The novel coronavirus, officially known as the COVID-19 continues its worldwide spread. The World Health Organization declared it an “epidemic” first, and then a “pandemic” on March 11, 2020.
This Handbook has been prepared to explore COVID-19’s impact from a legal point of view. The first section of this Handbook takes a brief look at force majeure and contracts, examining principles of force majeure, relevant contractual issues and tips for parties to watch out.
Other sections of the Handbook address how specific industries, contracts and transactions are affected from a legal perspective. As such, in Sections 2 and 3, we continue by assessing possible legal implications from the perspectives of the energy industry and projects involving construction and sales (with specific references to different contract types, FIDIC and CISG). How finance contracts and enforcement in general are or may be affected is under spotlight in Section 4. Section 5 includes an in-depth coverage of Turkish employment law issues arising from COVID-19. The final two sections of this Handbook delve into COVID-19’s impact on corporate governance and M&A transactions, the latter analyzing the matter from the perspective of different stages of a deal.
On the whole, this Handbook strives to serve as a comprehensive guide to COVID-19 related legal issues. We hope that a collective view across practices and industries would give the reader an overall perspective on the legal issues that have arisen, moving beyond the extensive, chaotic and incremental nature of the changes we are facing daily.
This Handbook has been prepared by Yazıcı Attorney Partnership for information purposes only. The information contained in this Handbook does not constitute legal opinion or legal advice in any way, and is not intended to be acted upon.
Section 1: Contracts and Force Majeure
As COVID-19 continues its spread amid crashed markets and overwhelmed healthcare systems, it is also taking a toll on contractual relationships while countries take drastic measures to slow the spread. These measures include ordering of curfews, travel bans, and state of emergencies, all of which undoubtedly have an enormous impact on businesses and underlying contracts.
This section concerns force majeure principles, contractual issues pertaining to force majeure, and tips for parties to watch out for, from the perspective of COVID-19.
- A Brief Look at Force Majeure
Force majeure events are exceptional events that render the performance of an obligation somewhat impossible. The definition, the events or the consequences thereof are not provided under the main Turkish legislation that governs obligations, i.e. the Turkish Code of Obligations numbered 6098 (“TcO”). However, although there is no codified definition of force majeure, the Turkish Court of Appeals is quite clear on the consequence of force majeure: the obligor will not be held liable for its failure to perform its obligations.
Force majeure events can arise out of social, legislative or natural reasons: a war or a coup d’etat would be social reasons, whereas import prohibitions or embargoes might lead to force majeure due to legislative reasons. The most obvious and undisputed force majeure events are perhaps the ones that arise out of natural reasons. Earthquake, flood, typhoon, hurricane and lightning easily qualify as possible force majeure events as do epidemics – the Turkish Court of Appeals has previously decided that epidemics would constitute a force majeure event that would arise out of a natural reason.
As a WHO-declared pandemic, COVID-19 should under normal circumstances qualify as force majeure. We should add two caveats at the outset: first, an event may look like force majeure but it may not qualify as one due to the facts of the case and second, even if an event is a force majeure event under one contract, it does not mean it will be a force majeure for other contracts. In other words, not all events lead to the same conclusion, and each case may have different aspects that must be considered.
Nevertheless, there are some characteristics that are regarded as pre-requisites for force majeure. If one of these is absent, it will likely mean that there is no force majeure event in place. First, the event must be an “external” event. This means the event should not be associated with or attributable to the obligor, or its business. Secondly, the event must be unforeseeable and unavoidable to the extent that from an objective point of view, it would not have been possible for anyone to have foreseen or avoided the outcome. Also, the event must cause a breach of an obligation in an absolute and inevitable manner, rendering the performance of the obligation impossible. Importantly, the impossibility of the performance obligation must be caused by the force majeure event itself.
It will hardly be disputed that COVID-19 was an external event. Also, it is not likely that it was foreseeable or avoidable. The key is to determine whether it caused the non-performance of an obligation, whether it rendered the performance impossible. Then there are other issues, such as notification and the duty to mitigate damages. All of these need to be subject to case-by-case review.
- Does Your Contract Say Anything?
The definition, requirements and the consequences of force majeure may well depend on what your contract says. The first thing to do therefore is to review the contract. Parties would be advised to look out for other terms that are sometimes (albeit not quite correctly) used interchangeably with force majeure events, such as “exceptional events” or “events beyond control”.
- If there is a force majeure clause in your contract, then the procedure described in the contract must be followed and the duties described under the force majeure clause must be complied with. The most obvious of these is the notification periods, as some contracts might require the affected party to notify the other in a given period of time in order for the affected party to be relieved from its obligations.
- It gets more complicated if there is a force majeure clause in your contract but it does not specifically refer to an epidemic. This is a disputed area under Turkish law – one argument is that if this is the case and the clause lists force majeure events in a limited manner, then no other event may be regarded as force majeure. The other argument is that even if the clause lists force majeure events in a limited manner, other events may be regarded as force majeure if the general requirements of force majeure are met. This will depend on the specifics of the case and the interpretation of the contract.
- In any case, suspension and termination provisions under the contract are of vital importance. Your contract may include provisions in relation to if, how and when the contract may be suspended and/or terminated and may have defined what the payment terms in case of any such suspension or termination will be.
- What If Your Contract Does Not Say Anything?
If there is no force majeure clause in your contract, then this means that the following are not defined in the contract: force majeure events, procedure to be followed by parties, and the consequences of a force majeure event. This does not automatically mean the end of story.
First, it should be checked whether the requirements set forth under the “A Brief Look at Force Majeure” header above are met. If the answer is yes, then it may be possible for the affected party not to be held liable for the breach. As for notification and mitigation of damages duties, the obligor must notify the other party without delay, that it has become impossible to perform the obligation and it must also take necessary precautions to mitigate damages. Otherwise, the obligor itself will be held liable for damages that arise out of the failure to notify or take precautions.
Importantly, under Turkish law, “risks” or “potential force majeure events” do not qualify as force majeure. A consequence of this is that the notification and mitigation duties described above will not be in place until the event renders the obligation impossible. It is worth noting that this is not always the case under contracts.
It is not an ideal case if the consequences of force majeure are not defined under the relevant contract. It is correct that a force majeure event breaks the causal link between the non-performance of the obligation (i.e. breach) and the resulting damage and so the obligor will not be liable for damages if there is a force majeure event. However, there are other issues surrounding force majeure. Consequences might vary under Turkish law and these will depend on a number of factors.
First, it must be determined whether the force majeure event renders performance completely and objectively impossible. If this is the case, then the TcO says the obligation will be terminated. This does not automatically mean that this is a typical termination of the contract as a whole, but the practical result may be the same. If the force majeure event renders performance partially impossible, then this will be applicable for the part which has become impossible, not for the entirety of obligations.
Alternatively, the force majeure event could have rendered performance of obligations temporarily impossible. This is very frequent with force majeure events, and the result of this from a legal standpoint is that the performance of the obligation is effectively postponed until after the force majeure event is over. The TcO does not have a codified procedure for suspension, but in practice, a temporary force majeure event might lead to de facto suspension.
As far as temporary impossibility is concerned, the Turkish Court of Appeals does accept that there is a certain period of time during which the parties would be expected to “endure” the continuance of the contract. From a practical point of view, this means that the Turkish Court of Appeals would allow parties to get out of the contract at some point if the event continues (and therefore the performance continues to be impossible) and this may (or may not) be in the form of rescinding the contract. The key issue is that there is no single answer and all of these will be decided on a case by case basis – some of these cases may even involve being subjected to higher standards solely because a party to the contract is a “merchant”.
- Does COVID-19 constitute a force majeure event?
It depends, because the requirements described at the outset of this Section must be met in order for COVID-19 to be deemed a force majeure event. It is very unlikely for COVID-19 or any other potential force majeure event to automatically qualify as a blanket force majeure event.
Take a Turkish contractor as an example: this company has undertaken to build a hotel for an employer in Veneto, Italy. Due to the outbreak and the current restrictions in Veneto, the Turkish contractor is barred from performing its obligations in time. The reason for this is that it is simply impossible for the Turkish contractor to continue construction works due to the force majeure event. The result is that the contractor is in breach of its obligation at the face of it, but it cannot be held liable for this breach.
This is not applicable to all cases. If this Turkish company entered into a contract with the same employer, but its obligation is to give remote consultancy services, then it is not as likely that the Turkish contractor’s obligations are prevented by a force majeure event. It is still possible, depending on the specifics of the case.
