"If you or your business is interested in doing legal transactions in Turkey..."
2008/08/26 | Ceyda Akbal
Legal Environment for Foreign Investments in Turkey
This memorandum briefly summarizes the following legal topics which are important for the investments of foreign investors in Turkey:
I. FORMS OF ENTERPRISES
The Turkish Commercial Code (the “TCC”) recognizes two distinct types of business enterprises: (i) partnerships, and (ii) companies. The legal differences between the two are related to the allocation of liability and the legal identity of the entity. Companies have a separate legal entity and provide their shareholders limited liability. A company is the most preferred form by foreign investors for their investments in Turkey.
A. Companies
Business structures with limited liability consist primarily of joint stock companies and limited liability companies. Both limited liability companies and joint stock companies are independent legal entities. Both may be 100% foreign owned. Minimum capital to be contributed to a limited liability company is five thousand Turkish Liras and for a joint stock company fifty thousand Turkish Liras.
A minimum of five shareholders, who may be either real persons or legal entities, are required to establish a joint stock company. When the number of shareholders of a joint stock company exceeds 250, the joint stock company is treated as a publicly traded company and becomes subject to the provisions of the Capital Markets Law.
The articles of association are the document governing joint stock companies. Issues not addressed in the articles of association are governed by the TCC. The shareholders of a joint stock company are afforded significant flexibility in drafting the articles of association, thereby serving the needs of the specific venture. Shareholders may also sign a shareholders’ agreement on contractual matters which they do not want to make part of the public records.
Once the articles of association have been drafted and signed by the shareholders, they are notarized and submitted to the local trade registry for registration. The company is registered at the trade registry and this registry is published in the Trade Registry Gazette within 15 days following the registration. A company is officially established at the time of its registration at the trade registry.
The capital of a joint stock company is divided into shares of equal value, which are treated as negotiable commercial paper. The shares may be either registered or bearer form. Shareholders may establish various classes of shares and allocate specific voting, dividend and liquidation privileges to such classes. Shares are issued for cash or capital in kind contributions. Shares issued for capital in kind contributions cannot be transferred for a period of two years.
By law, the general assembly of the shareholders has ultimate control of a joint stock company because it has the most important powers, such as laying down and amending the articles of association, increasing and decreasing capital, appointment of directors and auditors, specifying the term of duty and the number of directors and auditors (unless otherwise stated in the articles of association), passing resolutions on the net profit, etc. Such powers are not transferable to other organs of a joint-stock company. The only statutory obligation of a shareholder is the payment of its capital participation, as and when called by the board of directors. If a shareholder does not pay its capital contribution when due, its shareholder rights can be revoked by a resolution of the board of directors. The liability of shareholders for obligations of a company is limited to their capital participation such that if a company becomes insolvent, shareholders cannot be held liable with their personal assets.
The executive body of a joint stock company is the board of directors, which consists of at least three members. It conducts current business and represents the company externally. The board may either manage the company directly or may arrange for the management to be carried out by the appointed members or the assigned managers. Decision-making in a joint stock company is by majority vote, but the TCC includes certain provisions to protect minority interests. Specific quorum and majority requirements for the board may be provided for in the articles of association. Proxies are not allowed but it is possible to pass a resolution without convening a meeting if all directors approve the resolution in writing and waive their right to request a formal meeting.
Board members are responsible to the company, the shareholders and the creditors for any failure in the performance of their duties and the losses they inflict on the company. The liability is based on fault and the legal basis of an action introduced against a board member would be breach of contract. This means that board members are jointly and severally liable unless a board member proves that the fault cannot be attributed to him in a certain transaction.
A joint stock company must have 1 to 5 statutory auditors who have a duty to verify that the statutory books have been properly kept and that the accounts have been registered in accordance with the scope of the company objectives. The majority of the statutory auditors must be Turkish. Statutory auditors are internal and different from external auditors. A joint stock company may contract with an external auditor for the auditing of the financial statements. However, external auditors cannot assume the duties of internal auditors and cannot replace them. Limited liability companies require a minimum of two shareholders, but may have no more than 50 shareholders. Limited liability companies may not issue shares in the capital markets, and their establishment and operating procedures are simpler than those for joint stock companies.
The three permissible types of corporate shares include share certificates, privileged share certificates and redeemed share certificates. Holders of privileged share certificates may receive a dividend or liquidation share greater than the share of capital invested and may have a privilege to vote in management decisions.
The TCC requires that joint stock companies and limited liability companies maintain two legal reserves. The legal reserves protect the rights of third parties by increasing the amount of owners’ equity. Each year, joint stock companies and limited liability companies must allocate 5% of their corporate profits, as calculated under the provisions of the TCC, to the first legal reserve. The 5% allocation must be contributed until the first legal reserve equals 20% of the company’s paid-up share capital. The TCC also requires that an amount equal to 10% of the amount distributed to shareholders be allocated to a second legal reserve.
B. Partnerships
Partnerships may be formed as ordinary partnerships or as partnerships regarded as commercial companies. All ordinary partnerships and commercial companies are subject to the provisions of the Turkish Code of Obligations and the TCC.
An ordinary partnership does not have a legal entity. It is formed by a group of entrepreneurs pursuant to an agreement, which has no impact on third-party relationships. Ordinary partnerships do not have their own trade name, nor do they appear in the trade registry or title deed. The partners of an ordinary partnership jointly own the assets of the partnership, and have unlimited personal liability for partnership debts.
