Term sheets in Türkiye function as pre-contractual instruments memorialising the principal commercial terms of a contemplated investment, acquisition, joint venture, or other transaction before the parties commit to definitive agreements. The Turkish legal framework governing term sheets operates through the Turkish Code of Obligations (Law No. 6098, the "TBK") of 11 January 2011, which entered into force on 1 July 2012; the Turkish Commercial Code (Law No. 6102, the "TTK") of 13 January 2011 governing corporate structures, share issuance, and shareholder rights; the Capital Markets Law (Law No. 6362, the "SPK") of 6 December 2012 governing venture capital fund regulation through SPK Communiqués; the Competition Law (Law No. 4054) of 7 December 1994 governing merger control thresholds; the Foreign Direct Investment Law (Law No. 4875) of 5 June 2003 establishing national treatment for foreign investors; and the procedural framework under the Civil Procedure Code (Law No. 6100, the "HMK") for domestic disputes and the International Arbitration Law (Law No. 4686, the "MTK") of 21 June 2001 for international arbitration.
The principal pre-contractual liability question — whether and to what extent the term sheet creates legally enforceable obligations before definitive agreements are signed — turns on TBK Article 2 (whether the parties have reached agreement on essential terms), TBK Articles 26-27 (freedom of contract and its limits), TBK Article 49 (culpa in contrahendo / pre-contractual liability framework), and TBK general principles on good faith (TMK Article 2 — Civil Code Article 2 — fundamental good faith principle). Specific term sheet provisions — confidentiality, exclusivity (no-shop), break-up fees, expense allocation, governing law, dispute resolution — are typically intended to be binding even when the substantive deal terms remain non-binding. This selective bindingness pattern requires explicit drafting to avoid ambiguity that Turkish courts may resolve unfavourably under good faith doctrines. ER&GUN&ER Law Firm advises Turkish and foreign investors, founders, venture capital funds, private equity sponsors, and corporate acquirers on term sheet drafting under TBK and TTK framework, conditional capital structuring under TTK Articles 460-461, preferred share design under TTK Article 478, transfer restrictions under TTK Articles 491-492, SPK-regulated venture capital fund compliance, Competition Law 4054 merger control filings, ISTAC arbitration drafting, and the integrated path from term sheet through Share Purchase Agreement (SPA) and Shareholders Agreement (SHA) execution. Practice may vary by authority and year — check current guidance.
Pre-Contractual Liability Under TBK Articles 2, 26, and 49
Turkish pre-contractual liability operates through several interconnected TBK provisions establishing when and how preliminary negotiations create enforceable obligations. TBK Article 2 establishes the foundational rule: where the parties have reached agreement on the essential elements (esaslı noktalar) of a contemplated contract, the contract is formed even if certain secondary points remain to be agreed; conversely, absence of agreement on essential elements means no contract has formed. The "essential elements" analysis for investment transactions typically includes the parties, the share quantity and class, the purchase price or valuation methodology, the closing conditions, and the principal investor protections — though the specific essential elements depend on the transaction structure and the parties' intentions.
TBK Article 26 establishes contractual freedom (sözleşme özgürlüğü) as the default principle, with TBK Article 27 limiting contracts that violate mandatory law, public order, personal rights, or are objectively impossible. Within these limits, parties have substantial latitude to structure their term sheets, including expressly providing that specific provisions are non-binding pending definitive agreement execution. Such non-binding language — typically phrased as "subject to definitive documentation," "non-binding indication of interest," "for discussion purposes only," or similar formulations — creates strong evidence of the parties' intent to defer binding obligations. However, Turkish courts examine the totality of the parties' conduct: where parties act in reliance on the term sheet (engaging legal counsel, conducting due diligence, foregoing alternative transactions), the non-binding label may be partially overcome by the substantive course of dealing under good faith doctrines. Practice may vary by authority and year — check current guidance.
TBK Article 49 establishes the pre-contractual liability (sözleşme öncesi sorumluluk or culpa in contrahendo) framework. Where one party causes damage to the other through fault during pre-contractual negotiations — for example, by making misrepresentations, abandoning negotiations in bad faith after the other party has incurred substantial costs in reliance, breaching confidentiality obligations, or violating exclusivity commitments — the responsible party may be liable for the resulting damages including reliance costs (transaction expenses, legal fees, foregone alternative transactions). The damages recoverable under TBK Article 49 are typically reliance damages rather than expectation damages — placing the injured party in the position they would have been if negotiations had not occurred, rather than if the contemplated transaction had closed. The strategic implication for term sheet drafting is significant: parties should expressly address the pre-contractual liability allocation through specific provisions on confidentiality, exclusivity, expense allocation, withdrawal rights, and break-up fees rather than leaving these issues to default TBK Article 49 analysis.
