Turkey’s newly relaxed commercial laws make it much easier for foreign firms to set up there, despite teething troubles with its implementation legislation
Back in 1956, the Turkish government enacted a commercial code, which governed the way businesses were established and run in the country. Under the rules, Turkey began its transition into a major economic player straddling Europe and Asia.
But about a decade ago it became apparent that the code was outdated and needed modernisation. The government set up a commission to look at what had to be changed, which got to work studying the laws of other countries and deciding what stayed and what went.
The process was a long one, and it took until this year for the new commercial code to finally come into force. It was implemented on 1 July but has been immediately followed by a raft of amendments, with more expected.
“It’s a complete overhaul,” says Bezen & Partners partner Nadia Cansun. “The 1956 code was completely outmoded and was not suitable at all for the current business environment.”
The overhaul was needed thanks to the massive increases in foreign investment into Turkey in recent years. Between 2005 and 2006, the value of foreign direct investment (FDI) doubled from $10bn (£6.3bn) to $20bn. FDI dropped off after 2008 but is back on the increase, rising from $9bn in 2010 to over $15bn last year.
Lawyers say their foreign clients often found the processes involved in setting up a subsidiary – or entering into a joint venture in Turkey under the old process – long, complicated and intensely bureaucratic.
A particular burden was the need for a joint stock company to have five shareholders and a limited liability company to have two, and the need to provide a long list of information about each of those shareholders.
“Lots of things that needed to be provided didn’t exist in other jurisdictions,” explains Cansun, adding that the process often bewildered foreign clients. “Not having to provide that information for five shareholders is going to streamline the incorporation process a little bit more.”
The new code eliminates the need to find several eligible shareholders for a company, reducing the requirement to one. It also establishes the concept of an independent board of directors after the abolition of the rule that directors also had to be shareholders in the company. The minimum number of directors has also been reduced from three to one, in line with EU legislation, and directors can now be legal entities as well as individuals.
“These are good things for foreign companies because it wasn’t easy for them to find three Turkish shareholders or board members,” says Sezin Turan, a principal at Cerrahoglu Law Firm.
Board meetings can now be held electronically, meaning foreign directors no longer have to travel to Turkey.
For the first time, the code introduces a requirement for companies to publish information online. Originally, this would have applied to all companies but, following an amendment, it will now apply only to those that will be independently audited. The introduction of independent auditing is also new, and the government is to announce which companies will have to meet this requirement.
Following that announcement, those companies will have to create a website to hold the required information. Turan says she welcomes the extra transparency this will give.
“I think the beneficiaries will be the people who are users of the commercial code or the potential investors because they should be able to see more clearly the conditions of the company and have greater access to more information in the public domain,” says Jonathan Blythe, a consultant with Şengüler & Şengüler Law Office.
Financial reporting will now be subject to International Financial Reporting Standards (IFRS), which Cansun says is not too much of a burden as it is reasonably similar to Turkish GAAP (generally accepted accounting principles).
“It’s trying to standardise the reporting requirements in this country with what’s used in other European jurisdictions,” she says.
Liability rules have also been shaken up. In the old code, individual board members were liable for their activities in the case of the company being sued – but now the companies will be liable. This also applies to outstanding debt, adds Bener Law Office partner Onur Küçük.
“This is a very new concept for us. Even though the parent company isn’t in Turkey, it could be sued by the shareholders in Turkey,” says Turan of the liability rules.
“The relationship between the company and the shareholder is also more regulated now. Historically, shareholders were using the company as their bank, using the assets for their personal needs. Now it’s more regulated,” Küçük adds.
Penalties for breaking the code’s provisions are relatively light. The original draft was much tougher, with prison sentences threatened for many breaches of the code, but the amendments mean that fines are now more likely.
“In the first version of the law there were very severe penalties but the government has amended all these provisions,” confirms Turan.
While lawyers are generally positive about the code, there are some elements which they have concerns about. These include the rules on acquisition finance, which currently prohibit a company from using the asset being purchased as collateral.
“We believe this will have a negative impact on acquisition finance, especially leveraged buyouts,” says Küçük.
His partner, Kuthan Öter, adds that companies will have to find something else to use as collateral. While this aspect of the legislation is similar to German laws, Öter notes that EU rules mean it is easier for companies there to find a way around the problem.
Turan identifies more onerous provisions governing agency agreements and non-compete obligations for agent companies as a potential issue.
“I don’t think the agents or the principals are aware of these new obligations,” she says, adding: “It wasn’t regulated in the commercial code before.”
The process of bringing the new code into force also gives rise to criticism. Quite apart from the length of time spent debating, discussing and drafting, the implementation process itself has been slow and cumbersome.
