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January 4, 2017

Importance of Compliance in M&A Transactions

Publications
Compliance
Mergers & Acquisitions

The Increasing Interest of Foreign Investors in the Turkish Market

While the volume of M&A transactions in Turkey decreased in 2015 (approximately USD 16.4 billion in 2015 compared to approximately USD 18 billion the year before), foreign investors’ interest has steadily increased. According to Deloitte’s 2015 Mergers & Acquisitions Report, foreign investors were responsible for 70% of M&A transactions in 2015, a spike from 30% and 44% in 2013 and 2014, respectively. Foreign investing benefits both foreign and local counterparts: Overseas companies diversify their investment opportunities while Turkish companies address their financial needs and find a place in the international markets.

As a natural result of the increasing foreign direct investment into Turkey, compliance due diligence has begun to play an essential role in both the pre-acquisition and post-acquisition periods. Possessing a strong compliance program positively affects a company’s valuation, the sustainability of the business, and the transaction’s overall ease, often expediting and facilitating the negotiations. Foreign investors in particular place great importance on compliance due to the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act’s extraterritorial effects and severe fines. Many other countries have followed suit by introducing their own compliance rules, causing foreign investors to be more vigilant and selective in their foreign investment transactions.

UK Bribery Act and FCPA are Worth Considering When Investing in Turkey

According to the UK Bribery Act and the FCPA, bribing foreign officials, whether directly or indirectly through intermediaries, is strictly prohibited. Both the UK Bribery Act and the FCPA have extraterritorial effects, meaning that the UK and the US governments can exercise their authority beyond their borders. Generally speaking, a company or an individual may be subject to these codes due to a business relationship with the UK and US, or due to links between shareholders and the countries, even if the company is not established in these countries or the individual does not hold citizenship of either country. Considering the extensive effect of these codes, foreign investors pay close attention to the compliance-related risks of investing in Turkey.

Moreover, Turkish companies have been slow to adopt and develop higher standards of compliance, as evidenced by Turkey’s corruption ranking in Transparency International’s Corruption Perception Index. In scoring only 50 points in the Index (100 points means a country is very clean; 0 means it is highly corrupt), a score denoting considerable compliance risks and little enforcement, Turkey ranked 66th among 168 countries in 2015; 64th among 175 countries in 2014; and 53rd among 177 countries in 2013. Considering the general lack of compliance culture in local companies in Turkey, the extensive compliance risks of the country and its region, and the inherent risks associated with M&A transactions, it is crucial to conduct proficient compliance due diligence before any share acquisition process to identify risk areas which may cause liability of the purchaser after the share acquisition. Furthermore, conducting compliance due diligence will minimize the purchaser’s liabilities if an earlier misconduct is revealed after the share transfer, if they can show that best efforts to reveal a compliance concern were made beforehand. Failure to conduct compliance due diligence during an M&A transaction can cause the foreign investor to inherit liabilities arising from the seller’s misconduct, even if the violation of anti-corruption regulation was committed prior to the share transfer and the foreign investor was unaware of the breach.

Reviewing the identified red flags will allow purchasers to decide whether they need to walk away from a transaction due to the potential for serious consequences or carve out a particularly risky part of the business. If a company decides to proceed with the transaction, a tailor-made compliance program, employee compliance trainings, and periodical internal compliance audits will allow them to minimize the compliance-related risks in the post-acquisition period.

The Turkish market is ripe with opportunities and profit, as evidenced by foreign investors’ appetite for it. Although compliance risks may be intimidating, these can be easily mitigated by conducting a compliance due diligence and establishing a bespoke compliance program.

This Article was originally published in Issue 3.5 of the CEE Legal Matters Magazine.