On this note, it is important to reiterate that even if COVID – 19 constitutes a force majeure event under a certain contract; this does not mean that the obligor is relieved from all of its obligations. Partial impossibility is very much possible and the obligation that has been affected from the impossibility caused by the force majeure event must be identified correctly in order to determine the effects of force majeure.
It is also worth noting that the rule under Turkish law is that a payment obligation cannot be rendered impossible due to a force majeure event. This is associated with the nature of this debt. Naturally there may be exceptions to this rule, but in general, it will be highly unlikely for COVID-19 to render the payment obligation impossible – regardless of whether your contract specifically addresses this issue or not.
The main takeaway from this section should be that incorrect identification of a force majeure event or its impact on your obligation, incorrectly assuming that COVID-19 constitutes force majeure for any and all obligations, or mistaking an event for a force majeure event in general may have serious consequences. In brief, such incorrect conclusions may cause the obligor to be liable to perform the obligation, and also cause it to be held liable for damages arising out of non-performance of the obligation.
- Hardship: Another Option
If COVID-19 does not qualify as force majeure for a contract, then parties should consider invoking the hardship clause under the TcO. Hardship is a different concept, as it does not render performance of an obligation impossible like force majeure does. Hardship means that the performance of the obligation is still possible, but it has become so difficult that it cannot, in good faith, be expected from the obligor to perform this obligation under the same terms and conditions as were initially agreed.
That being said, hardship is not entirely irrelevant from force majeure and impossibility, because the requirements are not very different. The condition that renders the performance of the obligation extremely difficult would need to be unforeseeable and unpredictable (it could not have been foreseen or predicted at the time of contract signing) and the obligor must not have had fault in the fact that the performance has become so difficult. There are other conditions for the hardship provision to be successfully invoked and if so invoked, it will allow the affected party to ask from the court that the terms and conditions are adjusted, and if this is not possible, then the contract may be rescinded.
- What Else Should You Consider?
- Certification Requirements
In some cases, a certification by a relevant authority might be required for the event to constitute force majeure. This may be a requirement under the applicable legislation as well; Turkish Public Procurement law is one example. Parties should check the applicable legislation (as well as the contract) to identify whether this is relevant for their obligations.
- Cross References and Subcontracts
Parties should look out for cross references in other contracts, as well as provisions in subcontracts. Some subcontracts may be the product of a flow-down of the main contract, and may require further notifications or notifications under different terms.
The COVID-19 outbreak might be quite relevant within the context of an insurance policy, even if COVID-19 does not constitute a “force majeure event” under the relevant contract. Your insurance policy, be it a Construction All Risks policy, a mechanical breakdown policy, or a general commercial enterprise policy, may cover epidemics or other forms of events which might be relevant. Insured parties are therefore advised to check their policies as well as the notification requirements thereunder and reach out to insurers to discuss what their options are.
Section 2: Energy
In this section of the Handbook, we explore if and to what extent the COVID-19 outbreak affects obligations with respect to oil and gas industry contracts and regulations, as well as under Turkish petroleum, natural gas and electricity market regulations, and mining laws.
- Oil & Gas Exploration and Production
The following focus on what force majeure means for oil and gas contracts and what the consequences are. Reference will be made to the model contracts of the Association of International Petroleum Negotiators’ (“AIPN”) as well as Turkish law principles including the Turkish Petroleum Act.
The oil and gas industry is by nature cyclical. However, due to an unprecedented combination of the decline in global consumption from COVID-19 and the price wars between the largest producers, the industry is going through unprecedented times. There were estimates that at this rate of supply overcoming demand, the world’s oil storage capacity may be full by early May 2020, in which case the prices would further plummet. OPEC + have agreed to production cuts but the prices will remain in historic lows by all estimates. In these extraordinary times, oil and gas contracts will naturally be dissected to find avenues to excuse performance, terminate contracts or suspend obligations. In this context, we have broadly reviewed industry contracts from the perspective of COVID-19 and, primarily, force majeure.
Oil and gas contracts tend to be subject to various governing laws. The law of the jurisdiction in which the activity will take place may be different from the law governing the relevant contract. In principle, both in civil and common law jurisdictions, while there may be default rules governing impossibility of performance in similar circumstances, a contractual force majeure provision would likely supersede such rules.
- Product Sharing Contracts (PSCs)
In respect of Production Sharing Contracts and other similar contracts (e.g., petroleum agreements, field technical services agreements, etc.) entered into with governments in countries that use a contractual scheme for exploration and production of oil and gas that belongs to the state, the contract language will be paramount.
These are contracts in which the contract may be subject to a law other than the local law for the activities to be conducted. So, any interpretation of the force majeure clause should be guided by applicable law per the contract and to the extent relevant, local law.
If the contract spells out “epidemics” as a force majeure event, it is likely that the non-performance or delay of the affected obligation will not result in a default. Notification obligations should be followed and there may be a requirement for the parties to discuss mitigation alternatives. However, all of these will require the specific obligation to be prevented due to force majeure. Causation is critical, if the specific duty can be performed irrespective of the force majeure event, then there would be no grounds to trigger force majeure in respect of that duty.
If the underlying document that grants the relevant petroleum right is not a contract but a license or a concession, then the matter would likely be more one of local laws. In that context, it should be borne in mind that local laws may be changed in such extraordinary circumstances. How much of that change can be reflected on an existing concession or license may well be the matter of an investment dispute in case of foreign contractors operating in different jurisdictions.
As such, the nature and content of the underlying document granting the petroleum right will determine whether COVID-19 can qualify as force majeure and what the consequences of these will be, and if COVID-19 can qualify as such, then the next step should be ascertain whether if affects performance of a certain obligation.
- AIPN Model Agreements:
- Joint Operating Agreements (JOAs)
The fact that force majeure will be defined by the type and content of the underlying document that gives the petroleum right gains further importance when the relevant petroleum agreements are considered, because the model agreements refer to the “Contract” that gives the petroleum right. For this reason, AIPN’s Model JOA provides the parties with alternatives when it comes to the force majeure definition. The alternatives provided in the model are wholly adopting the definition in the Contract, defining force majeure broadly as a matter outside the relevant party’s control, and curtailing the latter definition by qualifying language.
Per the Model JOA, if a party becomes unable to carry out its obligations as a result of force majeure and if such party gives notice within a reasonable period of time, then the affected obligations will be suspended. Importantly, the Model JOA specifically excludes payment or security obligations from the force majeure clause, so the affected obligations will not involve these.
- Farm Out Agreements
The principles under the model Farm Out Agreement are substantially the same with that of the Model JOA. Again, the relevant party’s obligation may be suspended subject to reasonable notice and swift resumption of duties when possible. As far as COVID-19 is concerned, the key issue is to determine whether this renders the relevant party unable to perform the obligation it seeks to have excused in whole or in part.
Provisions concerning default under the Model JOA and similar agreements usually provide for various remedies (ranging from suspended voting rights at the operating committee to seizure of a party’s interest under the Contract) when a party is in default, most notably in its cash call obligations. Such provisions will also be critical in the upcoming days as parties with deteriorating finances fail to keep up with their obligations.
- Offshore Drilling Contracts
This AIPN model defines force majeure as events or circumstances that are beyond the reasonable control of a party, preventing or delaying the performance. The affected party is required to “promptly” notify and keep updated the other party, and it is only if this requirement is met that the affected party will be excused from performance, with duty to mitigate the force majeure effects in place.
Although the wording of this is different to that of the above-mentioned AIPN models, the gist of it is the same. Importantly however, this AIPN model refers specifically to epidemics and pandemics. It is quite straightforward that COVID-19 will qualify as force majeure if the other general requirements in the model are met, the latter being the key issue.
Therefore, the contractor may be paid the force majeure rates described, and parties would not be liable to each other for any delay in or failure of performance. Importantly, the model allows parties to consider excluding payment or security obligations from force majeure events. The AIPN model also provides for several termination options, so the force majeure consequences really depend on what the parties opted for at the outset of their contractual relationship.
- Turkish Petroleum Act
Under Turkish law, the obligations of the petroleum license holders concerning exploration and production of oil and gas are governed by the Turkish Petroleum Act numbered 6491 (“Petroleum Act”) and its secondary legislation, and the COVID-19 outbreak may also have consequences impacting these obligations.
