimination among the potential license holders would be useful and to the benefit of general welfare. It is also worth noting that the amendment mentioned above applies only to the applications made after the enactment of the amendment. Therefore, this will not affect the license holders having obtained exploration licenses previously. The chart below indicates the numbers for the year 2012: CHART INDICATING THE AMOUNTS FOR FINANCIAL CAPABILITY GROUP OF MINES FINANCIAL CAPABILITY (TL) II (b) 59.375,00 III 118.750,00 IV 142.500,00 V 59.375,00 VI 237.500,00 2012/I 42

PRE-EXPLORATION/GENERAL EXPLORATION/DETAILED EXPLORATION PERIODS TOTAL MINIMUM INVESTMENT AND EXPENDITURE AMOUNT AND EXPENDITURE RATIO EXPLORATION PERIODS GROUP OF MINES TOTAL MINIMUM INVESTMENT AMOUNT FOR THE YEAR 2012 MINIMUM INVESTMENT RATIO (%) II (b) 59.375,00 40 III 100.937,50 40 PRE-EXPLORATION PERIOD IV (a) 100.937,50 40 IV (b) 100.937,50 40 IV (c) 142.500,00 40 V 59.375,00 40 VI 142.500,00 40 GENERAL EXPLORATION PERIOD (FOR ONE YEAR) GENERAL EXPLORATION PERIOD (FOR TWO YEARS) EXPLORATION PERIODS DETAILED EXPLORATION PERIOD (FIRST YEAR) DETAILED EXPLORATION PERIOD (SECOND YEAR) DETAILED EXPLORATION PERIOD (THIRD YEAR) DETAILED EXPLORATION PERIOD (FOURTH YEAR) II (b) 118.750,00 40 III 118.750,00 40 V 23.750,00 40 IV (a) 178.125,00 40 IV (b) 178.125,00 40 IV (c) 296.875,00 40 VI 296.875,00 40 GROUP OF MINES TOTAL MINIMUM INVESTMENT AMOUNT FOR THE YEAR 2012 MINIMUM INVESTMENT RATIO (%) IV (a) 118.750,00 20 IV (b) 118.750,00 20 IV (c) 237.500,00 20 VI 237.500,00 20 IV (a) 118.750,00 20 IV (b) 118.750,00 20 IV (c) 237.500,00 20 VI 237.500,00 20 IV (a) 118.750,00 20 IV (b) 118.750,00 20 IV (c) 237.500,00 20 VI 237.500,00 20 IV (a) 118.750,00 20 IV (b) 118.750,00 20 IV (c) 237.500,00 20 VI 237.500,00 20 Conclusion Exploration strategies for mineral reserves are directly related to technology, knowledge, industry s needs and investment priorities. For this reason, true and effective exploration programs should be planned to achieve the export target and reveal the correct mineral potential of the country. The amendment brought with regard to minimum investment amounts and financial capability is significant in this sense. 2012/I 43

L E G A L N E W S B U L L E T I N T U R K E Y Competition Claim of Damages Arising from Competition Law Infringements Nilay AKÇAY W The Competition Board ( Board ) has completed over 173 investigations in the past, and the monetary fines the Board imposed are around 800 million TL. There is, however, another risk waiting for undertakings: claim for damages. Unlike the compensation for actual damage principle under Turkish law, competition law gives the opportunity to injured parties of competition law infringements to claim for up to three folds of their actual damages. Technically, this fine is qualified as a private law fine and it must be paid directly to the claimant. So why are such claims for damages initiated so seldom by undertakings or end users in Turkey? e could qualify the reasons for the ineffectiveness of private enforcement as many people are unaware of the rights; competition law is a new and technical field for courts; most of the early ruling of the Board was annulled because of procedural deficiencies, there were serious disputes on the assessment of damage. Private enforcement of competition law is quite effective in the Unites States, but we may not be able to say the same for Turkey. Although, there is no explicit provision under the Treaty on the Functioning of the European Union ( TFEU ) regarding this issue, the European Commission ( Commission ) published a White Paper on Damages Actions for Breach of the EC Antitrust Rules. On the other hand, the work including actions for damages as well as collective redress mechanism has been opened to public opinion in 2011. We could qualify the reasons for the ineffectiveness of private enforcement as many people are unaware of the rights; competition law is a new and technical field for courts; most of the early ruling of the Board was annulled because of procedural deficiencies, there were serious disputes on the assessment of damage. Some of those problems may require structural remedies, while the others may require the reciprocal communication between the courts and the Board. The unlawful act, damage, fault and causal connection are the basic elements for a tort liability to come into question. The proof of damage is still a controversial issue, but we could categorise the types of damages as the overpaid price, lost profits and other damages. For instance, the compensation of overpaid prices in case a cartel exists or the compensation of lost profits in case predatory pricing or the abuse of dominant position occurs, is possible. The indirect damages are generally not accepted as actual damage to be compensated under competition law. The plaintiff, in material compensation cases, is the injured party by the unlawful act. For instance, in a poultry meat market, a reseller buying from an undertaking, which is the member of a cartel, is the direct purchaser, while the end user buying the meat from the reseller is the indirect purchaser. However, the damage caused to the end user could not be considered as indirect damage in this case and it should also be compensated. On the other hand, the White Paper states that in case a claim right is entitled to indirect purchasers; the passing on defence could be performed by the defendant to prevent over compensation of damage. The damage of end us- 2012/I 44

U ers may be less in case they are in the position of indirect purchaser since the resellers may not reflect the high prices that they are exposed to. The potential customers are the purchasers who could buy the products where there is no competition law infringement. The potential customers are forced not to buy any products or to buy any substitute products since the cartel arrangement causes the prices to increase. However, it is pretty hard to set the causal connection between the damages of potential customers and the competition law infringement. On the other hand, the competitors, suppliers, the undertakings in the relevant markets may be considered among potential plaintiffs. In the scope of competitors, all the potential and the actual competitors shall be taken into consideration. The competitors are damaged by cartel arrangements as well as predatory pricing, refusal of supply, bundling etc. The damage occurs as lost profits for competitors and it may change according to the closeness of competitor to the infringing undertaking. nlike EU and US enforcement, individuals or institutions do not have a class action right in Turkey. However, a new directive, to be enforced by Commission, may affect Turkish legislation as to state class actions under legislation in order to increase sanctions for competition law infringements. Unlike EU and US enforcement, individuals or institutions do not have a class action right in Turkey. However, a new directive, to be enforced by Commission, may affect Turkish legislation as to state class actions under legislation in order to increase sanctions for competition law infringements. This would clearly lead up the effective use of claim for damages mechanism for competition law infringements. Since there is no other provision under competition law regarding the limitation period, we should apply the one year limitation period for tort liability. Thus, the claim for damages should be raised within one year after learning the damage and the responsible party, and in any case within ten years after the infringement takes place. On the other hand, it is not always very easy to determine the starting date of limitation period. The Board decision is not a pre-condition to present a case, however in practice courts prefer to make the Board decision as prejudicial question. Therefore, in a claim for damages arising from competition law infringements, the limitation period could start from the notification of the Board s reasoned decision. In case the plaintiff is not the claimant in the Board s investigation phase, the limitation period should start at the earliest after the publishing of reasoned decision on the Competition Authority website. The last point to be discussed under claim for damages is the proof requirements. Under Article 59 of the Act No. 4054, it is stated that The existence of agreement, decision and practices restricting the competition may be proved with any type of evidence. Thus, injured parties may prove the damage they are exposed to because of competition law infringement with any type of evidence. Under the general principles of the Law of Obligations, the burden of proof is on the plaintiff in claims for damages. In concerted practices, the burden is reversed by the special regulation of competition law. Therefore, when the injured parties present the evidences that indicate the impression of competition law infringement in the market, such as concurrent price increases of undertakings, the long standing stability on prices, the sharing of market; the defendants should prove that they did not conduct any concerted practice. It seems quite difficult to determine the difference between the price the injured parties paid and the price they could pay if there were no competition law infringement while proving the amount of damage. This calculation basically requires a detailed analysis where certain economic parameters and past data are used. Thus, the regulations shall be effectively conducted regarding the expertise of Competition Authority. Lastly, under general principles it should be reminded that when the damage could not be exactly proven, the judge could appraise the damage favouring the equity principles. 2012/I 45

L E G A L N E W S B U L L E T I N T U R K E Y Parental Liability for Competition Law Infringements of Subsidiaries Kaan GÜRER One of the novelties of the new Turkish Commercial Code is the introduction of provisions regarding group companies. Until now, the phenomenon of group companies was not regulated by law in Turkey and was mainly dealt with on a case law basis. This to some extent resembles the difficulties when dealing with group companies, not only from a commercial law perspective. In competition law one of the most controversial issues arises from the group company phenomenon. When compared with other fields of law the terminology used to describe the very subject of competition law rules presents itself as being peculiar and unique. The European Union introduced the term undertaking in order to cover a fairly broad range of economic entities. Many jurisdictions thereafter used exact translations of this term, e.g. Unternehmen in Germany and teşebbüs in Turkey. The common concept behind this terminology makes competition law provisions applicable to almost anyone engaged in an economic activity, excluding both employees, who are by their very nature the opposite of the independent exercise of an economic or commercial activity, and public services based on solidarity for a social purpose. Along with the concept of undertakings the EU has introduced the concept of a single economic entity, a concept which was again copied by many other jurisdictions including Turkey. The result of this concept is that a group of entities which effectively function as a single economic unit are seen as one undertaking. This in turn means that group companies are subject to competition law as one single unit. This conclusion may understandably make CEO s of group companies break into a sweat. This is due to the fact that this understanding has far-reaching consequences with regard to liability. And indeed, according to the European Commission s established practice parent companies may be liable for competition law infringements of their subsidiaries. The Commission repeatedly held that a parent company and its subsidiaries will form a single economic unit when the parent exercises decisive influence over the conduct of the subsidiary. Decisive influence may be established where the subsidiary, despite having a separate legal personality, does not decide independently its own market conduct but rather is considered to operate in accordance with the will of its parent company. As a result the whole group company will be identified as being one undertaking in the meaning of competition law. This has crucial impacts on the amount of fines imposed by the competition authorities with the concept of parental liability the Commission enables itself to base the maximum fine limit on the total turnover of the whole group company. Turning back to the amendments of the new Turkish Commercial Code as noted in the introduction above, the law now gives room to applying the control test established in EU law to Turkish group companies and, thus, holding parent companies liable for their subsidiaries competition law violations in accordance with the Commission s longstanding practice. However, it is more than noteworthy that this concept in fact conflicts with the main principles of company law not only in Turkey but in the majority of jurisdictions all over Europe. These principles are the principle of separate legal personality and limited liability which constitute the cornerstones of Turkish company law. One of the legal instruments developed in this respect to exceptionally allow disregarding these principles in order to hold parent companies liable for their subsidiaries conduct stems from Germany and is translated into English quite figuratively as lifting the corporate veil (orig. Durchgriffshaftung). 2012/I 46

P arent In Turkish company law the corporate veil can only be lifted in case of a clear abuse of rights. The Turkish courts have only restrictively made use of this instrument and have always decided on a case by case basis without establishing a general rule in this regard. In other European jurisdictions there have always been sporadic decisions where the control test within a group company was applied in order to assess whether the corporate veil could be lifted in situations where the parent company had dominant and long-standing control over its subsidiary which therefore could not be seen as a fully independent entity. This approach has never received broad acceptance and has always been criticised. companies in group companies should be aware of the risks involved in competition law infringements of any of their subsidiaries they exercise control over. This criticism seems to have disappeared when it comes to competition law. Regardless of the company law principles and the discussion arising from the lifting of the corporate veil the Commission has nevertheless established a practice which disregards the separate legal entities in group companies and deals with them as forming one undertaking and one single subject to competition law rules. The Commission consistently held that whenever parent companies exercise decisive influence over their subsidiaries they are jointly and severally liable for the latter s competition law breaches. In its earlier decisions the Commission only covered cases where the parental interest in the subsidiary amounted to 100%. In its earlier decisions the Commission even held parents liable where they had lower participations in their subsidiaries if the parent had control rights allowing for decisive influence which further had to be actually exercised. In February 2012 the EU s General Court issued two important judgments in this regard, strengthening the Commission s practice concerning parental liability. Both cases involved 50/50 joint ventures and in both cases the Court held that both parents could be held liable for competition law infringements conducted by their JV. In one case even negative control solely exercised through veto rights was sufficient to trigger parental liability. The practice of the Turkish Competition Board is still nebulous with regard to parental liability. In its current practice, the Board does only hold the separate legal entity which violated competition law responsible and does not consider the parent companies liable for anti-competitive conduct of their subsidiaries. There are only a few exceptions from this general practice and in two of them the Board has in fact imposed fines on the parent company for their subsidiaries competition law infringements. In its Metro Otobüs decision of 2006 the Board imposed a fine on the parent company for acts of its subsidiary. However, this was based on the fact that both legal entities were managed by the same persons who gave the decisions which led to the anti-competitive conduct. In its TTNet decision of 2008 the Board extensively discussed the liability issue. However, rather than giving clarity to the Board s approach on parental liability, this decision caused uncertainty and reduced the predictability of future decisions. The imposed fines were based on the sum of both the parent company s and its subsidiaries turnover but only with regard to the turnover generated in the relevant product market. Further, the Board failed to discuss clear criteria in order to establish in which cases parents will be held liable for their subsidiaries conduct and in which not. As a result, the Board has yet to establish a consistent practice on parental liability and its decisions need to be closely followed in this regard. Having said that, the Turkish Competition Board traditionally follows the Commission s general approach when establishing its practice in new areas. Therefore, there is good reason to believe that the Board may eventually apply the same rules as set out by the Commission when deciding on parental liability issues, in particular with a view to the changes in the Commercial Code. Consequently, parent companies in group companies should be aware of the risks involved in competition law infringements of any of their subsidiaries they exercise control over. However, the situation is not as hopeless as it seems. The Commission has recently accepted measures implemented by the parent companies in order to prevent their subsidiaries from violating competition rules to negate parental liability. The Commission notes that parent companies have a specific responsibility to ensure that all subsidiaries over which they hold decisive influence comply with competition law. The implementation of overall compliance policies in group companies could therefore be a crucial aspect in escaping fairly high fines based on parental liability. 2012/I 47

L E G A L N E W S B U L L E T I N T U R K E Y Finance & Projects Financial Assistance under the New Turkish Commercial Code Tamsyn MILEHAM Ferda DUMRUL FINANCIAL ASSISTANCE Typical Leveraged Buy-Out Structure Hold Co Acquisition Funding Upstream Loan For Debt Service SPV Target Company Bank Guarantees/Security Subsidiaries T he As it is widely reported and discussed the new Turkish Commercial Code ( New TCC ) introduces wide range of new aspects to the transactions in Turkey. One of these is the prohibition on financial assistance which will mean the structuring of acquisition financed transactions will become more difficult. New TCC will lead to banks (and advisors) having to think and structure creatively to ensure they are fully protected in what is already, internationally, a difficult market. Whilst it can be seen that many of the provisions reflect similar legislation in other EU jurisdictions, this does not help to open up the acquisition finance which might otherwise have been a booming market in Turkey in the years to come. Below we explain some of the key issues. Share Buybacks Taking the Second Council Directive of European Economic Community numbered 77/91 as a reference point, the New TCC enables the joint stock companies and limited liability companies for shares to undertake share buybacks not exceeding 10% of their capital subject to certain conditions such as general assembly approval for granting authority to the board, duration of the authority, determination of price and compliance with preservation of legal reserves. The transactions which exceed the aforesaid threshold or conducted in breach of the provisions of the New TCC will be void and any shares acquired must be sold within six months from their acquisition or then must be cancelled through capital decrease. The provisions regulating the conditions of share buybacks under the New TCC do not directly relate to financial assistance. However, Article 380 of the New TCC seeks to prevent a target company from advancing funds, making loans or providing security or guarantees to a third party in relation to the acquisition of its 2012/I 48

shares. The aim of Article 380 of the New TCC is to avoid circumvention of the restrictions on share buybacks and explicitly provides that the transactions having this effect will be deemed void. However, the consequence of these provisions is that guarantees and security provided to a bank funding a leveraged buyout or upstream loans provided to service leveraged may be void. The exceptions to this prohibition are: (i) transactions which fall under the scope of activities of banks or financial institutions; and (ii) advances, loans and security provided to the company s employees or parent or subsidiary s employees in order to acquire the shares of the company which shall comply provided that the requirements related to preservation of legal reserves are complied with. Restrictions on Loans to Shareholders The New TCC also prohibits shareholders taking loans from joint stock companies and limited liability companies which are subsidiaries unless the debt arises from a transaction which is within the scope of business of company and which is related to the business of the shareholder, which in any case must be on arm s length basis. This prohibition also applies for the members of the board of directors and related parties (including the companies they have participation interest) subject to certain conditions. The council of ministers has recently prepared a draft law amending the provisions of the New TCC which is anticipated to be enacted prior to entry into force of New TCC on 1 July 2012. According to the draft law, the loans to shareholders can be granted provided that the shareholders fully pay their capital contributions and the profit of the company is sufficient to set aside statutory reserves and preceding losses. The restrictive provisions related to members of the board of director and related parties are amended to exclude the companies in which the members of board of directors and related parties have participation interest. Group of Companies The New TCC introduces a new concept called group of companies composed of companies if one company has direct or indirect control over the other(s). The notion of control is defined broadly which does not merely depend on the shareholding levels but the ability to dominate the decision making via voting rights, representation in the board or contractual arrangements. The provisions related to group of companies under the New TCC preclude the parent company abusing the control over its subsidiaries in any way which would result in such subsidiaries to incur losses. This includes grant of financial assistance by means of giving guarantee or security. Although abuse of control by the parent company does not render the transaction void, the parent company is obliged to compensate the losses of the affiliate within the same financial year or provide a method for compensation within the same financial year. If the parent company fails to compensate, the shareholders and creditors of the subsidiary are entitled to commence proceedings against the parent company and the members of directors of the parent company for compensation of losses. It is important to note that the New TCC provides that no compensation shall be awarded if it is proved that the transaction which caused the loss has been entered into could have been entered into by the independent members of board of directors of such company acting in good faith and with duty of care. There is another exemption provided under the New TCC. If a parent company holds (directly or indirectly) 100% of the shares or voting rights of its subsidiary, in which circumstance it is entitled to instruct the subsidiary to conduct transactions in line with the specified and concrete policies of the group, irrespective of whether such transaction is to the subsidiary s detriment and causes losses. Nonetheless, the parent company is not entitled to impose instructions which (i) explicitly exceeds the ability to pay, (ii) jeopardizes the existence or (iii) results in losses of material assets of the subsidiary. The leveraged finance deals are structured so that an SPV is incorporated to acquire the shares of a target company (and group) all cash is generated at the level of the target company (or its subsidiaries). This cash therefore needs to be lent to or dividends made to SPV in order to enable it to repay the acquisition finance debt and this may now no longer be possible. There are ways to structure around some of these issues. One example is to take advantage of the improved provisions in the New TCC in respect of merger, and therefore requiring the target company to merge into the SPV. As a result the assets of the target company become assets of the SPV or borrowers and can be secured in favour of the lenders. However, banks will still be at risk during the period which the merger is being completed and will therefore need to consider this in their risk assessments. Furthermore, tax consequences of such merger have to be taken into account. The New TCC will lead to banks (and advisors) having to think and structure creatively to ensure they are fully protected in what is already, internationally, a difficult market. 2012/I 49

L E G A L N E W S B U L L E T I N T U R K E Y Standard Terms under the New Turkish Code of Obligations Ferda DUMRUL A The new Turkish Code of Obligations No. 6098 ( New TCO ) which will enter into force on 1 July 2012 introduces an essential innovation to the Turkish law practice; the standard terms and conditions concept. The New TCO regulates the definition and validity conditions of contracts incorporating standard terms in detail and provides for specific legal protection for the weaker party to such contracts. s per Article 21 of the New TCO, the standard terms which are against the interest of the counter party cannot be validly incorporated into a contract unless the drafting party has explicitly informed the counter party of the existence of the standard terms and granted the opportunity for the counter party to assess the content thereof and the counter party approval of such terms are obtained at the time of conclusion of the contract. A similar legal protection was initially introduced under the Consumer Protection Law No. 4077 and then under the Regulation on Unfair Terms in Consumer Contracts whereby unfair terms already included in a contract that is unilaterally imposed against the consumers by sellers, suppliers or creditors contrary to the principle of good faith are deemed to be void and not binding upon the consumer. The New TCO broadens up the sphere of application of the legal protection as it applies to all types of contacts including standard terms which are to be executed by individuals and corporate entities for business purposes including contracts executed under grant of permission. (As a matter of implementation, the consumer contracts will continue to be subject to consumer legislation.) Pursuant to Article 20 of the New TCO, standard terms are contractual terms previously and unilaterally prepared by the drafting party with the intention to use such terms in similar contracts in future and proposed to the counter party at the time of conclusion of a contract. In order to determine whether terms and conditions of a contract qualifies as standard terms within the meaning of the New TCO, assessments have to be made as to whether the respective terms (i) are prepared in advance by the drafting party at the time of conclusion of the contract, (ii) are proposed to counter party for acceptance without negotiation aiming to use such terms in similar contracts for future transactions. In order to avoid circumvention of the law, the New TCO provides that neither the content style, form of the standard terms, nor the fact that whether such terms are incorporated in the text or annexes of the contract shall not be taken into account when making the legal assessment. Furthermore, the fact that the context of the contracts including standard terms is not identical or the contract includes a notation that all of such standardised terms are accepted through negotiation does not prevent such terms to be classified as standard term. As per Article 21 of the New TCO, the standard terms which are against the interest of the counter party cannot be validly incorporated into a contract unless the drafting party has explicitly 2012/I 50

informed the counter party of the existence of the standard terms and granted the opportunity for the counter party to assess the content thereof and the counter party approval of such terms are obtained at the time of conclusion of the contract. If the foregoing conditions are not met, the standard terms shall be deemed as void. The invalidity of standard terms do not affect the validity of the contract as a whole, the remaining terms of the contract shall continue to be valid. However, in order to ensure the legal protection of the weaker party the New TCO prescribes that in case of invalidity of standard terms, the drafting party cannot claim that it would not have entered into the contract in the absence thereof. In order to comply with the validity requirements, the drafting party shall unambiguously warn the counter party that is willing to enter into contract which consists of standard terms and the relevant terms must be in form and style that are comprehensible to a reasonable person. In this respect, if the standard terms are in small fonts, or drafted in a legal or technical language, the counter party would not have been granted the opportunity to examine such terms. In order to avoid the restrictions and sanctions provided under the new code, the involvement of legal advisors and inclusion of negotiation element may be considered as a tool to prove that the contract has been negotiated. Apart from setting out the definition and validity conditions for including standard terms which are in detriment of the counter party, the New TCO provides for additional restrictions regarding implementation of standard terms. Firstly, the standard terms which are alien to the nature of the contract and the characteristics of the work contemplated thereunder are also considered void. Secondly, if the contract consists of standard terms which are unclear or ambiguous or could have more than one meaning, it is interpreted to be against the drafting party. Moreover, the terms that provide for the right to unilaterally modify the terms of a contract with standard terms or to introduce new terms are also void. As a boiler plate provision the New TCO also states that the standard terms that contravene the good faith principles or aggravate the conditions of the counter party are to be deemed void. Subject to certain exceptions, the provisions of the New TCO governing standard terms do not apply retrospectively thus the existing contracts may not be affected. Though the implementation of the new provisions of New TCO is yet to be tested, it seems inevitable that the financial institutions, banks, insurance companies, travel agencies who predominantly use standard contracts will be forced to revise their contracts to comply with the New TCO. Privileged Shareholders Meeting Under the New Turkish Commercial Code Mustafa Yiğit ÖRNEK In order to address the economic needs of companies, shares that have different and superior rights when compared with other shares are commonly used. These shares are called privileged shares and are protected by the law through convening special meetings for holders of such privileged shares ( Privileged Shareholders Meeting ). Reason for Convening the Privileged Shareholders Meeting Under the new Turkish Commercial Code ( New TCC ), once privileged shares are issued, if there will be any amendment to articles of association affecting the rights attached to privileged shares approval of the Privileged Shareholders Meeting is required. 2012/I 51

