As Covid-19 continues to wreak havoc, many countries face both an economic and a health crisis. But for Turkey, the concept of crisis is nothing new: it has long been part of everyday life. The current malaise, which predates the pandemic, has its origins in the attempted coup of 2016 and the government’s authoritarian response: over 300 people were killed and 75,000 arrested, including 2,700 judges. Such coups d’état have punctuated Turkey’s historical narrative in every decade since the 1960s. More recently, there was the currency and debt crisis of 2018, which saw the credit rating agencies downgrade Turkey’s debt to junk status.
Notwithstanding these difficulties, President Erdoğan is still firmly in control. Added to the $120bn in infrastructure spending since 2003, new highways and rail links are planned. Turkey’s $730bn economy, the world’s 20th-largest, even managed to expand slightly last year. But problems persist: inflation at 15% and interest rates recently hiked to 19%, while the Turkish Lira’s precipitous decline against the US dollar has sparked an exodus of foreign capital. In an effort to boost tourism, one of the country’s strongest sectors, Turkey announced that it would be the first country to accept British holidaymakers without Covid checks. Despite Erdoğan’s promises to cut inflation in an attempt to restore confidence, sustained turbulence undermines the country’s economic credibility.
Against this backdrop, Turkish law firms offer a mixed view of their current business and the short- term outlook. ELIG Gürkaynak partner, Gönenç Gürkaynak, summarises the past year: ‘There was a severe impact between mid-March and September 2020; it was quite bleak. That first shockwave took a toll on many transactions and the overall workload. But then things started to return to a steadier rhythm. Some areas, such as our bank finance practice, have been hit more significantly, as compared to litigation, regulatory and compliance, which have not been impacted at all.’
Realism versus optimism
For many firms, a sense of realism prevails. ‘It’s undeniable that 2020 was a hard year for Turkey, due to the devaluation of the Lira and the global economic recession caused by the pandemic – both of these factors have affected our clients,’ says Meryem Efser Karayel-Keßler, managing partner at Matur & Ökten & Karayel-Keßler Law Offices.
‘The economic situation is unstable, which affects investors,’ adds Emrah Karadağ, managing partner of his eponymous firm which specialises in employment. ‘Hospitality and tourism were booming sectors for us with clients from throughout the region,’ says Sena Heuvels, managing partner of Heuvels Uras, which she co-founded in 2019. ‘But that stopped with the pandemic.’
‘Some companies and industries managed to turn the crisis into an opportunity, I guess we are one of them.’
Eda Atasü, KIN & Partners
Regardless of these assorted challenges, optimism continues to be a fundamental part of the Turkish psyche. ‘If there is a crisis, there are also opportunities,’ says Eyüp Kul, founding partner at Lexist Law Firm. ‘Some companies and industries managed to turn the crisis into an opportunity, I guess we are one of them,’ echoes Eda Atasü, head of corporate at KIN & Partners. ‘We can proudly say that we have successfully surpassed the challenges that came with Covid-19,’ says Egemen Egemenoğlu, head of international transactions and projects at Egemenoğlu Law Firm.
Reşat Moral, managing partner of Moral & Partners, provides an insight into the work done by his firm over the past year: ‘Corporate advisory was a sustainable growing area of practice while M&A transactions increased,’ he notes. ‘The rise of PE activities, valuations of Turkish target companies and Turkey’s industrial position as an alternative hub were key factors. Technology, privacy work, employment and litigation also grew.’
There is a notably sanguine tone from Serdar Paksoy, founder of the firm which bears his name: ‘Given Turkey’s history of economic downturns followed by spectacular rebounds, some investment advisers also see the current period as offering attractive valuations for buyers with the prospect of sizeable returns when the market recovers.’ It is a view confirmed by Roger Kelly, a leading economist at the European Bank for Reconstruction and Development. ‘Turkey has quite a resilient economy that tends to recover rapidly from shocks,’ he recently told Turkey’s state news agency.
Arguably the acid test of demand for legal services in any legal market resides with three matrices: aggregate billings, fee rates and the level of hiring. In this context, the picture is nuanced. Partners are notably less keen to engage in detailed discussion about billing volumes, preferring instead to talk of the disruptive impact of Covid-19 on fee levels.
