PrivateEquity Funds
Legal work relating to the establishment of venture capital and private equity funds, their investment structures and their relationships with portfolio companies.
Private equity funds are fund structures that invest in companies which are not publicly held by acquiring shareholdings in them. This area covers the establishment of funds, investment agreements, shareholder relationships and exit processes.
Scope
Private equity and venture capital funds are structures established to invest the resources they raise from investors, mostly in companies that are not publicly held, by way of shareholding. In Türkiye, venture capital investment funds and venture capital investment trusts are subject to Capital Markets Law No. 6362 and to the communiqués of the Capital Markets Board (SPK) relating to these structures, and are under the Board’s supervision. As regards the investee company, the provisions of Turkish Commercial Code No. 6102 on joint stock companies and limited liability companies apply.
A venture capital investment fund is a pool of assets without legal personality, established and managed by a portfolio management company; a venture capital investment trust, by contrast, is established in the form of a joint stock company. These structures involve a multi-layered relationship. Investors participate in the fund, the fund is managed by the portfolio management company and the fund’s resources are channelled to the portfolio company; the portfolio company, in turn, has founding shareholders, managers and other shareholders. The rights and obligations of each layer are regulated in separate documents: the fund’s internal regulation and prospectus, the participation and commitment documents concluded with investors, and the share purchase and shareholders’ agreements concluded with the portfolio company. Consistency between these documents is important for preventing disputes that may arise, particularly at the exit stage.
Frequently encountered matters
- Choice of a fund or trust structure, establishment approval and the application file to the SPK.
- Preparation of the fund’s internal regulation, prospectus, and participation and investor commitment documents.
- Investors’ obligations in respect of capital calls and the consequences of default.
- Legal due diligence on the portfolio company.
- Share purchase, capital increase and convertible instrument agreements.
- Shareholders’ agreement: board representation, veto rights, information rights.
- Preferred shares and anti-dilution protection arrangements.
- Exit mechanisms such as pre-emption rights, tag-along, drag-along and put and call options.
- Share ownership plans for managers and employees.
- Representations and warranties, and indemnity provisions.
Process and points to note
The work begins with determining the type of the envisaged structure and the investor base. Participation in venture capital funds may often be limited to qualified investors; this scope is checked against the relevant communiqué. For the application to the Board for the establishment of the fund, the internal regulation, prospectus and required documents are prepared.
At the investment stage, the legal review conducted on the portfolio company affects how the contractual terms are set. Certain arrangements in a shareholders’ agreement may create obligations only between the parties, and may need to be reflected in the articles of association as well in order to be asserted against the company and third parties. For this reason, the contractual provisions and the articles of association are designed together. Matters such as the transfer of shares in joint stock companies, preferred shares and restrictions on the transfer of shares are regulated in the Turkish Commercial Code (TTK).
Exit from an investment may take place through routes such as a strategic sale, an initial public offering, a sale to shareholders or a buy-back by the company, and each has its own legal and tax dimension. Tax exemptions relating to fund and trust earnings are set out in Corporate Tax Law No. 5520; since their conditions and rates may change, the current legislation is checked on a transaction-by-transaction basis. For transactions that qualify as concentrations, a notification to the Competition Authority may also be required. These explanations do not constitute investment advice.
Our office’s approach
Fund documents, investment agreements and exit provisions are considered together; which document grants which right to which party is summarised in table form. As legislation and Board regulations may change, the current text is taken as the basis in each transaction.