L E G A L N E W S B U L L E T I N T U R K E Y T he Invitation for the call of Privileged Shareholders Meeting Article 454/2 of the New TCC explicitly provides that if the board of directors does not call for a Privileged Shareholders Meeting within one month, each holder of privileged shares is entitled to request, from the commercial court of first instance, to invite the Privileged Shareholders Meeting to be convened within 15 days commencing as of the date of expiry of the period granted to the board of directors. The invitation shall include the agenda for the amendment of the articles of association. Meeting and Decision Quorums of Privileged Shareholders Meeting Article 454/3 of the New TCC stipulates the meeting and decision quorum of the Privileged Shareholders Meetings. The meeting quorum of each Privileged Shareholders Meeting is met New TCC conveys material clarification in order to specifically protect the rights of the privileged shareholders and their interest in the company with the presence of holders of privileged shares which corresponds to sixty percent of the share capital representing the privileged shares. The decision quorum is met with the majority of the holders of privileged shares attending the meeting. Attendance of Privileged Shareholders to the General Assembly Meeting Detrimental to the Rights of Privileged Shareholders and Voting in Favour of Such Resolutions Article 454/4 of the New TCC addresses another issue that gave rise to debates for many years and provides that no separate Privileged Shareholders Meeting is required in order to approve a resolution that detriments the privileges, if such resolution is passed at a general assembly meeting which is both attended and approved by holders of privileged shares or their proxies that, meets the relevant meeting quorums of Privileged Shareholders Meeting. The Consequences of Failure to Convene the Privileged Shareholders Meeting Pursuant to Article 454/5 of New TCC, the general assembly resolution shall be deemed as approved if the Privileged Shareholders Meeting is not held within the required period as explained above. This rule aims to protect the company. Legal Remedies against Privileged Shareholders Meeting Article 454/7 of the New TCC explicitly provides that a lawsuit for cancellation can be filed against the Privileged Shareholders Meeting. The board of directors may claim cancellation of resolution of Privileged Shareholders Meeting and registration of general assembly resolution alleging that the resolution for amendment of the articles of association does not prejudice the privileged rights. The new provision clearly states that the lawsuit for cancellation shall commence against the privileged shareholders voting against the resolution and therefore prevent the unnecessary litigation brought forward privileged shareholders who approve the resolution. According to Article 454/7 of the New TCC, lawsuit for cancellation should be addressed to the court within one month as of the date of the general assembly. Thus, this new article reduces the period of time to file a lawsuit set out in the current practise, i.e. by Article 381 of the current Turkish Commercial Code which foresees three months period of time for cancellation. As a result, the New TCC conveys material clarification in order to specifically protect the rights of the privileged shareholders and their interest in the company. 2012/I 52

Surety under the New Turkish Code of Obligations Gözde KAYACIK Surety is one of the most common collaterals used by banks under Turkish Law. The new Turkish Code of Obligations ( New TCO ) which will enter into force in July 2012 and will introduce radical changes on the surety. Previously under the Code of Obligations with No. 818 ( TCO ), limits on surety provider s liability were vague. The New TCO aims to provide new limits on the liability of the surety providers in order to protect their rights against beneficiaries, primarily banks. Among the three types of surety (i.e. ordinary, several and joint) under Turkish Law, the most commonly used one by the banks is the joint and several surety whereby the creditor is free to seek collection from either the primary obligor or one of the surety providers. Therefore, the below explained changes, inter alia, have one of the most significant impact on banks. 1. Rules Applicable to All Types Surety: The changes under the New TCO introduce restrictions as to terms and conditions of surety. Pursuant the TCO, the provisions in relation to surety is not mandatory meaning that the parties can agree on the contrary. Therefore, it is sufficient for the surety provider to sign a written surety and waive its rights. However, pursuant to Article 582 of the New TCO, the surety cannot waive its rights provided under the law unless otherwise is stated in the New TCO. Another change introduced with the New TCO is the requirements as to the form of surety. In addition to the written form requirement under the TCO, the New TCO seeks for other conditions. The first requirement under the New TCO is that the maximum amount that will be secured by the surety provider shall be indicated in the surety in its own handwriting. The second requirement is that the surety date. Finally, the type of the surety (i.e. several) shall also be inserted into the surety and such again must be done in handwriting by the surety provider. In the event the surety provider is a real person, another requirement provided under the New TCO is the approval of surety provider s spouse. Article 584 of the New TCO also clarifies that surety provider s spouse s approval must be given prior to the execution of the surety or at the time of execution the latest. 2. Types of Surety: As well as providing for requirements applicable to all kinds of surety, the New TCO also provides for certain terms and conditions for specific types of surety. Ordinary Surety: Article 585 of the New TCO regulates ordinary surety and provides for the same requirements as the TCO for recourse against the surety providers. Accordingly, creditors may only recourse directly to the surety provider (without having to first demand the payment of the debt from the primary obligor) under the below listed circumstances: when proof of insolvency is obtained at the end of enforcement proceedings against the debtor; when the enforcement against the debtor in Turkey becomes impossible or considerably difficult; 2012/I 53

L E G A L N E W S B U L L E T I N T U R K E Y S urety the debtor is bankrupt; or a composition period is granted to the debtor. Several Surety: The existing provisions of the TCO allow creditors to seek collection from either the primary obligor or surety provider in case of joint and several surety. Although this main principle is preserved under the New TCO, in case of delay in performance, prior to pursuing surety provider or liquidating pledge on movable the creditors are required to send a notification to the defaulting primary obligor. However, if it is obvious that primary obligor does not have the ability to pay, surety provider may be pursued directly. Another new requirement sought under the New TCO is that if a claim of a creditor is secured by a movable pledge subject to delivery or by a pledge on receivables, then such creditor cannot have recourse to the surety provider prior to liquidating such pledge. The exceptions to this principle will only apply if: is one of the most common collaterals used by banks under Turkish Law. The new Turkish Code of Obligations ( New TCO ) which will enter into force in July 2012 and will introduce radical changes on the surety. there is a judgement stating that the debt cannot be collected through enforcement of the pledge; the debtor is bankrupt; or a composition period is granted to the debtor. Joint Surety: Joint Surety is a type of collateral where each surety provider undertakes to ensure the fulfilment of its own portion of the debt of the primary obligor and is responsible for fulfilment of the other surety providers undertakings in relation to the principal debt. Each surety provider under a joint surety shall be responsible from the whole debt in case the agreement provides for joint responsibility with the primary obligor or several surety relationship among the joint surety providers. The joint surety definition and responsibilities of joint surety providers under the TCO are preserved under the New TCO. However, pursuant to Article 587 of the New TCO, creditors which are currently free to seek collection of the whole debt from each joint surety provider will instead have to initiate execution proceedings against all joint and several surety providers (which may be pursued in Turkey ) at the same time in order to claim the whole amount from each of them since that the surety provider, against whom the enforcement proceedings are commenced, is entitled to raise an objection to pay the whole debt. 3. Limitation on Duration of the Surety The New TCO, in addition to the above terms and conditions, also provides for an expiration period for the sureties provided by real persons. Pursuant to Article 598 a surety will automatically expire by the end of ten years from the execution date of the surety. Nonetheless, an opportunity for an extension has also been stated under the New TCO provided that a notice of extension is served one year prior to the expiry date of the surety. In such case surety may be extended upon surety provider s written acceptance. The period of extension may again only be a maximum of ten years. Article 599 of the New TCO further introduces a new provision aiming the protection of the surety provider. Accordingly, if a surety for future debts is provided and the primary obligor s financial status is significantly disrupted after the execution of the surety or the primary obligor s financial condition is much worse than the surety provider assumed in good faith; then the surety provider may rescind the surety with a written notice at any time prior the occurrence of the debt. However, in such case the surety provider will be liable to compensate the damages of the creditor. 4. Guarantee Pursuant to Article 603 of the New TCO, the above explained validity requirements listed for the surety (i.e. the form requirements, capacity for being a surety provider, and consent of spouse) will also be applicable to the other agreements titled differently, including but not limited to guarantee documents, in which real persons provide personal security for third party debts. This provision aims to provide protection to real persons and does not affect the corporate guarantees. 2012/I 54

Effects of the New VAT Exemption on the PPP Hospital and BOT Projects and undertaking of Loan on BOT Projects in Turkey Furkan ÜNSAL In order to decrease the financing burden of Value Added Tax ( VAT ), decrease the value of investments and enable the relevant administration to undertake the financing in Built-Operate-Transfer ( BOT ) and Public Private Partnership projects ( PPP projects ), a new Law regarding the Amendment of Value Added Tax Code and the Law on Procurement of Some Investments and Services within the Framework of Built-Operate-Transfer Model and Public Procurement Law ( Law No.6288 ), was enacted by the Turkish Parliament and published on 05.04.2012 in the Official Gazette. VAT Exemption on the PPP Hospital Projects and BOT Projects The Law No.6288 provides for two separate regimes in relation to the VAT exemption on BOT and PPP Hospital Projects: (i) as to: a. tenders which are launched before the date of entry into force of the Law No.6288 and whose bid submission date has not occurred prior to the entry into force of the Law No.6288; and b. tenders will be launched after the date of entry into force of the Law No.6288 until 31.12.2023. for goods and services to be provided under the scope of the relevant project during the investment period are exempt from VAT. (ii) as to: a. tenders in respect of which bids have been submitted before the date of entry into force of the Law No.6288; and b. tenders awarded before the date of entry into force of the Law No.6288 and for the part of works and services to be provided following the date of entry into force of the Law No.6288, the VAT exemption for goods and services to be provided during the investment period following the entry into force of the Law No.6288 under the scope of the relevant projects shall apply subject to the following two conditions: 1. the winning bidder/spv/consortium has applied for the exemption within three months from the date of entry into force of the Law, 2. the winning bidder/spv/consortium shall undertake in writing and agree with the relevant administration to set off the decrease in the financing costs, arising from the VAT exemption, with either: (i) reducing the operational period, or (ii) decreasing the lease (availability) amount, or (iii) shortening the leasing period (i.e. the operational phase in PPP Hospitals). Pursuant to the third paragraph of Article 1, the taxes assumed for deliveries of goods and performance of services shall be set off from the (corporate) tax to be paid on the relevant project. 2012/I 55

L E G A L N E W S B U L L E T I N T U R K E Y T The taxes that cannot be compensated through set off shall be returned upon the demand of the tax-payer within the scope of this exemption under the provision of Article 32 of the VAT Law (actual benefits of the VAT exemption to be reviewed on the basis of the financial models applicable to each project). Pursuant to the last paragraph of Article 1, the Ministry of Finance will define the goods and services to be included in the scope of the exemption and set the principles and procedures regarding exemption and how the remaining part of taxes, which cannot be set off, are returned to the tax payer. Undertaking Financing for BOT Projects Pursuant to the first paragraph of Article 3 of the Law No.6288, the contract to be signed with he VAT exemption with respect to BOT and PPP projects may generate considerable saving in relevant investments. In addition, in case of termination of BOT projects, the possibility of relevant administration undertaking financing may encourage lenders to finance the BOT projects. the assigned company may contain provisions to the effect that in the event of termination (no reference is made on the reasons of termination, e.g. SPV s default, the relevant administration s default other cases of termination, so one may assume that it applies to all cases of termination) and therefore the project is returned to the relevant administration, then: (i) the relevant administration may undertake the amount of external financing actually used in the performance of the relevant project and not yet reimbursed at the date of termination; and (ii) if any amount of external financing has not been drawn at the date of termination, the relevant administration may use such undrawn amounts for the remaining part of the relevant project. The above provisions therefore may be inserted in BOT contracts. Pursuant to the second paragraph of Article 3 of the Law No.6288, in case the relevant administration undertaking the loan is not within the general budget of the government then the administration itself is authorised to take such action. In the event such administration is within the scope of the specific budget (autonomous budget for itself), then the Cabinet of Ministers will be authorised to decide if such financing can be undertaken by the relevant administration upon the suggestion of the Ministry under which such administration operates, or it can be undertaken by the Undersecretariat of Treasury upon the demand of the same Minister, under which the above administration operates, and the suggestion of the Minister, under which the Undersecretariat of Treasury operates. This paragraph applies to the financing of projects tendered by public organisations and institutions and subsidiaries and local governments which are not included in the general budget (these institutions are specified in the Law regarding the Public Fiscal Management and Supervision - Law No. 5018). The second paragraph of Article 3 therefore does not apply to the Ministry of Transportation and the Ministry of Health as they fall within the general budget. Pursuant to Law No. 6001 and Law No. 5018, the General Directorate of Highways ( GDH ) has been included in the list of entities which have a special budget. Therefore, pursuant to the third paragraph of Article 3, the projects tendered by the GDH will benefit from the above regime in the event the Ministry of Transportation, Marine Affairs and Telecommunication suggests and the Cabinet of Ministers approves it. The VAT exemption with respect to BOT and PPP projects may generate considerable saving in relevant investments. In addition, in case of termination of BOT projects, the possibility of relevant administration undertaking financing may encourage lenders to finance the BOT projects. 2012/I 56

L E G A L N E W S B U L L E T I N T U R K E Y Litigation & Arbitration Turkey: International Investments and Settlement of Investment Disputes Seda EREN C Turkey is considered as one of the fastest growing economies in the world and within the largest economies in the Europe region and worldwide. Turkey ranks as the world s 13th most attractive destination for Foreign Direct Investment in 2012, according to the A.T. Kearney FDI Confidence Index. The Ministry of Economy announced as of the end of 2011 that around 30,000 companies with foreign capital operate in Turkey. Turkey is a member of several international and regional organisations and since the 80s Turkey entered into several free trade, trade onscious encouragement of foreign investments and foreign trade resulting from Turkey s ongoing liberalisation policy is prompted by domestic legislative reforms and activities in international areas aiming to render protection and security to foreign investors in Turkey and cooperation agreements along with taking economical reforms for the liberalisation of trading. In this respect, foreign trade in terms of exports and imports has grown into a significant level. Turkish investors are active in several regions around the world and major Turkish investors are ranked within the top 100 investors in particular sectors such as construction in many regions including Europe. Conscious encouragement of foreign investments and foreign trade resulting from Turkey s ongoing liberalisation policy is prompted by domestic legislative reforms and activities in international areas aiming to render protection and security to foreign investors in Turkey and Turkish investors investing in foreign states. In this regard, Turkey has paid due attention to foreign investors rather common reluctance and hesitation to be subject to domestic laws and litigation proceedings before domestic courts. Considering foreign investors strong tendency to establish arbitration as the method of resolution of investment disputes, Turkey has taken several steps to provide settlement of investment disputes by arbitration. Turkey has entered into bilateral investment treaties ( BIT ) with many states as provided in Ministry of Economy s official website. As set out in the official website of the Ministry of Economy, the main purposes of Turkey s BITs are to increase the bilateral flows of capital and technology, and protect investments of international investors in the framework of the legal system of the host contracting state. In line with these principals, BITs are signed with countries having strong investment relations with Turkey or carrying a potential in this direction or with which the development of bilateral economic relations are considered promising Many of the BITs regulates that the investment disputes should be settled by arbitration subject to the ICC Rules. Likewise, the majority of these BITs provide that the governing law applicable to the investment disputes should be UNCITRAL Rules. Without limitation, there are BITs providing for settlement of disputes by ad hoc arbitration or by arbitration subject to ICSID 2012/I 57

L E G A L N E W S B U L L E T I N T U R K E Y Rules and the choice of law may come along as the UNIDROIT Rules. In addition to bilateral investment treaties, Turkey entered into force multinational treaties regulating settlement of investment disputes by arbitration. Particularly, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States entered into force on 2 April 1989 as published on the official List of Contracting States and Other Signatories of the Convention (Official Gazette: 6.12.1988-19830). Turkey is also a party to NAFTA-North America Free Trade Agreement since 1994 and entered the Energy Charter Treaty into force in 2001. Please note that Turkey is a civil law country and according to Article 90 of the Constitution of Republic of Turkey, the international treaties which are duly entered into force have the force of law within the hierarchy of laws. Also, Turkey is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards - the New York Convention. Turkey has revised or adopted domestic legislations to allow for settlement of disputes with foreign investors by arbitration. Pursuant to the Act numbered 4501 and dated 21.01.2000 regarding the Principles to be Followed When Disputes Arising from Concession Covenants and Contracts Concerning Public Services, disputes arising out of public services including built-operatetransfer agreements having a foreign element and the related concession covenants and contracts are settled by international arbitration. Further, Turkey enacted the International Arbitration Act in 2001. This Act applies to disputes which contain a foreign element and designate Turkey as the place of arbitration or to disputes in which the provisions of this Act are designated by the parties or the arbitrator or arbitral tribunal. Recently, in 2011, Turkey revised the provisions on arbitration contained in the Code of Civil Procedures in line with the overall revision of the code. Following the enactment and revisions of these codes, the role of national courts in arbitration proceedings has become more and more limited and national courts in Turkey are gradually becoming more arbitration friendly whereas the implementation of international rules and principles on arbitration has significantly developed. Individual Application Right to the Constitutional Court Serkan SAYGILI The individual application right allows individuals to appeal to the Constitutional Court where their basic rights and liberties, protected under the European Convention on Human Rights ( ECHR ) and its attachment protocols which are accepted by Turkey, are infringed by acts or decisions of legislative, executive or judicial branches. The individual application is a last legal remedy due to protect basic rights and individuals in domestic law. With the recognition of this right, all domestic legal remedies must be exhausted before resorting to the European Court of Human Rights ( ECtHR ) in relation to the infringements of basic rights and liberties. With Referendum on constitutional changes which has been adopted on 12 September 2010, a new domestic legal remedy, namely an individual application right, has been added to the Turk- 2012/I 58

W ith ish Constitutional jurisdiction. Following, these constitutional changes legal regulations have been made regarding the application of this right with the new law. The new law will regulate the individual application process and will enter into force on 23 September 2012. In accordance with the new law, the Constitutional Court will only review submissions against decisions which are finalised after this date. In other words, retrospective individual application review will not be possible. With this legal regulation an individual application right to the Constitutional Court is recognised and a new domestic legal remedy is found and thereby the important step has been taken to protect basic rights and liberties, and rule of law. The individual application right is regulated under the title Individual Application Right of the new law. this legal regulation an individual application right to the Constitutional Court is recognised and a new domestic legal remedy is found and thereby the important step has been taken to protect basic rights and liberties, and rule of law. What are the terms for application? The following two terms should be present in order to bring an action through the individual application right to the Constitutional Court: - A right that is allegedly infringed should be present both in the Constitution and the ECHR and its attachment protocols which were accepted by Turkey. - All administrative and judicial remedies prescribed by law due to transaction, action or negligence that are causing the alleged infringement should be completed prior to the individual application. However, legislative actions and regulatory administrative actions and actions which have been exempted from judicial review by the Constitution will not be subject to the individual application. Who can apply? The individual application right to the Constitutional Court is applicable to people whose current and personal rights have been affected directly and caused an alleged infringement by a transaction, action or negligence. However, a corporate body also has an individual application right by reason of their legal entity s rights are infringed. Although the Constitution does not discriminate citizens, foreign and stateless people by stating everyone, the individual application right to the Constitutional Court is only available as a primary right to citizens and therefore foreign people are outside the remits. Application period and procedure Individual applications should be made within thirty days from the date of completion of remedies; if there are no remedies, the application period will begin within thirty days from the date of discovering the infringement. Applications to the Constitutional Court should be made either directly to the Constitutional Court with a petition or through other Courts or overseas agencies in order to be sent to the Constitutional Court. Decisions that may be awarded following an investigation The Court will decide on inadmissibility of the individual application and not review on the merits on the following conditions as a result of application to the Constitutional Court: - If the application is not important in terms of determining the scope and the limit of basic rights, - If the applicant has not experienced any significant damages, - If the application is obviously unmeritorious. The Court will review the application on the merits in deciding the admissibility of the individual application. Following the review on the merits, the Court will decide whether the applicant s right is infringed or not. In case of decision of infringement, the Court will award the required actions in order to remove the infringement and its consequences. Furthermore, if the judicial infringements result from any Court s decision, the application file should be sent to the relevant Court in order to retry for the removal of the infringement and its consequences. The Court may order damages or indicate the necessity of pleading in general courts in case of lack of legal benefit for retry. The Constitutional Court s refusal decision will not preclude the application to the European Convention on Human Rights. However, the Court will impose the litigation costs and a penalty for the applicants where the court ascertains that the applicant is obviously dishonest in its individual application right. 2012/I 59

L E G A L N E W S B U L L E T I N T U R K E Y Construction Arbitration Selen SÜMER S pecial Construction contracts require a special level of knowledge and expertise. This special character of construction contracts does not only lead to a specific diligence while drafting and negotiating those but also requires a high level of expertise for settlement of disputes arising there from. This is especially true for constriction contracts with high contract prices. Vis-a-vis the requirement for a special treatment during the resolution of disputes, construction contracts mostly set forth an arbitration clause pursuant to which the disputes between the parties shall be settled by an arbitral tribunal. Why Arbitration in Construction Contracts? When there is a dispute arising from a construction contract, such dispute generally relates character of construction contracts does not only lead to a specific diligence while drafting and negotiating those but also requires a high level of expertise for settlement of disputes to a technical issue which cannot solely be settled by the implementation of abstract legal norms because the disputed technical issues are mostly of a complicated character. Accordingly, the technical problems should be evaluated by the technical experts who have enough time and energy to focus on the technical aspects. Arbitration in construction contracts permits that the technical experts are involved in an efficient way for the resolution of the technical problems. The expert reports provided by those will serve for the arbitrators to have a better understanding of the project and technical issues subject to dispute at hand. In the scenario where the state courts have jurisdiction to settle the dispute arising from a high amounted construction contract, the process would be more time-consuming and inefficient. Although the state courts have mostly the authority to appoint technical experts, it may occur that the appropriate technical experts may not be appointed. Furthermore, it is probable that the technical experts appointed by the state courts would not be able to dedicate enough time when the technical expert fees determined by the state courts are taken into consideration. However, if the relevant issue is to be resolved by arbitration, the parties would ensure that well-recognised international experts handle the disputed issues. Of course, this will lead to the consequence that the specific knowledge and high level of expertise of the technical experts appointed by the parties will facilitate the arbitral tribunal s task by providing expert reports comprising to-the-point technical evaluation which definitely have an efficient effect. The only point which makes the arbitration preferable for construction contracts is not the involvement of technical experts in an efficient manner. Another key aspect which renders arbitration favourable for construction contracts is the opportunity for the parties to appoint arbitrators who are well-familiarised with construction projects. It is evident that the choice of the arbitrators who have a background of construction projects will be a plus point for the quickest way of the resolution of the dispute. It is also self-evident that the arbitrators who have a deep knowledge of construction projects can more easily and effectively lead the proceedings and have a better understanding of the parties positions. This will also relive the parties tension during 2012/I 60

the arbitration because each party against whom a high amount of claim is alleged would be sure that the dispute is in the safe hands which will enlighten the sharpest way of proceedings. The favourable conditions cited above, which lead the parties to prefer arbitration clauses in the construction contracts, are not limited. There are many other factors for the choice of arbitration. For example, the parties may have a certain degree of freedom with the consent of the arbitral tribunal not only for the conduct of the proceedings but also for the timetable. The parties may agree that all technical expert reports and witness statements should be submitted together with the memorials or the submission of technical expert reports and witness statements shall follow the exchange of memorials. If an agreement is reached by the parties, the procedure which is most appropriate for the conduct of the proceedings can be adopted. This would evidently have a time-saving effect. Similarly, the parties may also agree on the timetable pursuant to which the submission dates are fixed. For example, the disputed construction project may be an ongoing project and the parties may be in such position that the dispute should be firstly resolved before they carry on the implementation of the construction project. In such case, it is likely that the parties would prefer that the submission dates are very close to each other so that the arbitration proceeding is quickly completed. No Adverse Effect??? As can be seen, the list of favourable conditions for arbitration is not exhaustive. However, it may also be argued that there are unfavourable conditions which may prevent the parties to adopt an arbitration clause in the construction contract. For example, in many jurisdictions, the parties may only appeal against the arbitral awards based on a very limited number of reasons even if the arbitral award is rendered obviously in a mistakenly manner. However, this is a risk to be taken for the parties who want to be sure that the dispute is resolved by the people who are well-familiarised with the construction projects and who have special level of expertise and knowledge. The Key Factor for Success in Construction Arbitration The parties who opt for an arbitration clause in construction contracts should be aware that for the success of the construction arbitration, the cooperation between the technical team and legal representatives is absolutely required. Otherwise, the legal representatives, although they have a deep knowledge in the construction sector, may be deprived of a well-structured understanding of the key issues. Accordingly, a close collaboration between the technical and legal staff should be ensured for the success in the construction arbitration. 2012/I 61

