Frequency of M&A disputes
The frequency of disputes largely depends on market conditions and M&A literacy. Turkey’s attractiveness to investors over the past two decades has naturally resulted in an increase in M&A transactions. The total disclosed number of deals realised in Turkey was 75 in 2019 and 83 in 2018. The total transaction value also decreased in 2019, although, including the estimates for deals with undisclosed values, it is anticipated that the total transaction value in 2019 was US$5 billion. The decrease in 2019 is the consequence of many socio-economic and political factors. In 2019, the world experienced several economic, political and security issues, such as the US-China trade tension, Brexit (the UK is one of Turkey’s most significant trade partners), a recession risk for the German economy, and increasing uncertainty about the EU’s future. Turkey, like other developed and developing countries, felt the aftershock of these events. As such, the decrease of transactions and total transaction value from year to year is understandable and recoverable. Additionally, at the beginning of 2020, the covid-19 pandemic disrupted the global economy, and its impact continues. Therefore, a global decrease of M&A transactions is expected to be seen in the short term. Despite the downtrend in the M&A market due to covid-19, it is possible to minimise negative impacts by implementing certain strategies. Companies can re-evaluate the structure of their organisation and operations and may also avail of the benefits and expansions available from the central banks. However, despite the political and economic issues, as well as the pandemic, it is foreseen that investor expectations of M&A transactions will be more positive and this will accelerate M&A activities in the upcoming period due to positive developments in the previous quarter, such as the US Federal Reserve’s decision on interest rates, the downward trend of inflation and a reduction of the current account deficit.
Furthermore, M&A literacy in Turkey has greatly improved in the past 20 years, bringing heightened professionalism to transactions. As the investment climate in Turkey strengthened, M&A transactions increased, outnumbering transaction-related disputes (that is, many marriages and very few divorces). A decade ago, commercial arbitration tended only to relate to construction, distributorship, sale of goods or provision of services, etc. For some time, the arbitration arena has greatly expanded to include M&A transaction disputes.
Form of dispute resolution
The surge in M&A transactions can be traced to foreign investors’ increased interest in Turkey. Foreign investors meant M&A transactions became international; investors requested an independent forum for disputes, the answer to which was arbitration. Consequently, arbitration practice developed concurrently with M&A practice. Over the past 20 years, M&A contracts have tended to include arbitration clauses and all related disputes are resolved through arbitration. Furthermore, as arbitration has a settled practice and many advantages, arbitration clauses specifying local institutions (such as Istanbul Arbitration Centre (ISTAC) arbitration) are routinely included in contracts even when all involved parties are Turkish. Arbitration has several advantages, the first and most significant of which is the ability to opt for confidentiality. The importance attributed to confidentiality is based in the sensitive nature of M&A transactions, in which due diligence reports, long-term business plans containing the target company’s minutiae, and trade secrets are exchanged during and after the transaction. Second, efficiency is a sine qua non for these types of disputes. Because of their overwhelming caseload, local courts in Turkey may not always be efficient or expedient enough in dispute resolution, which may jeopardise companies’ operations, especially when disputes are among shareholders. Third, the types of contracts used in transactions are complex, and few judges in Turkey possess the legal expertise required to resolve related disputes. In arbitration, parties have the right to choose their arbitrator – usually one who possesses the relevant expertise – making it more likely the parties will reach a satisfactory resolution. Finally, arbitration is procedurally flexible, making it a mechanism by which parties can more broadly enjoy their right to be heard. Therefore, what is typically being negotiated in the Turkish context is not whether to choose arbitration, but the seat of arbitration, the governing law and the drafting of the arbitration clause.
Furthermore, in recent years, interest in and studies on alternative dispute resolution mechanisms has gained momentum in Turkey. The mandatory mediation process was introduced for commercial litigation in 2019, compelling parties to a commercial dispute to first undergo the mandatory mediation process and to proceed with court litigation if the dispute is unresolved in mandatory mediation. In other words, the parties cannot proceed with court litigation unless the mandatory mediation process is exhausted. The only exception to the mandatory mediation process is arbitration (i.e., if the parties have an arbitration agreement, they are not obliged to resort to the mandatory mediation process). The mandatory mediation process resulted in the resolution of 57 per cent of commercial disputes in 2019, eliminating the need to proceed with court litigation. After observing parties’ interest in and the success of mandatory mediation, the prominent local arbitration centre, ISTAC, introduced mediation-arbitration rules (the Med-Arb Rules) at the end of 2019. The Med-Arb Rules provide users with a two-tier dispute settlement mechanism in the same proceeding. In this model, the parties attempt to resolve their disputes through mediation; if mediation fails, the parties resort to arbitration. If the parties give their explicit and written consent, the mediator can also act as an arbitrator. The model enables the parties to reach a settlement by either mediation or binding arbitration. Combining these methods may save time and costs. ISTAC states that it established the world’s first written rules to regulate mediation-arbitration. Thanks to this two-tier system, parties have the opportunity to resolve their disputes without resorting to the courts as well as to utilise the mediation mechanism.