‘A reduction in fees has not happened,’ says Gürkaynak. ‘We have not changed hourly rates, but we are giving more aggressive fees in transactional work, which is less abundant at the moment. Clients are asking for reductions.’
At one of Turkey’s largest commercial firms, Pekin & Pekin, managing partner Fethi Pekin concurs with the demand for more flexible fee structures. So too has Nihat Erciyas, managing partner of Erciyas, who adds: ‘We had to make a reduction in some hourly rates to maintain our market position.’ In some practice areas, rates are said to have fallen by as much as 25% in nominal terms. After accounting for an inflation rate of 15%, that could mean a reduction of up to 40% in real terms. ‘While our work is increasing, our money is decreasing,’ says Kul.
‘We couldn’t take on trainees, unfortunately, because it was a bit more difficult to train new people from home,’ explains Karayel-Keßler. ‘It’s unfair to bring new people on board when we can’t train them as we should. So we decided that for the latter half of 2020, we wouldn’t take any.’
Nevertheless, things are buoyant enough for some hiring to continue. ‘New people are being hired because there is demand,’ notes Gürkaynak. At Özay, partner Rıza Yücel is notably upbeat on both points: ‘It is clear that fees in the Turkish legal market are more competitive than before, but thankfully, we have not come to a point where staff and fee reductions have been necessary,’ he says. ‘On the contrary, we have recruited some new team members because our workload has increased.’
Some firms clearly have an eye on the future. ‘With a certain degree of caution, we are looking at opportunities to hire talent that will be positioned for anticipated resurgence in activity,’ says Zeynel Tunç, co-founding partner at Tunç Firat Dereli, which was established last October. Buğra Aydın, corporate partner at Öncel, Aydın & Uygun Attorney Partnership (OAU), adds: ‘We decided to increase the number of our mid-level associates. We believe this provides the best bang for the buck for our clients, while reducing the need for internal training of junior staff in the short term.’
There are plenty of lawyers to choose from – Turkish law schools have produced tens of thousands of them in recent years. ‘We have more than enough lawyers in Turkey,’ says Karadağ. ‘In almost every university, there is a law faculty, producing four or five times the number of lawyers that used to receive a licence five years ago. Even if the economy grows and investment continues to come to Turkey, it’s not guaranteed that there will be enough work for every young lawyer.’
Like their counterparts in other jurisdictions, Turkish law firms are keen to highlight how well things have gone since everyone was forced to work from home. Heuvels notes that ‘Covid has changed lifestyles: working from home, wanting more places with gardens, more space.’ Yücel suggests that working from home ‘will become common practice, even though it will create some uncertainty in terms of labour law matters. Some major Turkish companies have already declared that they will be adopting this policy.’
Gürkaynak believes that had anyone asked Turkish law firms about their home working policies a year ago, less than 5% would have spoken positively about it. ‘They would start recounting the evils of working from home: work discipline and how people wouldn’t take what they’re doing seriously. When things get back to normal, it’s going to be quite obvious that it does work.’
Deals and debt
According to Deloitte, Turkish M&A activity has shown signs of a notable recovery since last June when the national lockdown was lifted and deal-making activity outperformed expectations. Remarkably, Turkish M&A volume broke a new record in 2020 by exceeding 300 transactions in a year for the first time: 304 deals were recorded with a total deal value of $9bn. These figures represent a year-on-year growth of 70% and 30% respectively. Early-stage M&As – backed by venture capital firms and angel investors – continued to increase, comprising nearly half of the total deal number.
‘M&A is holding itself at a fairly satisfactory level in view of current market uncertainties, as the practice is fed by large divestments and strategic opportunities,’ says Paksoy. He identifies investor interest across a broad range of sectors: insurance and pensions, food and beverages, chemicals, industrial supplies and machinery, financial services, and pharmaceuticals. ‘We also see foreign players increasingly seeking opportunities to invest in Turkish companies with a focus on emerging technologies, especially payment systems and communications technology, in parallel with global trends.’