L E G A L N E W S B U L L E T I N T U R K E Y An Exceptional Concept for the Limits of Liability in Corporate Entities: Lifting the Corporate Veil Onur YALÇIN Efe ÖNDE corporate veil occurs upon incorporation of a company. The veil falls The between the company and the company s members, shareholders and partners, and in some way hides them from the view of third persons. The principle of lifting the corporate veil is not a concept governed under Turkish law. However, in exceptional situations the courts may lift the corporate veil against the limited liabilities of shareholders. Therefore, the corporate veil is lifted, in accordance with the equity principle and the rationale of the provisions, in order to prevent the abuse of power and aim for the big shareholder hidden behind the corporate veil. The majority of legal systems distinguish the corporate entity wholly from the real persons and as a result the corporate entity is responsible for all the debts and assets in the corporation. The veil protects the persons who have established and operate the organs. That is to say, the claimant will not be able to claim the real persons assets for the debts of the corporate entity. It should be noted that lifting the corporate veil principle is not exclusive to commercial law. It is also observed in other areas of law. In some circumstances, the law provides certain provisions to apply to the organs of the corporate entity. In those circumstances it will not be necessary to apply the corporate veil principle. Obvious examples for the mentioned provisions are within the Civil Code Article 50/3, which requires for the personal liability of the organs for their faults. By this provision the Civil Code deviates from the separation principle. A second example is under Articles 178-180 of the Turkish Commercial Code, and under Articles 236-238 of the new Turkish Commercial Code ( New TCC ). According to these articles, a collective partnership is responsible for its own debts. Yet, the partners are secondarily responsible for the debts of the partnership as well. As the legislative authority has regulated the partners responsibility, according to certain scholarly opinions of the doctrine, the veil is already lifted, thus, partners cannot hide behind the veil. However, Article 209 of the New TCC introduces a responsibility to maintain confidence and requires the dominant company to be responsible for this reputation in circumstances where the community reputation reaches a point that gives confidence to the society or to the consumers. This provision will be established with practice and therefore, it is too early to state that the veil will be lifted completely, but it is step forward for doing so. Under Turkish Jurisdiction, lifting the corporate veil was first observed particularly in tax cases. Yet the name of the principle was not pronounced. The Council of State has applied the principle of lifting the corporate veil and expressed in its decision that the actual position shall be taken as a basis but not the legal position. Thereafter, the Court of Appeal has also applied the lifting the corporate veil principle. The organic link is an exceptionally important issue concerning the corporate veil principle. In practice, the courts seek for an organic link for different corporate entities that can be responsible for the debts of another corporate entity. 2012/I 62

T he There are some similarities between the organic link and lifting the corporate veil principle as both principles extend the responsibility purposes. The necessity to lift the corporate veil may occur in situations related to insufficient capital, the confusion of the assets and the organisations of the corporate entities and the partners, abuse of the corporate entity etc. corporate veil occurs upon incorporation of a company. The veil falls between the company and the company s members, shareholders and partners, and in some way hides them from the view of third persons. Firstly, if a partnership is operating with inadequate capital to perform its field of activity, then the partners of this company cannot hide behind the corporate veil and benefit from the limited responsibility principle. In other words, the corporate veil shall be lifted for some circumstances when a capital, which does not meet the field of activities of a company, is present. However, the relevant court will decide whether to lift the veil on a case by case basis. Secondly, the circumstance for the confusion of the organisation and assets of the partners and the corporate entity constitutes a reason to lift the corporate veil. One of the main principles of having a separate corporate entity is owed to the separation of the assets and the organisation from its partners.. Therefore, the veil protecting the partners will be lifted as a result of this breach and thus they will be held directly responsible. Lastly, another reason for the veil to be lifted occurs when the corporate entity is used intentionally to damage the claimants. Therefore, the corporate veil will fail to protect those who unfairly and intentionally deceive and damage claimants without their knowledge. To conclude, in practice, lifting the corporate veil is not very common as the proving and determining of it is a very hard issue. Therefore, in the doctrine and in the Court of Appeal decisions it is seen as an exceptional and very rare occasion. Security Obligation of Foreign Legal Entity Alize TUFAN Foreign parties right to seek legal remedies is ensured by the Constitution of Republic of Turkey in line with private and public international laws. In this context, a foreign party may seek legal remedies in Turkey and may, without limitation, file a lawsuit before Turkish courts, initiate enforcement proceedings and may intervene in a lawsuit. Legal entities, the registered address of which is not domiciled in Turkey (in other words, legal entities which have not been incorporated in Turkey according to Turkish laws) are considered as foreign legal entities. On the other hand, companies registered in Turkey in accordance with Turkish laws are not considered as foreign entity for security purposes even where any such 2012/I 63

L E G A L N E W S B U L L E T I N T U R K E Y T company is a subsidiary of a foreign company, formed by foreign capital or by foreign shareholders. Should foreign legal entities exercise its right to file a lawsuit, intervene in a lawsuit or initiate an enforcement proceeding in Turkey, the general rule regulated in Article 48/1 of the International Private and Civil Procedure Law ( IPCPL ) is, the foreign legal entity should provide security. he foreign legal entity may be exempt from security obligation where there is a bilateral or multilateral treaty between Turkey and state of domicile of the foreign entity. In the absence of a treaty, exemption may nevertheless be granted subject to discretion of the court if there is reciprocity between Turkey and state of domicile of the foreign entity. The foreign legal entity may be exempt from security obligation where there is a bilateral or multilateral treaty between Turkey and state of domicile of the foreign entity. In the absence of a treaty, exemption may nevertheless be granted subject to discretion of the court if there is reciprocity between Turkey and state of domicile of the foreign entity. It is worthwhile to note that, under exceptional circumstances, the court may provide exemption in the absence of a treaty or reciprocity. In addition, exemption may be granted if the foreign entity has property in Turkey, which may be a receivable secured by a guarantee in rem in favor of the foreign entity, and which is sufficient to cover the amount of security. Enforcement proceedings subject to a Turkish court order/award or a court order/award enforceable in Turkey does not require deposition of security by foreign entities. The amount of security is determined by the court where the demand is pursued by the foreign entity. In principle, the security shall be deposited to the Central Bank of the Republic of Turkey in foreign currency. In practice, security may be deposited in Turkish Lira and security by letter of guarantee, stocks and mortgage may also be accepted by the court as a valid security. In case the parties to the dispute have an agreement in force relating to security, the provisions of this agreement shall apply. The amount of security is in principle set taking into account legal fees and expenses. Although unlikely, IPCPL provides that, in case the court is in a position to foresee any additional loss or damage to the opposing party as a result of a lawsuit or enforcement proceeding by a foreign entity, this risk of loss and damage may also be considered in determination of the security to be provided by the foreign entity. In case the foreign entity does not deposit the security determined, the lawsuit/enforcement proceeding will be dismissed on procedural grounds. Some of the states that Turkey has a multilateral or bilateral treaty with areas follows: Albania, Austria, Belgium, Denmark, Finland, France, Germany, Japan, Italy, Luxembourg, Netherlands, Norway, People s Republic of China, Philippines, Poland, Portugal, Romania, Spain, Sweden Switzerland and United Kingdom. 2012/I 64

Arbitrability: What are the Limits? Simel SARIALİOĞLU As a dispute resolution mechanism, arbitration gives the freedom to parties to refer their disputes to arbitrators instead of national courts. Once arbitration is agreed by the parties to settle prospective disputes arising out of a contractual relationship, then they should go to arbitration once a dispute arises. Yet, not all disputes are arbitrable. In fact, according to Article 15 of the Turkish International Arbitration Law No. 4686 ( Law No. 4686 ), which applies to disputes with a foreign element and where Turkey is designated as the place of arbitration or where the parties or arbitrators have chosen to apply the provisions of the Law No. 4868 to the dispute, an arbitral award will be set aside (annulled) in case the local court evaluating the award, following an action for set aside, determines that the dispute subject to the arbitral award is not arbitrable under Turkish law. The court may make this evaluation ex officio; in other words, it is not subject to the non-arbitrability objection of a party. Similarly, the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards addresses arbitrability such that Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. In Short, the Convention limits the parties autonomy to refer their disputes to arbitration by subject matters capable of settlement by arbitration. Under the Convention, non-arbitrability is recognized as a ground for a State court to refuse recognition and enforcement of an arbitral award. Accordingly, recognition and enforcement of an arbitral award may be refused if the competent authority in the country, where recognition and enforcement is sought, finds that the subject matter of the difference is not capable of settlement by arbitration under the law of that country. Therefore, when referring a dispute to arbitration, it is important to know whether the subject matter of your contract is arbitrable under the law of the country where the arbitral award will be enforced. Otherwise, the arbitral award, which you have successfully obtained with a tremendous success after a bloody battle may never be enforced. Like most national law, there are limits to arbitrability under Turkish law. According to Article 1 of the Law No. 4686, disputes regarding rights in rem (real rights) on immovable properties in Turkey and disputes that are not subject to the will of both parties are not arbitrable. The same rule prevails for arbitrations held under the Turkish Code of Civil Procedure, which applies to disputes where there is no foreign element within the meaning of the Law No. 4686 and where the place of arbitration is designated as Turkey. Additionally, there are some restrictions in terms of arbitrability to disputes relating to public order, IP rights and competition law. Rights in rem: The Law No. 4686 sets forth two prerequisites for non-arbitrability of a dispute relating to immovable properties: (i) the immovable should be in Turkey, (ii) the dispute 2012/I 65

L E G A L N E W S B U L L E T I N T U R K E Y T should relate to rights in rem. In the alternative, disputes regarding immovable properties which do not relate to rights in rem, such as the dispute arising from a rental contract regarding an immovable, may be arbitrable. Disputes not subject to the common will of the parties: Within the sense of disputes that are not subject to the will of both parties, criminal disputes are not arbitrable. Similarly, ex parte proceedings, such as change of name, providing certificate of inheritance, allowing marriage, shortening marriage periods, are also not arbitrable. Public order: In order for the parties to refer their dispute, the dispute should not relate to public order. As per the established Court of Appeal decisions, arbitration agreements are valid for disputes which do not relate to public order. In this regard, matters of bankruptcy and, to some extent, employment agreements are not arbitrable. herefore, when referring a dispute to arbitration, it is important to know whether the subject matter of your contract is arbitrable under the law of the country where the arbitral award will be enforced. Otherwise, the arbitral award, which you have successfully obtained with a tremendous success after a bloody battle may never be enforced. It can be said that an arbitration clause contained in an individual employment agreement will be void because it is not subject to the will of both parties. Yet, it does not mean that all employment law related matters are non-arbitrable. According to Article 34/2 of the Collective Labor Agreement, Strike and Lock-Out Law, during the postponement period, the parties may agree to refer the dispute to a private arbitrator. IP rights: It is argued that the disputes arising from the rights at the parties free disposal are arbitrable, such as disputes of industrial and intellectual property rights. Accordingly, trademark, patent, industrial design and copyright disputes can be referred to arbitration. Yet, the arbitration agreement will only be binding for the parties of the dispute. In other words, in case a dispute arising from an infringement of an intellectual or industrial property right is referred to arbitration, the award is only binding on the parties of the arbitration. Yet, this is an undeveloped field in Turkish law. Competition law: Whether or not matters of competition law are arbitrable is a grey area given the lack of case law and sufficient academic works addressing the issue. Generally speaking, it can be said that issues that does not relate to the use of a public force or are not within the exclusive competence of the Competition Authority may be arbitrable. For instance, examination of agreements, concerted practices and decisions limiting competition (Article 4 of the Competition Law), abuse of dominant position (Article 6 of the Competition Law), mergers & acquisitions (Article 7 of Competition Law) relate to use of a public force and are within the exclusive competence of the Authority. Similarly, imposing sanctions to establish competition, maintain the situation before infringement, etc. in accordance with the Section 4 of the Competition Law are reflections of the Competition Authority s public force. In fact, in many member States of the European Union, competition law is accepted as arbitrable. In the famous Eco Swiss vs Benotton case, the European Court of Justice held that competition disputes are arbitrable, yet the intervening rules of EU competition law must be applied. In principle, in USA and EU, it is accepted that competition law related actions for damages, unjust enrichment and adaptation of contracts are arbitrable. Taking into consideration the similarities between the EU and Turkish competition law regime, some scholars argue that the criteria in EU competition law application should also be adopted for Turkish law and the competition law related disputes that are subject to the will of the parties should be arbitrable (such as an action for damages due to breach of competition law). However, this is an undeveloped field in Turkish law. * * * Under Turkish law, it is hard to determine whether or not a matter is arbitrable unless it is explicitly stipulated in a piece of legislation. For the advantages of arbitration cannot be underestimated, in order to have an enforceable award, it is advised to ensure that the subject matter of the dispute is arbitrable under the law of the country where enforcement of the award will be sought. 2012/I 66

Post-Award Remedy under Turkish Law: Setting Aside of Arbitral Awards Seteney Nur ÖNER This article canvasses the setting aside of an arbitral award as a post-award remedy under Turkish law; both in respect of the Turkish International Arbitration Law No. 4686 ( IAL ) for awards with foreign element and seated in Turkey, and the Turkish Code of Civil Procedure No. 6100 ( CCP ) which brought a fresh approach with its liberal view to arbitration after its enactment on 1 st of October 2011. As arbitrators can generally said to be appointed by the parties in the belief that those arbitrators are the appropriate people for the dispute matter, an arbitral award enjoys the presumption that the issues in dispute were well considered and judged by the arbitrators; this is one of the ultimate reasons for the parties agreement to resolve the dispute by way of an arbitration, alongside the -relative- speed of arbitral proceedings. Thus, a post-award remedy (i.e. setting aside) should to the extent possible- avoid re-hearing of the action. In order to avoid the use of postaward remedy as a tool for re-hearing of the already arbitrated issue; the tendency of the Turkish lawmaker is to limit the grounds for setting aside an award, and to regulate the setting aside mechanism just to make sure that the parties really intended to arbitrate on the disputed matter, the award properly deals with the matter that the parties wanted to arbitrate which is ultimately resolved by the award, the parties were provided with equal and sufficient opportunity to establish their actions, and alike. International Arbitration Law No. 4686 The disputes carrying a foreign element as described in Article 2 [1] of the IAL shall be deemed international and be subject to the provisions of the IAL. Article 15 of the IAL grants the opportunity to initiate an action for setting aside an arbitral award which falls within the scope of the IAL. The article provides that the only remedy against arbitral awards is setting aside. It should be noted that this action can be initiated unless the parties waived their right to do so. Parties whose domicile or habitual residence is not in Turkey can waive this right by inserting a provision to the arbitration agreement or by way of a separate agreement to be made in writing. Further, the grounds on which the parties are able to bring a case for setting aside can also be narrowed by way of waiver (as set out below). The action should be initiated within thirty days of receiving the award (or the corrected, interpreted or completed award). [1] 1. If the residence or headquarters of the parties to the arbitration agreement are in different countries. 2. If the countries of residence or headquarters of the parties are different from: a) The place of arbitration mentioned in the arbitration agreement or determined by the parties based on the arbitration agreement. b) The place where significant obligations arising from the main agreement shall be fulfilled or the place which has the closest connection with the dispute matter. 3. If at least one of the shareholders of the party to the main agreement constituting the basis of the arbitration agreement has brought foreign capital or the implementation of the main agreement requires foreign capital to be provided under the credit and/ or guarantee agreements. 4. If the main agreement or legal relation constituting the basis of the arbitration agreement provides inter-country capital or commodity transfer. 2012/I 67

L E G A L N E W S B U L L E T I N T U R K E Y T Initiation of the action for setting aside suspends the enforcement of the award. In line with arbitration being a relatively speeded-up process, the action is heard by the civil court of first instance as a matter of primary importance and urgency. Unless the court decides otherwise, the judgement is made without conducting a hearing and purely based on the documents submitted. The following reasons may lead to setting aside an award: 1. Incapacity of one of the parties to the arbitration agreement 2. Invalidity of the arbitration agreement under the governing law determined by the parties, or Turkish law if there is no choice of law 3. Failure to comply with the procedure for appointment of the arbitrator(s) as agreed by the parties or set out in the IAL he tendency of the Turkish lawmaker is to limit the grounds for setting aside an award, and to regulate the setting aside mechanism just to make sure that the parties really intended to arbitrate on the disputed matter, the award properly deals with the matter that the parties wanted to arbitrate which is ultimately resolved by the award, the parties were provided with equal and sufficient opportunity to establish their actions, and alike. 4. Failure to make the award within the time period determined for the arbitration 5. The arbitrator s/arbitral tribunal s decision regarding its competence was in breach of Turkish law. 6. The arbitrator/arbitral tribunal has ruled on matters beyond the scope of the arbitration agreement 7. The arbitrator/arbitral tribunal has failed to rule on all matters raised 8. The arbitrator/arbitral tribunal exceeded its power 9. The arbitration was not conducted procedurally in accordance with the agreement of the parties, or failing such agreement in relation to procedure, not in accordance with the IAL, with this failure impacting on the merits of the action 10. Breach of equality between the parties. 11. The court determines that the dispute is not arbitrable under Turkish law or the award is in breach of the public policy. In an action for setting aside, the court can examine the award only on the basis of the reasons listed above (save where the parties have agreed to exclude such grounds). This examination by the court is completely different from an appellate review which is effectively an examination of accuracy of the decision and its compliance with law. As will be noted, none of the reasons listed actually relate to the merits of the award, save for the court s examination in respect of public policy. It is accepted that in specific actions the court may examine the merits of the award to determine whether the public policy is breached. Examples of breach of public policy, according to the Court of Appeal, can be awards dealing with rights in rem of immovable property in Turkey, signing of the arbitration agreement by an unauthorized representative, or accepting that the arbitration clause in a collective bargaining agreement is valid for the employees. However, in any case, a public policy examination in an action for setting aside is not an examination of the merits in the appellate review sense. If the action for setting aside has been initiated with the claim that the arbitrator or the tribunal made an award on a particular matter beyond the scope of the arbitration agreement and their power, and this particular matter can be effectively separated from those other matters falling under the arbitration agreement and covered by the award, the action can be limited to the matter that exceeded the scope of the arbitration agreement. The courts decision regarding whether or not to set aside an award can be appealed. The Court of Appeal examines the action as a matter of primary importance and urgency. Code of Civil Procedure No. 6100 In general terms, unless there is a foreign element and the parties refer to another specific body of rules for arbitration, the arbitration seated in Turkey shall be subject to the provisions of the CCP. Similar to the IAL, the CCP, which has been in force since October last year, regulates the action for setting aside as a post-award remedy for arbitral awards which fall within its scope. It should be noted that this is a significant 2012/I 68

change; as prior to amendments introduced by the CCP, the only remedy in respect of arbitral awards was by appeal. The grounds for initiating an action for setting aside the award under the CCP are almost identical to those under the IAL. Under the CCP, the action should be initiated within a month of receiving the award (or corrected, interpreted or completed award). Unlike the IAL, initiating an action for setting aside under the CCP does not suspend the enforcement of the award. However, the court may decide to suspend enforcement if the party requesting the suspension deposits an amount to be determined by the court in correlation with the value of the matter in dispute, as security. The court s decision in relation to the setting aside of an award can be appealed. Any such appeal also does not suspend the enforcement of the award. Limitations on Interest Rates Tuğçe Aslı TURÇAL The provisions regarding interests are individually regulated under new Turkish Code of Obligations No. 6098 ( New TCO ) to be entered into force on 01.07.2012 which is similar to the current Turkish Code of Obligations No. 818 ( TCO ). Article 88 of the New TCO regulates capital interest while Article 120 regulates default interest. The remarkable issue in those regulations is that it is the first time both capital interest and default interest is limited. This new regulation in Turkey is compatible with applications of many other countries such as Switzerland, Germany and Austria which also applies limitations to interest rates. Article 88 of the New TCO, regulating capital interest, provides that if the annual interest rate is not regulated in the agreement, it is determined according to the effective legislation. This is a new provision considering that the TCO had set this rate at 5%. The new regulation does not favour regulating a fixed rate as interest rates change with the necessities of the economy. Therefore, if there is no determination in the agreement regarding interest rates, then the interest will be set according to the Law on Capital Interest and Default Interest No. 3095 (Law No. 3095). This rule is also applicable to the regulation regarding default interest. On the other hand, if the capital interest rate is determined in the agreement, this will be applied on one condition: according to Article 88/2 of the New TCO, the interest rate determined freely in the agreement shall not be in excess of 50% of the interest rate regulated by legislation. In case the determined rate exceeds this regulation, the exceeding part will partially be ineffective and the maximum ratio set in the legislation will be applied. There is a similar limitation in default interests regulated in Article 120 of the New TCO that the default interest rate determined in agreements shall not be in excess of 100% of the interest rate regulated by legislation. It is a matter of consideration whether these limitations are also applicable to merchants. There is a view stating that by taking the new Turkish Commercial Code No. 6102 into consideration, which regulates that the interest rate is freely determined in commercial transactions, only limitations regarding consumers regulated in Consumer Protection Law No. 4077 may be applicable, however, if both parties of the transaction are merchants, the interest rate will be freely determined. 2012/I 69

L E G A L N E W S B U L L E T I N T U R K E Y T he Another view states that the justification of the new articles regarding interest stipulates the aim as to protect the debtors against extraordinary interest rates without making any distinction whether the debtor is a consumer or a merchant and since there is no distinction for the application of those remarkable issue in those regulations is that it is the first time both capital interest and default interest is limited. provisions to merchants or consumers in the articles themselves or in their justifications, they should be applicable to both. The view supporting of this application provides that the Article 9 of Law No. 6102 sets out that relevant legislation provisions are applied in commercial transactions; regarding legal capital and default interest rates. Considering the relevant legislation also includes the New TCO, those limitations in interest rates are also required to be applicable to merchants commercial transactions. In practice of those new provisions, the interest rate in commercial transactions will be determined freely by the parties in the agreements. In case the interest rate would not be determined expressly by the parties in their transactions, the interest rate will be determined in line with the relevant provisions limiting the applicable rates. Application of those provisions will bring important changes to commercial life. So, it is important to know when these provisions will be applied. Will they be retroactive, immediately active or to be applied in future? These questions are clearly answered by Article 7 of the Law No. 6101 on Enforcement and Application of Turkish Code of Obligations stating that provisions regarding interest rates will be applicable to the ongoing cases. Therefore, these provisions will have an immediate effect on ongoing cases considering their importance. Lease Agreements in the New Turkish Code of Obligations Levent BELLİ The new Turkish Code of Obligations Law No 6098 ( New TCO ) that will enter into force on 1 July 2012 introduces various changes for Lease Agreements. Following the enforcement of the New Turkish Code of Obligations, provisions of the Turkish Code of Obligations Law No 818 and Law No 6570 ( TCO ) on lease agreements of Real Estate Properties shall become invalid and provisions of the New TCO shall start to apply. One of the important changes introduced by the New TCO about lease agreements is in the definition of Lease Agreement. In the New TCO the definition including all lease agreements has been made contrary to the old TCO and lease agreement has been defined as the agreement where lessor leaves use of something or benefits from it as a result of use to the lessee and lessee agrees to pay the mutually agreed rent against such utilization. Different from the old TCO, it has been stated that the lessor undertakes to leave benefits of something to lessee as well as rights to use. Accordingly, it has been accepted that in addition to allowing use, allowing benefiting from it may also constitute one of the obligations of lessor. Another change that has been introduced 2012/I 70