Per the Petroleum Act, license holders are required to comply with their work programmes, failure of which may cause the bank letters of guarantee submitted to the General Directorate of Mining and Petroleum Affairs to be forfeited. Not commencing production under a production license may even cause the license to be cancelled. If however, there is a force majeure event that affects the rights and obligations of the license holder, then such rights and obligations will be postponed.
Epidemics are one of the force majeure events listed under the Petroleum Act, and it may qualify as a force majeure event if it meets the requirements. However, the key issue remains that the COVID-19 must affect a specific obligation deriving from the legislation. Otherwise, the license holder will be obliged to carry on as if there were no such event, and failure to do so may have serious consequences in respect of the obligations due to the state.
On 29 April 2020, the Ministry of Energy and Natural Resources (“MENR”) issued an announcement consisting of some measures and incentives to reduce the negative impact of the pandemic on the oil and gas exploration and production companies, which are as follows:
- The state royalty payments for March 2020 which are due on 30 April 2020 are postponed to 31 July 2020 and the date for the submission is postponed to 20 July 2020.
- The state royalty payments for April 2020 which are due on 31 May 2020 are postponed to 31 August 2020 and the date for the submission is postponed to 20 July 2020.
- The state royalty payments for May 2020 which are due on 30 June 2020 are postponed to 30 September 2020 and the date for the submission is postponed to 20 September 2020.
- The obligations for license holders under their exploration or production licences are postponed for 6 months.
- Petroleum and Natural Gas Markets
The main principles of force majeure, which are set forth by the Petroleum Market License Regulation, mainly revolve around unavoidability of the event and the prevention of obligations under the legislation. The postponement of obligations due to force majeure will be the decision of the Energy Market Regulatory Authority (“EMRA”), which may alternatively decide that the obligation is cancelled in its entirety.
This is similar to what is provided under the Natural Gas Market License Regulation. Neither market regulation spells out epidemics, but COVID-19 may qualify as force majeure event eventually, but the key issue is that COVID-19 must render the license holder unable to perform its obligations.
Electricity Market License Regulation provides for the main principles for an event to be classified as force majeure, which are unavoidability, unforeseeability and prevention of obligations under the legislation. Epidemics are included in the non-limited list of events that may be considered as force majeure.
In case of a force majeure event, EMRA will have the authority to postpone or suspend the obligations of a license or pre-license holder in accordance with the effects of the force majeure and for the duration of the force majeure event. It will also have the authority to cancel the obligations of the license or pre-license holder if it becomes apparent that the obligations are impossible to fulfill. The license holder should apply to EMRA for this decision to be made.
EMRA announced on 3 April 2020, that the specific periodic obligations of license holders for pre-license holders and those who have signed connection agreements in relation to the license-free electricity generation are postponed for a period of 3 months without the need for application due to COVID-19. The postponed obligations include (without limitation) construction periods set forth under licenses as well as mergers and spin-offs. Importantly, these obligations are only postponed if the deadline of the specific obligation has terminated, or will terminate as of 10 March 2020.
Mining is primarily governed by the Mining Law numbered 3213 (“Mining Law”). According to the Mining Law and if the license holder files an application, MAPEG may decide to suspend the license if there is a force majeure event, in which case the administrative fines that would normally be imposed on the license holder for failure to produce less than what it had declared it would not be imposed.
According to a change in the Mining Law enacted on 26 March 2020, as a part of the legislation that consists of the national response towards the Covid-19 pandemic, the Ministry may decide, in case of a force majeure event, that the financial obligations of mining companies are deferred or are split into instalments. The change also provides a suspension of the statutory periods under the Mining Law. Within this context, the Ministry is authorized to announce force majeure for certain parts or regions of the country and to identify which financial obligations cannot be carried out due to force majeure.
Following the above amendment to the Mining Law, an announcement was published on the website of the General Directorate of Mining and Petroleum Affairs (“GDMPA”) on the measures taken by the Ministry regarding the Covid-19 situation. The announcement affirms that a state of force majeure has been declared between 1 April 2020 and 30 June 2020 (including these dates) in accordance with Annex 19 of Mining Law, amended by the Law No. 7226, for mining licensees and royalty holders that have been directly affected by precautions taken against the spread of the Covid-19.
The measures announced by the Ministry include, among others, the following:
- Technical documents regarding operational activities in 2019, which had to be submitted by the end of April 2020 pursuant to Article 29 Paragraph 4 of the Mining Law have been postponed by three months starting from the date of the lifting of force majeure and shall be completed until 30 September 2020.
- For every license/license application requiring the submission of a preliminary survey report, mineral exploration project, exploration activity report or an operation project within the dates of the declared force majeure, the dates of submission and any other requirements related to this are extended until 30 September 2020.
- In relation to the operation licenses that require, as per Article 24 of the Mining Law, the submission of an operation project within the dates the declared force majeure, requirements on the six months’ advance submission of the operation project, and any other obligations under Article 24 Paragraph 2 of the Mining Law, shall not be applicable.
- In the event that the terms granted to license holders for the completion of any processes under the relevant articles of the Mining Law fall within the dates of the declared force majeure, such periods shall be extended until 30 September 2020.
- The 2019 state royalty payments, which ordinarily have to be made by the end of June 2020 by license holders pursuant to Article 14 of the Mining Law, can now be paid until 28 December 2020.
- License fees that were doubled for a failure to pay within the month of January, which ordinarily have to be made by the end of June 2020, can now be paid until 28 December 2020 without cancelling the license on condition that double the amount is paid.
- In calculating the periods on which permits set out under Article 7 of the Mining Law were not issued in time, in the application of Article 24 Paragraph 11 of the Mining Law, the entire calendar year of 2020 shall be disregarded for the period subject to the calculation of administrative fees, and any long-stop dates shall not be applicable until 28 December 2020.
- In any evaluation made pursuant to Article 24 Paragraph 12 of the Mining Law (which provides under certain conditions the imposition of an administrative fine in case production levels are below the ones that were declared), the force majeure period shall not be taken into consideration.
 D. Yergin, The Oil Collapse, The Foreign Affairs, 2 April 2020.
Section 3: Projects
In this section, we take a look at different types of contracts and transactions in projects to showcase if COVID-19 could be considered a force majeure event under contracts governed by Turkish law and if that is the case, which procedure should be followed. To that end, we touch upon FIDIC, construction contracts and international sale of goods, including CISG – all with reference to the common requirements of force majeure explained under Section 1 – Force Majeure and Contracts.
- FIDIC Suite of Contracts:
The 1999 FIDIC forms provide for Force Majeure events and consequences under Clause 19, which is changed to Clause 18 entitled “Exceptional Events” for 2017 FIDIC forms. This change in the title may be confusing from a civil law point of view, given an “exceptional event” may be deemed a different concept, and it is indeed the case under Turkish law. Theoretical discussions surrounding this rebranding aside, both forms list force majeure events or exceptional events by way of example and set forth that an event may qualify as force majeure or exceptional event as long as it is beyond control, which the affected party could not have provided against, which is unavoidable and not substantially attributable to the other party, with the affected party being prevented from performance. Neither form specifically refers to epidemic or pandemics as an example force majeure or exceptional event.
As for the notification and mitigation duties, FIDIC forms do require the affected party to give notice to the other within 14 days which starts from the day the affected party became aware or should have become aware of the event. This obligation is vital, because the consequences of force majeure depend on the notification. If the notification duty is not complied with, the affected party will not be excused from performance, which importantly, does not in any case, cover performance of payment obligations. Further, the affected party will not be entitled to time extension (or “EOT” under the 2017 forms) or costs. For the 2017 forms, the affected party would need to keep notify the other in the event there is a continuing exceptional event. In any case, each party will be under the duty to minimize delay.
A force majeure event may lead to termination under the FIDIC suite of contracts if substantially all the works are prevented and this prevention continues for 84 days (uninterrupted) or 140 days (total). This termination would fall under Optional Termination under Sub-Clause 19.6 (18.5 for the 2017 forms), which provides for the broadest payment upon termination terms under FIDIC contracts.
There are important differences between what a FIDIC form of contract requires for force majeure and what Turkish law requires – by way of example; the FIDIC forms do not require the event or circumstance to be “unforeseeable”. In general, parties should be careful to notify the other party per the time period given under the contract, which may start from the day such party should have become aware (which will have to be considered on a case-by-case basis) and follow the procedure detailed under the respective contract. Ascertaining whether the force majeure event can amount to termination is of vital importance too, given the FIDIC forms only allow termination if the force majeure affects substantially all of the works, which means COVID-19 will not amount to termination unless it affects the majority of the works and not less.