He further identifies competition and antitrust work as strong. ‘But the most significant growth has been in debt restructuring, insolvency as well as banking and finance work, all of which are driven by the impact of current economic conditions and increased investor caution.’
The amount of international work is decreasing, suggests Orkun Özkan, managing partner at Özkan Gürden Bingöl. ‘Generally, our clients, especially in banking, or those who directly invested in Turkey, are coming to us just to close their business,’ he says. ‘They’re not coming for new projects. They either try to liquidate, restructure, or close. Banking will be most probably booming after the Covid crisis because people will start asking for credit again. Refinancing and restructuring will be the hot topic and we expect distressed assets and loans to be important as well.’
According to Pekin, the high volatility of the Turkish Lira has been a continued drag on investment. ‘But it is refreshing to mention that certain sectors – e-commerce, healthcare and life sciences, technology and media – are facing comparably high demand, as a result of which a number of deals with significant values have been done,’ he says.
‘M&A is holding itself at a fairly satisfactory level in view of current market uncertainties, as the practice is fed by large divestments and strategic opportunities.’
Serdar Paksoy, Paksoy
Because of increased debt, Yücel also suggests that the number of M&A deals will increase. ‘Given that some companies are facing financial distress, we believe that the number of strategic M&A projects will rise.’ Kul adds: ‘Companies that have capital problems can now sell shares for less than their book value so there will be some M&A opportunities.’
As elsewhere, sectors of most interest to foreign investors include e-commerce. ‘Investment has grown and will continue to do so,’ says Egemenoğlu. ‘Purchases through e-commerce websites, such as Trendyol, have undeniably increased with people being stuck at home due to prolonged curfews and other measures taken by the government.’ He also cites logistics, since ‘transportation needs have increased due to the consumption frenzy over e-commerce.’
Erciyas concurs. ‘The most obvious deficit in Turkey is the lack of logistics infrastructure to manage the booming demand for e-commerce – significant development and investment is needed because without them, the development of e-commerce is not possible,’ he says. Fintech is another target sector for future M&A, he suggests, while investment in production facilities, especially for electronics and durable goods, is likely.
Room for optimism
‘Once the pandemic is over, when investors have more appetite for investing, then of course, Turkey will still have a lot of good companies available to invest in,’ says Heuvels. ‘Because people would like to sell and recover some cash, there will be great opportunities, in my opinion, in all sectors in terms of M&A. Hospitality and tourism will also thrive.’
A broader picture is developed by Moral. ‘The Turkish people and the business community have endured a serious examination,’ he says. ‘We believe that many lessons were learned. Agility and resilience will be key factors for the profitable growth model of companies following the pandemic. Workplaces and employment models will be transformed as the employment relationships become more flexible. Despite the challenges that the legal market will go through, there are clear milestones to reach such as digital transformation, efficiency and multi-disciplinary expertise.’
What about those crises? ‘As a Turkish attorney for more than two decades I’ve seen a fair share of crises,’ says Gürkaynak. ‘I used to think that I knew what one was and how to handle it. We’ve had five major crises in Turkey, economically and socially. And yet, I have never seen anything like this – suddenly everything came to a halt and there was no light at the end of the tunnel. So, bouncing back from that, and seeing that humanity has developed the means to cope is going to bring its own kind of euphoria after all of this has gone. So, I’m optimistic that there will be a great period after the pandemic is over.’ LB
Employment strife
Most firms highlight employment as having been a particularly strong source of work during the past year. ‘After the pandemic hit, it became the most active area because we had legislation enacted to protect employment relationships,’ explains Emrah Karadağ , managing partner of Karadağ Law Office. ‘The termination of employment contracts is only possible because of dishonest actions by employees. But many employers are violating this restriction and terminating employment despite the legal provisions.’
Sena Heuvels, managing partner of Heuvels Uras, adds that ‘after the new legislation, which included a ban on firing people, a lot of clients approached us. Employment was the biggest issue – everybody panicked, especially clients who had too many staff; they wanted to dismiss people. We drafted a lot of employment documents to put people on unpaid leave. That’s the maximum you could do.’