Grounds for M&A arbitration
The main transactional documents are sale and purchase agreements (SPAs) (these may include share subscription instead of or in addition to share purchase, or may be designed as asset transfer agreements instead of share sales) and shareholders’ agreements (SHAs). The common types of disputes arising from SPAs concern breach of representations and warranties terms, particularly based on failure to disclose or misrepresentation by sellers (very frequent) and disagreements on post-closing price adjustments (very frequent). The most common SHA disputes arise out of the exercise of corporate governance (frequent) and share option rights (very frequent). Finally, fraud (frequent) is another recurring reason for dispute; however, proving it is very difficult under Turkish law.
To be more specific, representations and warranties are one of the most important terms in SPAs. Their purpose is to define the target company’s condition and guarantee its past and current (representations) and future (warranties) performance. They map out the sellers’ boundaries of liability for the target company. The representations generally included in SPAs are to ascertain the accuracy of the information the sellers provide about a target company’s financial, legal and operational status as at the closing date. Disputes arise when representations turn out to be inaccurate, leading the target company and buyer to suffer losses. In this case, the buyer claims for damages.
The majority of warranties disputes arise as a result of the vague wording of representation and warranty terms. Parties frequently agree on purchase price adjustments to track changes in the target company’s valuation in the period between a given commencement date (such as the signing date or last accounts date as at the end of the year immediately prior to the signing date) and an end-date (such as the closing date, immediately prior to the closing date or the post-closing date). These mechanisms are prone to disputes because of the complexity of agreeing on the definition of the relevant balance sheet positions and performance characteristics, and agreeing on the standards and methods applicable for valuation and later adjustments.
After the closing of the transaction, if the sellers remain in the target with majority or minority shareholdings, an SHA kicks in and the target company is, usually, under joint control of at least two shareholders, which can be natural persons or corporate entities, or a combination of natural and legal persons. Wherever there is split control, disputes are likely; however, not all disputes are amicably resolved between shareholders, and arbitration becomes a necessity. Arbitrated disputes occur because parties cannot agree if a share sale or purchase option right is valid, if it is exercised rightfully, in whose favour certain elements in the option right are to be interpreted, or on the structure and management of the target company.
Fraud and failure to disclose
In general, the seller is expected to disclose everything it knows to the buyer. Under Turkish law, the seller cannot evade liability (unless the liability is contractually limited to the extent allowed by law) based on the argument that it was unaware of certain information, or does not possess certain documents with respect to the target company, as its shares are at stake. The only party that possesses such detailed information is the seller. In this context, it is necessary for the seller to know everything about the target company that is crucial to the deal and to disclose it to the buyer. To avoid the omission of crucial information and a blind sale, buyers conduct extensive due diligence. In the due diligence process, a professional team examines all of the target company’s documents for anything missing from the target company’s history and prepares a report wherein it inspects the target company’s existing condition. Moreover, in the context of Turkish M&A, parties tend to attach either a list of due diligence documents, the documents themselves, or a CD containing the documents uploaded to virtual data room to indicate which documents were submitted for the buyers’ review. This aims to limit the sellers’ liability that may arise out of the documents or events disclosed to the buyer during the due diligence process. However, depending on the negotiations and the parties’ bargaining powers, buyers can request to hold the sellers liable even if the buyer conducted proper due diligence and can include this provision in the transaction documents. Alternatively, though rarely, sellers can limit their liabilities irrespective of the due diligence exercise and disclosed information.
Apart from the above, if the sellers do not disclose information willingly (that is, commit fraud), and this leads to a loss for the target company or the buyers, the limitation of liability clauses are invalid.
A due diligence report cannot realistically reflect the target company’s position with complete accuracy, and the best option is to prepare a disclosure letter.