- Other Construction Contracts:
It is very common for construction contracts to include detailed force majeure provisions, in which case the procedure described under the contract should be followed. But contracts that are not modeled after a standard form of contract may not have detailed force majeure clauses or may not have force majeure clauses in the first place. If this is the case, Section 1 – Force Majeure and Contracts explains the general principles regarding force majeure.
One important additional issue that parties to a construction contract should take into consideration is that they are subject to the “contract for work (i.e. work and services)” provisions under the Turkish Code of Obligations (“TcO”). This means that the contractors are subjected to very high standards as they are fully liable for the performance of the works in time and with quality, and are required to prove that they are not in default when the contrary is claimed by the counterpart. The contractors of work or service contracts are required to act as “prudent” contractors, which is a standard in addition to the “prudent merchant” principle under Turkish Law. If a contractor becomes aware of any event at all that would jeopardize the timely completion of the work, then it must notify the employer of this event immediately. In a way, force majeure clauses that include specific notification requirements describe this notification period. If the contract includes no such requirement, then the contractor would be required to notify the employer immediately. What “immediately” means will need to be considered on a case-by-case basis, which consideration should also include whether the contractor should have notified the employer not immediately after it became aware but it should have become aware. In other words, there may be instances which may need a broader interpretation with respect to prudent contract.
- Public Procurement Contracts
If a certain construction project is governed by the public procurement legislation under Turkish law, then this means the procedures described under the individual contract and the Public Procurement Laws numbered 4734 and 4735 as well as the secondary legislation and the individual public procurement contract will need to be strictly followed.
Force Majeure events and consequences thereof in relation to the public procurement legislation are set forth under the Public Procurement Contracts Law numbered 4735, which provides for a “seemingly” limited list of events as Force Majeure. This list includes epidemics, and the events of force majeure and conditions for the issuance of time extensions are also included in public procurement contracts.
However, no event automatically qualifies as a force majeure event. The public authority may accept an event as an event of force majeure only if the event is unavoidable and is not caused by the contractor’s fault. Another requirement is that the contractor must be unable to overcome the fact that the event prevents fulfillment of an obligation. It is equally important that unlike most private contracts, public contracts under this legislation requires the contractor to notify the relevant public authority in writing within 20 days upon the occurrence of the force majeure event, with certification of the force majeure event from authorities. The administration will be authorized to conclude the contractor’s application, upon which the administration may grant time extension or terminate the contract.
A Presidential Circular numbered 2020/5 issued on 1 April 2020 reinforces the above, and it further states that the relevant administration is required to obtain the Ministry of Treasury and Finance’s opinion before reaching a decision.
Parties would therefore be advised to review their public procurement contracts and notify the relevant administration with the required documents, per the contract and the legislation. That being said, a general notification of a pandemic will likely not be considered as sufficient documentation since the effects of the pandemic over the performance of the contract is highly important. Therefore, the effects of COVID-19 on a public procurement contract will need to be considered on a case-by-case basis.
- Sale of Goods
In case the contractual relationship between the parties relates to the sales of goods, the issue is, again, whether there is a provision on force majeure within the contract or not. If the answer is in the affirmative, then such provision will be applied whereas, in the absence of a force majeure clause, whether and how a certain event qualifies as force majeure will depend on the applicable law. From a Turkish law perspective, this will depend on whether the sale of goods is and international sale subject to the United Nations Convention on the International Sales of Goods (“CISG”) or whether the sale is subject to the TcO provisions.
CISG does not refer to force majeure explicitly. However, it does include a provision concerning an “impediment beyond control” under Article 79, which in the doctrine is accepted to cover issues relating to hardship and/or force majeure. For an event to qualify as an impediment beyond control, the party claiming the occurrence of such event could not have been reasonably expected to have foreseen it at the time of the signing of the contract or to have avoided or overcome it or the effects thereof.
Similar to other instruments providing for a force majeure event, CISG also requires the notification of the concerned impediment to the other party within a reasonable time.. Additionally, as a general principle and in connection with Article 77, parties are under the duty to mitigate the loss or damage caused by such an impediment, otherwise the right to demand compensation and/or claim other rights provided under the contract may be adversely affected.
The consequence of failing to perform an obligation due to an impediment beyond control is that the affected party will be exempt from its liability for performing this obligation. This however, does not affect any other right available under the contract. There is no consensus in the doctrine as to the scope of the exemption: some argue all liability is terminated in case of an event beyond control, whereas others argue that the affected party will only be relieved from the liability to pay damages.
Whether COVID-19 would qualify as an impediment beyond control needs to be evaluated in line with the specifics of each case. By way of example, if an obligation was not performed due to an imposition of a customs restriction by the government or cancellation of transportation availabilities due to COVID -19, then such party may be relieved from liability. Importantly, different conclusions will need to be drawn for different cases.
A case-by-case evaluation is required to determine the liability of the party in breach regarding other rights available to the other party under the contract and CISG. For instance, there may be cases where the party in breach is required to provide substitute goods or perform remedial action free of charge depending on the circumstances, and the nature of the obligation that is not complied with.
- TcO Provisions on Sales of Goods:
If the sale of goods is not within the scope of application of the CISG, then this relationship will be governed by the TcO if Turkish law applies to the contractual relationship. Please refer to the explanations under Section 1 – Force Majeure and Contracts for how COVID-19 may impact contracts.
One important issue specific for sales is the passage of risk. As a rule, the seller bears this risk until the goods are delivered to the buyer. As far as force majeure is concerned, whether delivery has been completed or not may affect which of the parties is required to establish that the requirements for force majeure are met.
Additionally, the TcO explicitly refers to force majeure in sales provisions by stating that the buyer’s right to rescind the contract survives in cases where the goods that have been delivered defectively by the seller are perished or severely deteriorated due to a force majeure event. Hence, provided that the delivered goods are defective, the buyer may still be entitled to terminate the contract depending on the circumstances of the case, even if the goods sold no longer exist or are heavily damaged by returning the remains of the goods to the seller.
In light of the above, if there is a breach under a sales contract due to COVID-19, based on a case-specific evaluation, there may be remedies and/or rights available to both the seller and the buyer.
Section 4: Finance
In this section, we review how facility agreements may generally be affected from events unfolding during the COVID-19 pandemic and how the rules enacted in the COVID-19 period have temporarily changed Turkish regulations concerning enforcement actions.
Finance contracts usually do not have force majeure provisions to protect borrowers, since in general parties are not relieved from monetary obligations due to force majeure. Force majeure pertains to an obligation the performance of which is rendered impossible or inequitable by an intervening event, which is difficult to argue in respect of payment obligations. Therefore, theoretically, a borrower’s repayments of a loan under a facility agreement would not be relieved by force majeure in the way a contractor’s performance to build a building would be.
Facility agreements may include representations that there is no event of force majeure or material adverse effect concerning the borrower at the time of signing, first and subsequent drawdowns. This is for the lenders’ protection and does not provide any force majeure protection to the borrowers.
Similarly, facility agreements for project finance transactions may have contingencies as to what would happen if a force majeure event occurs under a project document, such as a construction contract. So relevant transaction documents should be reviewed from the perspective of the documents concerning the implementation of the project at hand and related consequences for the facility agreement, if any.
An event like COVID-19 will hurt the markets and supply chains of many borrowers. The Turkish President has announced that the borrowers that default on their loan payments in April, May and June will be notified with a different annotation noting “force majeure” (normally a borrower default should be notified to the Banking Regulatory and Supervision Authority latest on the third month of the default), indicating an intent to have the financing and regulatory institutions treat defaults in this period with more leniency.
- Suspension of Enforcement-Related Actions and Relevant Periods
Requesting the payment of a debt, claiming payment under a negotiable instrument, seeking the enforcement of a judgment, enforcing a lien, attaching a property, foreclosing on a mortgage and similar actions conducted through execution office (icra dairesi) or bankruptcy office (iflas dairesi) proceedings for debt collections, establishment of liens and enforcement of security interests are suspended between 22 March 2020 and 15 June 2020. Unless the suspension is extended, these proceedings will resume after 15 June 2020. The deadlines with fifteen days or less remaining at the start of the suspension period will be deemed extended for further fifteen days starting from the day following the end of the suspension period.