Binding vs Non-Binding Provisions Analysis
The standard term sheet structure in Turkish practice distinguishes binding from non-binding provisions through explicit drafting. The substantive deal terms — valuation, share quantity and class, investor protections, governance rights, exit mechanics — are typically designated as non-binding indications of intent subject to definitive agreement execution. The procedural and protective provisions — confidentiality, exclusivity, expense allocation, governing law, dispute resolution, term sheet expiry — are typically designated as binding obligations effective upon term sheet execution. This bifurcated structure should be expressly stated, often through a "Binding Provisions" section listing the binding clauses and a general statement that all other provisions are non-binding pending definitive agreements.
Confidentiality provisions (gizlilik) are generally enforceable under Turkish law, with breach triggering damages under TBK Articles 49-55 and potentially injunctive relief under HMK Articles 389-399 (interim injunctions / ihtiyati tedbir). Confidentiality scope should specify: the confidential information categories; the permitted purposes (typically deal evaluation only); the duration of obligations (typically 1-3 years post-termination); the permitted disclosures (regulatory requirements, advisors under similar obligations, court orders); and the remedies for breach. Exclusivity provisions (münhasırlık / no-shop) prevent the target/founders from engaging with alternative investors during a specified period (typically 30-90 days), enabling the lead investor to commit resources without alternative-deal risk. The exclusivity duration, scope (which counterparties are excluded), exceptions (existing pipeline contacts, fiduciary duty exceptions), and remedies (often break-up fees rather than specific performance) all require careful drafting. Practice may vary by authority and year — check current guidance.
Break-up fees (cayma tazminatı) and expense allocation provisions allocate financial responsibility for transaction costs in various scenarios. Break-up fees may operate as: liquidated damages (cezai şart) under TBK Articles 179-182, providing pre-agreed compensation for specific termination triggers; reverse break-up fees, payable by the buyer or investor to the target if the buyer/investor terminates without cause; or expense reimbursement, covering specific cost categories rather than liquidated damages. Turkish courts recognise reasonable break-up fees but may reduce excessive amounts under TBK Article 182(3) judicial reduction power for clearly disproportionate liquidated damages. The "reasonableness" standard considers the deal size, the parties' negotiating power, the protected investment value (deal certainty for the lead investor or target), and customary market practice. Term sheet expiry provisions establishing automatic termination after a specified period (typically 30-90 days) protect both parties from indefinite obligations and create natural milestone points for definitive documentation progress.
Standard Provisions in Turkish Term Sheet Practice
Turkish venture capital and private equity term sheets typically address a standard set of substantive provisions adapted to TTK and SPK regulatory framework. Investment structure provisions specify: the security type (preferred shares under TTK Article 478, common shares, convertible notes, SAFE-style instruments under specific Turkish adaptation, or hybrid structures); the number and price of shares; the pre-money and post-money valuation; the option pool (typically structured through TTK Articles 460-461 conditional capital with employee allocation framework); and the use of proceeds. Investor protection provisions include: liquidation preference (1x non-participating preferred is standard, with participating or multiple-x variants in specific contexts); anti-dilution rights (broad-based weighted average is standard, with full ratchet in distressed scenarios); and pro-rata participation rights for future rounds.
Governance provisions under TTK framework establish how investor influence operates within the Turkish corporate structure. Board composition specifies the number of board seats and the appointment rights — typically structured through Articles of Association amendments under TTK Articles 339 framework granting specific share class members the right to nominate directors, supplemented by shareholder agreement voting commitments. Information rights specify the financial reporting (typically monthly management accounts, quarterly financial statements, annual audited financial statements), board observer rights, and inspection rights — supplementing the statutory minority shareholder rights under TTK Article 437 (inspection of accounts) and TTK Articles 438-444 (minority rights including special audit). Veto rights (negatif veto hakkı) require investor approval for specified material actions — share issuances, debt incurrence above thresholds, executive compensation changes, related-party transactions, M&A activity, and material contract executions. Practice may vary by authority and year — check current guidance.