Burden of proof
The burden of proof is a procedural issue and the general rule is the party that makes a claim must prove the facts supporting its claim. A claimant must prove (1) the respondent’s breach of contract; (2) the loss the claimant suffered; and (3) the causal link between the claimant’s loss and the breach of contract. The respondent must prove it did not cause the breach of contract. However, there are certain situations where the burden of proof is swapped. For instance, if a seller claims the price of a product sold or service provided was not paid, and the buyer claims it paid the agreed amount, the buyer must prove this. If the buyer can show that it made a payment, the burden of proof would be incumbent on the seller to prove the payment was not received.
Another example can be the burden of proof rules for penalty clauses. Under Turkish law, if an agreement contains penalty clauses (such as penalty clauses to secure the seller’s non-compete or non-solicitation covenants), the claimant does not have to prove the amount of its losses but can directly claim the penalty amount. However, if the claimant’s losses are higher than the penalty amount, the claimant must prove its losses exceeding the penalty amount established under the agreement, and that the losses were caused by the counterparty.
Apart from the above, parties are free to enter into ne plus ultra or burden of proof agreements under which they can eliminate one of the elements of liability: the party’s fault. For instance, the buyers and the sellers can be held liable for their breach of the SPA, and representations and warranties terms, respectively. Moreover, parties commonly enter into agreements or include a clause in SPAs where a buyer’s prior knowledge of the target company will not prevent it from making demands under the SPA (pro-sandbagging) or that will prevent it from making any demands (anti-sandbagging).
Under Turkish law, for persons to know whether particular information is adequate, how they obtained that information is unimportant (it is an outcome of the good faith principle).
As a party to the transaction agreements, the seller is responsible to the buyer. In ordinary circumstances, the target company’s management or representatives cannot be held liable for the breach of any representation and warranties terms based on the seller’s knowledge, if the management or representatives are not party to the transaction agreements and assumed no liability specifically under these agreements. However, as stated above, the sellers must prove they are not at fault (ne plus ultra) to avoid liability; if the seller can prove this, and that the management or representatives possessed the knowledge in question, the seller can avoid liability. In this case, the buyer must make a claim against the management or representatives. If some evidence must be collected to prove a fact, a party may request document production. However, it does not switch the burden of proof.
If there is a breach of the transaction agreement, claimants tend to claim damages, which is the easiest remedy if the claim is monetary and the quantum is calculable. In contrast, the enforcement of specific performance, such as the exercise of option rights, is the most problematic remedy to execute under Turkish law, as in many other jurisdictions. For instance, in practice it is difficult to enforce a call option if the party possessing the shares does not transfer its shares willingly, since the performance of the share transfer is subject to the endorsement and physical delivery of the share certificates to the option holder. If the party granting the option right does not transfer the shares voluntarily, the option right holder must initiate arbitration proceedings (or litigation proceedings if there is no arbitration agreement between the parties). If the party granting the option right does not transfer the shares despite the award rendered against it, the option right holder must start execution proceedings for the physical delivery of the shares in accordance with Article 24 of the Turkish Enforcement and Bankruptcy Law. The competent execution office must order the party granting the option right to deliver the shares to the option holder within seven days of receipt of the execution order. If the party granting the option right does not transfer the shares, the execution office will try to find, collect and physically deliver the share certificates to the option holder. If the execution office cannot find the certificates, this option becomes a fool’s errand. As the certificates are movable, they can be easily hidden, lost or destroyed. If the share certificates are lost or destroyed, only the last rightful owner whose names are written on the share certificates can request the cancellation of the lost or destroyed share certificates from the Turkish commercial courts. Upon receipt of the court decision, the party granting the option right must request the company’s board of directors to issue new share certificates. However, if it fails to do so, no new share certificates can be issued, and the option right cannot be enforced despite the existence of an award rendered in its favour. If the share certificates cannot be found or reissued, the claimant can only request the monetary losses it suffered, if these can be proven. To avoid such difficulties in exercising prospective share transfers, the parties prefer to secure their rights through an escrow mechanism.
Measure of damages
Quantification of compensation in an M&A dispute is often difficult because if the share transfer is valid, it means the SPA is still in force, which leads claimants to request positive damages and loss of profit, if this can be proven.