Pursuant to Article 330 of Enforcement and Bankruptcy Law numbered 2004 (“EBL”), in case of an epidemic, general misfortune or war, enforcement proceedings may be suspended for a certain period of time in all or some parts of the country. Pursuant to this provision, a Presidential Decree was passed on 22 March 2020 (the “Presidential Decree”), as part of the measures taken to prevent the spread of the COVID-19. The Presidential Decree suspended the initiation of enforcement and bankruptcy claims across the country, subject to exceptions, between 22 March 2020 and 15 June 2020. In this context, requests for new enforcement and bankruptcy proceedings will not be processed and enforcement of preliminary injunctions by way of seizure of assets will not occur during this time.
After the Presidential Decree came into force, the Ministry of Justice’s Executive Affairs Department published announcements detailing its implementation on 24 March 2020 and 02 April 2020. Further, the Law on Amendment of Certain Laws No. 7226 (“Law No. 7226”) concerning COVID-19 prevention measures came into force on 26 March 2020 providing that all relevant statutory periods will be tolled until the end of the suspension period. Pursuant to its Provisional Article 1(b), subject to exceptions, the statutory periods or the periods that judges or enforcement and bankruptcy offices determine under enforcement and bankruptcy laws concerning enforcement and bankruptcy claims, requests pertaining to the enforcement provisional attachments, and effecting attachments and seizures have been tolled between 22 March 2020 and 15 June 2020. The tolling period may be extended by a Presidential Decree to be published in the Official Gazette once, for a period not exceeding six months.
- Actions Unaffected from Suspensions
- Actions in Favor of the Other Party
Pursuant to the Provisional Article 1 of the Law No. 7226, within the scope of Law No. 2004 and other laws related to execution processes, during the suspension period, a party may request to file an action that is in favor of the other party. For instance, the debtor may request the sale of the collateral or the creditor who has previously announced the sale may waive its sale request since these transactions are in favor of the other party. Similarly, other actions arising from the debtor and creditor’s agreement will be considered within this scope, as agreements are deemed in favor both parties.
Another exception under Provisional Article 1 of Law No. 7226 is that debtor’s voluntary payments would be accepted by the execution office. Consequently, default interest and other interests on debts will continue to accrue during the suspension period, as the debtors are not precluded from paying off their debts during this period. Similarly, the Ministry of Justice’s Executive Affairs Department’s announcement of 24 March 2020 provides that debtors can have existing liens or seizures removed by execution offices upon paying off relevant debts (and assuming the relevant file does not have a list of creditors (sıra cetveli), and other third parties’ rights would not be affected).
- Third Party Actions
Neither the Presidential Decree nor Law No 7226 has an explicit provision on the effect of the suspension on third parties, namely those who would be required to pay a debtors’ receivables to his creditor, rather than the debtor, by way of an enforcement office order; for example those concerning attachment of salaries. Ministry of Justice’s Executive Affairs Department made an announcement on 2 April 2020 to clarify the ambiguity about third party transactions, especially those regarding the attachment of salaries. Accordingly, attachment of salaries (arising from unpaid alimony or other debts) will continue during the suspension period, as well as other notices of attachment under article 89 of EBL.
- Alimony-Related Claims
Presidential Decree and relevant regulations have set an exception for alimony debts. They are exempt from the suspension period and tolling of relevant periods. Therefore, initiation of enforcement claims related to alimony payments and related actions can continue as usual.
 Law No. 7226, Provisional Article 1.
 Presidential decree numbered 2279, published in the Official Gazette numbered 31076.
 Pursuant to the Provisional Article 1 of the Law No. 7226, the periods regarding the procedures that complement the interim injunctions set forth in Civil Procedures Law numbered 6100 (“CPL”) are excluded from the suspension period. In this respect, the deadlines under CPL that complement interim injunctions, such as the deadline for an objection to an injunction or a request for the implementation of an injunction, will continue during the suspension period.
objection to an injunction or a request for the implementation of an injunction, will continue during the suspension period.
Section 5: Employment Law
This section explains the potential implications of the COVID-19 pandemic from the perspective of Turkish labor law by exploring the effects of the pandemic on the rights and obligations of the employers, as well as those of the employees.
- What information obligations do employees and employers have in respect of COVID-19?
An employer is under a duty to ensure the health and safety of its employees by taking the necessary measures and monitoring their implementation. To ensure occupational health and safety in the workplace, an employer should inform its employees about the health and safety risks that they may be exposed to at the workplace. In this context, employers should inform their employees about COVID-19. Likewise, employees are under a duty to not endanger their own health and safety and those of others who are affected by their actions at work, and to act in line with the occupational health and safety trainings they have received and employer’s related instructions. Considering the increasing number of cases of COVID-19 and the virus being transmitted quite quickly, employees who show symptoms of, are infected by or are at particular risk of being infected by COVID-19 must report this to their employer immediately.
- Can an employer instruct an employee to undergo medical examination?
An employer should ensure that its employees are subjected to health surveillance by taking into account the health and safety risks they may be exposed to at the workplace. Along with an employer’s obligation to ensure the health and safety of its employees, within the context of COVID-19, it is likely that an employer may instruct an employee to undergo a testing when it is reasonably deemed necessary.
- How can working arrangements differ?
Employers can continue work in different ways. During COVID-19 pandemic, an employer may continue its operations by different means to ensure occupational health and safety, as follows:
- Work-from-home arrangements:
Remote working is allowed under Turkish employment law. Given an employer’s obligation to protect its employees, in the midst of the Covid-19 pandemic, if an employee’s job description and working conditions are amenable, it would be appropriate to implement remote working practices. The law does require a written agreement between the employer and the employee to implement a remote working model. However, when the urgency that COVID-19 imposes is taken into consideration, in practice, it may not always be possible to enter into a written agreement with each employee for this purpose – this is especially so in large companies. In that case, remote working practices and their context should be announced in writing by the company’s management.
- Short-time work practices:
In cases where temporarily (i) the working hours at the workplace are significantly reduced or (ii) activity in the workplace is wholly or partially suspended, due to the general economic, sectoral or regional crisis, or exigent causes (zorlayıcı sebep), a short-time working practice may be allowed in the workplace for up to three months and the proportionate cut in employees’ paycheck would be compensated (up to a limit) by government allowances durıng this period provided that the company’s relevant application is found to be appropriate. The Turkish Court of Appeals has found that situations such as quarantines due to epidemics are exigent causes. Therefore, COVID-19 would be deemed an exigent cause allowing for short-time work practices at the work place, which would entitle the employees to short-term work allowances, provided minimum social security and working day conditions are met. The President’s office’s press release of March 18, 2020 has indicated that the processes required to benefit from the short term work allowances will be facilitated and accelerated.
As per Article 8 of the Law in Relation with Minimizing the Effects of Novel Coronavirus (COVID-19) Pandemic on Economic and Social Life and Law on the Amendment of Various Laws numbered 7244 (“Law No.7244”) the short-time working allowance will be paid on the basis of employers’ declarations, without prior confirmation of compliance due to COVID-19. However, any over payment made due to false employer declarations would be collected from the employer with legal interest. This article came into force on 17 April 2020, to be effective as of 29 February 2020. The term of short term work allowance support has been extended by one month in 29 June 2020.
- Compensatory work:
If an exigent cause has led to a business interruption, whereby the employees did not work or worked significantly below normal working hours, then the employer may, within the two months following the end of the interruption, have its employees to perform compensatory work and these compensatory work hours would not count as overtime. Such compensatory work cannot exceed three hours a day and the maximum amount of hours worked including compensatory work hours cannot exceed eleven hours per day (and 7.5 hours at night shifts); nor can compensatory work be performed on holidays. Thus in respect of work that has been stopped due to COVID-19, employees can be required to perform compensatory work subject to the relevant conditions.
- Can an employer require an employee to take an unpaid leave during COVID-19?
According to Law Numbered 7244 , an employer may send an employee on unpaid leave without the employee’s consent. This period has been extended until 19 November 2020. Such unilateral declaration of unpaid leave would not be deemed a rightful cause for an employee’s termination of the employment contract. The Law Numbered 7244 provides a wage support of TRY 39.24 per day to employees (i) who have been sent on unpaid leave and cannot benefit from short-time working allowance or (ii) whose employment contracts were terminated after 15 March 2020 and who cannot benefit from the regular unemployment compensation; provided that such employees are not entitled to pensions or other social security benefits. The term of the wage support cannot exceed the term for which employers have been precluded from terminating employment contracts. If an employer employs a person during the term in which the employee is provided wage support, an administrative fine would be imposed on the employer and the wage support paid to the employee would be reclaimed with legal interest.