Founder commitments include: vesting schedules typically structured through restricted shares with company repurchase rights for unvested shares under TTK Articles 501-503 (acquisition of own shares within statutory limits) supplemented by shareholder agreement vesting provisions; non-compete and non-solicit restrictions during employment and post-departure periods; intellectual property assignment confirming all founder-developed IP is assigned to the company; and confidentiality obligations covering company information. Exit provisions include: registration rights (relevant for IPO scenarios under SPK framework); drag-along rights enabling majority sale forcing minority participation in approved sales (typically requiring qualified majority threshold and minimum value protection for dragged minority); tag-along rights enabling minority participation in majority sales (usually proportional participation rights); and right of first refusal on share transfers. The integrated provision design must comply with TTK mandatory rules while implementing the substantive commercial agreement, requiring specific drafting attention to ensure enforceability of customarily international VC provisions within Turkish law constraints.
Conditional Capital Under TTK Articles 460-461
Conditional capital increase (şarta bağlı sermaye artırımı) under TTK Articles 460-461 provides the principal Turkish law mechanism for implementing employee equity programs, conversion features for convertible securities, and similar share issuance arrangements where shares are issued conditional on specific events. Under TTK Article 460, joint stock companies may resolve to increase capital up to a specified amount conditionally, with shares issued only upon specified events (option exercise, conversion of convertible securities, achievement of specific milestones). The conditional capital authorisation requires Articles of Association provision and specific general assembly resolution under enhanced quorum requirements.
For employee equity programs, conditional capital under Articles 460-461 enables the company to authorise a share pool from which options or restricted shares can be granted to employees over time without separate general assembly approval for each grant. The framework supports vesting schedules, performance conditions, and exit liquidity events common in international employee equity practice. The tax treatment of employee equity under Income Tax Law (Law No. 193, the "GVK") Article 17 amendments addressing employee equity compensation requires careful structuring — typically with income tax at exercise (under salary income rules with specific valuations) and capital gains analysis at disposition under GVK Articles 80-82 framework. Practice may vary by authority and year — check current guidance.
For convertible securities (convertible notes, convertible preferred, SAFE-style instruments adapted to Turkish law), conditional capital under Articles 460-461 enables the conversion mechanism to operate without requiring separate capital increase approvals at each conversion. The convertible instrument terms specify the conversion triggers (next equity round closing at specified minimum size, IPO, change of control, maturity), the conversion price (typically discount to next round price or valuation cap), and the conversion mechanics. The instrument should be structured as either (i) a debt instrument convertible to equity through Article 460 mechanism, or (ii) an equity-related instrument (warrant, option) implementing the conversion right. The choice between debt and equity-related structuring affects tax treatment, accounting treatment, and creditor priority in distressed scenarios — requiring integrated tax, accounting, and legal analysis. The Turkish law adaptation of internationally-developed instruments like SAFE (Simple Agreement for Future Equity, originated by Y Combinator) typically requires modification to align with Turkish corporate law requirements while preserving the substantive economic structure.
Preferred Shares Under TTK Article 478
Preferred shares (imtiyazlı paylar) under TTK Article 478 provide the principal Turkish law mechanism for implementing investor preference structures. Article 478 permits the issuance of share classes with specific privileges in: profit distribution (kâr payı imtiyazı); liquidation proceeds distribution (tasfiye payı imtiyazı); voting rights (oy imtiyazı) under TTK Article 479 framework; and other specific rights as defined in the Articles of Association. The privileges must be specified in the Articles of Association and approved through general assembly resolution under TTK Article 421 enhanced quorum requirements (typically requiring qualified majority of the affected share class plus general assembly approval).
For VC investment structures, preferred shares typically implement the liquidation preference (priority distribution of investment amount before common share distribution in liquidation events) and dividend preferences (cumulative or non-cumulative dividend preferences depending on structure). The 1x non-participating preferred standard means investors receive their investment amount back first in liquidation, with remaining proceeds distributed to common shareholders. Participating preferred (1x preference plus participation in remaining proceeds) and multiple-x preferred (2x, 3x preferences in specific contexts) operate similarly with adjusted economic distribution. Voting privileges under TTK Article 479 are limited — voting rights cannot exceed 15 votes per share (with limited exceptions for specific qualifying companies under SPK and government-related shareholdings), constraining the international practice of weighted voting. The preferred share class structure also enables board appointment rights through specific class voting provisions in Articles of Association under TTK Article 339 framework, supplemented by shareholder agreement voting commitments. Practice may vary by authority and year — check current guidance.
