Nowadays, it is easily observed through news reports and bank notifications that many companies are going through a public offering process. With the announcement made by joint stock companies of their intention to sell their shares through Borsa (Stock Exchange) Istanbul, news of public offerings moved to the forefront. Especially since 2023, number of publicly traded companies in Turkey has significantly increased, consequently, the number of publicly traded companies on Borsa Istanbul is increasing day by day.
So, why have companies in Turkey been going public in recent years? One of the key reasons is to access a more suitable source of financing that may accelerate company growth, especially in light of rising credit costs. Through the public offering process, companies raise their share capital by selling shares to investors, aiming to improve their financial position and meet their financing needs. This financing method has become a preferred option as it provides capital to the company without the obligation to repay debt within a set timeframe, offering a long-term, low-cost source of funding. Once the company’s shares are publicly offered and begin trading on the stock market, the transaction becomes an attractive long-term source of financing and liquidity. In addition to securing funding, becoming a publicly traded company brings numerous benefits, including institutionalization, increased recognition, globalization, and enhanced credibility.
With the increase in the number of publicly traded companies, it can be said that processes such as mergers and acquisitions—other key investment methods—have also intensified, leading to a rise in the number of these transactions. The level of flexibility in the transfer process differs significantly between public and private companies. While there are numerous procedures that both the target company, the selling shareholders, and the investor buyer must follow within the framework of capital market regulations, we will try to focus on highlighting some of the most important aspects in this article.
What Should Be Considered During the Risk Assessment Phase?
One of the most fundamental legal processes in investment transactions, such as mergers and acquisitions, is the
Due Diligence review stage, which involves evaluating the company for both the investor (buyer) and the seller. At this stage, it is crucial for the investor to assess the target company, identify potential legal risks, and shape the investment process by focusing on issues that directly impact their interests and could affect the realization of the investment. For the seller, the goal is to manage the exit process smoothly, ensuring that the transaction proceeds efficiently and facilitates the successful realization of the investment.
In M&A transactions where a publicly traded joint-stock company is the target, three key questions form the basis of the legal examination under capital markets legislation during the Due Diligence review stage:
(i) Has the target company fully complied with its public disclosure obligations? (ii) Is the company in compliance with the corporate governance principles applicable to it? and (iii) Has any regulatory authority initiated an investigation into the target company for potential violations of capital market obligations, or does the company have any significant disputes with its investors?
The failure of a publicly traded company to fully meet its public disclosure obligations or to adhere to the mandatory corporate governance principles may have critical consequences in the risk assessment process, as these issues may lead to sanctions under capital markets legislation.
During the risk assessment phase, the main issues that need to be evaluated and examined within the scope of the company’s public disclosure obligation are; whether the information required to be disclosed on the Public Disclosure Platform (“
PDP”) and significant transactions are fully disclosed, whether (i) the disclosures are made in a timely manner, (ii) the reason for the postponement of any postponed disclosure is based on justified reasons, (iii) the investors are misled, (iv) the company is included in any investigation pursuant to the Capital Markets Law (“
CMB”) for this reason, (v) the company is subject to sanctions.
In the continuation of the Due Diligence stage, within the scope of the corporate governance principles to which the Publicly Traded Company is subject; whether the general assembly, board of directors and committee meetings of the company are held in accordance with the legislation, determination of related party transactions and common and continuous transactions, whether these transactions are included in the independent audit report if they exceed the threshold value, determination of the pledges and guarantees granted by the company, whether the actions taken according to the financing needs of the company and whether material contracts are announced are among the main examination issues.
Why is the Public Disclosure Obligation Important?
The primary rationale for disclosure on the Public Disclosure Platform (PDP) is to provide information that may influence an investor's investment decisions, particularly developments affecting the company's financial position. A publicly traded company must ensure that it fulfils such obligations before being evaluated by investors. The investor, in turn, should assess transactions in light of the regulations outlined in the Material Transactions and Exit Right Communiqué, the Material Events Communiqué, and the Material Events Guide. These regulations cover a broad spectrum, from transactions involving tangible fixed assets to mergers and acquisitions. Since there is not always a clear threshold for transactions that must be disclosed on the PDP, it is advisable to consult the Guidelines for each specific transaction. However, the most important criterion in all cases remains whether the transaction could impact the company's share value and performance.
It will also be important to make PDP disclosures on time, and these issues will also be analysed by investors. For example, financial reports must be disclosed to the public in accordance with certain deadlines. There is a black out period after the financial reports are prepared but before they are disclosed to the public. Since trading in the relevant capital market instruments by individuals or their relatives who have insider or continuous information about the company during this period will be defined as a market distorting act, in case such an issue is detected, this issue may be considered as a “red-flag” in the transfer transaction.
Why is Corporate Governance Principles a Subject of Review?
Transparency is one of the most critical elements of a publicly traded company. To ensure this transparency, it is vital that the corporate governance of the company complies with the legislation. The Communiqué on Corporate Governance will provide guidance on issues such as how the general assembly of the company will convene, at what intervals it will convene, the number of the board of directors’ members and its structure, and related party transactions.
In Due Diligence processes, it is essential to assess whether the publicly traded company complies with corporate governance principles and operates within this framework. One of the key issues outlined in the Corporate Governance Communiqué is related party transactions. These transactions have a specific reporting process and must be disclosed to the public. Additionally, they are addressed in a separate section of the independent auditor's report, and related party transactions must be approved by the board of directors. According to the Communiqué on Corporate Governance, transaction amounts should be proportionally compared to the company's annual turnover, total assets, or company value, and the relevant thresholds should be determined. Necessary actions should be taken in accordance with these thresholds, and transactions must be approved by corporate governance mechanisms such as Board of Directors or General Assembly Resolutions. The investor will evaluate the company's adherence to these procedures during the review.
Another important issue to examine during the Due Diligence process of a publicly traded company is the matter of pledges and encumbrances, as regulated in Article 12 of the Corporate Governance Communiqué. It is crucial to assess whether pledges and collateral have been provided in accordance with the conditions and procedures outlined in the Communiqué. In standard due diligence processes, the issue of pledges and collateral is carefully scrutinized due to its financial implications. However, in the case of publicly traded companies, in addition to these financial considerations, compliance with the Corporate Governance Communiqué is also evaluated separately.
As a result;
During the risk analysis of publicly traded companies, it is crucial to align closely with capital markets regulations, particularly by examining the Communiqué on Material Events, the Communiqué on Material Transactions and Exit Rights, and the Communiqué on Corporate Governance to ensure accurate risk assessment.
Compared to a standard merger and acquisition process, in processes where a publicly traded company is the subject, there will naturally be differences in the regulations and procedures to be applied together with the institutions to be authorised. For this reason, the process should be approached carefully for the investor and the publicly traded company, and notifications regarding the planned share takeover should be made at the right time throughout the process. Our primary recommendation in this context is for target publicly traded companies to conduct an internal preliminary assessment prior to any investor review. In this regard, by undertaking a “Vendor Due Diligence” process, companies can identify their own deficiencies with the assistance of their legal and financial advisors before disclosing company information to third party investors and eliminate these deficiencies in advance to the extent possible. It will be very crucial for the investor to carry out this evaluation process with expert legal advisors in order to ensure that critical details are not overlooked. Such measures will facilitate the processes and bring both the investor and the target company and the selling shareholders closer to a smooth takeover process.