- Can an employer require an employee to take a paid leave during COVID-19?
The annual paid leave request must come from the employee.[1″] That being said, an employer may request all or part of the employees to take paid leaves in the period from April till the end of October.
- Can an employer provide administrative leave to its employees during COVID-19?
An employer can request employees to take administrative leave whereby the employees are paid their full wage during the term of this leave and their annual paid leave rights are reserved.
- Can an employer terminate an employment contract for “just cause” due to COVID-19?
The Law Numbered 7244 establishes a temporary ban over most grounds for an employer’s termination of employment contracts for a period of three-months, accompanied by granting the employers the right to unilaterally require the employees to take unpaid leave during that period as explained above under the “unpaid leave” section.
Under Article 9 of Law Numbered 7244, employers are precluded from terminating employment or service contracts, regardless of whether they are within the scope of Labor Law numbered 4857 or not, for a period of three months following 16 April 2020 for reasons other than immoral, dishonorable or malicious conduct or other similar behavior. The President is entitled to extend the prohibition term until six months.
- Can an employee abstain from work with pay due to COVID-19?
An employee exposed to serious and imminent danger is required to file an application with his employer requesting the danger to be identified, as well as remedial measures. The employer is then required to convene and come to a decision on the matter immediately and to report its decision in writing. If the decision supports the employee’s request, the employee may abstain from work until necessary measures are put into practice and would be entitled to payment during this time. Further, an employee should leave his workstation or the dangerous area and proceed to a place of safety without complying with the preceding procedures in case of serious, imminent and unavoidable danger. If remedial measures are not taken in the face of a serious and imminent danger despite the employee’s request, the employee may abstain from work and would be entitled to pay; alternatively the employee may terminate the employment. If the employee abstains from work without these conditions being met, then the employer may terminate the employment contract for just cause.
- Can an employee terminate an employment contract for “just cause” due to COVID-19?
In addition to the situation under the above header, an employee may terminate his employment for just cause and without having to observe the required notice periods, if the employer or another employee who is constantly near the employee and with whom the employee is in direct contact is suffering from an infectious disease or from a disease incompatible with the work of the employee. Further, an employee may terminate his employment for just cause and without having to observe the required notice periods if an exigent cause necessitates the suspension of the work in the employee’s workplace for over one week. In this context, the cessation of work carried out in the workplace may be deemed an exigent cause.
- How should an employer deal with health-related information of an employee infected with Covid-19?
Health data of an employee who is infected with COVID-19 is sensitive personal data and can only be processed, absent explicit consent of the employee, by authorized institutions and organizations and those who owe a confidentiality obligation for the purposes of protecting public health, preventive medicine, conducting medical diagnosis, treatment and care services, planning and managing health services and its financing.
- How to proceed?
It is not possible to predict the extent and duration of the measures to be taken in respect of COVID-19. This note attempts to provide a framework with which to consider the possible implications of these measures on the employers’ and employees’ rights under Turkish law. The legal implications of COVID-19 will crystalize in the following days in line with the guidance of relevant authorities and institutions. Each case should be analyzed on its own facts; particularly so under such novel circumstances.
In the meantime, an employer’s duty to ensure its employees’ safety by implementing the appropriate preventative measure should be borne in mind.
 Law on the Occupational Health and Safety numbered 6331, Article 19
 Law on the Occupational Health and Safety numbered 6331, Article 15
 Labor Law numbered 4857, Article 14, paragraph 4
 Unemployment Insurance Law numbered 4447, Article 2
 Unemployment Insurance Law numbered 4447, Article 6
 9th Civil Chamber of the Court of Appeals numbered 2017/11091 E. 2019/11043 K. and dated 15 May 2019
 Labor Law numbered 4857, Article 64 and Regulation on Working Times Regarding the Labor Law, Article 7
 Article 9 of Law numbered 7244 adds Provisional Article 10 to Labor Law numbered 4857
 Pursuant to Labor Law numbered 4857, Provisional Article 10
 Annual Leave Regulation numbered 25391, Article 7
 Annual Leave Regulation numbered 25391, Article 10
 Article 9 of Law numbered 7244 adds Provisional Article 10 to Labor Law numbered 4857
 The effective date of the Law Numbered 7244
 Pursuant to Article 25/II of Labor Law numbered 4857 and any similar provisions under relevant laws
 Law on the Occupational Health and Safety, Article 13
 Labor Law numbered 4857, Article 25 (II) (h)
 Labor Law numbered 4857, Article 24(I)(b)
 Labor Law numbered 4857, Article 24(III)
 Law on the Protection of Personal Data numbered 6698, Article 6
Section 6: Corporate Governance
This section reviews the changes that the economic measures to counteract the effects of COVID-19 have brought to corporate governance of Turkish companies.
- What are the effects on upcoming General Assembly meetings?
If your company’s articles of association (“AOA”) allows for the convening of general assembly meetings electronically, and you have the IT infrastructure in place to conduct the general assembly meeting (i.e. a shareholders’ meeting), then it is fine to proceed with the general assembly meeting electronically. The COVID-19 outbreak would have minimal impact on the conduct of the meeting itself. Do note that if the company’s AOA does not include such provision, introducing it will require convening a general assembly (i.e. a shareholders’ meeting), and, among others, the purchase and setup of IT infrastructure, which might not be feasible both in terms of time and costs.
If there is no such provision in the AOA and you would like to postpone the meeting, it would be possible for the company’s Board of Directors to adopt a resolution in this direction. The most sensible way to postpone the general assembly meeting would be to do so by way of a Board of Directors Resolution which would set out why the meeting was postponed. This resolution would then be published with the Turkish Trade Registry Gazette.
If it is not possible for the Board of Directors to adopt a resolution on such short notice – then as of 20 March 2020, it is now possible, per Ministry of Commerce advice, for companies to postpone a planned and announced general assembly meeting directly by way of a petition to be signed by a company signatory, which is to be published with the Turkish Trade Registry Gazette. This might be regarded as a more practical way but this deprives the company of the opportunity to set a date for the postponed meeting.
If you would like to proceed with the general assembly meeting, there are no prohibitions towards companies’ convening their own general assembly meetings. However, in planning a general assembly meeting, the Board of Directors should consider if it would be safe, from an health and safety perspective, to convene the meeting at all – there are currently no consequences for not convening an ordinary general assembly meeting in the first three months of a financial year.
This said, for urgent resolutions, the general assembly of a company can and should still convene, provided that it is possible for the shareholders to furnish authorization documents for legal entities or their proxies, which might be challenging if such documents have to arrive notarized and apostilled from abroad. For general assembly meetings that necessitate the attendance of a Ministry representative, we would suggest notifying the representative as early as possible.
- Are we prohibited from taking any resolutions at the General Assembly level?
If a company (a joint-stock company, or a limited company) does not resolve to distribute dividends, or if the Board of Directors is not being authorized to distribute dividends in advance, then there are currently no restrictions.
If a company (a joint-stock company, or a limited company) has resolved to distribute of dividends (i) arising out of the net profits of the year 2019, or (ii) arising in part out of the net profits of the year 2019, and in part from the profits accrued from the financial year of 2018 and beyond, then your company is subject to several restrictions for the distribution of dividends. An initial restriction was introduced by way of introducing a provisional article to the Turkish Code of Commerce No. 6102, effective as of 17 April 2020. The application of said provisional article was narrowed down further by way of a communiqué from the Ministry of Commerce, effective as of 17 May 2020. As said communiqué has not been drafted to be retroactively effective, (i) General Assembly resolutions involving a distribution of dividends that were adopted until 17 May 2020 (exclusive), and (ii) General Assembly resolutions involving a distribution of dividends that were adopted after 17 May 2020 (inclusive) are subject to different restrictions, as detailed below.
These restrictions are in effect until 30 September 2020, and the President of the Turkish Republic is authorized to shorten or extend this term by up to three months.
Any General Assembly resolutions that are in breach of the below restrictions will arguably be deemed void, and the company may be held liable for any incompliant dividend payments made to the shareholders.
Resolutions on the distribution of dividends that were adopted until 17 May 2020 (exclusive):
If the distribution of dividends is to be solely utilized in full to fund the increase of company’s capital by way of a duly adopted resolution for the same to amend the articles of association of the company to increase capital, then no restrictions apply.
