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Special Purpose Vehicle (SPV) under Turkish Law
Special Purpose Vehicle (SPV) is a company established by an organization to undertake a specific business purpose or activity, having a separate legal entity. It possesses a distinct asset base and operates as a vehicle for external financing of a company. In other words, the financial activities and associated risks of a company are kept separate through the SPV. The main purpose of conducting financial activities through an SPV is to keep the borrowed funds off the company's balance sheet and limit the liability to the capital invested. This way, the main company is also protected against the risk of bankruptcy.
The SPV itself acts as a subsidiary of the main company that transfers its assets to the SPV's balance sheet. The SPV becomes an indirect source of financing for the main company by attracting independent equity investors to assist with the acquisition of debt obligations. This is particularly useful for large credit risk items such as subprime mortgage loans.
SPVs are commonly used in specific structured finance applications such as asset securitization, joint ventures, and property agreements, or to isolate the assets, operations, or risks of the main company. However, their most common use occurs in corporate mergers and acquisitions.
Investor companies establish a Special Purpose Vehicle (SPV) in the country where the investment will be made, and they obtain the necessary credit for the project through this SPV. In this way, the SPV becomes the borrower party in the credit agreement that will be signed with syndicate banks for project financing.
Under Turkish law, SPVs are established as limited liability companies or joint stock companies. SPVs are established to achieve a specific purpose, and they state this purpose in their articles of association. The shareholding structure of SPVs is determined by the requirements of the relevant industry sector as well as the size and type of investment involved. For example, some tender specifications set out requirements for Turkish citizenship and/or minimum experience in the relevant sector (especially in high-tech projects). Similarly, some laws, such as the Build-Operate-Transfer numbered 3996, require SPVs to be established as joint stock companies rather than limited liability companies. In terms of shareholder structure, especially in larger-scale projects, investors sometimes involve two or more different groups in order to fulfill the preconditions under the relevant tender specifications or laws and to create a consortium that is stronger both financially and technically.
The primary governance documentation of an SPV is its articles of association. An SPV is managed and represented by a board of directors appointed during the shareholders' meeting. All decisions take Bun during a board of directors' meeting will be effective and binding on the SPV only if they comply with the quorum requirements stated in the articles of association and the Turkish Commercial Code (TCC).
Foreign board members will be required to obtain a tax identification number before their appointment. In the articles of association, the SPV may grant the board of directors the authority to issue internal regulations regarding the partial or complete delegation of the management of the SPV to one or more board members or third parties, in accordance with Article 367 of the TCC.
How is SPV Used in Corporate Mergers?
In the business world, companies often engage in corporate mergers by either participating as the parent company or through a Special Purpose Vehicle (SPV) established for this purpose. They finance the acquisition of target companies by obtaining credit.
In short, it can be defined as follows:
(i) The target company to be acquired through credit is participated in either by the parent company or through a specially established Special Purpose Vehicle (SPV).
(ii) Subsequently, the acquired company is merged tax-free with the parent company/SPV under Article 19 of the Corporate Tax Law No. 5520 (KVK).
(iii) As a result, the financial burden of the acquisition is transferred to the target company. In this structure, the interest on the mentioned credit is deductible from taxable profits within the acquired company.
The reason why SPVs do not expense the interest on the loans they use and why they aim to transfer this burden through a merger can raise questions. The answer to this lies in considering the purpose of establishing SPVs. SPVs are typically created solely for the purpose of acquiring the target company and do not have any other business activities. Therefore, these companies do not generate taxable profits in the short and medium term due to the nature of their operations.
At this point, through the "debt push-down" model, the SPV merges with the target company and transfers its financing expenses to the acquired and profit-generating company. This way, the interest on the loans can be deducted as expenses by the acquired company, reducing its taxable income.
SPVs not only provide protection for the assets and liabilities of a parent company but also offer protection against bankruptcy and insolvency. These entities can also find an easier way to raise capital. Additionally, SPVs have more operational freedom as they are not burdened with as much regulation as the parent company.
Some of the pros and cons of SPVs are as follows:
Pros:
The borrower of the credit is not the investor companies themselves, but the Special Purpose Vehicle established by them. Therefore, the debt arising from the credit will appear in the balance sheet of the SPV, not in the investor companies' balance sheets. Since the credit debt will not be reflected in the investor companies' balance sheets, they can reduce balance sheet risk and gain the opportunity to obtain credit for other investments.
Tax advantages
If certain assets of SPVs are established in specific geographical locations like the Cayman Islands, they may be exempt from direct taxation.
Risk distribution among multiple investors
Assets held in an SPV are financed through debt and equity investments, distributing the risk among multiple investors and limiting the risk for each investor.
Companies can isolate risks from the parent company
Companies benefit from isolating specific risks from the parent company. For example, if there is a significant decline in the value of assets, it will not directly impact the parent company.
Cons:
Lack of transparency
Some SPVs can be highly complex with multiple layers of securitized assets, making it difficult to track the associated risk level.
Lack of regulation
The regulatory standards applicable to the parent company may not necessarily apply to the assets held within the SPV, creating indirect risk for the company and investors.
Reputation risk for the parent company
If the performance of assets within the SPV is worse than expected, it can tarnish the reputation of the parent company.
Liquidity risks
If the assets within the SPV underperform, it may be challenging for investors and the parent company to sell the assets in the open market, posing a liquidity risk for the assets
Difference between SPAC and SPV under Turkish Law
SPAC (Special Purpose Acquisition Company) is a type of SPV formed with the purpose of merging with or acquiring a non-public company and providing financing through capital markets for merger/acquisition transactions.
According to Article 4 of the Turkish Merger and Division Communiqué, a SPAC is defined as a "Merger-Purpose Partnership." According to this definition, a SPAC is an organization that is established with the purpose of merging with a non-public partnership, and it has no activities other than achieving this purpose. It is required to offer at least half of its shares representing the post-initial public offering capital to the public within a predetermined period and subsequently merge with a non-public partnership. The definition of a Merger-Purpose Partnership is also included in the Communiqué on Repurchased Shares.
Conclusion
As a result, SPVs are companies established for a specific purpose and are restricted from operating outside of that purpose. They play a significant role, particularly in corporate mergers and acquisitions, providing funding for investment projects, and contributing to the development of commercial life as major funds. It can be said that these organizations provide security for both the investing company and the credit institutions. In fact, while the lender secures the loan through collateral, the investing company narrows down its scope of responsibility, thus protecting the company against bankruptcy. Despite their crucial importance, they have not yet been subject to the necessary legal regulations in Turkey and SPVs has to be regulated separately with specific provisions
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Nazli OZKUL
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Mustafa İsmail ÇAKAR
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