Conversion provisions for preferred shares — conversion to common shares at IPO, automatic conversion at specified valuation thresholds, voluntary conversion at investor option — operate through Articles of Association amendments and require careful structuring under TTK class share framework. Anti-dilution provisions (broad-based weighted average is standard, full ratchet in distressed scenarios) operate through preferred share conversion ratio adjustments triggered by qualifying down-round issuances. The mechanical implementation requires Articles of Association formula clarity and shareholder agreement enforcement provisions. Drag-along and tag-along rights typically apply across all share classes through shareholder agreement provisions, with the preferred share class structure determining the trigger thresholds and exempt categories. The integration of TTK preferred share framework with internationally-developed VC investor protections requires specific Turkish-law adaptation rather than mechanical translation of foreign templates — a common source of enforcement difficulties when foreign templates are used without adaptation.
Transfer Restrictions Under TTK Articles 491-492
Share transfer restrictions (bağlam) under TTK Articles 491-492 enable Turkish joint stock companies to limit the transferability of registered shares (nama yazılı paylar) through Articles of Association provisions. Under Article 491, the Articles may provide that share transfers require company approval (typically board of directors or general assembly), with the company entitled to refuse transfer to specific categories of transferees or for other Articles-specified reasons. Article 492 limits the company's refusal grounds to: (i) reasons specified in the Articles of Association; or (ii) the company's offer to purchase the shares at fair value (real value) on its own behalf, on behalf of other shareholders, or on behalf of third parties.
For VC-backed companies, transfer restrictions through Article 491-492 framework implement: founder vesting (unvested founder shares subject to company repurchase at original price); right of first refusal (other shareholders entitled to purchase shares before sale to third parties); right of first offer (selling shareholder must offer to existing shareholders at proposed terms before approaching third parties); and lock-up periods (founder shares subject to transfer prohibition for specified periods post-investment, typically aligning with vesting). The implementation requires both Articles of Association provisions establishing the share class transfer restrictions and shareholder agreement provisions specifying the operational mechanics. The combination of corporate-level restrictions (binding on the company and successor shareholders) and contract-level restrictions (binding on signing shareholders only) provides layered enforcement. Practice may vary by authority and year — check current guidance.
Drag-along rights (satışa katılma zorunluluğu) and tag-along rights (satışa katılma hakkı) operate principally through shareholder agreement provisions rather than Articles of Association, though Articles provisions can support enforcement. Drag-along provisions enable a qualifying majority (typically 50%-66% of shares depending on structure) to force minority shareholders to participate in an approved sale on the same terms, eliminating minority blocking risk in exit scenarios. Tag-along provisions enable minority shareholders to participate proportionally in significant majority sales, preventing majority shareholders from selling to third parties without offering minority equivalent exit opportunities. The interplay between these provisions, the right of first refusal/offer framework, and the underlying TTK transfer restrictions requires careful sequential structuring to avoid conflicts and ensure clear operational implementation. The enforcement of shareholder agreement transfer provisions has been substantively addressed in Turkish jurisprudence, with the Court of Cassation generally upholding well-drafted transfer restriction provisions while scrutinising provisions that effectively eliminate share liquidity in unconscionable ways.
SAFE Agreements and Convertible Notes in Turkish Practice
SAFE agreements (Simple Agreement for Future Equity, originated by Y Combinator) and convertible notes have become common early-stage investment instruments globally, requiring specific Turkish law adaptation when used in Turkish company contexts. The fundamental challenge is that SAFE in its US-developed form does not fit cleanly into Turkish corporate law — neither pure debt nor pure equity, the SAFE relies on US contract law flexibility that requires specific structuring under TTK framework. Turkish-law adaptations typically structure SAFE-equivalent instruments through: (i) convertible debt structure under TTK general capital and TBK borrowing framework, with conversion triggered through TTK Article 460-461 conditional capital mechanism at specified events; (ii) warrant/option structure granting future share subscription rights with conversion mechanics; or (iii) hybrid structures combining debt and equity elements adapted to specific transaction needs.