Blythe identifies problems with the implementing legislation in particular. “One of the main things that we see in practice is that the final version of the provisions related to the code didn’t come into force until the night before the code was meant to come into force,” he says. “There was some debate about whether they might postpone the implementation of the law, but they didn’t.”
“The difficulty seems to have been that it’s dragged on for a very long time. There’s a lot of theoretical stuff in there but how that plays out in practice wasn’t addressed in the draft,” adds Cansun.
Turan says the amendments needed as a result of the law being rushed through are being issued “very slowly”, although most, if not all, should have been published by the time this article is published.
Blythe says the uncertainty resulting from not having the implementing regulations passed in time has led to a confusing summer for lawyers trying to advise companies wishing to set up in Turkey.
He says Şengüler’s first client following the implementation of the code was a foreign investor company, establishing in Turkey with one shareholder under the new rules. The Turkish investment agency Invest in Turkey says it is possible to establish a company in a single day, by taking the necessary documents to a registry office – but Blythe says it took two to three weeks for the Şengüler client.
“We had to go back and amend this, that and everything else,” says Blythe. He thinks this was because the Istanbul trade registry itself was unclear on what needed to be completed to get the registration through.
“Things are improving, which is good, but it has been a little bit of a bumpy ride and the main reason for that was the lack of implementing legislation,” he adds.
Cansun says she would welcome more centralisation within the registries, rather than having a different registry for each part of Turkey, and a way of filing things online. She acknowledges that Turkey is trying to improve the infrastructure but there is a way to go yet.
“That’s always a difficult thing to explain to the client,” she says. “I think the actual infrastructure around this new legislation will need to change and there will need to be a centralised registry.”
Like Blythe, she says Bezen has found that the process of incorporation has been slow since the introduction of the new code.
“Change always brings a period of uncertainty. The problem is that nobody in the registry knows how to interpret certain things,” Cansun says.
However, for lawyers, uncertainty can be a good thing. For much of the past year, clients have been seeking guidance from their advisers ahead of the introduction of the new commercial code about what they will need to do to comply with it.
“I don’t think that’s a great big money earner – it’s just good client service,” Cansun says. “I think it’ll be interesting as people start doing deals in the new environment to see how the practice develops.”
Küçük says training in the concepts introduced by the new code is essential, for clients, lawyers, judges and others, such as the officials who work in the trade registries.
“They need to be well understood by practitioners. We have to understand the purpose of each specific provision when we’re evaluating each specific matter,” he says.
“Everybody is trying to minimise the effect of the new code. There will be a transition period, of course. I totally appreciate the efforts the Ministry of Justice is putting in to minimise the downsides of changing the code,” Küçük adds.
Cansun says she would welcome more collaboration between lawyers to ensure that everyone is interpreting the new provisions in the same way.
“You need to have some sort of consensus and you can only get that from asking other practitioners,” she says. “The one thing that people might start doing a bit more is using Turkish professors as of counsel to try to get a bit of a spin on how this might be interpreted. In another six months, things will have to be tested.”
Blythe also notes that the legal and business communities may have to wait to see how the provisions work in practice, especially as jurisprudence established under the old code no longer applies.
“One of the main knock-on effects is that we’ve all had to throw out our libraries with regard to the old commercial code. It’s a redraft and a change and a substantial revision to the old one. The previous jurisprudence isn’t necessarily always going to apply to the new provisions so it’s a question of waiting for a while,” he says.
While practitioners are generally united about the need for the new code and its hopefully positive effect on encouraging foreign companies to invest in Turkey, they are divided on the issue of whether there was enough consultation before the law’s introduction.
“There were many gaps in the law that weren’t discussed in detail. Even the universities and law firms weren’t involved in these discussions,” claims Turan.
Cansun agrees more consultation would have been useful. “I find it a bit odd that you could bring in such an important piece of legislation without consulting the people who will work with it on a practical basis,” she argues.
But Küçük and Blythe both say they are happy with the amount of consultation around the code. Küçük says the lawyers involved in the drafting process are “sophisticated”, while Blythe specifically picks out corporate lawyer Unal Tekinalp, who chaired the committee working on the law.
Exactly how much impact the new commercial code will have on the Turkish business environment remains to be seen. However, just a few weeks after its implementation, the general feeling is that it is a good thing for the country and should help Turkey maintain its attractiveness in the eyes of foreign investors going forward.
Turkey: key facts
GDP (current US$, 2011): 773.1bn
Annual inflation (August 2012): 9.3 per cent
Population (December 2011): 74724269
Life expectancy at birth: 74
Unemployment rate (May 2012): 8.2 per cent
Source: World Bank, Turkish Statistical Institute