Unfortunately, calculation mechanisms make it difficult to render a quantum analysis in practice. Under Turkish law, only compensatory damages can be awarded; awarding punitive damages is forbidden. Theoretically, positive damages are calculated by subtracting the current financial status from what the financial status should have been if the breach of contract had not occurred. Loss of profit is calculated by subtracting the profit gained from what the financial status should have been if the breach of contract had not occurred. However, calculation of the expression of ‘what the financial status should have been’ is quite difficult and complicated, as this depends on varying factors such as the constantly changing economy, and the difficulty of obtaining demonstrable evidence. Quantum analysis reports can be used as evidence in arbitrations. However, since the findings of these reports are based on assumptions, they are not 100 per cent reliable. The greater the number of experts involved in a dispute, the more confusion can occur. Therefore, it is advisable for the parties to an M&A transaction to agree on which method to apply for measuring damages or to include a penalty clause to avoid unnecessary disagreements.
Special substantive issues
Many M&A transaction agreements contain ‘best efforts’ clauses. This expression, originating in global M&A practice, does not exist in Turkish law. Therefore, in Turkey, parties and judges alike do not perceive best efforts clauses as a meaningful obligation, resulting in conflicts of interpretation and usage of these clauses. The general M&A practice in Turkey interprets best efforts clauses as underlining that the parties are to undertake commercially reasonable effort to: act like a prudent merchant; be aware of the financial and political effects; and act in the company’s interest. ‘To act in good faith’ or ‘to act like a prudent merchant’ are possible replacement clauses that can be easily understandable under Turkish law, are supported by sufficient case law and are based on the Commercial Code and the Civil Code.
Special procedural issues
Parallel procedures, such as simultaneous arbitration and litigation proceedings, and the enforcement of arbitral awards, are subject to special procedural issues.
In parallel procedures, Turkish parties may attempt to initiate a lawsuit in the local courts to take advantage of the possible application of Turkish law and the judge’s questionable prejudice against the foreign party, even if a valid and explicit arbitration clause exists. This results in parallel proceedings before different forums on the same subject matter, which presents an unsettled legal problem. Some scholars opine that the second proceeding initiated must await the first proceeding’s judgment. However, if the tribunal or the court does not follow this general principle, or if there are two different judgments on the same dispute, what are the consequences? Since this issue remains unresolved, lawyers generally try to draft agreements with unequivocal arbitration clauses that will be engaged if a dispute arises.
The enforcement of foreign arbitral awards is another difficulty. Unfortunately, because enforcement proceedings are heard before the Turkish courts, the procedure takes longer than necessary and can last up to three years, including the higher court review. Even though the examination of the courts is limited to the reasons given under the New York Convention and the Turkish International Private and Procedure Law, judges take an excessive amount of time to consider whether the enforcement conditions are lawful or to examine the substance of the case, although it may be beyond their authority. Additionally, one of the most difficult conditions for the enforcement of the award is not to be against public policy. Because the term ‘public policy’ is vague and a judge can interpret it in many ways, it can lead a judge to render an incorrect decision. Consequently, this leads the claimant to apply for an appeal and extends the process.
A recent issue is the spotlight on the infamous Code on the Mandatory Usage of the Turkish Language in Commercial Enterprises (Code No. 805), which entered into force through its publication in the Official Gazette dated 22 April 1926, No. 353. According to Article 1 of Code No. 805, all Turkish companies and enterprises are required to use the Turkish language in all types of transactions, contracts, communications, records and books in Turkey. According to Article 2, foreign companies are required to use the Turkish language (1) for the documents and books to be presented to the Turkish government authorities within Turkey, and (2) for their communications, transactions and relations with Turkish companies and persons. Code No. 805 is an ancient piece of legislation introduced when the Turkish Republic was first founded (and even before the revolution that switched to the Latin alphabet from Arabic, so the original text is in Arabic), based on the legislators’ fear of foreigners taking jobs from local Turks as they were mostly educated in the native language. The Code was essentially a tool for social reform and politics to empower and employ locals rather than foreigners in the early years of the Republic. Until recently, Turkish courts and the Turkish Supreme Court applied Code No. 805 only to transactions between two Turkish entities. However, in a conflicting and rare decision in late 2017, the Turkish Supreme Court, contrary to expectations, adopted an approach mandating that Article 2 requires non-Turkish parties to execute their agreements in the Turkish language when they are transacting with Turkish entities. However, the Turkish Supreme Court, through a decision rendered at the end of 2019, relieved practitioners by not considering the ‘execution of the agreement between two Turkish entities in a foreign language’ as a breach of public policy. This assessment supports the dominant approach in the local market that Code No. 805 should not concern public policy. These two conflicting decisions show that Turkish courts have no established precedent regarding this issue, although we believe that the first decision is an exceptional one and the second one proves that Turkish courts are moving towards a more liberal approach. In any case, to mitigate the risk of courts ruling arbitration agreements invalid, it is advisable for parties to sign their arbitration agreements in both Turkish and English, at least for the time being, until the Supreme Court delivers a jurisprudential unification decision.
