Lecture handout Artemel / AD 232.

01

THE LAW OF FDI IN TURKEY

AND

PRIVATE EQUITY INVESTMENTS

Contents of this handout:

1. A brief history of FDI in Turkey
2. The Law of FDI in Turkey
2.1 The 1954 Legislation
2.2 In between the 1980s and 2003
2.3 The Law of 2003
2.4 The law of 1954 and the law of 2003 compared
2.4.1 The principal distinctions between the two laws
3. FDI and Turkish Company Law
3.1 The ‘visible’ types of investment
3.2 The ‘less visible’ types of investment
4. Significance of shares and shareholding
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~♦~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The aim of this lecture and handout:

a) To examine:
→ FDI and the law in Turkey (following from the last lecture where FDI and the
legal setting for which was examined in the international context tracing it down from its
origins down to present day developments.
→ Venture Capital as a form of investment within the framework of FDI and
familiarise ourselves with the technical terms as well as the concepts which will
serve as a stepping stone for moving on to the topic of Turkish company law
b) To prepare the groundwork for the next lecture:
→ On the various types of companies that may be established under Turkish law
focusing on their respective (her biriyle ilgili olarak) characteristics as well as legal
features and requirements.

? Reading material provided in connection with this lecture:

7 Chapter 11 in Introduction to Turkish Business Law (by Ansay and Schneider)
; Report prepared by Murat Taşçı, Analyst at Is Private Equity Investment Trust on
Venture Capital
; The current FDI law both in Turkish (as well as the English translation from the
CMB (Capital Markets Board; Sermaye Piyasasi Kurulu) in Turkey)
5 International Investors Association (YASED) Barometer Survey Results (2009-I)
for an extremely recent analysis of investor sentiment in both English and
Turkish
! Additional useful link to FDI in Turkey:
http://www.yased.org.tr/webportal/English/Pages/MainPage.aspx

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Notes:
In this handout:
a) Attention should be paid to legal terms and expressions in order to gradually become
familiar with specific legal terminology and concepts
b) Where deemed appropriate, the Turkish equivalent of certain terms have been provided
for the convenience of students

1. A brief history of FDI in Turkey

Various concessions (imtiyaz-lar) allowed to foreign individuals and companies during the
Ottoman Empire which have enabled these individuals and companies to invest in the Empire by
setting up businesses or injecting capital to various institutions such as the Ottoman Bank, may
be seen as measures to encourage what we commonly refer to today as ‘foreign direct
investments’.

As mentioned in the previous lecture, the term ‘foreign direct investment’ (dogrudan yabanci
yatirim) became the commonly accepted expression to refer to a range of activities undertaken
by a foreign entity (i.e. a legal person such as a company or a real person (gercek kisi, sahis), an
individual) (kisi, varlik; legal entity: tuzel kisi, hukuki varlik). The term is also, generally
associated with and brings to mind, the body of measures which are adopted by the host
(evsahibi) or recipient country in connection with this phenomenon.

As mentioned in the previous lecture, the institutionalisation (kurumsallasmasi) of this

phenomenon in the shape and form that we have come to know it today, can be traced back to
the aftermath of the 2nd World War and the establishment of international financial
organisations that were set up to encourage (tesvik, destek) the flow of capital (sermaye akisi)
around the world.

In the case of Turkey, notable dates may be listed as follows:

1950s The Marshall Plan through which capital funds (sermaye fonlari) injected into the country
as in other parts of Europe with a view to assist in the reconstruction efforts following
the war
1952: Turkey joins NATO
1954: Turkey hosts USAF air base
1954: Law on the Encouragement of Foreign Capital No.6224
1959: The first Business Administration School in the country is established at Robert
College (on the same campus where stands today Bogazici University)
1980s: Several decrees (kararname) supplementing the 1954 ‘Investment Law’
2003: Foreign Direct Investment Law No. 4875