Convertible note structures under Turkish law typically operate as TBK-governed debt instruments (loan agreement / ödünç sözleşmesi) with specific conversion provisions triggering equity issuance through TTK Article 460-461 conditional capital. The note specifies: principal amount and interest rate (often 0% or low single-digit for VC-style notes); maturity date (typically 18-24 months); conversion triggers (qualified equity financing closing at specified minimum size, change of control, maturity); conversion price (typically discount to next-round price, often 15-25%; or valuation cap establishing maximum effective valuation; or both with the more favourable applying); and conversion mechanics (automatic vs optional, share class issued, related rights). Practice may vary by authority and year — check current guidance.
Tax considerations for convertible note structures are significant. Interest income on the note is taxable as interest income to the holder under GVK and KVK frameworks. Withholding tax under GVK Article 94 applies to interest payments depending on the holder's classification (Turkish resident individual, Turkish resident corporate, foreign resident). The conversion event itself typically does not trigger taxable disposition under specific Turkish tax interpretations, though the Revenue Administration's guidance through VUK Article 413 (özelge / mukteza) can vary by specific facts. The disposition of converted shares triggers capital gains analysis under GVK Articles 80-82 (individuals — 5-year holding for exemption) and KVK Article 5 framework (corporates — specific exemption conditions). For foreign investors, Double Tax Treaty (DTT) analysis affects withholding tax rates on interest and treatment of capital gains. The integrated structuring of convertible notes for Turkish investments requires coordinated corporate, contract, and tax analysis — making the apparent simplicity of "SAFE" or "convertible note" labels misleading without substantive Turkish-law structuring.
SPK Regulation of Venture Capital Funds
Venture capital fund regulation in Türkiye operates under the Capital Markets Law (Law No. 6362, the "SPK") of 6 December 2012, with detailed implementation through SPK Communiqués. The principal regulated structures are: Venture Capital Investment Funds (Girişim Sermayesi Yatırım Fonları, "GSYF") regulated through the SPK Communiqué on Venture Capital Investment Funds (Communiqué Series III, No. 52.4); and Venture Capital Investment Trusts (Girişim Sermayesi Yatırım Ortaklıkları, "GSYO") regulated through the SPK Communiqué on Venture Capital Investment Trusts (Communiqué Series III, No. 48.5). Each structure provides regulated investment vehicles with specific tax and operational benefits.
GSYF (VC Investment Funds) operate as fund structures managed by licensed portfolio management companies under SPK supervision. Key requirements include: portfolio management company licensing under SPK framework; minimum fund size and investor commitment thresholds; investment restrictions limiting fund investments to qualifying venture capital investments under specific criteria; and reporting obligations to SPK. Tax benefits include exemption from corporate tax on qualifying portfolio investment returns under specific conditions. GSYO (VC Investment Trusts) operate as joint stock companies registered with SPK as VC investment trusts, with similar regulatory framework but corporate structure rather than fund structure. Tax benefits include corporate tax exemption on qualifying portfolio investment returns. Both structures provide institutional vehicles for collective venture capital investment with regulatory oversight and tax benefits, but require substantial operational infrastructure and SPK compliance. Practice may vary by authority and year — check current guidance.
Foreign-domiciled venture capital funds investing in Turkish startups operate principally outside the GSYF/GSYO framework, structuring investments as direct equity participation in Turkish target companies without using the regulated Turkish fund vehicles. The foreign fund's investment is governed by the Turkish target company's TTK and SPK framework rather than SPK fund regulation. The foreign fund may consider establishing Turkish vehicles for specific operational reasons (tax efficiency, regulatory benefits, local market access) but is not required to do so for direct investment. Cross-border investment by foreign VC funds is supported by Foreign Direct Investment Law (Law No. 4875) Article 3 national treatment, with the Turkish target company benefiting from foreign investment without specific structural restrictions beyond those applicable to Turkish-funded transactions. Sector-specific restrictions (defence, broadcasting, certain other regulated sectors) apply equally to foreign and domestic investors with specific consultation thresholds in some cases.
Competition Law 4054 Merger Control Considerations
Investment transactions exceeding specific thresholds trigger Turkish merger control filing requirements under the Competition Law (Law No. 4054) of 7 December 1994 administered by the Turkish Competition Authority (Rekabet Kurumu). The merger control framework operates through the Communiqué on Mergers and Acquisitions That Require Competition Board Approval (Communiqué No. 2010/4), as amended substantively by Communiqué No. 2022/2 increasing the relevant thresholds and addressing technology-sector transactions specifically.
