In short: guarantees and collateral for acquisition financing in Turkey

Guarantees and guarantees

Linked company guarantees

Are there any restrictions on providing related corporate guarantees? Are there any limits on the ability of affiliated companies registered abroad to provide guarantees?

In addition to the prohibition of financial assistance, which may invalidate collateral or guarantees provided by target companies to third parties to facilitate the acquisition of their own shares, there are no restrictions on guarantees granted by related parties resident in Turkey. or abroad, provided that such a guarantee, which will be considered a transaction with related parties, should be made at arm’s length and in accordance with transfer pricing rules. Whether the prohibition on financial assistance applies to intragroup collateral and guarantees is debatable among legal experts. Although no precedent has been set to date on this issue, the Turkish Commercial Code explicitly allows intra-group pledges and guarantees if the losses of the security provider are compensated by the parent company. Thus, in the authors’ opinion, this exception should be assessed on a case-by-case basis by acquisition financiers and their advisers.

Target assistance

Are there specific restrictions on the target providing guarantees or sureties or financial assistance in connection with an acquisition of its shares? What steps can be taken to enable such actions?

Transactions entered into by (target) joint-stock companies to provide, in a non-exhaustive manner, advance payments, loans, guarantees or guarantees for the acquisition of their own shares by a third party will be deemed null and void in accordance with the Turkish Commercial Code. Financial aid granted by banks or financial institutions in the normal course of their activities for the acquisition of their own shares and the acquisition of shares by employees of the company or its subsidiaries are exempt from the prohibition on ‘financial aid. On the other hand, if such operations reduce the capital reserves which must be established by law or the company’s articles of association; violate the rules relating to the use of legal reserves; or not allowing the company to affect the legal reserves required by law, these exceptions will also lapse.

There are no explicit conditions or money laundering procedures under Turkish law regarding the prohibition of financial aid or its recourse. As such a prohibition does not apply to limited liability companies, the requested guarantee may be provided by limited liability companies rather than by joint stock companies. To this end, the target company can be transformed into a public limited company prior to carrying out financial assistance operations. Although there is no judicial precedent blessing any of them, the alternatives suggested by legal doctrine are an upstream merger of the target company into the acquiring entity, an upstream or downstream merger of the acquiring company in the target company, the acquisition by the target company of its own shares in the acquiring company, and reduction of capital or distribution of dividends at the level of the target company. It is also common market practice to make target companies and buyers party to the facility agreements as joint and several debtors and guarantors. However, such an operation falls under the ban and therefore runs the risk of being considered null and void. The interpretation by Turkish courts as to whether these alternatives can be considered a circumvention of the law remains unclear, as no precedent has been set to date.

Types of security

What types of security are available? Are floating and fixed loads allowed? Can a general lien be granted on all the assets of a business? What are the typical exceptions to an all-asset grant?

A pledge on the shares of the target company is the most preferred guarantee in the context of acquisition financing, as it does not fall within the scope of the prohibition of financial assistance. Other common types of collateral are collateral on movable property, collateral on bank accounts, assignment of receivables (for example, dividends from the target company), mortgages, sureties or guarantees. Although a floating charge is allowed (for example, a movable pledge on the shares of a commercial enterprise) under Turkish law, a pledge on all the assets of the enterprise (global lien) cannot be established. . Alternatively, all current and future movable property of a business can be pledged without transferring user rights under a movable pledge agreement. In addition to movable property, each warranty must be granted separately, each type having its own requirements for validity and completeness.

Conditions for perfecting a security

Are there specific laws governing the improvement of certain types of collateral? What types of notice or other steps must be taken to pledge a security right?

Each type of guarantee provides for different requirements of validity and completeness:

  • a mortgage guarantee can only be provided by signing a written agreement in official form before the register of title deeds;
  • a pledge on movable property can only be established by signing a pledge contract, which is established electronically in the register of pledged movable property (TARES) before a notary, and by registering the corresponding contract on TARES ; and
  • to establish a pledge on the shares of the limited liability company, the pledge contract must be passed before a notary.