2. The Law of FDI in Turkey

2.1 The 1954 Legislation
The first piece of legislation (mevzuat) designed to encourage investments by foreign investors
is the 1954 Law.
The formal title of the law is as follows:
Law on the Encouragement of Foreign Capital No.6224 (6224 sayılı Yabancı Sermayeyi Teşvik
Kanunu)

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2.2 In between the 1980s and 2003

The next wave of legislation comes in the 1980s when the country undergoes radical
liberalisation movements as in other parts of the world. The liberal (free) environment where
capital moves from one country to another requires flexibility and a safe as well as predictable
playing ground (hareket sahasi, oyun sahasi). In order to benefit from the increasing flow of
capital from capital-exporting countries (sermaye ihrac eden ulkeler), new measures to keep
apace with economic developments and investment trends in the world were adopted by
successive governments in Turkey. These new measures (onlem-ler) and regulations (duzenleme-
ler) were issued in the form of communiqués (letter/notice that provides guidance on the
application of a law; teblig, tâmim, genelge) and decrees rather than passing a new law on the
subject (see for example Decrees No.8/168 (1980); No.86/10353 (1986); No.95/6990 (1995);
Communiqués No.2 (1995); No.3 (1996) and the establishment of the General Directorate for
Foreign Investment [Yabancı Sermaye Genel Müdürlüğü] (generally referred to as the Foreign
Investment Directorate (FID)) under the Undersecretariat of the Treasury) [Hazine
Müsteşarlığı]).
.
2.3 The Law of 2003
Law No. 4875 on Foreign Direct Investment (4875 sayili Dogrudan Yabanci Yatirimlar Kanunu) (to
be referred to in the handout as the ‘Foreign Direct Investment Law (or FDI)) which came into
force in 2003 is the existing law that regulates (duzenlemek) foreign investments.

2.4 The law of 1954 and the law of 2003 compared

Laws reflect to a great extent the underlying political and economic environment and cannot be
isolated from the social context in which they are prepared and put into force. In this sense
both the 1954 and the 2003 laws shed light to a certain degree on the reigning policies in
respective times.
Note: By way of comparison, as an illustration (example; ornek) the wording and the content in
Article 1 (a) and (b), subparagraph 3 (Madde 1/a ve 1. Madde, b fikrasi, 3. bendi – the article, the
paragraph as well as the subparagraph referred to has been used as is the custom and manner
for quoting such articles in the respective legal cultures; this often gives rise, particularly in the
Turkish as to the order of precedence and Turkish terminology when referring to
paragraph/section (fikra) and subparagraph/subsection (bent) of the 1954 Law may be
interesting to mention in passing:
In the original Turkish text (where both of the following clauses have been removed):
‘Memleketin iktisadi inkisafina yararli olma’ and
‘yabanci sermaye, ulke capinda tekel teskil edecek faaliyetlerde bulunan kuruluslarda cogunluk
hissesine sahip olamaz’

2.4.1 The principal distinctions between the two laws

♦ The term ‘foreign investor’ has been re-defined to include Turkish nationals who reside
abroad.

♦ Except for setting up liaison offices (irtibat burosu), the approval based system has been
removed in the 2003 law and replaced by one based on notification (bilgilendirme) where the
Undersecretariat of the Treasury is informed of the investment

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♦ Minimum foreign capital requirement of USD 50,000 has been abolished (kaldirildi) in the
2003 law

♦ Within the definition of ‘foreign investments’, new forms of investments have been included:
• Purchase (alim) of a certain amount of shares (hisse) on the stock exchange (borsa;
menkul kiymetler borsasi) (apart from the obvious case of purchase of shares when a
company participates in a Turkish company by buying a proportion of existing shares
– the emphasis here is on those purchased on the stock exchange; this was an area
which was not previously covered by the former law and was not defined as a form of
FDI)
Note: Technically, such investments made in the form of purchase of shares on the
stock exchange, come under the definition of ‘portfolio investments’ (portfoy yatirim-
lari) or ‘indirect investments’ as opposed to ‘direct investments’. This, in turn, might have
distorting effect when actually assessing the amount of ‘direct investment’ as such. It
should also be added that privatisation related investments would normally also come
under portfolio investments i.e. as a form of indirect investment.