T about lease agreements in the Turkish Code of Obligation is the new explicit regulation regarding the rental period. In Article 300 of the Turkish Code of Obligation, it has been stated that lease agreements may be concluded for a definite or indefinite period of time and contracts expiring at the end of the determined period are contracts of definite duration and other contracts are lease agreements of an indefinite duration. The importance of making a definite and indefinite duration classification for lease agreements in the law shall show itself with the expiry of the contract. According to the New TCO; lease agreement shall automatically expire at the end of the duration if the duration was determined explicitly or implicitly. If parties continue with the leasing relationship without having an explicit agreement, in this case lease agreement shall automatically become a contract of indefinite duration. he Lawmaker imposed a new regulation with the purpose of preventing the lessor from misusing their strong status against the lessee and to bring additional responsibilities to the lessee in order to conclude the contract. Accordingly; if the establishment or continuance of a lease agreements for Residences and Roofed Business Premises is based on the lessee to undertake a liability which does not provide any benefit to the lessee or which is not connected with using leased property, the lease agreement shall be valid, however the associated contract shall be invalid. Special provisions for lease agreements were regulated under the title Rents of Residences and Roofed Business Premises since Law No 6570 on Rents of Real Estate Properties was revoked upon regulation of general provisions on lease agreements in the New TCO. The Turkish Code of Obligation does not make a distinction according to the location of the leased property different from the old TCO, it includes all residences and roofed business premises within this scope, and moreover, it ensured that the provisions of this law to apply to furnishings left to the lessee under the lease agreement. However, immovables such summer resorts and hotel rooms which are allocated for temporary use due to its characteristics are left out of the scope in case they are rented for a period of shorter than six months. Conflicts that may arise out of this type of leasing shall be settled by judges in accordance with general provisions considering the situation and the conditions surrounding the concrete case. The Lawmaker imposed a new regulation with the purpose of preventing the lessor from misusing their strong status against the lessee and to bring additional responsibilities to the lessee in order to conclude the contract. Accordingly; if the establishment or continuance of a lease agreements for Residences and Roofed Business Premises is based on the lessee to undertake a liability which does not provide any benefit to the lessee or which is not connected with using leased property, the lease agreement shall be valid, however the associated contract shall be invalid. Accordingly; if the lessor obliges the lessee to conclude an insurance contract related with the leased property or to buy the leased property after a certain period of time, the lease agreement shall not be valid, other associated contracts shall be invalid. In addition, the fact that the associated contract has been signed with the lessor and a 3rd party entity shall not change the outcome. The Lawmaker introduced a new regulation about Security Deposit that may have to be paid by the lessee in order to rent as a Residence or Roofed Business Premise, with the purpose of protecting the rights of the lessee. Accordingly, if the lessee is obliged to pay a security deposit under the lease agreement, this amount shall not exceed the total amount of 3 months rent. In addition, contrary to practices up till today, security deposit shall not be paid to the lessor; instead, it shall be deposited in a term savings account which does not allow withdrawal without permission of the lessor. If securities are to be given instead of a security deposit, this paper shall be deposited in a bank. If the lessor does not notify the bank that he filed a law case or an execution/insolvency procedure against the lessee in connection with the lease agreement within 3 months upon expiry of lease agreement the bank shall be liable to return the security deposit or securities to the lessee. The objective the New TCO; is to apply provisions of a single law in lease agreements, to prevent encountering certain problems in practice and to protect the lessee against the lessor who is in a stronger status. As a rule, the New TCO shall not apply to actions and procedures before the enforcement date. The date of action or procedure shall be taken into consideration and provisions of law in force at that date shall apply. However, default, termination and expiry that shall occur in connection with such actions and procedures after 1 July 2012 shall be subject to the provisions of the New TCO. 2012/I 71

L E G A L N E W S B U L L E T I N T U R K E Y Draft Guide of the Visionary Tradesman in Arbitration: Effectiveness of Agreement İrem AKGÜN Having recourse to arbitration may become a sort of surprising issue in business. Turn of the commercial activities which were carried with the belief that sustainable relations would last is inevitable. Yet, it is encouraged to ensure resolution of the disputes by arbitral proceedings at the outset. While bad business is a pressuring problem of itself, surprise of the ineffective arbitral agreement is a further sad news to digest. In order to avoid such unexpected situations, some of the issues should be underlined when drafting an arbitral agreement during transactions according to Turkish Laws. How to Draft an Effective Arbitral Agreement? It is highly recommended to consider the nature of the future disputes before the execution of a contract. Turkish International Arbitration Law allows not only contractual disputes to be resolved by arbitration, but also non-contractual disputes, namely unjust enrichment or torts. However, the parties should be careful to draft an arbitral agreement in respect of a present legal relationship, not a relationship to be formed in the future. Furthermore, in a majority of the cases, the arbitral agreements are deemed ineffective as explicit and definitive expression of intent is lacking in the agreement. This universal strict approach is also adopted in Turkish practice. Therefore, the parties should pay special attention to refer the issue to be resolved by arbitration in absolute terms. Otherwise, the arbitral agreement is deemed not valid and thereby, the dispute will be resolved by court proceedings which were not intended all along. Another critical element exhibits itself in the form of the agreement. The arbitral agreements should be executed in writing. In order to meet that condition, an arbitration agreement has to be contained in a written document signed by the parties or in an exchange of a communication means such as letter, telegram, telex, fax or an electronic form or it should not have been objected in the Answer of the Respondent to an assertion of the existence of an arbitration agreement mentioned in the Request for Arbitration. A valid arbitration agreement shall be deemed to have been concluded also in the case of reference to a document containing an arbitration clause so as to make it a part of the main contract. Moreover, it should be noted that arbitral agreements may be extended to the third party who is not a party to arbitral agreement when a contact for the full benefit of third party is concluded. In other words, arbitral proceedings will be initiated against said third party who is not in privity of an arbitral agreement. Court s Jurisdiction Over the Dispute As one the most frequently encountered situations, one of the parties may file an action although a valid arbitral agreement exists since the interest of the filing party requires so. Under that situation, the other party should put forward its objection as to arbitration. However, the timing is of the essence in this respect. The objection should be raised within two weeks following the service of Claimant s petition who filed the suit in the first place. However, upon the application of the Respondent, the court may grant extension of time up to one month considering the particulars of the circumstance. It is recommended to be extremely careful not to bring forward the objection any time later as the court will have jurisdic- 2012/I 72

S hould tion on the matter and decide on the merits of the dispute when the time limit of two weeks -unless an extension is granted- is not followed. Under Turkish Code of Civil Procedure, the parties principally will not be summoned to be present at the hearing when objection as to arbitration is examined. That is because of the fact that objection as to arbitration shall be examined be noted that arbitral agreements may be extended to the third party who is not a party to arbitral agreement when a contact for the full benefit of third party is concluded. by the same procedures as preliminary questions, that is the court decides on the issue on the case file. However, if the court decides to hear the parties in this respect, the parties are summoned to be present at the preliminary examination hearing and the court shall hear parties statements first. Accordingly, the objection will either be accepted or dismissed whether or not a hearing was conducted. Where the objection for resolution of dispute through arbitration is not accepted or critical time limitation is missed by the parties, the court will have jurisdiction to decide on the case. In other words, the dispute previously agreed to be resolved through arbitral proceedings by mutual consent will be examined and decided in court proceedings. In this case, Turkish Code of Civil Procedure does not allow parties to appeal the decision in respect of dismissal of the objection as it is merely an interlocutory decision. Yet the concerned party may have recourse to law against the interlocutory decision besides the main decision when it is rendered. Turkish Laws place no different requirements than world s arbitral rules applied uniformly in essence. However, the perspective of Turkish courts practice should be benefited as a drafting tool in order to honor parties respective stipulations and further specific steps should be taken to procedurally ensure dispute resolution by arbitration. 2012/I 73

L E G A L N E W S B U L L E T I N T U R K E Y Minority Right to Request Special Audit from the Court According to the New Turkish Commercial Code Derya TAŞDEMİR EVİN F In addition to the legally obligatory audit, the Turkish Commercial Code ( TCC ) enables joint stock companies to appoint special auditors with the purpose of auditing and determining specific issues. Ordinary audits serve to inform shareholders through periodical reports following audits of the business and or the minority to be able to request a special audit from the court, the right to information and inspection must be exhausted, the special audit request should relate to specific issues, and should be necessary for the use of the shareholder s rights. Once these conditions are satisfied, the minority must convince the court that the company or the shareholders experienced a loss due to the actions of the founders or company organs, which were contrary the law or the Articles of Association. its operation. However, when special audits are concerned, distinct from ordinary audits, instead of every operation of the company conducted in a period, only one or a couple of specific operations are subject to the audit. The practical purposes of the special audits are disclosing the operations or activities that may make it possible to file damage claims and penal suits against founders, executive board members and auditors; understanding whether the balance sheet has been prepared in accordance with the principle of accuracy and precision, determining whether procedures such as registered capital increase and decrease and liquidation were conducted in accordance with the Law and Articles of Association; and, collecting evidence regarding corrupt operations. The significance of a special audit is based on the fact that it has a pioneering characteristic regarding liability cases that might be brought against company organs, and it can result in the postponement of some balance sheet meetings, cancellation of some general assembly resolutions and use of such other shareholding and minority rights. As stated in the New Turkish Commercial Code ( New TCC ), a special audit is an administration proposed in order to enable the shareholder to use his/her rights that he/she possesses as a shareholder and, just as the right to information and the right to examine, it grants the shareholder with information on certain issues and use his/her right to vote in that direction. The first condition for shareholders to request a special audit is that a special audit request should pertain to the investigation and inspection of specific issues. Specific can be defined where the scope and the limit of the matter is definite. A specific case can be any operation, 2012/I 74

procedure or resolution of the company, the financial state and financial needs of the company, resolution of prevailing company (facility) or the losses it causes to the company. According to the New TCC, for a shareholder to be able to demand a special audit from the general assembly, the special audit should be necessary regarding the availability of the use of shareholding rights. The condition brought with Article 438/1 of the New TCC, aims to prevent the abuse of the right to claim a special audit and ensures that the company is not unnecessarily occupied and damaged. Evidently, the term necessity not only includes determining evidence for filing a claim concerning the liabilities of company organs or the cancellation of the general assembly; but also to inform the shareholder about a specific issue before using his/her right to vote. Before demanding a special audit on a specific issue, a shareholder should use his/her right to information or inspection regarding the issue in question, as stated in Article 437 of the New TCC. This condition aims to prevent the arbitrary acts of shareholders with the help of other legal instruments to offer an extensive understanding of the case, and resorting to special audit when the use of these legal instruments are found inadequate or no result is gained. The New TCC has completely changed the provisions for appealing to the court in order to eliminate the obstacles and promote the effective use of minority rights. Shareholders should present their request of special audit to the general assembly with a petition. In case the general assembly rejects the special audit demand, minority shareholders then gain the opportunity to appeal to the court with the same demand. The opportunity of directing special audit demand to the court is granted only to minority shareholders. The New TCC generally finds that the possession of 1/10 of the capital is adequate to gain minority title, however, when public joint stock companies are concerned, a minority shareholder title can only be obtained when 1/20 of the capital is owned. For the minority to be able to request a special audit from the court, the right to information and inspection must be exhausted, the special audit request should relate to specific issues, and should be necessary for the use of the shareholder s rights. Once these conditions are satisfied, the minority must convince the court that the company or the shareholders experienced a loss due to the actions of the founders or company organs, which were contrary the law or the Articles of Association. Minority shareholders can apply to the court within 3 months, the latest, after the general assembly s rejection of the special audit demand. This period is defined as the final term. When the minority directs a special audit request to the court, the case shall be brought against the company. In case the general assembly rejects the special audit demand, the court shall inspect the existence of every condition stated above. At the end of the case, the Court shall adjudicate the issues such as the relations between the company and special auditors, protection of company interests, the period in which special audits should be completed and whether the company processes the special audit report during the case. 2012/I 75

L E G A L N E W S B U L L E T I N T U R K E Y Intellectual Property & Technology Promotion of Unlicensed Medicinal Products İbrahim YAMAKOĞLU - İrem Cansu ATİKCAN I n In principle, promotion of unlicensed medicinal products (pharmaceuticals) is prohibited under Turkish Law. This prohibition is essentially based on Article 3 of the Pharmaceuticals and Medical Preparations Law No. 1262, prohibiting promotion/advertising of unlicensed pharmaceuticals. In the same direction, Article 6 (2) of the Regulation on Promotion of Medicinal Products ( Regulation ) stipulates that unlicensed or unauthorized products shall not be promoted to healthcare professionals. However, there are certain exceptions stipulated under Turkish law which are scrutinized with this article. order to increase profitability, the importance of promotion for pharmaceutical companies is beyond argument. Therefore, the wide scope of application of these exceptions has always been beneficial for pharmaceutical companies. In order to increase profitability, the importance of promotion for pharmaceutical companies is beyond argument. Therefore, the wide scope of application of these exceptions has always been beneficial for pharmaceutical companies. The application of these exceptions became even more significant in Turkey especially following 2010, as the Ministry of Health started conducting GMP audits to the manufacturing sites of imported pharmaceuticals following their and this caused schedule problems in the marketing authorization process, which resulted delays in presenting new pharmaceuticals to the market. However, due to the limited number of officers of the Ministry of Health who could be assigned to conduct such audits all over the world, the average licensing period lasts more than two years. With this regard, considering such a delay, promotion of unlicensed products by pharmaceutical firms by the virtue of an exception becomes even more significant. The only exception to promotion of unlicensed products has been regulated under Article 6(2) of the Regulation. Pursuant to this article, at the international conferences organized in Turkey, promotion of unlicensed products can be performed. According to the interpretation of this provision, if a product is not registered in Turkey, but registered in another country and/ or registration process of a product is pending in Turkey, promotion at such conferences is allowed. It is important to note that this provision recently came into force as of December 31, 2011 with the new Regulation, however prior to this date in accordance with the announcement of the Ministry of Health dated August 28, 2006 promotion of unlicensed products was banned even for international conferences/congresses. Along with the Regulation, the Code of Good Promotional Practice ( AIFD Rules ), which is adopted by the Association of Research-Based Pharmaceutical Companies ( AIFD ), stipulates detailed provisions enabling promotion of unlicensed medicinal products under certain circumstances. Even though AIFD Rules is not legislation, AIFD members diligently comply with these sectoral ethical rules / code of conduct. Most recently, AIFD has been working on a comprehensive amendment on existing rules, 2012/I 76

T he Regulation, which came into force at the beginning of 2012, allows promotion of unlicensed medicinal products within a limited legal framework which becomes clearer with the interpretations of AIFD Rules. especially in order to harmonize with the new Regulation. As the release of this new version is expected soon, in this article the draft AIFD Rules are taken into consideration as well. Article 3.2 of the AIFD Rules (Draft AIFD Rules Article 4.2) firstly repeats the principle that the promotion of unlicensed products is prohibited and counts the exceptions. This provision clarifies the only exception stipulated under the Regulation. International conferences regulated under Article 6 (2) of the Regulation is specified by AIFD Rules as international conferences with high participation. Pursuant to AIFD Rules, where an unlicensed product is demonstrated at the promotion booths, it must be clearly and explicitly indicated that the promoted product is not licensed in Turkey. In addition, in order to avoid any misunderstanding, the AIFD Rules specifies that the promotion ban shall be applied until the license or authorization is obtained and that the firm can initiate its promotion activities prior to obtaining marketing/selling authorization. Other exceptions stipulated under AIFD Rules are analysed briefly; (1) Teaser campaigns: Teaser campaigns can be initiated prior to license, provided that such campaigns include neither commercial nor International Non-proprietary Names (INN) and in compliance with the wording and spirit of AIFD Rules. Even though teaser campaigns are allowed, in order to avoid actions going beyond the aim of this exception, it is emphasized that the purpose of this exception and other related rules must be respected. (2) Legitimate exchange of information on a scientific or medical platform: Based on the common interpretation of AIFD along with EFPIA, during the development phase of a medicinal product, legitimate exchange of medical and scientific facts and information via scientific and medical platforms, is not prohibited provided that there shall be no promotion. These facts and documents can only be exchanged at scientific and medical platforms, which are based on AIFD Rules; (i) Refereed independent journals and other similar scientific publications; (ii) Scientific and medical meetings, congresses, etc. and posters or oral presentations at such conferences, independent of the promotional influence of the supporting companies; (iii) Satellite symposia, which are organised and sponsored in such meetings by pharmaceutical companies, and adopted by the conference scientific organization board and inserted to the program. Such information exchanged in such platforms can even be shared with the healthcare professionals that did not attend such meetings or does not have the subscription for the publications, provided that these healthcare professionals request a written exchange of this information from the firm. (3) Exchange and distribution of literature upon written request: In Turkey, literature containing information regarding unlicensed products and/ or indications can only be distributed upon written request of a healthcare professional. Furthermore, such literature should explicitly state that the product or the indication is not yet licensed in Turkey and during distribution no visual or verbal promotion can be performed. (4) Promotion under the scope of Multi-Center Clinical Trials: Along with the above-mentioned scientific platforms, scientific information regarding unlicensed products can be exchanged with physicians/investigators and pharmacists participating a multi-centre clinical trial. However, such exchange is prohibited for the meetings which are open to the participation of others outside that clinical trial, even if the purpose of the meeting is to determine potential investigators. To sum up, the Regulation, which came into force at the beginning of 2012, allows promotion of unlicensed medicinal products within a limited legal framework which becomes clearer with the interpretations of AIFD Rules. With this regard pharmaceutical companies are enabled to promote their products to healthcare professionals within this limited extend, without waiting the conclusion of long-lasting registration period. 2012/I 77

L E G A L N E W S B U L L E T I N T U R K E Y Amendments in the Pharmaceutical Pricing Communiqué Sinem TEOMAN In Turkey, pricing of pharmaceutical products is regulated under a Decree and a Communique. The Communique contains much more detailed provisions as it stipulates the requirements of the implementation. It has been observed that the Government continously introduces new changes to the Communique to control budget spendings on pharmaceuticals. In that respect, in mid April a further amendment was made in the Communique, which actually is a reflection of the amendments made in the Decree in November last year. In this Article, we would like to summarise the amendments and provide our comments on its likely impact on the industry. 1. Definitions: Definitions have been revised with the Amendment Communiqué. The definition of co-marketing products, traditional herbal medicinal products, combination generic products, and combination original products were added. The definition of equivalent product was divided into two definitions as pharmaceutics equivalent product and equivalent product as pharmaceutics form ; the definition of 20 year old product was divided into two as 20 year old product which is subject to reference price and 20 year old product which is not subject to reference price. Furthermore, amendments were made on definitions of hospital packaged products, generic products and reference price changes. 2. Amendment of Ratio: Before the Amendment Communiqué, the sale price to wholesalers of an original products, which already has a price approved by the Ministry of Health ( MoH ) or will obtain a price for the first time, could be determined up to 100% of the reference price. Following the launch of a generic product, the original product could obtain the sale price to wholesalers up to 66% of the reference price. Furthermore, all generic products could obtain a sale price to wholesalers up to 66% of the reference price of the original product following the launch of the first generic product. Essentially, the ratio of 66% had been initially determined as 60%; however, the amount was later increased to 66%. Such ratio was again decreased to 60% following the Amendment Communiqué. Accordingly, the price to wholesalers of an original products, which already has a price approved by the MoH or will obtain a price for the first time, shall be determined up to the reference price. Following the launch of a generic product, the original product could obtain a sale price to wholesalers up to 60% of the reference price which is recorded on thedatabase of the MoH. Furthermore, all generic products could obtain a sale price to wholesalers up to 60% of the reference price of the original product following the launch of the first generic product. 3. 20 Year Old Pharmaceuticals: The Amendment Communiqué stiputates detailed provisions regarding 20 year old products.. With the new regulation, fundamental amendments are made on the maximum price that 20 year old products can be obtained. Before the Amendment Communiqué, it was stipulated in the Communiqué that 20 year old products with a sale price to wholesalers above TRY 6,79 could obtain the maximum sale price to wholesalers,which equals to 100% of the reference price and the sale price to wholesalers of such products generics could not exceed the sale price to wholesalers of the reference price of the original product. Within the context of this regulation, 20 year old products could obtain sale price to wholesalers which equals to 2012/I 78

I 100% of the reference price. On the other hand, 20 year old products with a sale price to wholesalers below TRY 6,79 were not subject to the reference pricing system. With the provisions stipulated by the Amendment Communiqué, whilst the maximum sale price to wholesalers of the 20 year old original products whose sale price to wholesaler is above TRY 6,79 can be 80% of the reference price; 20 year old original products whose sale price to wholesaler is below TRY6,79 can obtain a sale price to wholesalers up to the reference price. On the other hand, 20 year old generic products can obtain a sale price to wholesalers up to 80 % of the reference price t has been observed that the Government continously introduces new changes to the Communique to control budget spendings on pharmaceuticals. In that respect, in mid April a further amendment was made in the Communique, which actually is a reflection of the amendments made in the Decree in November last year. In addition to the mentioned regulations, detailed provisions are stipulated regarding pricing of 20 year old products. Within this context, pricing rules of 20 year old original products and 20 year old generic products are differentiated. While prices of 20 year old original products are determined, firstly one-to-one equivalent products which are available in the reference countries including manufacturing and exportation countries are considered. If one-to-one equivalent product is available in these countries, 80% of the lowest price shall be taken into account as a reference price. If one-to-one equivalent product is not available in the mentioned countries, the price shall be determined by considering firstly the price of equivalent products, followed by the prices of similar products. If the similar products are also unavailable, reference price determination shall be made within the EU countries that the product is available. 4. Products Which Are Subject To Special Pricing Rules Excluding 20 Year Old Products: It was stipulated in the Communiqué before the Amendment Communiqué that the reference pricing system shall not be applied to plasma derived blood products, medical foods and enteral nutritional products, radiopharmaceutical product, allergy products and orphan products. Such provisions were revised with the Amendment Communiqué. Accordingly: - Reference price which is 10% more than the cheapest reference county price shall be considered for plasma derived blood products. - Medical foods and enteral nutritional products shall be priced in accordance with the cheapest reference price. However, a price which is up to 5% above the reference country price where these products are cheapest may be granted with the decision of the Price Evaluation Commission, so as to ensure competitiveness and product availability, without prejudice to the principles relating to original and generic products. - Manufactured radiopharmaceutical products shall be priced in accordance with the production card and exported radiopharmaceutical products shall be priced in accordance with the price of the exportation and production country. - Allergy products and orphan products shall be priced up to the reference priced proved by the official documents obtained from the exportation and production country. 5. General Principles on Pricing of Original, Generic and 20 Year Old Products: Fundamentally, general principles on pricing of original, generic and 20 year old products excluding combination products are preserved with the Amendment Communiqué. On the other hand, there are also certain amendments and additions. Within this context, a provision which stipulates that if a price difference exists between the products which are licensed under the co-marketing agreement, the same price shall be given to these products in case the firms request such change in accordance with the Communiqué. Furthermore, principles which stipulate pricing of a reimbursed product in case such product is not subject to reimbursement in reference countries are set forth. To summarise, if respectively one to one equivalent, equivalent or a similar product which is subject to reimbursement, Turkey is only available in reference countries including the manufacturing and/or exportation country out of the scope of reimbursement, cheapest one to one equivalent product s price shall be considered as reference price in accordance with such regulation. If one to one equivalent of the one to one equivalent product is not 2012/I 79