 Dr Ismail G Esin and Yalın Akmenek are managing partners, Ali Selim Demirel is a partner and Demet Kas¸arcıog˘lu is a senior associate at Esin Attorney Partnership, a member firm of Baker McKenzie International.
 Ernst and Young Turkey, Mergers and Acquisitions Report Turkey 2019, January 2020, www.ey.com/Publication/vwLUAssets/EY-birlesme-satin-alma-islemleri-2019-raporu-m-and-a-2019/$File/EY-MA-Raporu-Turkiye-2019.pdf (last accessed 20 August 2020).
 ‘Covid-19: The post outbreak M&A scenario’, www2.deloitte.com/br/en/pages/strategy-operations/articles/covid-19-fusoes-aquisicoes-pos-crise.html (last accessed 20 August 2020).
 Ismail G Esin, Özgün Çelebi, Sevgin Erker and Demet Kas¸arcıog˘lu, Chapter 10: ‘Arbitrating M&A Disputes’, in: Ali Yesilirmak and I․smail G Esin (eds), Arbitration in Turkey, 2015, pp. 265–266.
 Statistics of Mandatory Mediation for Commercial Cases, https://adb.adalet.gov.tr/Sayfalar/istatistikler/istatistikler/ticaridavasarti.pdf (last accessed 20 August 2020).
 Code of Obligations Article 219: ‘The seller is liable even if he has not been aware of the defects.’
 Code of Obligations Article 221: ‘Any agreement to exclude or limit the warranty is void and null, if the seller has gross fault in transferring the object sold with defect.’
 Civil Code Article 6: ‘Unless otherwise is stated in the law, every party is under the burden to prove the existence of the facts he relies his right on.’
 Code of Obligations Article 112: ‘Where the obligation has not been performed at all or as required, the obligor must compensate the damage or loss of the creditor unless the obligor proves that he was not at fault.’
 Code of Obligations Article 180(2): ‘Where the damage that the creditor suffers is higher than the amount of penalty, the creditor does not demand this further compensation without proving the fault of debtor.’
 Ali Ergin Çelebi, Disputes regarding the Mergers and Acquisitions Transactions and Arbitration, p. 32; I․smail G Esin and S Tunç Lokmanhekim, Mergers and Acquisitions in Practice, pp. 22-23.
 Civil Code Article 2(1): ‘Everyone must act according to the good faith principles while exercising his rights and fulfilling his obligations.’
 Law No. 2004.
 Enforcement and Bankruptcy Law Article 24(3): ‘In the event that the debtor fails to comply with this order either in part or in whole, and the asset which constitutes the subject matter of the judgment is in the debtor’s physical possession, either as the exact asset or in kind, the asset is taken from the debtor by force and delivered to the creditor.’
 Enforcement and Bankruptcy Law Article 24(4): ‘To the extent that the debtor does not possess the asset, the value of the asset indicated in the court judgment is collected from the debtor. If the debtor fails to pay the relevant sum, it is collected by way of attachment, without the need to serve a further enforcement order. In the event that the value of the movable asset is not indicated in the judgment or is disputed, then the enforcement officer shall assess the value of the asset based on its market value as of the date of the attachment.’
 ‘The judge must, before anything, determine the amount of damage caused when deciding on the damages. The amount of damages cannot exceed the amount of damage caused.’ Tekinay, Akman, Burcuog˘lu and Altop, Tekinay Law of Obligations General Provisions, p. 583; Turkish Code of Obligations Article 51: ‘The judge defines the scope and payment method of the damages according to the situation’s circumstances and aggravation of the fault.’
 Code of Commerce Article 18(2): ‘Every merchant must act like a prudent businessman in all the activities related to his commerce.’
 Law No. 5718.
 International Private and Procedure Law Article 54: ‘The competent court shall render enforcement subject to the following conditions: . . . The court decree shall not openly be contrary to public policy.’
 11th Civil Chamber of the Court of Cassation Decision No. 2016/5836 – 2017/4720, dated 26 September 2017.
 15th Civil Chamber of the Court of Cassation Decision No. 2019/2474 – 2019/3640, dated 26 September 2019.