♦ Foreign investors are not confined to establishing only joint-stock corporations (Anonim
Sirket) or limited liability companies (Limited sirket); under the current law they can either
set up (or participate in an existing Turkish company) any other form of company structure
just as any other Turkish company (i.e. 2 other types of ‘company’ or partnership options –
which will be examined in our next lecture)

3. FDI and Turkish Company Law

The nature of FDI, at the expense of oversimplification can be thought of under two main
categories:
3.1 The ‘visible’ types of investment
♦ The act of bringing in machinery (makine) or equipment (techizat) (as well as industrial and
intellectual property rights (Sinai ve fikri mulkiyet haklari), including know-how and trade
secrets (ticari sirlar), which are all in fact and by contrast to the heading of this subsection
‘intangible’ (soyut; elle tutulamayan) rights– a topic which is proposed to be covered as a
special topic in AD 480 at summer school under Special Topics in Management under the title
of ‘Legal Aspects of Intellectual Property Management) or

♦ The exercise of rights obtained from the Turkish government with respect to the
exploration and extraction of natural resources (as in the case of mines or oil fields)

3.2 The ‘less visible’ types of investment

♦ The establishment of a new company in Turkey or
♦ Participating in an already existing Turkish company

It is through this ‘less visible’ category that we may conveniently shift to an examination of
Turkish company law. It is suggested that this form of activity is less visible as opposed to types
of investment activities that involve almost a purely physical act such as digging a mine.

In either the establishment of a new company or becoming part of another company which is
already in existence, what may be described as a less outwardly physical investment activity
takes place. In each of the above cases, the foreign investor makes a foreign investment by
paying a sum of money (a monetary investment) in return for either the entire or part of the
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share capital (the value of the assets (varliklar) of a company held as shares; sermaye payi) in a
company.

4. Significance of shares and shareholding (sirketin hisse senetlerinden elinde bulundurma;

hissedar olma)

A share is defined in the Dictionary of Law by Peter Oollin Publishing (as recommended in the
syllabus) as follows (including simple definitions for particular types of shares which confer
(saglamak, bahsetmek) various rights depending on the nature of the share:

‘One of many parts into which a company’s capital is divided, owned by shareholders’
Examples for use of the word ‘share’ in this sense (as is provided in the Dictionary of Law
following the definition):
‘He bought a block of shares in Marks and Spencer’;
‘Shares fell on the London market’;
‘The company offered 1.8m shares on the market’

The right to own shares is also a crucial criteria in certain foreign direct investments and has
accordingly been explicitly provided for in the Law of 2003 (see the attached Law which has
been supplied both in English and Turkish):

In the English text:

Article 2 (b) (ii): Share acquisitions, where the foreign owner owns 10 percent or more of the
shares or voting power …; and
Article 2 (b) (1): Stocks and bonds of foreign companies

In the original Turkish text:

Madde 2/b/ii: Menkul kiymet borsalari disinda hisse edinimi (meaning other than those obtained
over the stock exchange i.e. buying shares of a company which is not on the stock exchange,
which in turn means not a company whose shares are not offered to the public at large which in
turn means that the company is, as the technical term goes, not ‘quoted’ on the stock exchange,
or not a ‘publicly held company’) veya menkul kiymet borsalarindan en az % 10 hisse orani ya da
ayni oranda oy hakki saglayan edinimler yoluyla mevcut bir sirkete ortak olmayi…’

M&A’s (Mergers and Acquisitions) as they are often referred to in the business and finance
world, which are also a common occurrence in the context of FDI, involve the acquisition (edinim;
elde etme) of the shares of a company by another.

Venture Capital (VA) is another mechanism whereby, an investor may inject capital into another
company by means of purchasing shares in the company into which capital is injected.

Venture capital which will be examined as a case-study involves the provision of finance to a
company where (a degree of risk may be involved) and therefore is often referred to as ‘private
equity’.

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