L E G A L N E W S B U L L E T I N T U R K E Y available in the mentioned countries, proportioned sale price to wholesalers shall be taken into account as a reference price. In case the price of a product which is not subject to reimbursement is taken into account as reference, increases and decreases of the product s price which is not subject to reimbursement shall be reflected to the price. If the product is licensed or launched to the market in one of the reference countries including the manufacturing and exportation country as a reimbursed product, reference price, country and sale price to wholesalers shall be updated in case the product is included in the reimbursed products in Turkey 6. Combination Preparations: Detailed regulations are made regarding pricing of combination preparations with the Amendment Communiqué. Within the context of this article, we only give place to principle regulations. Combination preparations are also subject to the reference pricing system. Prices of equivalent products shall be considered for the pricing of combination preparations. If an equivalent product is not available, the price which is determined through proportioning of prices of similar combination products which include the same active ingredients shall be considered as a reference price. If the combination preparation is not available in the reference countries or a similar combination product which will be directly proportioned cannot be found, the total of reference prices of active ingredients included in the combination preparation shall constitute the reference price for combination preparations. 7. Stock loss: It was stipulated in the Communiqué before the publication of the Amendment Communiqué that changes made on the pricing list shall be implemented five days following the publication of the list; however, this period shall not be delayed for the newly added products. Furthermore, it sets forth price decreases transpired from reference price changes or voluntarily made by the firms shall be applicable without waiting for such term if losses occurred in the stocks of the pharmacies are compensated. Whilst such regulations are preserved with the Amendment Communiqué, various additional regulations are also stipulated. Accordingly, stock losses of pharmacies arisen from the decrease of ratio applied to reference prices shall be paid by pharmacies to wholesalers and from wholesalers to pharmacies. Within this context, notifications made to the Pharmaceutical Tracking System by pharmacist shall be taken into account and the total amount of pharmacy costs of products present in the pharmacy stock, affected from the price changes and registered to the Pharmaceutical Tracking System shall be paid from marketing authorisation holders to wholesalers within fifteen days following the announcement of change and wholesalers shall pay this amount to pharmacies within fifteen days. As stated above, pricing of pharmaceuticals is principally stipulated under the Decree and the Communiqué. Such legislation which is constituted outside of the legislation preparation technique and includes detailed provisions cannot be correctly applied every time. Although principles on pricing are stipulated with the detailed provisions which also includes examples; since phrases used in provisions are lengthy and complex and open to interpretation, queries on pricing of products cannot be easily responded. Reference pricing principles which are applicable in our country cannot be uniformly applied since market conditions, product status and procurement way are different in reference countries as well as other EU countries. In this respect, we believe that if the Pharmaceuticals and Medical Device Authority of Turkish Republic announces its up-to-date interpretative opinions on queries arisen from the implementation of the legislation by considering cyclical development both in Turkey and the EU in its website, it would be very helpful for marketing authorisation holders to prepare of their pricing declarations in accordance with the amended legislation. 2012/I 80

Trademark within Terms of Attachment and Realisation Fulya ÖZGENER I Trademark is considered as one of the assets of a natural or legal entity due to its capability of distinguishing undertaking s goods and services from others and its monetary value. Thus, trademark would be subject of dispositive transactions in that regard. t is obvious that the number of trademark registrations in Institute Records increases day by day, therefore the possible legal transactions in the scope of trademarks shall increase in the same direction. Thus, in order to create more advantageous outcomes both on behalf of the creditor and the trademark owners, useful methods should be regulated for attachment and realisation of trademark in terms of Enforcement Law. Pursuant to Article 19 of the Trademark Decree Law No. 556 ( Decree ); a right arising under registered trademark or trademark application may be levied in the independent execution of the undertaking. Distinctively from the seizure of movables, Article 86 of the Bankruptcy and Enforcement Law ( Enforcement Law ) shall not be applicable. Rather, Articles 94 and 79/II of the same law will be taken into account with respect to attachment of trademarks. Article 94 of Enforcement Law is implemented for registered trademarks, non-registered trademarks and trademark applications. The Enforcement Office, which received the demand of the attachment, shall levy the attachment at the latest within three days. Further, there is no need for prior notification or presence of the debtor during the attachment in order to proceed. However, as Article 79 of Enforcement Law regulates, the attachment of the properties which are public registered; only registered trademarks can be subject of this article. It can be said that fairly practical system for registered trademarks is adopted by this article. Namely, in the event of trademark owner and the enforcement office which received the demand of attachment are not in the same region, the attachment will be recorded in the Trademark Registry and will be accomplished on the date of record. In brief, the most important difference between Article 94 and 79 of Enforcement Law, in terms of trademark attachment, is the effect of the registration. The frequently faced problem in this regard is whether the trademark can be subject to partial attachment or not, as there is no consensus in the doctrine. In light of the Decree System, the different trademark owners of the same trademark due to partial attachment will definitely cause problems. Thus, it would be more convenient to accept, both in theoretical and practical ways, that trademark shall be subject of attachment only as a whole. The attachment of the trademark shall give 2012/I 81

L E G A L N E W S B U L L E T I N T U R K E Y the creditor the right to request the sale of the trademark and assignment of the sale value to him within the scope of its credit. Otherwise, the creditor will not have the right to use the trademark, to make a saving on the trademark or request the transfer of the trademark. Shortly, the modification will be made only on the status of trademark not on the trademark owner. In that respect, the Court of Appeal rejects the decision of TPI s decision not to accept the transfer of trademark which is subject to attachment. Which way of the attachment of the trademark is taken, is not important in terms of realising a trademark. In both of the attachment methods mentioned above, the Bailiff shall apply to the Enforcement Court due to realise a trademark pursuant to Article 121 of Enforcement Law. Further, the same article states that relevant opinions may be taken in order to determine the procedure of sale as it is significant to realise trademark at full value for both the trademark owner and the creditor. Enforcement Law provides a wide judicial discretion to the Enforcement Court. Thereby, the Court may order a compulsory public auction for the sale of the trademark or assign an officer for the realisation. Further, the Court can realise the trademark within the terms of private sale due to a preliminary injunction. However, we would like to mention that Article 121 of Enforcement Law does not provide new and useful methods to realise a trademark. Moreover, it is questionable that an officer assigned by the Enforcement Court in order to realise a trademark shall proceed more appropriate than a Bailiff. Thus, in light of the increasing economic and legal aspects of the Industrial Rights, we estimate that the Enforcement Court shall provide the opinion of expert in order to ensure accurate value of trademark. To sum up; it is obvious that the number of trademark registrations in Institute Records increases day by day, therefore the possible legal transactions in the scope of trademarks shall increase in the same direction. Thus, in order to create more advantageous outcomes both on behalf of the creditor and the trademark owners, useful methods should be regulated for attachment and realisation of trademark in terms of Enforcement Law. Parallel Importation Süleyman SOYSAL Trademark rights grant extensive authority to the trademark owner. However, there are limits on this right as there are with other rights. If the trade of branded goods is left to the monopoly of the trademark owner, it would contradict the principle of protection of free trade. The legislator must balance the interests of the trademark owner and the traders circulating the branded goods. The most basic principle of providing this balance is the principle of exhaustion that determines when the trademark right will end. Pursuant to the Trademark Decree No. 556, acts related with a product containing the registered trademark shall not constitute a breach of the rights of a registered trademark, where such acts have occurred after the product has been put on the market in Turkey by the proprietor or with his consent. In other words, after original products have been put on the market, it is legal to put original products on market in Turkey or other 2012/I 82

P arallel countries (original products should have been put on the market before) by third parties without any authorisation from the trademark owner. The crucial situation of the principle of exhaustion is parallel importation. Parallel importation allows third parties to obtain goods subject to intellectual property rights directly from licensed or authorised overseas sources, rather than dealing with local suppliers, licensees or agents. Thus, parallel importation allows for competition between sources of the same or similar goods. The reason of permission of parallel importation is to provide free movement of goods and monitor the competition. In relation to parallel importations, the original product should be previously put on the market by the trademark owner. Otherwise, the trademark owner s right will not foreclosure. Because parallel importation is directly associated with exhaustion of the rights, regulation in parallel importation can vary from country to country. The principle of exhaustion of the rights can be territorial, regional and international. The concept of national exhaustion does not allow importation allows third parties to obtain goods subject to intellectual property rights directly from licensed or authorised overseas sources, rather than dealing with local suppliers, licensees or agents. the trademark owner to control the commercial exploitation of goods put on the domestic market by the trademark owner or with his consent. However, the trademark owner or his authorised licensee could still oppose the importation of original goods market abroad based on the right of importation. In regional exhaustion, territories of several countries are accepted as a single territory and if the trademark owner puts the product on that market, the trademark owner s right on the trademark shall be deemed exhausted. Lastly, where a country applies the concept of international exhaustion, the rights are exhausted once the product has been sold by the trademark owner or with his consent in any part of the world. The main reason of the parallel importation is the difference between the current price of the country of origin of the goods and countries that the goods are offered on the market. Owners of -branded goods may maintain a different price policy for having various economic advantages or increasing the market share in a country. The price margin is extremely important in terms of parallel importers. In such a case, the market traders may take an advantage with freedom of parallel import so they could import the product which can be obtained from a country where the product may be procured to a country where the product may be sold at a higher price. In order to prevent this situation, brand owners sell the products in different brand names and change the packaging on the market in the offering country and the producing country. Thus, they try to make parallel importation impossible. However, these actions of the trademark rights holders are limited by The Treaty of the European Communities. Article 28 of the Treaty states that the free movement of goods may not be prevented and quantitative restrictions on imports and equivalent effects between member countries may not be prohibited. Hence, the European Court of Justice accepts its decisions that after original products have been put on the market by trademark owner, the trademark right is deemed to be exhausted. There is an uncertainty regarding which system is adopted in Turkey on the principle of exhaustion. However, according to Article 13of the Law No. 556, after launching a registered brand to the market in Turkey by its trademark owner or third person with his consent, acts relating to the goods are beyond the rights which come with brand registration. For this reason, it is accepted by doctrine that Turkey adopted the principle of national exhaustion. Indeed, in the Supreme Court s case-law the principle of national exhaustion has been accepted and importation of original goods can be prevented if the goods have not been put on the market in Turkey. For instance, according to Supreme Court of the 13 th Circuit, if original products are put on market by trademark owner or with his consent, the brand rights will be exhausted and the owner cannot prevent to sell his products by third parties anymore. Furthermore, the dominant view is that parallel importation cannot be prohibited. As a result, in particular, European Union countries aim to make parallel imports more common and determine the limits of the use of trademark rights. There are various regulations for parallel imports and the principle of exhaustion that is directly linked with parallel imports but there is no common worldwide adoption for principle exhaustion, so uncertainties about limiting the rights of the trademark owner continue. 2012/I 83

L E G A L N E W S B U L L E T I N T U R K E Y Click-Wrap Agreements: Do You Know What You Are Agreeing To? Burak ÖZDAĞISTANLI T he Within the last decade, conventional trade has started to leave the scene to electronic trade in business-tobusiness ( b2b ) and business-toconsumer ( b2c ) transactions. The increase of internet use in the world and the internet generation gave a big boost to electronic trade. Nowadays, a substantial number of internet users are buying services/goods over the web. As a natural consequence, the increase in the number of electronic trade transactions created its reflections in the legal environment. Today, most of the b2c internet transactions are governed with agreements named clickwrap agreements in the industry. This name is common feature of these agreements is that the acceptance of the user is connected to performance of an action, such as opening a box or pressing a button. derived from the agreement type shrink-wrap where when the user opens the box or tears the package of the purchased good, this shows that the user asserts with the terms enclosed. These two types of agreements are not the only ones, with the development of technology, other agreements such as web-wrap agreements began to be used in the industry and many more are on the way. The common feature of these agreements is that the acceptance of the user is connected to performance of an action, such as opening a box or pressing a button. These agreement types are not limited with the ones stated above, however, as click-wrap agreements are the most common type of electronic agreements which consumers face in their daily lives, we will be focusing on the enforceability of the click-wrap agreements and the declaration of acceptance given by the consumers. In general, click-wrap type agreements are used as End User License Agreements (EULAs) in the software industry. It is possible to understand the need to use click-wrap agreements in the software industry as it is impossible for each consumer to sit, discuss and sign a separate agreement with each software company, for each separate product. Therefore, companies decided to use click-wrap type agreements for sale of goods or services. In click-wrap agreements, the terms are written into the agreement as in regular agreements. The difference is that the terms of the agreement are presented to the consumer through electronic communication and the user declares his/her acceptance electronically by clicking buttons such as I Agree, I Accept etc. The user/consumer has the right to reject the agreement by clicking I do not Accept, Cancel however, as agreements are not negotiable and the acceptance statements are not conventional, some questions and doubts arise with regard to the enforceability of such agreements and acceptance statements. Legal Approach to Electronic Agreements In the recent years, we have seen efforts to strengthen the enforceability of the electronic agreements throughout the world. The Uncitral Model Law on Electronic Commerce, Uniform Electronic Transactions Act and Directive 2012/I 84

I 2000/31/EC on electronic commerce are examples of such efforts. These efforts are boosting the electronic trade and are encouraging the companies and consumers to enter into electronic agreements. One of the important provisions in the Uncitral Model Law on Electronic Commerce is Article 11, which states an offer and the acceptance of an offer may be expressed by means of data messages. Where a data message is used in the formation of a contract, that contract shall not be denied validity or enforceability on the sole ground that a data message was used for that purpose. This provision clearly n click-wrap agreements, the terms are written into the agreement as in regular agreements. The difference is that the terms of the agreement are presented to the consumer through electronic communication and the user declares his/her acceptance electronically by clicking buttons such as I Agree, I Accept etc. states that offer and acceptance can be expressed electronically. Uniform Electronic Transactions Act and EC Directive on Electronic Commerce also have similar provisions. The case law in the U.S.A. and Europe are also similar. In many cases, the validity of click-wrap agreements has been upheld by US and European Courts. The legal status and enforceability of the clickwrap agreements in Turkey is not too different from the approach in the U.S.A. and Europe. In principle, both offer and acceptance can be undertaken by any means (orally, written or electronically) unless there are some form requirements. Therefore, the way offer or acceptance is declared does not affect the validity of the clickwrap agreements. This approach is also supported by Uncitral Model Law. Electronic signature or as it is usually referred to as e-signature is another aspect of electronic agreements. E-signature is accepted as to have the same affect and enforceability of the conventional signature throughout the world and Turkey. In Turkey, e-signature is stipulated under Law on Electronic Signature w. no. 5070 dated 15.01.2004. As per this law, secured electronic signature has the same effect of the conventional signatures signed with hand. Therefore electronic signature is a valid and undeniable way of explicit declaration of intent in an electronic agreement. Therefore, frequent use of electronic signatures in electronic agreements will be a positive affect for e-commerce. As it is clear that the click-wrap agreements are valid, parties agreeing to such agreements (especially consumers) must read and understand the terms of such agreements. Having said the above, as these agreements are non-negotiable, it should be considered that the offering party may misuse these types of agreements. Click-wrap agreements are standard agreements and in most of the cases, consumers are party to click-wrap agreements. Therefore, the principle stated above should be evaluated with an approach to protect consumers. 2012/I 85

L E G A L N E W S B U L L E T I N T U R K E Y Unfair Competition in the New Turkish Commercial Code from the Consumer Protection Perspective Hatice EKİCİ The new requirements introduced by globalisation and technological advancement necessitated legal reforms. In this respect and within the harmonisation with European law, reforms are being made in Turkish private law. The most important reform is the amendment of the Commercial Code. The Turkish Commercial Code which has been in force since 1957 ( TCC ) will be replaced with the new Turkish Commercial Code ( New TCC ) which will enter into force on July 1, 2012. The New TCC includes significant changes that would affect commercial life. The unfair competition provisions are one of these changes, whereby, the examples of unfair competition are increased with the New TCC. These new examples are quoted from the Swiss Unfair Competition Law. The current framework regarding unfair competition mainly addresses the competition between commercial competitors, while the New TCC aims to protect not only such commercial competition, but also the public interest and consumers rights. Within the framework of this general purpose, the provisions are regulated to protect the persons and interests listed below: Competitors Customers Professional and economic associations Public interest Customers protected under the unfair competition provisions are not only the persons receiving goods or services for commercial purposes but also the end consumers. The new examples of unfair competition acts which are stipulated under the New TCC in order to protect end consumers rights are as follows: i) granting discount for some goods in a misleading manner (Art.55/1-a-6), ii) misleading customers, by means of gifts, as to the effective value of the offer (Art.55/1-a-7), iii) impairing customer s freedom of decision by using particularly aggressive sales methods (Art.55/1-a-8), iv) misleading customers by obscuring the quality, quantity, purpose, utility or danger of goods, works or services, (Art.55/1-a-9), v) omitting to clearly state his trade name or other information in respect of instalment sale agreements and consumer loan agreements in public advertising (Art.55/1- a-10,11), vi) installment sale agreements or consumer loan agreements which contain missing or misleading information (Art.55/1-a-12). The new examples listed above are based on the concept of limiting the consumer s freedom of choice due to wrong or misleading statements and are similar to the provisions regulated under the Consumer Protection Law (the CPL ) At the present time, in the event of unfair competition, consumers have an elective right to choose a remedy under the TCC or the CPL. 2012/I 86

T he However, consumers generally choose to exercise their rights under the CPL and before the consumer courts. The most important reason such is that consumers prefer a quick solution such as refund or a price reduction for defective goods rather than initiating a claim for damages. Furthermore, consumers who have purchased goods of a minimal amount prefer to have their disputes resolved before a consumer court rather than initiating a lawsuit in a commercial court which would be more costly. Although the New TCC regulates certain new provisions on protection of consumers, there is no specific provision regarding the procedural current framework regarding unfair competition mainly addresses the competition between commercial competitors, while the New TCC aims to protect not only such commercial competition, but also the public interest and consumers rights. issues, i.e. before which courts that consumers would bring their claims. Therefore, despite the changes in the New TCC it is expected that consumers will continue to exercise their rights before consumer courts and request remedies under the CPL. Although the New TCC does not introduce any changes with regards to the procedure of bringing a claim it has widened the ambit of those who have the right to initiate an action by granting such right to non-governmental organisations which protect consumers economic benefits. Furthermore, organisations which protect consumers benefits and the professional associations have become less restricted with the changes under the New TCC. Specifically, the precondition that a member of organisations which protect consumers benefits or professional associations must have suffered damage or there must be risk of damage as regulated under the current TCC has been removed. Therefore, organisations which protect consumers benefits will be able to demand the determination or prevention of the unfair competition without a member s damage or risk of damage. Other than the consumers and the organisations which protect consumers benefits, also competitor companies will be in a position to demand that other companies should comply with consumer protection provisions. Therefore, these provisions protect not only the consumers but also the competitors. In that respect, we estimate that consumer protection aspects will be more discussed before the courts, also by the competitors. In brief, the New TCC regulates new provisions parallel with the CPL however we anticipate that the changes shall increase consumer protection and ensure fair competition. We will witness the extent consumers will benefit from the protection implemented with the New TCC. Nonetheless, it is evident that with the New TCC an important step shall be taken towards the protection of the fair competition. Therefore, the New TCC will provide a competition environment in compliance with good faith among competitors and thus indirectly the protection of consumers. 2012/I 87

L E G A L N E W S B U L L E T I N T U R K E Y Draft Patent Law Ece SARICA I nventions Inventions are among major factors of economic growth as they serve as a tool in transferring the newly created or developed products and procedures to economic values by way of availing the use of these inventions to industries. Due to this economic-related importance, inventions shall be legally protected both for inducement of innovational acts and to become part of the countries economic orders. In this regard, these interests are compromised pragmatically under granting patent and utility model protections. The first law in which national patent and utility model protections were regulated is the 1879 dated Letters Patent Law. With this law the Ottoman Empire became the 5 th country worldwide to grant patent protection. This law continued to stay in force until it was repealed by the 551 are among major factors of economic growth as they serve as a tool in transferring the newly created or developed products and procedures to economic values by way of availing the use of these inventions to industries. Numbered Decree Law Pertaining to Protection of Patent Rights ( Decree Law ) in year 1995. As of this date, a number of changes have been made in our patent legislation, numerous international conventions have been signed. In order to adopt Turkish patent legislation to this highly dynamic area, a Patent and Utility Model Law ( the Law ) was prepared in year 2009. Among primary novelties brought by the Law, the repeal of the system endeavouring grant of patents without examination comes first. There are two systems in granting patent protection as per the current Decree Law: Systems with examination and without examination. According to the Law s preamble the reason for repeal of the system without examination is that the certain inconveniences led by this system have been seen in application and as the main benefit of this system was to provide low cost protection obtained in a short period, there is already a protection meeting these needs, i.e. the utility model system. Considering contemporary developments and attitudes, there are detailed provisions in the law providing legal protection to Biotechnological inventions. As it is issued under a separate section within fourteen articles, this topic is anticipated to have particular significance with regard to pharmaceutical sector s future related to high technology products. One of the important implementation is the possibility for third party appeals to be filed only after a decision is rendered by the Turkish Patent Institute ( TPI ) on acceptance or rejection of the patent application. Pursuant to the current Decree Law, third parties could file an appeal against the application without waiting for a decision from the TPI (i.e. within six months as of publication of the research report) based on the allegation that the application does not fulfil the patentability criteria. After this first appeal, a second appeal claiming presence of any formal deficit could be made. However, with the new Law, the appeal filed against the research report has been repealed, and in exchange the possibility of delivering an opinion on the research report has been brought. By this way, appeals are to be filed against the decision of the TPI and the main ground for filing those appeals would be an allegation on the lack of patentability criteria. Another novelty of the Law is the possibility of reestablishment of lapsed rights due to expiration of legal periods despite diligence and care of the right holder and ultimately prevention of unjust loss of rights. Herewith, the applicant and patent owners damnification is intended to be sloughed off. The request for reestablishment shall be made within two months as of removal of the reason for not complying with the period and in any case within one year as of termination of the period not complied with. 2012/I 88

In addition to those above, changes are also made in the utility model system. According to such, the third parties who intend to file appeals can also request issuance of the research report. Pursuant to the effective Decree Law, the research report on state of art is not issued for utility models in principle and the sole exception is TPI s request. The aim of providing third parties with the right of requesting this report is to grant an exceptionally solid right. By this means, the lawsuits regarding utility models before courts is aimed to be decreased, as some of these appeals would be evaluated and filtered by the Institute. The legislation and implementations in the field of intellectual and industrial property in which patent and utility model rights take place are one of the significant factors that affect transnational economic relationship and politic decisions. It is evidently known that that harmony in legislation eases and enhances the trade of goods and services. That is why the intellectual and industrial property field is among the fields with the highest number of international agreements that have been signed. In addition, Turkey is under an obligation to harmonise its national legislation with the European Union communautaire. As a matter of fact, this obligation constituted the impetus of development of Turkish intellectual and industrial rights legislation. In this direction, especially international reforms made in the patent legislations have been taken into consideration, at the same time the code is intended to be in conformity with Turkey s unique structure and could satisfy the needs thereof. Among the international legislation that are taken into consideration, first of all the European Patent Convention and then the European Union communautaire, the Patent Law Agreement, the Patent Cooperation Treaty and World Trade Organization s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) could be specified. Together with relevant circles optimistic anticipation on enactment of the code within the first half of this year, the subject text remains as draft since 2009. Besides the Patent Code, also the Trademarks Law and Law Pertaining to Protection of Designs are pending as drafts since 19.02.2009, whereas the Law Pertaining to Protection of Geographical Indications and Traditional Specialities Guaranteed Products is pending since 31.12.2009. When considering the significance of industrial rights and efforts in harmonisation of those worldwide, the Turkish lawmaker shall envisage legal power to the related legal texts that have been pending for a long time. After this stage, to have a contemporary legislation, it would be the turn of shareholders in application to show effort in proper and uniform application of these rules. Therefore, it is crucial for the said drafts to be enacted as soon as possible. Data Protection and Privacy Rights in Turkey Ayla ÖZENBAŞ In recent years, with the development of communication technologies and particularly the internet, the collection, use and transfer of data have become easier. Consequently, several transactions of daily life are commonly carried out through such mediums as it provides numerous benefits to both consumers and organisations. Consumers are able to complete transactions quickly and without the need to physically attend any establishment, whilst organisations and businesses enjoy the commercial benefits of using technology. Having established that use of an electronic medium for data processing is attractive to both consumers and businesses, it is important to remember that such benefit is not without risk. In this respect, several countries around the world are developing legal regulations in order to prevent abuse and ensure 2012/I 89

