Foreign investors do not need to acquire 100% of a Turkish company. They may purchase a minority share and become a partner with the existing shareholders. Türkiye’s foreign investment regime generally gives foreign investors the same rights and liabilities as domestic investors in company establishment and share transfers.
However, purchasing a minority stake creates different risks from acquiring control of the company.
1. You May Not Control the Company
A 10%, 20% or 30% shareholder may have significant economic exposure without having effective control over management.
The majority shareholder may generally have greater influence over matters such as:
- appointment of management;
- business strategy;
- investments;
- financing;
- distribution of profits; and
- important commercial decisions.
Therefore, the investor should understand exactly which decisions require its approval before purchasing the shares.
2. Check the Articles of Association
The company’s Articles of Association should be reviewed carefully.
The investor should check:
- voting rights;
- privileged shares;
- management appointment rights;
- transfer restrictions;
- capital increase rules;
- dividend provisions; and
- decision-making thresholds.
A 25% shareholding does not necessarily mean that the investor has 25% of the practical control of the business.
3. Minority Shareholders Have Certain Legal Rights
Turkish Commercial Code provides certain protections for minority shareholders.
For example, in a non-public joint stock company, shareholders representing at least 10% of the capital may request that the general assembly be convened or that certain matters be added to the agenda. For publicly held companies, this threshold is generally 5%.
However, statutory minority rights alone may not provide sufficient commercial protection for a foreign investor.
4. Risk of Dilution
A foreign investor purchasing 20% of a company should consider what happens if the company later increases its capital.
If the investor does not participate in the new capital increase, its percentage ownership may decrease.
The Shareholders’ Agreement should therefore address:
- capital increases;
- pre-emption rights;
- new investors; and
- protection against unfair dilution.
5. Profit Does Not Always Mean Dividend
A profitable company does not necessarily distribute all profits to shareholders.
The majority may prefer to retain earnings for:
- new investments;
- debt repayment;
- expansion; or
- working capital.
A foreign investor expecting regular dividend income should therefore review the company’s dividend policy before investing.
6. How Will the Investor Exit?
One of the most important questions is:
How can the foreign investor sell its shares later?
The agreement should consider:
- right of first refusal;
- tag-along rights;
- drag-along rights;
- valuation mechanisms;
- transfer restrictions; and
- exit procedures.
Without a proper exit mechanism, a minority investor may own valuable shares but have difficulty finding a buyer.
7. A Shareholders’ Agreement Is Important
A minority foreign investor should generally consider entering into a detailed Shareholders’ Agreement with the other shareholders.
The agreement may provide protections concerning:
- board representation;
- veto rights for important decisions;
- access to financial information;
- capital increases;
- dividends;
- related-party transactions;
- transfer of shares; and
- exit rights.
The purpose is to determine the investor’s rights before disagreements arise.
Conclusion
Buying a minority stake in a Turkish company may provide an attractive way to enter the Turkish market without acquiring the entire business.
However, the investor should not focus only on the percentage of shares being purchased.
The key questions are:
Who controls the company?
Which decisions require the investor’s approval?
Can the investor’s shares be diluted?
Will profits be distributed?
And how can the investor exit the investment?
For this reason, foreign investors should review both the company’s corporate documents and the proposed Shareholders’ Agreement before purchasing a minority stake.
This article provides general information and does not constitute legal advice.
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