For pledges on the shares of the joint stock company, a written pledge agreement must be signed and share certificates (if issued) must be delivered to the pledgee.

A pledge on shares of listed public limited companies can be constituted by a written pledge agreement and electronic registration with the central registration agency.

A debt assignment agreement must also be executed in writing, preferably before a notary, to crystallize the date of completion.

Guarantees and sureties given by Turkish residents in favor of non-residents must be notified to the Turkish Ministry of Finance within 30 days from the date of issue. This notification is for statistical purposes only and does not constitute a requirement of completeness.

Renewal of security

Once a security interest is perfect, are there renewal procedures to maintain the validity and registration of the lien?

In principle, there are no renewal requirements for guarantees under Turkish law. Depending on the type of transaction or in accordance with the requirements of certain laws, the parties may choose to establish a guarantee for a limited period (for example, a mining permit mortgage cannot be constituted for a period longer than the term of validity of the mining permit). If this is the case, the warranty must be renewed or extended before the expiration of this period.

Consent of stakeholders for guarantees

Is there a “works council” or other similar authorizations required to approve the provision of guarantees or sureties by a company?

Turkish law does not require obtaining the consent of a works council or similar body for the provision of guarantees or other security by the company. However, if the collateral provider is a listed company and grants a pledge or guarantee in favor of third parties in the normal course of its business, the provision of such collateral or guarantee should be limited to its participation and approved by resolution. of the Board adopted with a majority vote of the independent directors.

Granting of a guarantee through an agent

Can collateral be given to one agent for the benefit of all lenders or must collateral be given to lenders individually, and then must changes be made on any assignment?

In principle, a guarantee can be granted in favor of all lenders on a pro rata basis, since the collateral is rights ancillary to the underlying obligations. However, although there is no explicit regulation on the concept of parallel debt in Turkish law, it is common for parallel debt structures to be included in financing transactions and for guarantees to be provided in favor of a financial institution. agent acting in the name and on behalf of lenders. If the pledge is pro-rated in favor of all lenders:

  • secured assets that require physical delivery (eg share certificates for pledging shares) will be held by one of the lenders in the name and on behalf of other lenders; and
  • In cases where a lender cedes its share to a new lender, the collateral agreements must also be changed and the new lender must adhere to the collateral agreement accordingly.

Turkish law also allows other types of collective guarantee agreements (eg joint creditors), which can be structured according to the specific needs of the parties to the transaction.

Protection of creditors before release of collateral

What protection is usually afforded to creditors before the collateral can be released? Are there ways to structure around such protection?

There are no explicit rules regarding the protection of creditors before the release of collateral. As a result, in some cases the discharge process can be time consuming and creditors should ensure that they have received and collected all outstanding debts before releasing their collateral.

Fraudulent transfer

Describe the fraudulent transfer laws in your jurisdiction.

Fraudulent transfers are generally governed by the Turkish Code of Obligations and Turkish Enforcement and Bankruptcy Law, under which any disposition made by an insolvent party and prejudicial to its creditors is considered null and void. Transactions in the two years preceding execution or insolvency which have been carried out without any consideration; in the year preceding execution or insolvency which included non-monetary payments, advances, deed restrictions or the posting of security for a debt then outstanding; and in the five years preceding the insolvency which were made with the intention of harming its creditors may be subject to cancellation.

Creditors must prove that the third party acquirer knew or should have known of the insolvent party’s financial situation and that the insolvent party was acting in bad faith or not in a prudent trader. However, bad faith on the part of the third party purchaser is presumed in business enterprise transfers and related party transactions. Fraudulent transfers by the deceased may also be subject to cancellation in accordance with the provisions of the Turkish Civil Code and the Turkish Code of Obligations.

Declaration date of the law

Correct on:

Please indicate the date on which the law stated here is correct.

February 5, 2021

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