L E G A L N E W S B U L L E T I N T U R K E Y E protection of personal data. Regardless of which country the law emanates from, the core purpose is to afford data subjects protection whilst providing a regulated framework. Current Data Protection in Turkey Although Turkey does not have a specific law regarding data protection, a Draft Law on Data Protection has been prepared and has been pending before the Grand National Assembly of Turkey since late 2008. However, legislative developments addressing data protection suggest that it shall be enacted in the foreseeable future. very organisation has data protection concerns whether dealing with consumer data or internal employee data, as data theft or abuse can result in financial loss and reputation damage. This coupled with legislative changes means that organisations have to address the issue of data security seriously and take appropriate measures to ensure data are properly safeguarded. One of the most significant legal developments addressing data protection was the amendments made to the Turkish Constitution. As a result of a referendum held on September 12, 2010, the protection of personal and privacy rights regulated under the Turkish Constitution were reinforced and bolstered. Specifically, the amendments ensure that data processing is more controlled and data subjects have been provided with rights regarding processing of their data in line with the Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data to which Turkey has been a signatory since 1981. In the absence of a specific law regulating data protection, the protection of personal and privacy rights afforded by the Turkish Constitution are enforced through several general laws and sector specific laws which impose civil, criminal and administrative sanctions for acts violating rights or breaches related to data protection. i. General Laws The Turkish Civil Code No. 4721 contains provisions that protect personal rights and stipulates that all violations of personal rights are to be deemed illegal unless the relevant person provides consent, it can be justified with a superior private or public interest or by law. In this respect, disclosing or abuse of personal data may be considered a violation of personal rights. Pursuant to the Turkish Civil Code No. 4721, in the event an individual s personal rights are violated such party may initiate civil proceedings for protection, request such acts to be stopped and claim compensation for unjust use of data. Pursuant to the Turkish Criminal Code No. 5237 unlawful recording, transmission or obtaining of personal data is considered a criminal act punishable by imprisonment. It also provides a distinction between personal data and sensitive data, whereby penalties are increased for recording data such as political, religious views, racial or ethnic origin, health status, moral tendency or union connections. Furthermore, it sets forth penalties for failure to delete or destroy upon expiry of the time period specified by law to retain such data. ii. Sector Specific Laws In addition to general laws discussed above, there are certain provisions relating to the protection of personal data and confidentiality of information in sector specific laws, such as the Labour Law No. 4857, Bank Cards and Credit Cards Law No. 5464 and the Banking Law No. 5411. The Labour Law No. 4857, provides protection of employees personal data that is gathered in the course of the employment relationship. Pursuant to the law, employers should use the information of their employees in compliance with rules of integrity and good faith and not disclose data if the employee has just benefit/grounds to require the retention of its secrecy. In the event that such protective provisions are violated the employee may claim compensation for damages as a result of such violation. Pursuant to the Bank Cards and Credit Cards Law No. 5464, storing information pertaining to personal data obtained through use of credit or bank cards is restricted and if this restriction is breached without the written consent of the card holder the party in breach may be subject to imprisonment and a judicial fine. The Banking Law No. 5411, places banks and other financial institutions under an obligation to protect confidentiality of customer data gathered in the course of their activities. The law has wide application whereby banks partners, members of board of directors, employees, representatives and officials shall not disclose confidential information relating to any bank or clients thereof 2012/I 90

which they have received in connection with their positions and duties to any authority other than those expressly authorised by the law. The law imposes penalties of imprisonment and an administrative fine for breach of confidentiality. Furthermore, the Communiqué for Management of Bank s Information Systems states that banks must obtain the data subject s consent and must inform the data subject as to how such data shall be processed, it further requires the bank to provide the data subject the option not to provide consent. Draft Legislation Although there is a degree of protection for privacy and data protection under the current legislation, the need for a specific legal framework has been recognised, hence the preparation of the Draft Law on Data Protection and other laws which address data protection such as the Draft Law Regulating Electronic Commerce. i. Draft Law on Data Protection The Draft Law on Data Protection has been prepared in light of the European Union Data Protection Directive No.95/46/EC and the Commission Decision 2001/497/EC of 15 June 2001. The aim of the Draft Law is to govern and regulate the protection of personal data and preserve the fundamental right of privacy. In general terms, the Draft Law permits personal data to be processed to meet legal obligations, if the processing of data is necessary and in the public interest, or if consent of the data subject is provided. Once the Draft Law is enacted, an effective control mechanism will be introduced with the establishment of an independent Data Protection Authority in order to enforce application of the law and define procedures for data processing. Such Authority shall ensure that data processors and/or controllers satisfy their obligations stipulated under the law to ensure protection of data. The law will also introduce the requirement for data processors and/or controllers to inform data subjects of their identity and give notice of the intended use of personal data, providing details, amongst others, of the purpose, method and consequences of such data processing. Furthermore, the Draft Law provides data subjects the right to complain about alleged unlawful data processing and regulates penalties, administrative fines and imprisonment for collecting, processing personal data in breach of the law and disclosing it illegally to third parties. ii. Draft Law Regulating Electronic Commerce Pursuant to the Draft Law on Regulating Electronic Commerce the service provider is under a duty to guarantee confidentiality of personal data and unless processing is required to satisfy a legal duty, data may only be processed if the data subject s written or electronic consent is obtained. It specifically regulates use of electronic means for marketing and stipulates that transmission of unsolicited communications by electronic means including e-mail or SMS messages for purposes of direct marketing or political propaganda cannot be sent without the recipient s prior consent. Having obtained prior consent from the recipient, the service provider is obliged to respect the boundaries of such consent. In this respect, communication sent should be appropriate and compatible with the consent provided. Furthermore, those who have provided their consent for their data to be used must be able to withdraw such consent and reject electronic communications freely and easily. Service providers who breach the provisions of the Draft Law shall be subject to administrative fines, however, there is no reference to imprisonment or provisions of the Turkish Criminal Code No. 5237. To sum up It is well known and accepted that data is a valuable asset to any organisation and with the rapid development of the internet and digital platforms those storing and processing data have become vulnerable and open to abuse. Consequently, every organisation has data protection concerns whether dealing with consumer data or internal employee data, as data theft or abuse can result in financial loss and reputation damage. This coupled with legislative changes means that organisations have to address the issue of data security seriously and take appropriate measures to ensure data are properly safeguarded. It is evident that data protection is an important issue in Turkey and shall be subject to strict regulation. However, until a single law is enacted, data protection is regulated under a number of different laws. In this respect, the matter of data protection is a legal minefield and seeking expert advice is the key to avoid breach and ensure compliance with legal obligations. 2012/I 91

L E G A L N E W S B U L L E T I N T U R K E Y Employment, Pensions & Benefits Provisions of the New Turkish Code of Obligations regarding Annual Leave Ahu Pamukkale GÜNBAY W ith The New Turkish Code of Obligations Law No. 6098 ( New TCO ), promulgated in the Official Gazette dated 4 February 2011 and numbered 27836, shall enter into force on 1 July 2012. Upon the enactment of the New TCO, the current Turkish Code of Obligations Law No. 818, in application for more than 80 years, shall be revoked. There were no provisions regarding the annual leave days under the Turkish Code of Obligations Law No. 818. However, with the enactment of the New TCO, four new provisions will be introduced in order to establish the obligations the enactment of the New TCO, four new provisions will be introduced in order to establish the obligations of employers with respect to annual leave days. of employers with respect to annual leave days. It should be noted that these provisions are almost the exact translations of the annual leave day provisions regulated under the Swiss Code of Obligations. The required conditions for the employees to be entitled to annual leave days as per the New TCO may be considered where: i) an employment relationship subject to the New TCO exists; and ii) the waiting period regulated under the New TCO has expired. The employment relationships subject to the New TCO are; any works performed other than works subject to the Turkish Labour Law, Press Labour Law and Maritime Labour Law. It does not differ whether the employment contract is a definite or an indefinite period, nor a part-time or a full-time contract. As per Article No. 422 of the New TCO, the employers shall procure the employees working for at least one year with at least two weeks annual leave; however, employees who are less than 18 years old or more than 50 years old with at least three weeks annual leave. The annual leave days are the statutory minimum; therefore, the days may be increased through employment contracts, but cannot be decreased. As per the New TCO, the annual leave right has been provided to the employee as a week. For instance, if the employee works for 2 days a week and has two weeks annual leave, then he would be entitled to a total of 4 days annual leave. However, a full-time or a part-time employee who works every day excluding weekly rest days would be entitled to an annual leave of two full weeks. The one year period regulated under the New TCO may be defined as 365 days starting from the employee s commencement date to work. Such period includes all the worked and unworked days in the workplace. Even if the employee does not work for the whole year, the waiting period will continue to be formed. In case the employee s employment is transferred to another employer by way of a workplace transfer or his employment contract is transferred to another employer or the employee is transferred due to a temporary employment relationship, then the 2012/I 92

period passed through the previous employer shall also be counted towards the employment period. Since there is no provision under the New TCO regulating that the periods at different employers with different employment contracts shall be combined and counted as one service period, then such different employment periods shall not be considered as a whole for determination of the annual leave period. However, a provision regulated under an employment contract regarding such application shall be deemed valid and previous employment periods may also be considered in determining the annual leave. The notice periods passed following the termination notification shall also be considered as part of the employment period. It should be noted that the Swiss Code of Obligations regulates that the employee shall be entitled to the annual leave as of the date of commencement to work and there is no waiting period regulated. However, the legislator decided to make a regulation parallel to the other labour laws in Turkey and did not include such provision under the New TCO. As per the New TCO, in case the employee fails to perform work for more than one month during the service year due to his own fault such as sickness due to the employee s fault, being arrested due to the employee s fault, arbitrary absence, or not performing work due to attending an illegal strike, the employer may deduct one day of the employees annual leave for each unworked whole month. If the employee is absent from work for the whole year due to his own fault, then 12 days shall be deducted from his annual leave days. Therefore, an employee may still have unused annual leaves left, even if he does not perform any work for the whole year. Thus, employees with at least two weeks annual leave of that year may use such unused annual leaves in the following year. The unworked period shall be formed with either continuous or noncontinuous absences due to the employee s fault. In case such period is less than 1 month, then no deduction may be made over the annual leave of the employee. Furthermore, the unworked 1-month period shall consist of days in the same year. Therefore, the employer cannot consider the unworked days of different years and add up these days to deduct over the annual leave days of the employee. In case the employee cannot perform work for at most three months during the service year due to sickness, accident, legal obligation or fulfilment of a public service without a fault of his own, then the employer cannot deduct from his annual leave days. The reasons regulated under the New TCO may be augmented considering the reasons subject to the employee s personality. Furthermore, the employer shall not make any deduction over the annual leave days of a female employee who cannot perform work for at most three months due to pregnancy and maternity. There is no additional right provided to the female employee in case of a multiple maternity. It should be noted that no provision against the employee and contrary to these obligations of the employer may be regulated under an employment contract or a collective labour agreement. The annual leave days shall be granted to the employee without any interruption. However, the annual leave days may be divided into two parts by mutual agreement between the employee and the employer. The employer shall determine the dates of the employee s annual leave considering the employee s request to the extent that it is compatible with the interests of the workplace and the employee s house order. Therefore, the employer shall not make an arbitrary decision regarding the dates of the employee s annual leaves. The New TCO has not regulated whether the annual leave days may be used before the entitlement to the leave or if the employee is be entitled to any leave for journey. Therefore, it should be accepted that such open issues may be decided by the employee and the employer through a mutual agreement. Finally, it is regulated under the New TCO that the employer shall make cash or advance payment to the employee for annual leave days before the employee uses such annual leave. The employee shall not waive his annual leave day right in return of any amount of salary or other benefits to be paid by the employer as long as the employment relationship continues. Upon the termination of employment contract for any reason, the salary corresponding to the unused annual leave days, calculated over the employee s last salary on the termination date, shall be paid to the employee or his legal beneficiaries. The statute of limitations for this payment runs on the date of termination of the employment contract. 2012/I 93

L E G A L N E W S B U L L E T I N T U R K E Y Definite Period Employment Contracts in the light of the provisions of the New Turkish Code of Obligations Katharina Cihan AKYÜREK As per the provisions of the Turkish Labour Law No.4857 ( TLL ), an employment contract may be established for either a definite or indefinite period. A contract for a definite period has a specified duration, while a contract for an indefinite period is open-ended. Although indefinite period employment contracts are the most usual form of contract in working life, definite period contracts which are concluded in exceptional cases cause several discussions in practice regarding their conclusion, renewal as well as termination. Different from the former Code of Obligations No.818, the new Turkish Code of Obligations No.6089 ( New TCO ) regulates new principles regarding definite period employment contracts and includes provisions on compensation claims. It is important to correctly establish the connection between the TLL and the New TCO to make a correct legal assessment regarding provisions on definite period employment contracts and other labour law issues. In the general preamble of the New TCO, it is expressly stated that provisions on employment contracts will cover employees who are out of the scope of the TLL. Thus, in cases where there is conflict between the provisions of the TLL, which is a specific law and the New TCO, which is a general law, the provisions of the TLL will be applied to the employment relationship subject to the TLL. Likewise, the provisions of the TLL will continue to be applied regarding issues which are expressively stipulated in the TLL and the New TCO will be applied regarding the issues which are not regulated in the TLL. The New TCO does not require that an essential (objective) reason exists at the initial conclusion of a definite period employment contract for definite period and necessitates an essential (objective) reason for successive definite period employment contracts. However, the TLL requires an essential (objective) reason for the initial conclusion and successive renewal of definite period employment contracts. Hence, it is regulated in the TLL that employers can only enter into a definite period contract; if the work undertaken by the employee lasts for a specific period of time; or the employee is employed for the completion of certain work or because of the emerging of certain facts at the workplace, which justify the conclusion of employment contract for a definite period. In this respect, the New TCO is more flexible than the TLL. Employees working with definite period employment contracts do not benefit from job security provisions of the TLL which provide favourable conditions for employees. Similarly, definite period employment contracts end upon expiry of the term of the contract and employees are neither entitled to severance pay nor notice pay. In this context, since the reasons which justify the signing of definite period employment contracts which may have disadvantageous consequences for employees concerning protection against dismissal are not enumerated on a limited basis in the TLL, it is accepted that definite period employment contracts may be concluded in similar cases where objective reasons are present. For instance since the public s admiration and demand is important for performing artists, it is accepted that definite period employment contracts may be concluded with such employees. Likewise, since the success of the team depends on the harmony between the players, the members of the team are frequently changed and the performance of sportsmen is prioritised, definite period employment contracts may be concluded with professional sportsmen. 2012/I 94

I t Moreover, as per certain court precedents of the Court of Appeal, it is accepted that there is an objective reason to conclude definite period employment contracts with senior executives because of their position and the nature of their work. For instance, a general manager is an executive and he undertakes the duty of management at high level. Thus the performance results of the general manager carry significance for the running of the business. Parallel to the court precedents, the doctrine accepts that definite period employment contracts are concluded with executives and considers that in such case the objective reason criteria is fulfilled. In such case the criteria of employment contract depending on success is accepted as objective reason to conclude definite period employment contracts with executives. is important to correctly establish the connection between the TLL and the New TCO to make a correct legal assessment regarding provisions on definite period employment contracts Successive Definite Period Employment Contracts, Termination and Compensations Similar to the former Code of Obligations No.818, the New TCO stipulates that definite period employment contracts end upon expiry of the term of the contract without any notification requirement unless otherwise agreed. In the former Code of Obligations No.818, it was regulated that if a definite period employment contract implicitly continues after its expiration, such contract will be renewed for the same duration, not exceeding a year. However, parallel to the provisions of the TLL, the New TCO explicitly regulates that if a definite period employment contract implicitly continues after its expiration; such contract will turn into an indefinite period employment contract. Only if there is an essential (objective) reason, successive definite period employment contracts may be concluded. Thus, the New TCO provides compliance with the TLL regarding renewal in this respect. As well, if it is determined that the employment contract will be terminated by termination notice and both parties have not used such termination notice, the definite period employment contract will become an indefinite period employment contract. Thus, it is assured that employees will benefit from the conditions of indefinite period employment contracts and their seniority rights will be calculated by also considering the duration of the first employment contract. As per the New TCO, if the employment contract lasts more than 10 years, both parties may terminate the employment by complying with a termination notice period of 6 months. In such case the termination will take effect at the beginning of the month following such period. In the former Code of Obligations No.818 it was regulated under the section regarding employment contracts that after a maximum term of ten years the employee may terminate the employment relationship any time after expiry of ten years with a notice period of one month. As there is no provision in the TLL regarding this issue, this provision will also be applicable to employment relationships subject to the TLL. Moreover, in accordance with court decisions and the doctrine, the New TCO explicitly regulates that in case of termination of definite period employment contracts prior to their expiry date, the employee may request the payments that he should have earned from his employer if the employment relationship had been terminated at the expiration of the fixed term, as compensation. Thus, the employee may claim for wages and benefits for the remainder of the definite period employment contract. However, any amounts that the employee has saved because of termination of his definite period employment, any earnings that earned from another work after the termination date or any earnings that the employee intentionally abstained from earning may be deducted from such compensation. Moreover, the same provision regulates that employees may be entitled with another compensation to be determined by the court by considering the conditions and specifics of each particular case. As another new provision which will also be applicable to definite period employment contracts subject to the TLL, the New TCO regulates that if the employee suddenly quits employment or does not start working without any just cause, the employer may claim for compensation in the amount of ¼ of the employee s monthly wage. Also the employer may request the indemnification for his additional damages. However, in case that the employer has not incurred losses or his damages are less than ¼ of the employee s monthly wage, the court may deduct the compensation amount. If the right of compensation has not ended via setoff, the lapse of time to request compensation is 30 days as of the date on which the employee has quit employment or has not started working and the employer shall use his right by pursuing or instigating a lawsuit within this duration. 2012/I 95

L E G A L N E W S B U L L E T I N T U R K E Y The New System on Compensation for Damages Arisen from Work Accident and Occupational Illness Hikmet ÖZKAYA Under the conditions stipulated by the law, work accidents and occupational illnesses occur where physical and/ or mental damage is caused to the insurant. The main liability for compensation of the damages arisen from work accidents and occupational illnesses rests with the Social Security Institution. However, the employer shall compensate the damages that are not compensated by the Social Security Organisation. The employer has a contractual liability to protect employees from physical or mental damage. This liability arises from the Labour Law and Code of Obligations. It is a defect liability arising specifically from employer s behaviour contrary to his duty to take reasonable care of the employee. Notwithstanding that the employer s liability is in principal a defect liability, employer s absolute liability is also accepted to protect the employee from being aggrieved in cases where the employer s fault cannot be detected or the damage emerges despite the employer took all the necessary precautions. Despite the employer took all necessary precautions, if it is not possible to prevent damage to the employees then employer shall be held liable on the ground of absolute liability. In such case, even though the employer has no fault on the damaging incident he shall be liable to compensate the employee s damages. This kind of liability of employers is called vicarious liability in law. Employer s vicarious liability is not regulated under any special laws and it was not set out in the Law of Obligations No. 818. Employer s vicarious liability based on the consideration that the employer should be liable even if he has no fault is for the first time laid out as a general provision in Article 71 of the New Code of Obligations No. 6098. In the article it is stipulated that in case of any damages arisen from activities of an establishment which poses danger in a considerable extent, the owner and, if any, the operator of the establishment shall be jointly liable from the damage. It further regulates the types of establishments considered to pose a danger in a considerable extent. The article also regulates that even if the law permits the activities of an establishment which pose considerable danger, the damaged persons may request balancing the considerable damages caused by activities of such establishments. The vicarious liability is the most severe among all kind of liabilities. Since in vicarious liability the defect of the employer or his fulfilment of the duty to take reasonable care is not taken into consideration; the employer may under no circumstances avoid liability. In order for employer s vicarious liability to take place, the establishment must pose danger 2012/I 96

T he in a considerable extent. The majority of the establishments posing danger are the factories which conduce to water, air and soil pollution. Other than these, base stations, mines and, gold and other precious metal mining establishments where cyanide is used are considered as among the establishments posing danger. As mentioned in the foregoing, the owner and operator of the establishment posing danger in a considerable extent are jointly liable from the damage incurred due to the activities of such establishment. The owner of the establishment must be considered as the employer who incorporated the establishment or took over the establishment. The operator is the person fully authorised by the owner of the establishment for the operation of the establishment or the lessee who leases the establishment from the owner. vicarious liability is the most severe among all kind of liabilities. Since in vicarious liability the defect of the employer or his fulfilment of the duty to take reasonable care is not taken into consideration; the employer may under no circumstances avoid liability. In regard to the balancing damages of the aggrieved persons, the Code of Obligations sets forth that in case of damages arising from the legal activity of an employer, such damages shall be balanced between the damaged and damaging parties in an equitable manner. In this regard, Article 50, 51 and 52 of the New Code of Obligations are of importance to make an assessment for the amount to be compensated by the employer. Accordingly, the burden of proof of the existence of the damage and fault was caused by a party, rests with the party claiming to be damaged.. In case the amount of the damage could not be proved, the court shall determine the amount of the damage in an equitable manner taking into consideration the nature of events and the precautions taken by the damaged party. The court determines the amount of the compensation to be paid to the damaged party by considering the circumstances and especially the weight of the fault. Nevertheless, where the party is aware that the action could cause damage or increased or decreased the damage, or he impairs the position of the person in charge of the compensation, the court may reduce or even completely eliminate the compensation. In the event that the person in charge of the compensation caused the damage with a minor fault and shall fall into poverty when he pays the compensation, the court may reduce the compensation. Another new provision is set forth under the New Code of Obligations regarding payment of compensation for material damages. Accordingly, survivor s pension, invalidity and old age pension, payments made by the Social Security Institution which cannot recourse completely or partially to the employer and the payments which are not aimed to fulfil an obligation cannot be taken into account when determining the material damages and cannot be offset from the compensation to be paid to the damaged party. The amount of the compensation calculated by the expert witnesses cannot be reduced or increased by the court without providing justification if the court finds the calculated amount higher or lower then it must be. In cases where vicarious liability comes into question, the court shall reduce the compensation as a result of equity if the employer would fall into poverty when he pays the compensation. However, the court is bound with the amount of the compensation calculated by the expert witness if the expert witness calculated it higher or lower than it must be; and the court cannot reduce the compensation in line with the equity principle without justifications. 2012/I 97