If the distribution of dividends will be made to the shareholders, and will not be solely utilized in full to fund the increase of company capital, then:
- only 25% of the net profits of the year 2019 may be distributed as dividends,
- profits accrued from the financial year of 2018 and beyond may not be distributed as dividends,
- voluntary reserves may not be distributed as profits, and
- the Board of Directors may not be authorized to distribute advance dividends.
If a company has already resolved on distributing dividends, or has authorized the Board of Directors to distribute dividends in advance by way of a duly adopted General Assembly resolution before 17 April 2020, and
- if payment of the dividends resolved on in said resolution has already been made in full, then no further action is necessary and the company is in compliance with the law,
- if payment of the dividends resolved on in said resolution has not been made in full, or at all, then payment of any amounts that exceed 25% of the net profits of the year 2019 have to be postponed without accruing interest until 30 September 2020 (or an earlier or later date subject to Presidential discretion), and
if the Board of Directors was authorized to distribute dividends in advance, then said authorization is suspended by law while the restrictions are in effect.
The above restrictions for resolutions on the distribution of dividends that were adopted before 17 May 2020 remain applicable. However, the communiqué contains a clearance mechanism allowing qualified companies to proceed with the distribution of dividends subject to conditions and the prior approval of the Ministry of Commerce.
All clearance requests with the Ministry of Commerce must include (i) a notarized copy of the company’s Board of Directors or the Board of Managers’ resolution that convenes the General Assembly meeting, which must be inclusive of an agenda involving the distribution of dividends, and (ii) the company balance sheet and profit and loss statement which would be serving as the basis for the distribution of dividends. Companies that intend to file for clearance requests must also include additional documents specific to their qualification, as noted below.
- “No public funding” qualification. Companies that are not benefiting from (i) a short-term working allowance pursuant to the Temporary Article 8 of the Law No. 7244 (see Section ___ above), (ii) wage support for employees on unpaid leave pursuant to the Law No. 7244 (see Section ___ above), and/or (iii) a Treasury-supported credit guarantee fund with outstanding debt are qualified to apply for an exemption to distribute dividends up to an amount of TRY 120,000. An intent to distribute dividends above this limit will be subject to the general restrictions and will not be able to benefit from an exemption even if the company has qualified. Companies seeking to rely on this qualification to obtain clearance must submit documents obtained from relevant public institutions to certify that the company is not benefiting from any of the allowances or support mechanisms listed immediately above.
- “Capital funding” qualification. If a company has a majority of shareholders (more than 50%) who would be directly utilizing more than half of the distributed amount of dividends to fulfil their capital payment obligations towards another joint-stock company or limited company, then it has qualified to apply for an exemption to distribute dividends.Companies seeking to rely on this qualification to obtain clearance must submit documents that certify that a majority of their shareholders (more than 50%) have outstanding capital payment obligations to a joint-stock company or a limited company.
- “Loan repayment” qualification. If a company has shareholders who would be directly utilizing the distributed amount of dividends to fulfil any payment obligations that are due under facility agreements (inclusive of general loan agreements and project finance arrangements), or may be due under said agreements while the restrictions are in effect, then it is qualified to apply for an exemption to distribute dividends, but the distribution of any amounts in excess of the shareholders’ payment obligations have to be postponed until 30 September 2020 (or an earlier or later date subject to Presidential discretion).Companies seeking to rely on this qualification to obtain clearance must submit documents that evidence their payment obligations under the relevant facility agreements.
What are the effects on upcoming Board of Directors Meetings?
As with the general assembly meetings, if the company’s articles of association allows for electronic board meetings and you have the IT infrastructure in place, then the shareholders may proceed with the meeting electronically.
If this is not the case and you would chose to postpone the Board of Directors meeting, then the recommendation to postpone a scheduled Board of Directors meeting should preferably come from the Chairman (or in its absence, the Vice-Chairman) in the form of a written proposal.
If you would like to proceed with the meeting, the Board of Directors can still discuss various Board-related issues over telephone or over videoconference, and vote and resolve on said issues by way of adopting a resolution pursuant to Article 390/4 of the Turkish Code of Commerce, which allows for Board of Directors resolutions to be signed in counterparts, provided that the same resolution is extended to all directors.
What are the Effects on Signature Authorities?
Although the payment and filing dates for some taxes and various statements has been postponed, company signatories’ terms can be crucial as renewing these would involve a Board of Directors resolution, a Trade Registry application, and a signature circular to be issued by a Notary Public, all of which will take time and may be delayed due to the COVID-19 outbreak. If your company signatories’ authorizations are about to expire, we would urge action as soon as possible. In any event, we would recommend all companies to ensure that they will have authorized signatories during the outbreak, for authorizations that may expire soon, take action well in advance.
 Article 12 of Law Numbered 7244, amending the Turkish Code of Commerce No. 6102 by adding the Provisional Article 13 thereto.
Communiqué on the Principles and Procedures for the Application of Provisional Article 13 of the Turkish Code of Commerce No. 6102.
Section 7: Mergers and Acquisitions
This section delves into the possible effects of the COVID-19 outbreak on mergers and acquisition transactions.
- What are the issues surrounding preliminary negotiations?
There is no reason to suspend preliminary negotiations over the deal structure, although presumably, these would largely commence electronically or via teleconference. So far in Turkey, the COVID-19 outbreak had an impact on small and medium-sized enterprises the most, which had to shut down, or drastically reduce working hours and personnel on duty, to avoid the contagion. Government services (besides those that are related to the judiciary, which is explained further below in this note) continue as is, however, some public services are being provided with a smaller group of officers on site, which leads to understandable delays and slowdown. If the LOI or the MOU is to have any reference to third-party actions or preliminary representations, it would be prudent to consider the current situation while drafting.
As a general rule, Turkish law has no specific form requirements, specifically for LOIs / MOUs that are commonly signed for M&A transactions. Accordingly, once an agreement is reached, these can be signed in counterparts – and the parties can exchange scanned copies of signed versions over e-mail.
- What are possible impacts on on-going due diligence reviews?
Most due diligence reviews are performed online, over virtual data rooms. While legal due diligence can be performed almost entirely over a virtual data room, typically, part of a financial and tax due diligence exercise as well as a technical due diligence review, require an on-site inspection of records, inventory sampling or production review. It will be challenging for all parties to organize a site visit and/or an on-site inspection, however, as of the date of this note, there is no general curfew on Turkish citizens under the age of 65 (and/or without chronic health conditions) on business days, so a site visit can be conducted by taking HSE-related precautions, however, site visits between different provinces should be planned ahead and will likely take more time as almost all airline companies in Turkey have suspended domestic and international flights until May 2020, and land-based transportation services have also either been suspended or are subject to prior approval from the local Travel Permission Boards established under provincial governorates. However, in any event and generally, the COVID-19 outbreak will likely limit the number of seller management and personnel available to respond to any queries that may be raised during the site visit.
Most third-party service providers for virtual data rooms have provided assurances over the course of the last few days that there may be a slight delay in responding to queries, but the virtual data sites would be up and running. However, it may be worthwhile to touch base with seller’s counsel to ensure that there will be no interruptions. If the seller is using its own intranet to convey documents, we would certainly recommend a discussion with the seller to plan how and when the documents will be uploaded and maintained.
In general, although there are currently no prohibitions that would prevent the conduct of due diligence (besides various limitations to travel which are addressed in this note), parties would be advised to expect this process to take more time and effort than usual.
- Is COVID-19 a force majeure event and what does that mean for an M&A transaction?
A force majeure event is typically not foreseen under share purchase or subscription agreements. The first step to take therefore is to review the contract for a force majeure clause, and in the likely absence thereof, review the contact for a “Material Adverse Effect” clause. An advance review of these clauses would be advisable on both sides of the deal in order to understand the procedure and effects of the event on the parties in light of the agreement.
If the events give rise to a material adverse effect, as defined in the agreement, that allows the buyer an exit from the transaction between signing and closing, the buyer may consider that route under the new circumstances.
Otherwise, if the contract envisages the effect of unforeseen events, then the outbreak may constitute such an event, particularly in respect of the conduct of a closing (see more below) or an extension of the longstop date due to an inability to complete the conditions precedent as a result of the unforeseeable event.
- Should the outbreak be taken into consideration in drafting a share purchase agreement?
While the M&A sphere has temporarily slowed during these initial phases of the COVID-19, activity will ultimately resume. In that context, certain measures are worth contemplating in the coming months, for the “new normal” we will be experiencing then.