Under the current framework, a transaction requires merger control filing if either: (i) the combined Turkish turnover of the parties exceeds TRY 750 million AND at least two parties have Turkish turnover exceeding TRY 250 million each; OR (ii) the Turkish turnover of the target exceeds TRY 250 million AND the global turnover of at least one party exceeds TRY 3 billion. For technology-sector transactions involving target companies in technology, telecommunications, or related sectors, additional thresholds apply specifically to capture nascent competitor acquisitions ("killer acquisition" framework under Communiqué 2022/2 amendments). The thresholds are subject to periodic adjustment by Communiqué amendments. Practice may vary by authority and year — check current guidance.
Filing procedure under the Communiqué requires comprehensive notification including: parties' identification and group structures; transaction structure details; Turkish and global market analysis; competition impact assessment; and supporting documentation. The Competition Board reviews and either: (i) clears the transaction (Phase I clearance, typically within 30 days); (ii) opens detailed investigation (Phase II, typically 6-month additional review); or (iii) prohibits the transaction (rare for non-problematic transactions). Closing without required Competition Board clearance triggers gun-jumping penalties under Law 4054 (significant administrative fines based on turnover percentages) and transaction unwinding risk. Term sheet negotiation should address Competition Law analysis early — assessing whether thresholds are triggered, allocating filing responsibility and costs, structuring closing conditions to await clearance, and addressing the gap between signing and clearance. For VC investments, threshold triggering is generally rare for early-stage rounds but becomes relevant for larger growth rounds, secondary transactions, and strategic acquisitions. ER&GUN&ER Law Firm coordinates Competition Law analysis and filing with transaction execution to avoid timing surprises and compliance gaps.
Dispute Resolution and ISTAC Arbitration
Term sheets typically address dispute resolution through governing law and forum selection provisions. For Turkish-target transactions, governing law is typically Turkish law, with disputes proceeding either through Turkish courts or arbitration. The Istanbul Arbitration Centre (İstanbul Tahkim Merkezi, "ISTAC") established under Law No. 6570 of 29 October 2014 (note: distinct from the prior tenancy law sharing the same number) provides a Turkish institutional arbitration forum for both domestic and international disputes. ISTAC operates under its own arbitration rules with experienced arbitrators, multilingual proceedings (Turkish, English, French), and integration with Turkish enforcement framework.
The choice between Turkish court litigation and arbitration involves several factors. Turkish court litigation through Commercial Courts (Asliye Ticaret Mahkemesi) under TTK Article 4 framework offers established procedural framework, lower upfront costs, and direct enforcement, but with longer timelines (multi-year typical for complex commercial disputes including appeals through Bölge Adliye Mahkemesi and Yargıtay) and public hearings reducing confidentiality. Arbitration through ISTAC, the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), or other institutions offers confidentiality, party control over procedure, expertise selection in arbitrators, and typically faster resolution, but with higher upfront costs (institutional fees plus arbitrator compensation). For international VC investments where parties span multiple jurisdictions, arbitration is often preferred for neutral forum and enforceability under the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (Türkiye party since 1991). Practice may vary by authority and year — check current guidance.
Arbitration drafting in term sheets should specify: the institution (ISTAC, ICC, LCIA, etc.); the seat of arbitration (Istanbul for domestic; potentially Geneva, London, Singapore, or other neutral seats for international); the language of arbitration (typically English for international, Turkish for domestic); the number and selection method of arbitrators (typically three arbitrators with each party selecting one and the two selecting the third, or sole arbitrator for smaller disputes); the governing law of the arbitration agreement (often distinct from substantive contract governing law); and any limits on arbitrator authority (interim relief, equity remedies, attorney fee shifting). The integrated arbitration provision should anticipate the substantive issues likely to arise and provide procedural framework appropriate to those issues. For transactions where Turkish courts may need to enforce the eventual award against Turkish assets, the arbitration provision should be drafted to facilitate that enforcement under International Arbitration Law (Law No. 4686) and Civil Procedure Code framework, with attention to Turkish public policy considerations that may affect enforcement of specific award elements.