L E G A L N E W S B U L L E T I N T U R K E Y Home Service Agreements and Marketing Facilities Agreements determined under the New Turkish Code Obligations Ezgi ÖZDEMİR The Turkish Labour Law No. 4857 stipulates that the employer and the employee are entitled to enter into any type of employment contract within the remits of the law based on the requirements of their employment relationship. However, the Labour Law does not stipulate all types of employment contracts. The new Code of Obligations determines two types of employment contracts which are not determined under the Labour Law, namely Home Service Agreements and Marketing Agreements. Home Service Agreements Contemporary employment models have arisen due to economical, technological and social developments rather than the classic employment model of working on a full-time basis at the workplace of the employer. Under home service agreements, the employee still has an economic liability to the employer, therefore, the employee must fulfil the work given by the employer in person or together with family members at home or at any other place selected by the employee, in return of wage. The employer should give information regarding the specialties of the work to the employee each time the employer delivers work to the employee in addition to the general employment conditions. Home service agreements are not subject any special form of employment contract. However, if necessary, the employer may inform the employee as regards to the material to be supplied by the employee, the payment to be made to the employee for such material and the payment to be made to the employee for the work to be performed by the employee. Otherwise, the customary payment for such work and for the materials is made to the employee. In the event that the materials are supplied by the employer, the employer is under the obligation to examine the materials delivered by the employer and to report the employer in case there are any defective materials. If the defects of the material emerge during the performance of work, the employee is required to immediately inform the employee regarding the defects and await the instructions of the employer. If not, the employee will be under the obligation to compensate the loss of the employer. Under home service agreements, if the employee does not perform work for the employer on a continuous basis, the employer may pay the employee at a piece rate. Nevertheless, if the employee performs work for the employer on a continuous basis, the employer should make fortnightly payments to the employee or upon consent of the employee on a monthly basis. The employer is obliged to also deliver an account statement to the employee in every payment 2012/I 98

T he made to the employee and if any, the amount and the reason of the deductions should also be specified in this statement. Although the employee works at home or at any other place selected by the employee, the employer shall take all required precautions for the occupational health and safety of the employee. In case the employee does not start and finish the work on a timely manner, the employer is entitled to terminate the employment contract on just cause. In addition, the employer can also initiate a lawsuit for the compensation of the expenses, loss of earnings and losses arising from not receiving the work on time. The employment relationship can also be terminated due to death of the employee, upon expiration of the definite or mutual agreement of the parties. In case, the employee who performs work at home fulfils the conditions determined under the Labour Law, the employee can be entitled to severance pay upon termination of employment. new Code of Obligations determines two types of employment contracts which are not determined under the Labour Law, namely Home Service Agreements and Marketing Agreements. Marketing Facilities Agreements The marketing employee acts as intermediary on the account of the employer which runs a commercial enterprise, for all kinds of transactions outside the enterprise. The employee can act as intermediary for any kind of transactions which are not immoral and unethical. On the other hand, the employer can also grant authorities to the employee to fulfil some transactions on behalf of the employer under a written contract. The marketing employee can fulfil the transactions determined under this contract in person on behalf of the employer. However, in case the employer did not grant a special authority to the employee, the employee cannot make collections on behalf of the employer and change the payment dates. In any event, the employee works on a continuous basis for the employer. The major difference between the agency and the marketing employee is that the agency acts on an independent basis and the marketing employee acts on behalf of the employer on a dependent basis since the marketing facilities agreement is a special kind of employment contract. If the terms and termination of the contract, the authorities of the marketing employee, the payment of salary and expenses, and the applicable law and the competent courts are not determined under a written contract, the provisions of law and the customary employment conditions are applied to the employment relationship between the parties. The marketing employee is obliged to follow the instructions of the employer and the validity of the instructions is not subject to the approval of the employee. Hence, unless there is a just cause, the employee shall visit the customers in compliance with the instructions of the employer. Even if the employee is of the opinion that it will be to the benefit of the employer to act contrary to the employer s instructions, the employee is still obliged to follow such instructions. If the employee is granted authority to make transactions on behalf of the employer, the employee should follow the prices and other conditions of the transaction determined in the instructions and cannot make any changes in the instructions without the consent of the employer. In principle, the marketing employee acts intermediary and/or fulfils the transactions within the area regarding a specific commercial business determined under the contract and protects the interests of the employer. Consequently, the employee cannot act as intermediary on his/her behalf or the third parties without the permission of the employer. Unless otherwise determined in writing, the employer cannot grant authority to other marketing employees to perform in the same marketing area or to the same customers. If there is a reason to change the provision of the agreement as regards to the marketing area or the customers, the employer can unilaterally amend such provision. However, the marketing employee s right to terminate the contract on just cause and to request compensation is reserved. The marketing employee cannot be held responsible for the customers who do not pay the employer or fulfil other obligations. The agreements made to the contrary shall be null and void. Additionally, the agreements stipulating that the marketing employee is obliged to compensate in partial or in full the expenses made for the collection of the receivables by the employer are null and void. However, if the marketing employee makes transactions with his/her own customers, the employee may undertake in writing to compensate one fourth of the loss of the employer in each transaction in return of an additional commission payment. It depends on the 2012/I 99

L E G A L N E W S B U L L E T I N T U R K E Y idea that the employee should know his/her own clients ability to make payment. In return of the works performed by the marketing employee, the employer can either make a certain amount of payment to the employee or the employer can also pay commission to the employee in addition to a certain amount of payment. The agreements in writing determining that the employee s salary will only compose of commission payment or a substantial part of the employee s salary will be commission payment are valid as long as such commission payment forms a reasonable consideration for the employee s activities. If the marketing employee is exclusively granted authority to work at a certain marketing area or for certain customers, the employee may request payment of the agreed or the customary amount of commission arising from the works performed by the marketing employee or from the works performed by the employer at this certain area or to such certain customers. If the authority is not exclusive to the marketing employee and other employees may also perform work at this area or for the same customers, the commission payment is made only for the works performed by the marketing employee in person. For the termination of employment, in case the commission paid to the employee composes at least one fifth of the salary, and the commission is influenced from the seasonal fluctuations,, the employer is entitled to terminate the employment contract of the employee who works with the employer as of the expiration of the former season with two months prior notice during the new season. Likewise, in the event that the commission paid to the employee composes at least one fifth of the salary, and the commission is influenced from the seasonal fluctuations, the employee is also entitled to terminate the contract with two months prior notice until the start of the new season if s/he has worked until the end of the former season and also continued to work after the season. Controversy between the Turkish Labour Law and the New Turkish Commercial Code with respect to Business Transfer Gülce SAYDAM The transfer of undertaking, business or part of an undertaking or business to another employer as a result of a legal transfer constitutes one of the most significant subject matters of social law. Unlike the former Turkish Labour Law numbered 1475, the Turkish Labour Law numbered 4857 ( TLL ) has clearly regulated transfer of business under Article 6 parallel to the regulations set out in the European Union Council Directive numbered 77/187 and 2001/23 with a view to harmonise its labour legislation with the legal acquis of the European Union as part of the accession course. 2012/I 100

I n Pursuant to TLL; When, due to a legal transaction, the establishment or one of its sections is transferred to another person, employment contracts existing in the establishment or in the section transferred on the date of the transfer shall pass on to the transferee with all the rights and obligations involved (Article 6/1). In the calculation of all the entitlements based on the employee s length of service, the transferee employer must act, in regard to the transactions concerning the employee, according to the date on which the employee had started work under the transferor employer (Article 6/2) In a transfer executed in accordance with the above, the transferor employer and transferee employer shall be jointly liable for the obligations which have materialised before the transfer and which must be defrayed on the date of the transfer (Article 6/3). The liability of the transferor employer is limited, however, up until the two years period following the date of the transfer (Article 6/4). order to prevent the controversial practice of the TLL and the New TCC, in terms of protection brought to employees against side effects of structural changes in companies, the field of application shall be explicitly defined by the lawmaker. Provisions on joint liability shall not be applicable in cases where the corporate status ceases to exist as a result of a merger, participation or where the corporate type is changed (Article 6/5). The transferor employer or transferee employer is not authorised to terminate the employment contract solely because of the transfer of the establishment or a section thereof, nor shall the transfer entitle the employee to terminate the contract for just cause. The right of the transferor or the transferee to terminate for reasons necessitated by economic, technological or organisational changes are reserved; so is the employer s and the employee s right to break the contract for just cause (Article 6/6). The provisions stated above shall not be applicable in the event of the transfer of the establishment as a result of liquidation of the employer s assets due to the insolvency of the employer (Article 6/7). On the other hand, the New Turkish Commercial Code No. 6102 ( New TCC ), which will enter into force on 1 July 2012 has also brought protection to employees against the side effects of structural changes in terms of division (splitup or spin-off), merger and conversion under Article 178. According to the said article of the New TCC, employment contracts executed with the employees shall be transferred to the transferee employer with all the rights and obligations arisen thereby until the day of the transfer provided that the related employee does not raise any objection (Article 178/1). If the employee raises an objection, the employment contract will be terminated at the end of the legal notice period and the transferee employer and the employee shall be liable to fulfil their contractual obligations during the term of the legal notice period until the date of the termination (Article 178/2). The former employer and transferee employer are jointly and severally liable for the employee s receivables due before the division and for the employee s receivables which are due within the period that will pass until the date the employment contract is to expire under ordinary circumstances or the date it is terminated due to the employee s objection (Article 178/3). Unless otherwise decided or unless it is evident from the circumstance, the employer cannot transfer the rights arisen from the employment contract to a third party (Article 178/4). Employees can request that their due receivables and their receivables which will become due as set forth in Article 178/ 1 be secured (Article 178/5). The shareholders of the transferor employer, who were liable for the debts of the company before the division, continue to be severally liable for the debts arising from the employment contract that are due until the day of transfer and for the debts which would become due if the employment contract were terminated under ordinary circumstances, or for the debts that arise until the employment contract is terminated due to the employee s objection (Article 178/6).The new regulations brought by the New TCC have been criticised by most of the labour scholars from various aspects, particularly it is claimed that the impact of division, merger and conversion of companies on employment relationship shall not be regulated under the New TCC bearing in mind the presence of a separate labour legislation in Turkey. 2012/I 101

L E G A L N E W S B U L L E T I N T U R K E Y The members of the commission in charge that prepared the New TCC had also argued whether such a specific provision is essential under the New TCC or not, however, determined to preserve the regulation under the New TCC notwithstanding Article 6 of the TLL based on the following reasons: 1. Article 6 of the TLL is a general provision applicable to all types of transfers, however, it is not applicable to the cases where the corporate status ceases to exist as a result of a division, merger or conversion. Thus, Article 178 of the New TCC is a specific regulation applicable to the cases where the corporate status ceases to exist as a result of a division, merger or conversion. 2. In the New TCC, the protection is more comprehensive and more secure in terms of employment receivables compared to Article 6 of the TLL because in cases of mergers and split up, the company terminates; nevertheless pursuant to Article 178 of the New TCC, shareholders of the terminated partnership company are jointly and severally held liable from the employment receivables. 3. Article 178 of the New TCC serves to the best interests of the employees since it grants employees the right to raise an objection on transfer of the rights and obligations arisen from the employment relationship to another employer. The underlying basis and rationale of the rules brought by Article 178 as outlined above has been criticised in the below perspectives: It is explained that the protection brought by the New TCC to the employees is not comprehensive than what is set forth under Article 6 of the TLL since only the share capital companies and cooperatives are subject to division, not the partnership companies. Therefore, personal liabilities of the shareholders will not be an issue in case of division. The other point argued was related to scope of Article 6 of the TLL. It is explained that, although Article 6 of the TLL is not applicable to the cases where the corporate status ceases to exist as a result of a division, merger or conversion, it is not necessary to look for a specific provision with respect to joint liability of the former employer with the new employer in fact since the former company ceases to exist as a result of a split up, merger and conversion. In other words, the employee cannot recourse any claim to the former employer with respect to his unpaid employment receivables since the two separate legal personalities no longer exist. The last point argued was related to employee s right to object to the transfer of his employment relationship to another employer in case of division, merger or conversion. It is claimed that this new regulation is likely to bring about many problems in working life. The supporters of this opinion further explained that changes in the corporate status of the company throughout division, merger or conversion do not solely result in essential change in working conditions of the employee, in other words the status change do not solely considerably worsen the employment conditions of the employee. Therefore, it is explained that the objection right granted to employees by this provision does not appear to be reasonable and seems to set barriers for maintenance of employment relationship. In conclusion, upon enforceability of the New TCC as of 1 July 2012, the application of Article 178 and its relevant provisions alongside the TLL is likely to be given a wide variety of approaches among scholars and practitioners. In order to prevent the controversial practice of the TLL and the New TCC, in terms of protection brought to employees against side effects of structural changes in companies, the field of application shall be explicitly defined by the lawmaker. 2012/I 102

Standard Terms within the Framework of Labour Law Simin YALÇINTAŞ Working life has immensely grown with the growth of industrialism and thus the need of standardisation in the working life arose. In theory, parties to a contract are free to negotiate the terms and conditions of the contract so long as they remain within the constraints imposed by the law. Nevertheless, in today s working life, to meet the requirement of standardisation and saving time, the terms of many contracts are laid out in printed standard forms to be used for all contracts of the same kind. These kind of contracts are called standard form contracts and the terms within these contracts are called standard terms. Pursuant to Article 20 of the New Code of Obligations ( New TCO ) standard terms are contractual stipulations which have been solely drafted by one of the parties to a contract and submitted to the other party in advance of signing the contract so as to be used in several subsequent contracts. Accordingly, in order for a contract to be deemed as a standard contract, the other party is required not to participate in the process of drawing up the contract. When determining the standard terms, no regard is made upon whether the terms are within the text or appendix of the contract. In majority of the enterprises, the terms and conditions of the employment and working rules are set by the employer as being applicable to all of the employees working in that enterprise rather than setting new terms and conditions for each employee hired. As a result, in practice a significant proportion of the employees do not negotiate with their employer before signing the employment contract, instead they sign standard form employment contracts at the time of their recruitment. Similarly, without being able to negotiate its term and conditions, the employer provides the employees with personnel regulations at the time of recruitment under which the general working rules applied within the workplace and the rights and the obligations of the employer and the employees are laid down in detail. Both standard form employment contracts and personnel regulations are deemed as standard terms in relation to the law of obligations. Standard form employment contracts, whose terms and conditions are laid out by the employer prior to signing the contract, fulfil an important role of standardisation at the enterprise. Such standard form employment contracts are prepared to be applicable to all of the employment relationships within the entire enterprise. On the other hand, today standard form employment contracts are used as a device for allocating contractual advantages in favour of the employer who lays down the terms and conditions of the contract. In a vast majority of the standard form employment contracts unjust terms are accepted by the employees in fear of losing the job opportunity. Similarly, standard form employment contracts are rarely read by the employees since the employee is in no position to negotiate the terms and conditions of the contract as the contract is presented on a take it or leave it basis with very few or no ability to negotiate the terms which are more favourable to it. The same applies for the personnel regulations which include general provisions with respect to work rules and conditions applicable to all of the employees within an enterprise. The content of such personnel regulations are unilaterally determined by the employers. Under the Labour Law, personnel regulations are deemed as appendixes of employment contracts and accordingly have the equal enforcement power with employment contract. With this reason, standard terms are subject to content control by the judiciary which may annul standard terms at the end of the proceeding. Standard term employment contracts and personnel regulations are primarily subject to content control in terms of the Labour Law and other labour law legislation. Accordingly, the terms of an employment contract or a personnel regulation cannot be contrary to and remove the effec- 2012/I 103

L E G A L N E W S B U L L E T I N T U R K E Y I n tiveness of mandatory rules of the Labour Law. Therefore, the parties to an employment contract cannot agree on terms and conditions which are contrary to the mandatory provisions of the Labour Law and other relevant legislation. The parties are only entitled to agree in an employment contract on the terms and conditions which are above the minimum standards stipulated under the Labour Law. The same applies for the personnel regulations which are deemed appendixes of the employment contracts. Secondarily, standard term employment contracts and personnel regulations are subject to content control in line with the provisions of the New TCO regarding standard terms which are stipulated under Articles 20-25. This means that in case of a dispute between the parties, content of a contractual stipulation in an employment relationship which is consistent with the Labour Law and other labour legislation shall be controlled for a second time by the courts in line with the general legal provisions regarding standard terms. practice a significant proportion of the employees do not negotiate with their employer before signing the employment contract, instead they sign standard form employment contracts at the time of their recruitment. According to the Article 21 of the New TCO, standard terms may be deemed invalid in two cases. Firstly, standard terms which are to the other party s disadvantage can be included in the scope of a contract only upon his acceptance provided that the party who lays out the contract has evidently informed the other party of the presence and the contents of these standard terms. Otherwise, the standard terms shall be deemed unwritten. Secondly, standard terms which are not familiar with the nature of the contract shall also be deemed unwritten. Accordingly, in case the terms of an employment contract or a personnel regulation, which are to the detriment of interests of the employee are not evidently informed the employee and thereupon the consent of the employee is not obtained by the employer, the employee shall be entitled to raise objection as to the validity of these terms. The burden of proof, on whether the consent of the employee is obtained for disadvantageous terms of the employment contract and the personnel regulation, is on the party who benefits from the clause, namely the employer. Since no statute of limitation is regulated under Article 21 of the New TCO, in case of a dispute between the parties, the employee is entitled to raise objections as to the validity of the disadvantageous terms of the employment contract and the personnel regulation without any limitation on time and the court shall consider it on its own motion. As per the Article 25, standard terms cannot contain any provisions which are to the disadvantage and detriment of the other party, being contrary to the good-faith principle. Accordingly, if the terms of a standard form employment contract, which are to the disadvantage and detriment of the employee, is additionally deemed contrary to the good-faith principle, such terms shall be null and void. In this respect, the terms of an employment contract regarding engagement, withdrawal and amendment reservations are of importance. The stipulations of an employment contract in which the employer reserves its right to make amendments on the employment conditions, or not to apply the current employment conditions in the future, or the employee is bound to work in any place that the employer shall instruct the employee to work shall be subject to content control. If the employee has not evidently informed of the presence and the contents of these terms and his acceptance is not gained by the employer, these kind of terms may be deemed unwritten by the court upon a disagreement between the parties. Additionally, in case such terms are to the disadvantage and detriment of the other party, being contrary to the good-faith principle; they may also be deemed as null and void by the courts. In the event that certain provisions of a contract are deemed unwritten, the remaining provisions of the contract shall continue to be in full force and effect. In this case, the party who lays out the contract cannot plead as a defence that he would not have entered in such an agreement without the presence of the said terms which are deemed unwritten. Moreover, if the terms in an employment contract or a personnel regulation meet the conditions of standard terms stipulated in Article 20 of the New TCO, it cannot be stipulated in the employment contract or personnel regulation that it shall not be deemed as standard terms. In other words, the conditions of standard terms are mandatory. 2012/I 104

The Provisions of the New Turkish Code of Obligations regarding the Termination of Employment Contracts İsmail Emrah KARADAĞ The provisions regulating the termination of employment contract of the new Turkish Code of Obligation ( New TCO ), which will enter into force on July 1, 2012, comprises remarkable changes and new approaches not only for workers who work within the scope of the Code of Obligations but also for the employees who work within the scope of the Turkish Labour Law ( TLL ). This article will examine these changes and the novelties. A. Expiration of the Contract As per the relevant provision of the Turkish Code of Obligation ( TCO ) which is still in effect, in case the definite period employment contract is implicitly continued, the employment contract shall be deemed as prolonged for the same period but for a maximum of one year. As per the provisions of the New TCO, unless the contrary is agreed, the definite period employment contract shall be terminated upon expiration. In case the definite term employment contract is implicitly continued, the definite period employment contract shall be deemed as an indefinite period employment contract. The same consequence shall apply where it is determined that the contract is to be terminated with a notification but none of the parties terminates the contract. Furthermore, as per the New TCO, executing definite period employment contracts consecutively is conditioned to the presence of an essential cause. Since there is a special provision in the TLL, this provision shall not apply to employment relations that are subject to the TLL. However, it should be noted that the regulation of the TLL is the same as the New TCO. B. Termination of the Employment Contract upon the Death of Parties As per Article 440 of the New TCO, upon the death of the employee, the employment contract shall terminate. However, the employer shall pay an amount equal to the employee s one month s wage to the spouse, children and any dependants of the employee. In case the employment relation continues for more than five years, the amount of the payment to be made to the aforementioned persons shall be equal to two months wage of the employee. This regulation shall apply to the relations that are subject to the New TCO. However, it is questionable whether this provision shall apply to the employment relations that are subject to the TLL in case the employer shall pay severance payment due to death of the employee. As the New TCO is not currently enforced, it is not possible to conjecture how the application shall be. However, according to the legal doctrine, this provision should be applied to employment relations that are subject to the TLL, in addition to the severance payment. The New TCO regulates that only where the employer is the base of the contract, the contract shall terminate upon the death of the employer. Otherwise, the successors of the employer will take the employer s place in the contract. This regulation is a reflection of the principle of universal succession. The provision further regulates that the transfer of the employment contract due to business transfer shall be applied whilst determining the obligations of successors. 2012/I 105

L E G A L N E W S B U L L E T I N T U R K E Y I n C. Termination of Employment Contract 1. In Respect to Definite Period Employment Contracts Article 435 of the New TCO regulates that each party may terminate the employment contract with a written termination notification basing on just cause without notice. It is further regulated that all circumstances and conditions where it cannot be expected for the party to continue the employment relation, within the framework of the good faith, are just causes. For employment relations that are subject to the TLL, the termination notification should also be in written form since it is not regulated under the TLL. Neither the TCO nor the TLL regulates the legal consequences of the termination of the definite period employment contract that are not based on just cause. However, the New TCO establishes new principals regarding this subject that apply to all employment relations. case the employee is within the scope of the TLL, the employee shall receive compensation in addition to severance payment and the wages of the employee for the period that he/ she did not work. As per Article 438 of the New TCO, in case the employer terminates the definite period employment contract without notice and without basing on just cause, the employee may request compensation equal to the amount that he/she could have acquired until the expiration of the contract. However, it is further regulated that the earnings that the employee has acquired or refrained from acquiring from another job may be deducted from the compensation. On the other hand, in case the employee does not start to work or leaves the job instantly without a just cause, the employer may request compensation equal to one quarter of employee s monthly wage. However, the employer s right to request additional compensation for damages that cannot be compensated with the above mentioned amount is reserved. In case the employer s loss is less or the employer does not suffer a loss, the above stated compensation may be reduced. The request of the employer is subject to a lapse of time. The employer is required to request this compensation within thirty days. 2. In Respect to Indefinite Period Employment Contracts The New TCO sets forth variable notice periods depending on employee s seniority. The notice period is two weeks for the employees whose seniority is less than one year; four weeks for the employees whose seniority is between one year and five years; and six weeks for the employees whose seniority is more than five years. However, since there is a specific regulation under the TLL regarding this, the provision of the New TCO shall not apply to employment relationships that are subject to the TLL. Furthermore, it is regulated that the notice periods may be prolonged by the contract provided that the notice period remains the same for both parties. The above stated provisions of the New TCO regulating the termination of a definite period employment contract basing on just cause shall be applied for indefinite period employment contracts. However, it cannot be applied to employment relations that are subject to the TLL since Articles 24 and 25 of the TLL are special provisions. D. Compensation due to Termination of Employment Contract 1. Bad Faith Compensation As per Article 435 of the New TCO, in case the employer abuses his/her right to terminate the employment contract, he/she is required to pay bad faith compensation equal to three times the amount of the employee s notice period s payment. The same provision is regulated under the TLL but only for the employees who are not within the job security provisions of the TLL. Therefore, the provisions of the New TCO shall not apply for employment relations that are subject to the TLL. Furthermore, this provision shall apply for the terminations realised by employees. 2. Termination Compensation As per the New TCO, in case the employer terminates the employment contract without basing on just cause, the judge may decide that the employer shall pay compensation to the employee provided that the amount of the compensation does not exceed employee s six months wages. In determining the amount of the compensation, the judge shall consider conditions such as the seniority of the employee, the gravity of the illegal termination, whether the employer terminated the contract by abusing his/her right, and the economical situation of the parties. On the other hand, by examining the aforementioned provision, it is possible to state that 2012/I 106

this provision shall further apply to indefinite period employment contracts. Therefore, it should be stated that this regulation shall be problematic in application. Hence, in case the employee is within the scope of the TLL, the employee shall receive compensation in addition to severance payment and the wages of the employee for the period that he/she did not work. 3. Notice Payment Above, we have stated the notice periods for the indefinite period employment contracts set forth under the New TCO. The employer may terminate the contract without giving the above mentioned notice period, by paying the wage of the employee corresponding to the notice period. For the employment relations that are subject to the TLL, notice periods shall be determined as per Article 17 of the TLL. The New TCO is ambiguous regarding the compensation that can be requested by the employer in case the employment contract is terminated by the employee. However, the provision of the New TCO stating: in case the employee does not start to work or leaves the job instantly without basing on just cause, the employer may request compensation equal to one quarter of the employee s monthly wage shall also be applied to the indefinite period employment contracts that are not subject to TLL. 2012/I 107