The COVID-19 outbreak may require a company to adopt specific corporate law, employment law and/or environmental law measures, and/or alter routine contracts and payment schedules. Parties would be advised to seek specific legal guidance on how to proceed for all the above actions, and be sure to disclose these measures to buyers’ advisors as they adopt them – this will make carving out COVID-19 related actions under interim management provisions and representations and warranties much easier.
There are multiple issues that need to be taken into account from this perspective:
- Interim Periods: Interim period clauses are typical under share purchase agreements where the buyer requests a nominal degree of supervision and control over the target company while conditions precedent to both parties’ obligations to close are being satisfied. Ordinarily, these interim period clauses suggest that business continue as usual. However, the outbreak may require certain measures from target company management (including suspending or terminating contracts with customers and suppliers) that may be outside the allowed list of actions under an interim period clause, and require the buyer’s approval. While it would understandably be difficult to pen an interim period clause that would capture COVID-19 related measures, specific instances (e.g. a decision to cause the employees to work remotely, etc.) can be carved out.
A buyer might also request a tighter interim period clause and make sure that any COVID-19 related measures or extraordinary actions are always subject to its prior approval. We would suggest to consider two issues here – one, an emergency measure (e.g. shutting down a workshop immediately due to an adverse diagnosis) that has to be adopted immediately to have full effect might conflict with a tight interim period clause, leading to a breach of interim covenants, or possibly worse, failure to adopt the right decision on time, all if the buyer fails to respond immediately to a clearance request. Second, tighter interim period clauses risk a gun-jumping allegation by competent competition authorities which might put the transaction itself to hazard. Overall, common sense should prevail in drafting interim period clauses – specific instances can be carved out or waived.
- Representations and Warranties: Seller representations under share purchase agreements are typically repeated both on signing and closing and refer to and cover a period of company history that ends with the date of closing. Similar to our notes on the interim period clauses above, some of the actions that the target company may adopt against the outbreak might be in technical breach of seller representations and warranties – specifically those related with company financials and company business. It would be difficult to anticipate all the possible measures a target company may take against a COVID-19 outbreak and carve them out in advance. Therefore, we would suggest that the share purchase agreement accommodate a sensible disclosure mechanism, which the buyer might be obliged, or encouraged, to respond with a waiver letter, over disclosed issues that strictly relate with the COVID-19 outbreak.
- Regarding Long-stop Dates. A long-stop date is typically a fixed date which, when elapsed, leads to the automatictermination of the contract. These are ordinarily present in share purchase agreements to ensure that the parties have the right to walk away in case of a severe delay. However, the COVID-19 outbreak and its effects on domestic and international parties may understandably lead to delays in satisfying conditions precedent and preparing to close the transaction. While a long-stop date is always advisable, being too aggressive with the date itself will likely put all parties in a difficult position later on.
- We have a signed share purchase agreement which does not accommodate any of the above. What should we do? Any of the above recommendations can be introduced to a share purchase agreement by way of an amendment. However, parties should make sure that the amendment is retroactive, to the extent possible, and up to a specific date.
- What if your deal is pending approval from a public authority?
Within this context, except for the Turkish Competition Authority, there are no consequences ascribed to a public authority’s failure to clear a transaction in a specific period of time. All Turkish regulatory authorities continue their duties as of the date of this note. However, most of these authorities began rotating their personnel to avoid overcrowding, or rotating out their personnel and perhaps more importantly, denying entries for visitors. Other public offices have limited their appointment schedules and visiting hours. These measures may make it difficult to follow up a procedure or may cause delays in the review and approval of merger transactions.
As for the Turkish Competition Authority, they are required to approve a request in 30 (thirty) days, expiry upon which the transaction will be deemed to have been approved. However, the Competition Authority can put this term “on hold” if it has any queries on the notification or the transaction itself. Therefore, parties would be advised to take this into account in planning for a date for closing.
- Closing: What to watch out for?
The closing of an M&A transaction will very likely require that the parties or their advisors convene to physically exchange closing-related documents, transfer and receive share certificates, and/or conduct and attend general assembly meetings. However, the date of closing may be subject to delay and postponement depending on the nature of documents that will be exchanged, and closing mechanics – a document that has to be delivered in a notarized and apostilled form might be delayed if the document’s country of origin has imposed a curfew and has limited public services. If this document is, by way of example, the purchaser’s resolution to participate in the target company for a share subscription agreement, it may hold the entire closing up until it can be issued and delivered. It would be advisable for parties’ advisors to discuss closing documents and closing date logistics well in advance to avoid any last-minute interruptions and, if the interruption is unavoidable, postpone the closing in advance.
Currently, all Turkish public offices continue their duties – however, Turkish Notaries Public now follow a certain schedule and it would be worthwhile to ensure that the Notary Public that will be visited for the closing (if, of course, required) is open on the planned date. Turkish Trade Registries under Chambers of Commerce are also still open as of the date of this note, however, to limit personnel exposure to third parties, most Trade Registries have introduced a daily registration quota.
Section 8: Dispute Resolution
COVID-19 had a direct impact on pending and prospective civil litigation, as well as ongoing arbitrations. This section concerns the summary of measures adopted concerning civil litigation.
- Commencing Actions in Civil Courts and Enforcement Offices
Law No. 7226 concerning COVID-19 prevention measures came into force on 26 March 2020 providing that all relevant statutory periods will be tolled until the end of the suspension period. Pursuant to its Provisional Article 1 (a), subject to exceptions, the statutory periods regarding the arising, usage or termination of a right (including the period for filing a lawsuit) had been tolled between 13 March 2020 and 30 April 2020. According to the Presidential Decree Numbered 2480 and titled “Decree in Relation to the Extension of the Tolling Period Provided to Prevent Loss of Rights in Judicial Affairs” (“Decree No. 2480”), the tolling period stipulated under Provisional Article 1 of the Law No. 7226 is extended until 15 June 2020 (including this date). Therefore, periods that are foreseen for the filing of lawsuits will not accrue until 15 June 2020 (including this date). Accordingly, no rights would be lost a lawsuit that normally should have been filed by 15 June 2020 (including this date) is not filed by then. However, there is no legal obstacle to filing lawsuits; lawsuits can be filed within the suspension period.
Unless the tolling period is extended or shortened, the statutory periods will resume after 15 June 2020. If the deadline for filing a lawsuit is fifteen days or less remaining at the start of the suspension period, the deadline will be deemed extended for further fifteen days starting from the day following the end of the suspension period.
Please note that the periods in relation to mandatory mediation proceedings are also suspended until 15 June 2020 (including this date). However, as with filing lawsuits, there is no legal obstacle to apply for mediation.
- Civil Actions Pending Mandatory Mediation
As indicated above, the periods in relation to mediation proceedings are suspended. However, mediation meetings in relation to the mediation applications made before the start of the suspension period can be conducted by the mediators and parties (with the consent of both parties). Please note that the statutory periods in which the mediation proceedings must be completed are also suspended until 15 June 2020 pursuant to Law No. 7226 and Decree No. 2480.
- Civil Actions Pending Before Turkish Courts
According to the decision dated 30 April 2020 Council of Judges and Prosecutors, hearings of the civil actions pending before Turkish Courts are postponed until 15 June 2020 (including this date). Thus, hearings until 15 June 2020 (including this date) are being postponed to future dates.
In addition, please note that notifications are still being served by the court clerk’s offices. In addition, there is no legal obstacle to submitting pleadings in civil actions files pending before Turkish Courts.
- Exceptions to the Suspension of Civil Actions
Pursuant to the Provisional Article 1 of the Law No. 7226, the periods regarding the procedures that complement the interim injunctions set forth in CPL are excluded from the suspension period. In this respect, the deadlines under CPL that concern interim injunctions, such as the deadline for an objection to an injunction or a request for an injunction, will continue as usual during the suspension period.
- Enforcement of Debts and Court Judgments
As set forth in more detail under “Enforcement” subtitle of Section 4 of this Handbook, requesting the payment of a debt, claiming payment under a negotiable instrument, seeking the enforcement of a judgment, enforcing a lien, attaching a property, foreclosing on a mortgage and similar actions conducted through execution office (icradairesi) or bankruptcy office (iflas dairesi) proceedings for debt collections, establishment of liens and enforcement of security interests are suspended between 22 March 2020 and 15 June 2020. Therefore, enforcement of debts and court judgements are suspended until 15 June 2020. Please see the explanations made under Section 4, under “Enforcement”, for details and applicable exceptions.