A partnership regarded as a commercial company is a legal entity with a legal personality independent from its partners, and may be either a limited or general partnership. In a limited partnership, one or more of the active general partners is liable for the partnership’s debts without limitation, while one or more of the limited partners are liable only up to the amount of the partner’s capital contribution to the partnership. This type of business organization is rarely used. In a general partnership, the company is the first party liable for the partnership debts, followed by the general partners. For partnerships that are regarded as commercial companies a written agreement is mandatory.
II. FOREIGN INVESTMENT LEGISLATION
The foreign direct investment law no. 4875 (the “Foreign Direct Investment Law”) emphasizes the key elements of the liberal investment environment in Turkey. A notification based system, rather than an approval based system, has been established with the Foreign Direct Investment Law. A foreign capital company is required to send to the Foreign Investment General Directorate of the Undersecretariat of Treasury a “Foreign Direct Investments Operations Data Form” after its establishment and not later than end of May every year. The form contains questions on some statistical information such as the capital and operations of the company.
The Foreign Direct Investment Law guarantees the principle of “equal treatment” for domestic and foreign investors. All companies established with foreign capital contributions and under the rules of the TCC (existing and newly established foreign companies) are regarded as Turkish companies. Therefore equal treatment both in rights and responsibilities is applicable to all such companies. Freedom to transfer of profits, dividends, proceeds from sale or liquidation of an investment, fees and royalties, interest payments on foreign loans and freedom to employ foreign personnel are set forth in the Foreign Direct Investment Law.
III. REAL ESTATE ACQUISITIONS
A. Acquisitions by Turkish entities with foreign capital
On April 16, 2008, the Constitutional Court annulled Article 3(d) of the Foreign Direct Investment Law which states that the companies established in Turkey by foreign legal entities or individuals or the companies in which foreign legal entities or individuals participate may freely acquire real estate or obtain rights in rem on real estate in Turkey. Real estate acquisitions by Turkish companies owned by foreign legal entities or individuals are regulated by the Article 36 of the Title Deed Law No. 5782 (the “Title Deed Law”) replacing the annulled Article 3(d) of the Foreign Direct Investment Law. According to the new law, Turkish companies with foreign participation are entitled to acquire real estate or right in rem on real estate in Turkey in order to perform their activities set forth in their articles of association.
Such companies may also acquire (i) lands that are located in military prevented zones, security zones or strategic zones, subject to the permission of the Chief of the Military Forces in accordance with the provisions of the Law on Military Prevented Zones and Security Zones, and (ii) lands that are located in special security zones, subject to the permission of the relevant governorship in which such land is located.
B. Acquisitions by foreign individuals and legal entities.
Pursuant to the Title Deed Law, foreign individuals are entitled to acquire real estate in Turkey provided that the real estate to be acquired (i) will be used for residential purposes or as a job-site, (ii) is located within the boundaries of an implementation zoning plan or a regional plan, and (iii) there is reciprocity with respect to the purchase of real estate between Turkey and the home country of the purchaser (i.e. a Turkish citizen is entitled to purchase real estate in the home country of the purchaser).
In addition, the acquisition of real estate is limited to 2.5 hectares per individual and it is not permitted to acquire real estate in military zones and, strategic regions, agricultural areas, mining zones and in regions having flora and fauna determined by the Government.
Pursuant to Paragraph 2 of Article 35 of the Title Deed Law, foreign companies can also acquire real estate in Turkey, except for the limited circumstances stated in the laws such as the Privatization Law, Mining Law, Petroleum Law, Tourism Incentive Law, Law on National Parks, Electricity Market Law, and Industry Zones Law. Foreign legal entities other than companies incorporated for commercial purposes can not acquire real estate or can not obtain rights in rem on real estate in Turkey.
Another limitation set forth in the Title Deed Law is that the rate of the total area of the land owned by foreign individuals and companies to the total area of the relevant province which is set forth in the zoning plans cannot exceed 10%. The Government may decrease this rate in certain provinces by taking into account their infrastructural, economic, environmental, cultural, agricultural, etc. significance.
IV. PRIVATIZATIONS AND LEGAL CHALLENGES TO PRIVATIZATIONS
Privatization in Turkey is regulated pursuant to the privatization law no. 4046 (the “Privatization Law”). The privatization process is carried out by two bodies: (i) the Privatization High Council, (the “PHC”), which is the decision making authority, and (ii) the Privatization Administration (the “PA”), which is the authority executing the decisions of the PHC, and advising PHC on the nomination of state owned economic entities in or out of the privatization portfolio and their restructuring for privatization.
Privatization decisions, like all the other administrative acts, may be challenged before administrative courts by any person with standing to challenge within a 60 days period. The decisions of the administrative courts may be appealed before the Council of State (Danistay).
Administrative courts may first suspend a privatization decision by issuing an injunction before rendering their final decision. The injunction decision is rendered after considering (i) the likelihood of success of the lawsuit, and (ii) the harm that would be caused by the failure to enjoin in rendering an injunction decision and allowing the execution of the privatization decision. After the injunction, the court granting the injunction continues to hear the case, and the injunction stays in place until the court has rendered its final decision, but meanwhile the privatization cannot be implemented.
In the event a privatization decision is annulled by an administrative court, such administrative act becomes retroactively null and void. There have been a number of cancellations of privatization tenders and sales by courts which were rendered after the relevant sales were concluded.
This is likely when the competent court does not initially grant an injunction halting the sale, because conclusion of the underlying litigation will generally take at least six months and may take up to two years. In many of these cases that we are aware of, the PA chose not to implement cancellation decisions rendered by courts after their sales were concluded. However the PA may change this approach in the future. For further information on the privatization in Turkey and the entities in the privatization portfolio, please refer to www.oib.gov.tr.