L E G A L N E W S B U L L E T I N T U R K E Y Real Estate Turkey to Boost Foreigners Real Estate Acquisition Hazal KORKMAZ I n Turkey is a vast and varied country with its remarkable landscapes and natural wonders, bordered by four different seas. Between the continents of Asia and Europe, Turkey s strategically key location has given it major power in the region. It is a fast developing nation and as a consequence it is rapidly becoming one of the regions most attractive countries for overseas real estate investors. Until recently, real estate acquisition by foreigners had been one of a few critical issues to which Turkish public opinion was sensitive. Relevant Legislation Restrictions on the freedom for foreigners to acquire real estate in Turkey are exceptional, which rules out the intensive interpretation of parallel to the enactment of the New Code, Turkey is currently one of the most talked about real estate markets in the world, with many publications ranking it as one of the top places to invest in property. the provisions of the law. Article 35 of the Turkish Constitution stipulates: Everyone has the right to own and inherit the property. These rights may be limited by law only in view of public interest. The exercise of the right to own property shall not be in contravention of the public interest. However, along with the above mentioned article of the Turkish Constitution, pursuant to Articles 35 and 36 of the Code on Title Deed No.2644 ( Title Deed Code ), foreigners may acquire any real estate or limited rights in rem on real estate upon compliance with legal restrictions. Upon approval of the the draft amendment to the Title Deed Code ( New Code ) aiming to reduce restrictions on real estate acquisitions of foreigners by the Grand National Assembly on May 5 th, 2012, mostly from the ones from Gulf Arab states, Russia and Azerbaijan, hundreds of foreign real estate investors and citizens are expected to conduct real estate investment which will boost real estate market and return great amount of profit in year 2013. The New Code has already entered into force for foreign real persons and foreign legal entities on 17 th May, 2012 and will be enter into force 3 months after for foreign capitalised Turkish legal entities. What is new? As currently regulated, the New Code determines restrictions regarding acquisition rights of foreigners in respect of acquiring a real estate as per the distinction between (i) foreign real persons, (ii) foreign legal entities which are companies incorporated under another state s legislations (the foreign legal entities other than the commercial companies do not have the right to acquire real estate property in Turkey) and (iii) foreign capitalised Turkish legal entities. [1] Foreign real persons: Aside from the removal of reciprocity principle (disabling many foreign real persons real estate acquisition in Turkey), Pursuant to the New Code, foreign real persons can acquire real estate in Turkey with very little restriction as to region and size, including areas of national importance and cultural heritage. [1] The foreign capitalised company within the meaning of the Foreigner Investments Law covers the foreign capital companies which are duly established or participated in accordance with the Turkish Law by foreign Individuals and Legal Entities 2012/I 108

The total area of the real estates and limited real rights on real estate that a real person of foreign nationality can acquire throughout the country cannot exceed 30 hectares, which was formerly 2.5 hectares. However, the Ministry of Environment and Urban Planning ( Ministry ) will be entitled to increase this size to 60 hectares in accordance with its benefits. Foreign legal entities: Pursuant to the New Code foreign legal entities are also able to acquire real estate and limited rights in rem on real estate in accordance with the provisions of certain codes. The mentioned codes are: the Petrol Law, the Code on Tourism Encouragement and the Industrial Areas Law. However, it must be noted that these rights and limitations are not granted for the purposes of creating a pledge in favour of these foreign legal entities. Foreign capitalised Turkish legal entities: Pursuant to the New Code, foreign capitalised Turkish legal entities, companies may acquire real estate or limited rights in rem in order to perform their core business stipulated in their articles of association. These companies are incorporated under the Turkish Laws however 50% or more of their shares are held by foreign real persons or foreign real entities As a further note, this principle is valid in case the real estate is assigned to another foreign capitalised legal entity in Turkey or if a foreign capitalised legal entity purchases the shares of domestic incorporation owning the real estate. In addition to this requirement, these companies are required to apply for Governorship approval to Governorship Office of the respective city where the relevant company resides. Such approval of the Governor s Office is not required in the event of establishing mortgages, real estate acquisition in the scope of foreclosure of mortgages; and real estate acquisition or transfer of limited rights in rem in case of mergers and acquisitions and the transactions of banks in the scope of credits and or collection of debts under the Banking Code with No. 5411. Conclusion Amendments of the Title Deed Law, especially removal of the reciprocity principle is a sign of the importance attached by Turkish Government to foreign real estate investment They will have major benefits for most nationals, who cannot acquire real estate in Turkey. From an investor perspective, restrictions were a serious problem for the real estate investment sector in Turkey, both for the Turkish market and foreign investors who were prevented from investing in Turkey. It is highly expected the better off Middle Eastern real estate investors, who focus on metropolitans like New York, Paris and London have now added Istanbul on to their real estate shopping list and statistics already show that there will be a major gold-rush for property in Turkey from the Middle East. In parallel to the enactment of the New Code, Turkey is currently one of the most talked about real estate markets in the world, with many publications ranking it as one of the top places to invest in property. 2012/I 109

L E G A L N E W S B U L L E T I N T U R K E Y Collective Construction and Condominium Law of Turkey Günel RZAYEVA The term real estate includes land, independent and continuous rights registered with the land registry, and independent sections registered with the condominium registry. Under Turkish Law, the basic regulations with respect to real estate are set forth under the Turkish Civil Code. On the other hand, there are various different laws as well as the Code of Obligations, Land Registry Law, Condominium Law, Zoning Law, Cadastre Law, Forestry Law, and Tourism Incentive Law. As the Turkish real estate market develops, the Condominium Law is becoming the centre of attention. The provisions and regulations of Condominium Law No. 634, enacted more than forty years ago, were no longer adequate for today s real estate world. Turkish Parliament amended the Condominium Law No. 634 two times with Law No. 5711 which was published in the Official Gazette on November 28, 2007 and Law No. 5912 which was published in the Official Gazette on July 7, 2009 ( TCL ). These new laws aim to resolve different kinds of problems due to the new concept of collective construction and of condominiums in Turkey. The Law No. 5711 changed the scope of condominium ownership from a single parcel/single building basis to a collective building/collective property basis with the introduction of updated concepts of common areas, management of the building(s), and individual unit owners cooperating in the payment of common expenses. In these respects, the new laws are more in line with the legal regime found for condominiums in jurisdictions like the US, Canada, and certain countries in Western Europe. A more local and physically relevant change is the requirement to construct safe and technically acceptable buildings for today s Turkey, by analysing the natural disaster risks (e.g. seismic), and requiring owners to take the steps necessary to make structural and other health/safety improvements to vulnerable buildings. As is the case with the condominium laws in the US, Canada, and Western Europe, individual flat owners are prohibited from making any alterations or repairs in the common areas (both limited and general) without the written consent of 4/5 of all owners. The new provisions of TCL brought some flexibility in quorums for decision making regarding building management resolutions and amending the existing plans. Modifications, such as construction, repairs, building a new facility, changing the exterior distemper at the common areas, was forbidden in the former version of the law, unless the written consents of every single flat owner were previously obtained,. However, the law does allow individual owners to make alterations and repairs by an expedited court decision, (without the written consent of the other flat owners) if immediate action is necessary. The law requires that the situation must be urgent, and such immediate action must be reasonable, appropriate and ameliorative of the problem. These laws bring Turkey s condominiums in line with those found throughout Europe and North America. The TCL has simplified and clarified this form of real estate ownership in order to make it easier for both developers and consumers to understand, and should provide greater legal security for purchasers of re-sales of this type of property. As the concept of residence buildings in the legal form of condominiums became more popular the building management plans are now more 2012/I 110

T hese sophisticated than before. In addition to regular building maintenance, stricter rules regarding services and limitations to the right of ownership of independent units are relevant. In case of dispute among the right holders in condominiums, the management plan is applied along with TCL. Since every management plan is unique to its own real estate, its designations are significantly important for owners. This plan, which regulates all the managerial and business issues of the building(s), is referred to in every dispute and co-exists with the building in its lifetime. new laws aim to resolve different kinds of problems due to the new concept of collective construction and of condominiums in Turkey. As another tool for management, it is stated in the new provisions of TCL that condominium shareholders are obliged to allow the inspection of their independent units in the building for safety and technical reasons. In addition, the new provisions of TCL provides an emergency intervention methodology that can be executed by the Courts for urgent building prevention measures to be taken without the consent of the independent unit owners. According to the new provisions of TCL, the building management plan is a mandatory regime. The provision sets out that the right holders of such co-owned real estates, with common areas, acquire building usage certificate provided by the district municipalities as the final permits to commence the use of the building shall first organise their ownership status under condominium principles and accordingly shall execute and register a building management plan within two years following the execution of the law. As a conclusion, in a country under the high risk of earthquake such as Turkey, following provision is critically important. In his/her divided unit, the flat owner is banned to perform any reparation, construction or adjustment in a damaging manner for the building. This expression was already present in the TCL, however, with the addition of the phrase bearing chords, columns, load-bearing walls and other elements of the bearing system to Article 4/1 sub-article (a), it is made clear that the structure of the building, especially the ones that are crucial for earthquake prevention, became part of the common areas of the condominium ownership sharing model. The Recent Reform of the Legal Framework Governing Leases Eda YIKILMAZ For decades, leases of residential and commercial spaces have been governed under the Law on the Leases of Immovable Property No. 6570 dated May 05, 1955 ( Lease Law ) and the current code of obligations No. 818 dated April 22, 1926 ( TCO ). Both of these laws, however, will be repealed and replaced with the new Turkish Code of Obligations No. 6098 dated January 11, 2011 ( New TCO ) and the Law on the Enforcement and Execution Procedure of the Turkish Code of Obligations ( Enforcement Law ) dated January 12, 2011, which both will enter into force on July 1, 2012. 2012/I 111

L E G A L N E W S B U L L E T I N T U R K E Y O ne One of the most significant aims of the New TCO is to reform the legal framework on leases and embrace all provisions governing residential and commercial leases in a comprehensive piece of legislation, in a way to meet the present day circumstances and needs. Accordingly, as opposed to the previous legal framework, the leases of all residential and (under-roof) commercial space will be regulated under the New TCO without any distinction as to the place of the leased property. It is important to emphasise that Turkish Law does not recognise the distinct nature of commercial leases. As the laws stand, a university student s lease of a single bedroom and the lease of a store in a shopping centre by a company are subject to the same laws and regulations. A. Reforms introduced by the New TCO with respect to leases The significant reforms introduced by the New TCO under the title Private Debt Obligations are as follows: i) Limitations on the deposits that may be requested by the lessors; ii) Determination of the upper limit for the rate of increase in rents; iii) Possibility to sub-lease leased properties; iv) Automatic accessions of new owners to existing lease agreements; and v) Lessors termination rights. of the most significant aims of the New TCO is to reform the legal framework on leases and embrace all provisions governing residential and commercial leases in a comprehensive piece of legislation, in a way to meet the present day circumstances and needs. 1. Deposit Payment One major tenant-friendly amendment introduced by the New TCO is the limitation on deposits lessors may demand from the lessees. As per Article 342 of the New TCO requesting a guarantee is permissible but restrictions are prescribed with regard to the extent and nature of such requests. The New TCO provides that the amount of a guarantee cannot exceed three months rent. If such guarantee is given in cash, it must be deposited into a bank account and cannot be withdrawn from the bank without the prior approval of the lessee. If the guarantee is a negotiable instrument, it must be deposited with a bank, and the bank will not return it unless both parties approve the return, or an execution proceeding or a court award becomes final and binding upon the parties. 2. Determination of Rent Under the current TCO, parties are free to agree the method for determining rent increases over the term of the lease. As a consequence, court practice and precedent have been important to resolve rent increase issues. In Turkey, parties often resort to the courts if the rate of the rent for successive years has not been agreed or a party believes the contractual increase to be unjust. In the event of such disputes, courts generally use fair market value or annual Producer Price Index ( PPI ) rates, as announced by the Turkish Statistics Institute. The New TCO adopts the established court practice of using PPI rates to determine annual rent increases, limiting the increase for the second year to no more than the annual PPI rate for the preceding year. This rule applies to both short and long term leases. If the parties fail to agree on the rate of the rent increase for successive rental years, a court will determine the rate increase which will not exceed the annual PPI rate for the preceding year, taking into account depreciation of the rented property and equitable principles. For leases with a term of more than five years, courts are alternatively permitted to determine an arm s length rental rate, rather than applying a PPI rate. The other amendment related to this subject is made for the situations that rental is determined at foreign currency. In case the rent has been determined as a foreign currency at the time of the agreement, the rent should not be amended until the end of five years. Rent shall be applied at new rental period that shall be determined by considering increasing rate at PPI index, the situation of lessor and precedent rent and by complying with equity at rent agreements which are more than five years or rent agreements renewed after five years and at the end of each five years after that. According to New TCO, in case parties concluded a rent agreement on foreign currency, there will be no changes on rent during the five years. After this duration, the matters such as foreign currency value, precedent rental shall be evaluated. 2012/I 112

3. Sub-lease of Property As opposed to the Lease Law, the New TCO entitles the lessee to sub-lease the premises (with the written approval of the lessor if the lease agreement is concluded for residential or professional purposes), provided that this sub-lease does not harm the lessor s interests. With an assignment, the assignor shall be jointly liable with the assignee until the end of the term of the assigned lease agreement, but with the proviso that the period of such joint liability cannot exceed two years. 4. Transfer of Ownership of Leased Property Unlike the current practice where a new owner, at his/her own discretion, may either become a party to the ongoing lease agreement or seek the lessee s eviction from the leased property, under the New Code of Obligations the new owner will automatically become party to the lease agreement upon the transfer of ownership of the leased property. As a result, the new owner will be bound by the terms of the existing lease agreement, unless he/she has a valid reason for seeking the existing lessee s eviction. 5. Termination by the Lessor The New TCO introduces important changes with respect to the termination of lease agreements. Pursuant to the New TCO, with respect to a lease agreement with a definite term, unless the lessee gives notice of termination at least fifteen days prior to the expiration of the term of the lease agreement, the lease agreement will be deemed renewed for one year with the same terms and conditions, and the lessor may not terminate the agreement based on the expiration of the lease agreement. Although this provision is the same as that under the current TCO, New TCO further provides that at the end of the tenth extension year, the lessor may terminate the definite-term lease agreement by serving a written notice three months prior to the expiration of each year of extension, without cause. Under lease agreements with an indefinite term, the lessor is entitled to terminate the agreement at any time, and the lessor, likewise, is entitled to terminate the agreement at any time, after the tenth year following the commencement date of the agreement, by serving prior written notice in accordance with the general provisions. According to Provisional Article 2 of the Enforcement Law, the New TCO that enables the lessor to terminate the definite term lease agreement after the expiration of the ten year extension period will only be enforceable subject to the following transitory conditions: i. With respect to definite-term lease agreements with less than five years remaining before the expiration of the ten year extension period, the lessor s termination right under the New TCO will be effective as of July 1, 2017; and ii. With respect to definite-term rental agreements, and the ten year extension period that has expired, the lessor s termination under the New TCO will be effective as of July 1, 2014. According to the wording of related the provision of the New TCO, we understand that the ten year extension term will be calculated from the end of the rental term determined in the agreement upon the mutual agreement of the parties. Therefore, the initial term of the lease agreement should not be included in the calculation of the ten year extension term Pursuant to the New TCO, the termination notice for the rent may only be valid if it is made in writing. Besides, please note that in the determination of rent, a new provision is stipulated under the title restriction of provisions against the lessee. Accordingly, there is no payment obligation upon the lessee other than rent and ancillary costs, and agreements arranging penalty or become due clauses in case of a failure to pay the rent on time, which are very common in practice, are void. However, please further note that this provision shall become enforceable for legal entity lessees after five years of the enforcement of the New TCO. Effective Date of the New Code of Obligations Article 1 of the Enforcement Law sets forth that (with respect to those lease agreements already executed) the provisions of the current TCO will apply to the determination of whether the agreement is binding on the parties. However, after July 1, 2012, the provisions of the New TCO will apply for issues of default, termination and dissolution arising out of such previously executed agreements. Although the New TCO will enter into force on July 1, 2012, certain significant provisions with respect to the lease agreements shall not be enforceable until July 1, 2017 according to the Enforcement Law. The relevant article stipulates that certain articles of the New TCO shall not enter into force for five years after July 1, 2012 with regard to the leases of workplaces, where the lessees are merchants and public or private legal entities. The provisions, which will become effective as of July 1, 2017 can be summarised as follows: 2012/I 113

L E G A L N E W S B U L L E T I N T U R K E Y i) Subleasing leased properties; ii) Termination notices for lease of mov- iii) ables; Non-use of leased property; iv) Scope of the provisions regarding the lease of residences and workplaces; v) Expenses for regular use (i.e. electricity); vi) Deposits required by the lessor; vii) Amendments in lease agreements infringing the rights of the lessees; viii) Term of litigation for disputes on rent; x) Extension of the term of litigation. Conclusion The New TCO has introduced significant reforms to the legal framework governing residential and commercial leases. Although a few provisions favouring lessors have been introduced, the legal framework is still dominated by tenantfriendly provisions. However, in order to better understand the practical impact of the reform, the interpretation of new provisions by the courts shall be observed for a couple of years. On a final note, the concept of commercial lease shall be introduced to Turkish legal framework governing leases since one size definitely does not fit all. ix) Provisions in lease agreements to the detriment of the lessees; and 2012/I 114

LEGAL TEAM Ahmet Öztürk aozturk@yukselkarkinkucuk.av.tr Ahu Pamukkale Günbay agunbay@yukselkarkinkucuk.av.tr Alize Dikmen Tufan atufan@yukselkarkinkucuk.av.tr Aydın Metin ametin@yukselkarkinkucuk.av.tr Ayla Özenbaş ayla.ozenbas@dlapiper.com Ayşe Nur Şanlı asanli@yukselkarkinkucuk.av.tr Ayşegül Solmaz asolmaz@yukselkarkinkucuk.av.tr Batuhan Uzel buzel@yukselkarkinkucuk.av.tr Berat Hamzaoğlu bhamzaoglu@yukselkarkinkucuk.av.tr Bünyamin Yılmaz byilmaz@yukselkarkinkucuk.av.tr Burak Özdağıstanlı bozdagistanli@yukselkarkinkucuk.av.tr Cansu Atikcan iatikcan@yukselkarkinkucuk.av.tr Ceren Berispek cberispek@yukselkarkinkucuk.av.tr Cüneyt Yüksel cyuksel@yukselkarkinkucuk.av.tr Derya Taşdemir Evin dtasdemir@yukselkarkinkucuk.av.tr Dilek Nazikoğlu dnazikoglu@yukselkarkinkucuk.av.tr Ece Sarıca esarica@yukselkarkinkucuk.av.tr Eda Yıkılmaz eyikilmaz@yukselkarkinkucuk.av.tr Efe Önde eonde@yukselkarkinkucuk.av.tr Ekin Gökkılıç egokkilic@yukselkarkinkucuk.av.tr Elifcan Argün eargun@yukselkarkinkucuk.av.tr Emrah Karadağ ekaradag@yukselkarkinkucuk.av.tr Emre Çizioğlu ecizioglu@yukselkarkinkucuk.av.tr Ezgi Özdemir eozdemir@yukselkarkinkucuk.av.tr Ferda Dumrul fdumrul@yukselkarkinkucuk.av.tr Ferhan Karadeniz fkaradeniz@yukselkarkinkucuk.av.tr Francesco Ferrari francesco.ferrari@dlapiper.com Fulya Özgener fozgener@yukselkarkinkucuk.av.tr Furkan Ünsal funsal@yukselkarkinkucuk.av.tr Gizem Göker ggoker@yukselkarkinkucuk.av.tr Gökhan Gökçe ggokce@yukselkarkinkucuk.av.tr Gözde Erdoğan gerdogan@yukselkarkinkucuk.av.tr Gözde Kayacık gkayacik@yukselkarkinkucuk.av.tr Gülce Saydam gsaydam@yukselkarkinkucuk.av.tr Gülendam Gülseven ggulseven@yukselkarkinkucuk.av.tr Günel Rzayeva gunel.rzayeva@dlapiper.com Halil Emre Önal honal@yukselkarkinkucuk.av.tr Hazal Korkmaz Hikmet Özkaya İbrahim Yamakoğlu İrem Akgün Jonathan Clarke Kaan Gürer hkorkmaz@yukselkarkinkucuk.av.tr hozkaya@yukselkarkinkucuk.av.tr iyamakoglu@yukselkarkinkucuk.av.tr iakgun@yukselkarkinkucuk.av.tr jonathan.clarke@dlapiper.com kgurer@yukselkarkinkucuk.av.tr Katharina Cihan Akyürek kozsen@yukselkarkinkucuk.av.tr Kübra Kalsın Levent Belli Melek Onaran Yüksel Merve Arslan kkalsin@yukselkarkinkucuk.av.tr lbelli@yukselkarkinkucuk.av.tr myuksel@yukselkarkinkucuk.av.tr marslan@yukselkarkinkucuk.av.tr Merve Çıkrıkçıoğlu mcikrikcioglu@yukselkarkinkucuk.av.tr Muharrem Küçük mkucuk@yukselkarkinkucuk.av.tr Murat Karkın mkarkin@yukselkarkinkucuk.av.tr Murat Öztürk mozturk@yukselkarkinkucuk.av.tr Mustafa Yiğit Örnek yornek@yukselkarkinkucuk.av.tr Nejdet Uslu nuslu@yukselkarkinkucuk.av.tr Nihan Palta npalta@yukselkarkinkucuk.av.tr Nilay Akçay nakcay@yukselkarkinkucuk.av.tr Onur Yalçın oyalcin@yukselkarkinkucuk.av.tr Oya Uğur ougur@yukselkarkinkucuk.av.tr Özlem Altay oaltay@yukselkarkinkucuk.av.tr Seda Eren seren@yukselkarkinkucuk.av.tr Selen Sümer ssumer@yukselkarkinkucuk.av.tr Sena Nur Çelik scelik@yukselkarkinkucuk.av.tr Serkan Saygılı ssaygili@yukselkarkinkucuk.av.tr Serpil Doğan sdogan@yukselkarkinkucuk.av.tr Seteney Nur Öner noner@yukselkarkinkucuk.av.tr Simel Sarıalioğlu ssarialioglu@yukselkarkinkucuk.av.tr Simin Yalçıntaş syalcintas@yukselkarkinkucuk.av.tr Sinem Teoman steoman@yukselkarkinkucuk.av.tr Soner Dönmez sdonmez@yukselkarkinkucuk.av.tr Süleyman Mert Soysal ssoysal@yukselkarkinkucuk.av.tr Tamsyn Mileham Tuğçe Aslı Turçal Zeynep Ergün Zeynep Şener tamsyn.mileham@dlapiper.com tturcal@yukselkarkinkucuk.av.tr zergun@yukselkarkinkucuk.av.tr zsener@yukselkarkinkucuk.av.tr Hatice Ekici hekici@yukselkarkinkucuk.av.tr 2012/I 115

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