Mfv Yigit Law Office İstanbul

General Introduction to Real Estate Investment Companies in Turkey

admin — Sat, 02 Nov 2019 16:41:24 +0000

Introduction

A rapid increase in the Turkish construction sector had caused companies to experience difficulties in covering their liquidity demands, paving the way for the commencement of Real Estate Investment Company (“REIC”) practices in 1995. Since the construction sector in Turkey has grown significantly in recent years due to increased economic stability, new regulations, extensive urban renewal projects, and rapid population growth which attracts and inspires foreign investors to invest in the Turkish real estate market, we would like touch briefly on the REIC.

Definition of the REICs

REICs are regulated in Capital Markets Law under the Communique numbered III-48.1 (“Communique”). According to the brief definition in the Communique, REICs are “a type of capital market institution which is founded in order to issue its shares for the purpose of operating and managing a portfolio composed of real estates, real estate projects, real estate based rights…”. In addition to this definition, there are also some other activities stated in the Communique, such as Infrastructure investment. Pursuant to the Communique, if a REIC’s activity covers only infrastructural investment, then its portfolio shall consist only of infrastructural investments and services.

Scope of the Activities

The main aim of REICs is investing in profitable real estate projects, including projects owned by companies that are idle because of the lack of liquidity. REICs are only able to engage in activities permitted by the Communique which are defined as real estate projects, and if the REIC’s Articles of Association contains a specific clause permitting it, infrastructure projects.

Pursuant to the Communique, REICs are under an obligation to invest at least 51% of their total assets in real estates, real estate projects, and real estate based rights. Moreover, at least 75% of the total assets of REICs shall be composed of activities and operations in a specific field of business or investment in a particular real estate or infrastructure project. REICs are not directly allowed by the Communique to be involved in construction, have equipment or machines, operate any hotel, shopping mall, supermarkets, or residential sites for commercial purposes other than rental income and purchase and sale of the real estate.

Main Conditions of the Establishment

REICs may be established directly as a joint stock company by having their Articles of Association compatible with the Communique or by amending their articles of association in accordance with the Communique. The establishment applications of REICs are first subject to the approval of the Board of Capital Markets (“Board”), then the Ministry of Customs and Trade. In order to get approval of the Board, it is necessary to satisfy the requirements stated under the Communique. Basically these requirements are: (1) Initial capital – or in the case of conversion, each of its paid capital, issued capital, and equity capital – shall not be less than the amount determined every year by the Board; (2) Founders of the REICs shall not have any criminal records, overdue tax debt, suspension of bankruptcy or order of bankruptcy, and shall have financial capacity and a good reputation; (3) The members of the Board of Directors and the general manager shall meet the requirements specified in the Communique; (4) The registered title of the new company shall include the phrase “Real Estate Investment Company”; and (5) At least 25% of its initial capital or issued capital shall be offered to the public within three months.

Pursuant to the Communique, REICs may only issue shares providing the privilege of nominating members of the Board of Directors as privileged shares before a public offer. After the public offer, REICs cannot issue privileged shares even though the shares are related to the nomination.

Main Incentives

Although REICs are restricted in their activities, they receive special tax advantages which enable them to avoid some tax obligations. For instance, pursuant to Corporate Tax Law, incomes of REICs are excluded from the 20% corporate tax. Additionally, if the Board makes profit distribution obligatory to a REIC, the 15% tax on distributed shares will be excluded from withholding tax as well. These incentives – which represent major advantages of REICs – attracts both small and large, domestic and international investors who are looking to diversify their stock portfolios and would likely benefit from REICs’ long-term returns.

Squeeze-Out and Sell-Out Right Under CML

admin — Sat, 02 Nov 2019 16:40:38 +0000

The Turkish Capital Market Law (“CML”) regulates the squeeze-out and sell-out rights in public companies and companies deemed to be public (companies with more than 500 shareholders). The main motive of the squeeze-out and sell-out provisions of the CML were to protect minority shareholders’ rights in public companies and to bring these rights into uniformity with European Union standards. The Capital Market Board of Turkey (“CMB”), the primary regulator in capital markets, has set out the principals and procedures of squeeze-and sell-outs in its communique numbered II-27/2 (the “Communique”).

The Communique defines a controlling shareholder as any shareholder who directly or indirectly holds a minimum of 98% of the total voting rights in a public company (when calculating voting rights, privileged shares and voting rights of third parties such as call option holders shall not be taken into consideration under the provisional article of Communique. A controlling shareholder may reach this threshold as a result of a takeover bid or otherwise, including acting with other shareholders. The controlling shareholder shall have the right to squeeze out minority shareholders while the remaining shareholders shall have the right to sell-out their shares to the controlling shareholder.

The Communique requires a controlling shareholder who reaches the 98% threshold or who purchases additional shares after reaching this threshold to declare this to the public. Following the declaration, the remaining minority shareholders may sell-out their shares within a three-month period. Loss of the required 98% minimum majority during this three-month period does not stop the process.

The Board of Directors of a company whose shares are subject to squeeze-out or sell-out rights (a “Company”) is obliged to verify whether or not the threshold has been reached or exceeded and prepare a valuation report to assess the value of per share price in accordance with the relevant regulations of the CMB within one month of the first sell-out application. The company is also obliged to notify the controlling shareholder of other shareholder demands within one month of the sell-out application, and within three business days of the declaration of the valuation report. The controlling shareholder should deposit the purchase price to the Company account within three business days and the Company should transfer such amount to the accounts of selling shareholders within two business days. A shareholder that wants to exercise her sell-out right must sell all his/her shares — including privileged shares.

In the event that minority shareholders holding less than 2% of voting rights fail to exercise their right to sell-out their shares to the controlling shareholder within three months, sell-out rights will be deemed to have lapsed, i.e. cannot be exercised again. Following the expiration of this period, the controlling shareholder may exercise its squeeze-out right within the following three business days in the form of an application to the CMB. The sell-out price and squeeze-out price are determined separately, in line with the CMB’s mandate to protect minority shareholders.

The Company shall submit an application to the CMB immediately after adopting a Board of Directors resolution regarding the cancellation of the squeezed-out minority shareholders’ shares and issuing new shares and obtain approval from the CMB for issuing new shares. For those Companies whose shares are traded on the exchange, once the CMB’s approval is obtained, the controlling shareholder shall deposit the squeeze-out price in the Company’s account. The day after the depositing the funds, the Board of Directors shall apply to the Central Registration Agency for cancellation of minority shareholders’ shares, shall transfer newly-issued shares to the Company’s account, and shall transfer the squeeze-out price to the minority shareholders whose shares are acquired by the controlling shareholder. For those minority shareholders who cannot be identified, the purchase price shall be held in an interest-bearing account with the Settlement and Custody Bank for three years, following which the funds shall be returned to the Company, which then must pay those amounts to the shareholders proving entitlement. For those Companies whose shares are not traded on the exchange, the controlling shareholder shall announce its decision to exercise his/her squeeze-out right and invite minority shareholders to apply to the Company for delivering their shares in return for the purchase price.

It may be concluded that the legislation protects minority shareholders more than controlling shareholders, as they may exit from the company and not be bound by the decision of the controlling shareholder by exercising their sell-out right before the controlling shareholder’s squeeze-out right. On the other hand, depending on the minority shareholders’ decision to exercise sell-out rights, the controlling shareholder may shake off small investors by exercising its squeeze-out right as it already has 98% of the voting rights. We believe that in a market where there still are companies with only 5% public shareholding, this high threshold is meaningful. We anticipate a greater exercise of these rights in near future.