From Term Sheet to SPA and SHA Implementation
The transition from executed term sheet to definitive transaction documentation (Share Purchase Agreement / "SPA" and Shareholders Agreement / "SHA") involves substantive expansion of the term sheet's economic principles into operational legal provisions. The SPA addresses the share transfer mechanics: parties; share quantity, class, and price; closing conditions (regulatory approvals including Competition Law clearance where applicable, accuracy of representations, no material adverse change, third-party consents); representations and warranties (the seller's substantive representations about the target's condition, with disclosure schedules detailing exceptions); indemnification (the seller's obligation to compensate the buyer for breaches of representations and specified other matters, typically with caps, deductibles, and survival periods); and post-closing covenants.
The SHA addresses the ongoing shareholder relationship after closing: corporate governance (board composition, voting commitments, reserved matters requiring qualified approval); information rights (financial reporting, board observer rights, inspection rights); transfer restrictions (rights of first refusal, drag-along, tag-along, lock-up periods); preemption rights for future issuances; anti-dilution adjustments for down-round issuances; founder vesting and good leaver/bad leaver provisions; non-compete and non-solicit restrictions; conflict of interest provisions; and exit mechanics including registration rights, drag-along triggers, and put/call rights in specific scenarios. The SHA effectively serves as the constitutional document for the investor-founder relationship, supplementing the Articles of Association and operating as binding contract among the signatories. Practice may vary by authority and year — check current guidance.
The drafting and negotiation of definitive documentation typically takes 30-90 days from term sheet execution depending on transaction complexity, due diligence findings, and party negotiation dynamics. Common challenges include: representation and warranty negotiation (scope, qualifications, materiality thresholds, and indemnification mechanics); disclosure schedule preparation (the seller's obligation to disclose specific matters as exceptions to representations); closing condition definition and waiver mechanics; transfer restriction operational details (especially complex tag-along/drag-along interaction provisions); and compliance with TTK mandatory provisions that may constrain customary international VC structures. ER&GUN&ER Law Firm coordinates the term-sheet-to-execution path for both Turkish and foreign clients, ensuring that the substantive economic agreement memorialised in the term sheet translates effectively into enforceable definitive documentation under Turkish law while preserving the parties' commercial expectations and providing operational clarity for the post-closing relationship.
Frequently Asked Questions
- Is a term sheet legally binding in Türkiye? Most substantive provisions are typically non-binding pending definitive documentation, but specific provisions — confidentiality, exclusivity, expense allocation, governing law, dispute resolution, term sheet expiry — are typically binding upon signature. The bifurcation must be expressly drafted to avoid ambiguity that Turkish courts may resolve unfavourably under good faith doctrines.
- What is pre-contractual liability under Turkish law? Under TBK Article 49 (culpa in contrahendo), parties may be liable for damages caused through fault during pre-contractual negotiations — misrepresentations, bad-faith abandonment after substantial reliance costs, confidentiality breaches, exclusivity violations. Damages are typically reliance damages rather than expectation damages.
- What governs essential terms agreement? TBK Article 2: where parties have reached agreement on essential elements (esaslı noktalar) of a contemplated contract, the contract is formed even if secondary points remain. Conversely, absence of agreement on essentials means no contract has formed. Essential elements depend on transaction structure.
- How are conditional capital structures used? TTK Articles 460-461 enable conditional capital increases for employee equity programs, conversion features for convertible securities (notes, SAFE-equivalents), and similar share issuance arrangements where shares are issued conditional on specific events (option exercise, conversion triggers, milestone achievement).
- What are preferred shares under Turkish law? TTK Article 478 enables preferred share classes with specific privileges in profit distribution, liquidation proceeds, voting rights (under TTK 479 framework limited to 15 votes per share with limited exceptions), and other rights specified in Articles of Association. Implementation requires Articles of Association provision and TTK 421 enhanced quorum approval.
- How are share transfer restrictions implemented? TTK Articles 491-492 enable Articles of Association provisions limiting registered share transferability through company approval requirements with specified refusal grounds or fair-value purchase right. VC investment frameworks implement founder vesting, right of first refusal, lock-ups through combined Articles and shareholder agreement provisions.
- How do SAFE agreements work in Türkiye? SAFE in original US form does not fit cleanly into Turkish corporate law. Turkish-law adaptations structure SAFE-equivalent instruments through convertible debt with TTK 460-461 conditional capital conversion, warrant/option structures, or hybrid arrangements adapted to specific transaction needs.
- What are the main convertible note tax issues? Interest income taxable to holder; withholding under GVK Article 94 depending on holder classification; conversion event typically not taxable disposition (subject to specific guidance); converted share disposition triggers capital gains analysis under GVK Articles 80-82 (individuals, 5-year holding for exemption) and KVK Article 5 (corporate exemption conditions).
- What VC fund structures exist? Under SPK framework: Venture Capital Investment Funds (GSYF) under Communiqué Series III, No. 52.4 — fund structure managed by licensed portfolio management companies; Venture Capital Investment Trusts (GSYO) under Communiqué Series III, No. 48.5 — joint stock company structure. Both provide regulated vehicles with tax benefits.
- Are there merger control filings for VC investments? Under Competition Law (Law No. 4054) and Communiqué 2010/4 (amended by 2022/2): filing required if combined Turkish turnover exceeds TRY 750M AND at least two parties have Turkish turnover above TRY 250M each; OR target Turkish turnover exceeds TRY 250M AND one party global turnover exceeds TRY 3 billion. Technology-sector specific thresholds apply for nascent competitor acquisitions.
- What are break-up fee enforceability limits? TBK Articles 179-182 govern liquidated damages (cezai şart). Reasonable break-up fees are enforceable; courts may reduce excessive amounts under TBK Article 182(3) judicial reduction power for clearly disproportionate liquidated damages, considering deal size, parties' negotiating power, protected investment value, and customary market practice.
- Is ISTAC arbitration available? Yes. The Istanbul Arbitration Centre (ISTAC) established under Law No. 6570 of 29 October 2014 provides Turkish institutional arbitration for domestic and international disputes. Multilingual proceedings, experienced arbitrators, and Turkish enforcement integration. Alternative institutions include ICC, LCIA for international disputes.
- What governs international arbitration? International Arbitration Law (Law No. 4686) of 21 June 2001 covers international arbitration with Turkish seat. Foreign awards enforceable in Türkiye under New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (Türkiye party since 1991), subject to Turkish public policy review.
- How do drag-along and tag-along rights work? Drag-along enables qualifying majority (typically 50-66% threshold) to force minority participation in approved sale on same terms, eliminating minority blocking risk. Tag-along enables minority proportional participation in significant majority sales. Implementation principally through shareholder agreement provisions with Articles of Association support.
- Where does ER&GUN&ER Law Firm support term sheet matters? Term sheet drafting under TBK and TTK framework; pre-contractual liability analysis under TBK Articles 2, 26, 49; conditional capital structuring under TTK Articles 460-461; preferred share design under TTK Article 478; transfer restrictions under TTK Articles 491-492; SAFE and convertible note Turkish-law adaptation; SPK-regulated VC fund compliance for GSYF and GSYO; Competition Law 4054 merger control filings under Communiqué 2010/4; ISTAC and ICC arbitration drafting; New York Convention enforcement; SPA and SHA negotiation and execution; and the integrated path from term sheet through definitive documentation closing.
Author: Mirkan Topcu is an attorney registered with the Istanbul Bar Association (Istanbul 1st Bar), Bar Registration No: 67874. His practice focuses on cross-border and high-stakes matters where evidence discipline, procedural accuracy, and risk control are decisive.
He advises Turkish and foreign investors, founders, venture capital funds, private equity sponsors, family offices, and corporate acquirers across Term Sheet Drafting under TBK and TTK Framework, Pre-Contractual Liability Analysis under TBK Articles 2, 26, and 49, Conditional Capital Structuring under TTK Articles 460-461, Preferred Share Design under TTK Article 478, Transfer Restrictions under TTK Articles 491-492, SAFE and Convertible Note Turkish-Law Adaptation, SPK-Regulated VC Fund Compliance under Capital Markets Law (Law No. 6362) and SPK Communiqués Series III, Competition Law 4054 Merger Control Filings under Communiqué 2010/4, ISTAC and ICC Arbitration Drafting under International Arbitration Law (Law No. 4686), New York Convention 1958 Award Enforcement, Share Purchase Agreement and Shareholders Agreement Negotiation, and Cross-Border Investment Structuring under Foreign Direct Investment Law (Law No. 4875).
Education: Istanbul University Faculty of Law (2018); Galatasaray University, LL.M. (2022). LinkedIn: Profile. Istanbul Bar Association: Official website.