The business impact on the hospitality sector is summarised by Orkun Özkan, managing partner at OGB (Özkan Gürden Bingöl): ‘They’re suffering, they can’t pay their rent and they can’t pay any of their employees, and it is still legally impossible to let them go.’ He explains that Turkish companies were banned from using foreign currencies in their contracts last year. ‘They have to use Turkish Lira instead,’ he says. ‘People were tending to make contracts, including employment contracts, in dollars or euros. Right now, that’s not possible.’
Egemen Egemenoğlu of Egemenoğlu Law Firm notes that his firm’s employment team was also extremely busy due to the new regulations. ‘We certainly expect an increase in employment disputes after the termination ban is lifted,’ he says. ‘So we’re planning to expand our employment law team and guide our clients through their expected plans to dismiss a significant number of employees.’
Everyone is now waiting for this restriction period to end, suggests Karadağ. ‘And when it does, there will be huge questions about the termination of employment contracts,’ he says. ‘This will be one of the most important practice areas in the post-pandemic period.’
Buğra Aydın at Öncel, Aydın & Uygun Attorney Partnership is expecting the ban on employment termination to be lifted soon. When this happens, he says, ‘many companies operating in Turkey will reduce their staff numbers, which will increase labour litigation and settlements.’
Disputes on the rise
Meryem Efser Karayel-Keßler, managing partner at Matur & Ökten & Karayel-Keßler Law Offices, sets the scene. ‘At the beginning of lockdown, there was a shared sense of “We’re all in this together, we can make it” – a new spirit of cooperation emerged during the early weeks of Covid-19, it was a time of unparalleled collaboration,’ she says. ‘But this spirit disappeared over three or four months. The initial confidence that we should support each other became strained as financial realities started to hit. As a result, demand for our dispute resolution services increased.’
Court proceedings last for an unnecessarily long time due to structural problems in the Turkish legal system, according to Nihat Erciyas, managing partner of Erciyas. ‘Hence, companies generally avoid lawsuits as much as possible,’ he says. ‘Disputes are mostly due to non-payment of a debt – either in time, or not at all. For this reason, the number of disputes is increasing.’
Inevitably, Covid-related work has been a key driver. Sedar Paksoy of Paksoy confirms that the disputes market is highly active: ‘We have opened around 100 new cases in the past year,’ he says. ‘I have never seen so many force majeure provisions being applied in my life – the International Chamber of Commerce published a new version of these provisions, so we all follow that,’ says Eyüp Kul, founding partner of Lexist Law Firm.
Egemen Egemenoğlu of Egemenoğlu Law Firm looks ahead. ‘Cases regarding the adaptation of the contracts due to force majeure are currently very commonplace and we expect them to increase and spread in different areas,’ he says.
Despite the promotion of arbitration and mediation locally, Pekin & Pekin managing partner Fethi Pekin notes that a wide range of disputes are being heard in Turkish courts. ‘Traditional litigation is still the most popular way of handling disputes,’ he says. ‘In commercial disputes, our experience suggests that because of economic fragility, combined with developments related to the pandemic and unpredictable fluctuations in the Turkish Lira, we will see an increasing number of contractual claims for non-performance or non-payment involving force majeure arguments.’
Logistical challenges have also arisen. Turkey’s digital transformation has some way to go before it reaches the necessary level of sophistication. ‘There was a backlog everywhere, especially in the public authorities due to quarantines,’ says Sena Heuvels, managing partner of Heuvels Uras.
Virtual hearings have begun but are not commonplace yet. However, Egemenoğlu’s firm has been involved in a number of them. ‘We have created new hearing rooms in our offices and our lawyers have attended over 100 virtual hearings since the beginning of the year,’ he says. ‘We strongly believe that this procedure must continue and increase even more after the pandemic in order for our legal system to keep up.’ Kul also participated in a recent virtual hearing. ‘It was such a long hearing, two weeks,’ he says. ‘It was a very good experience for us. But I am afraid that, in future, we are going to live online.’
From April to September 2020, the Turkish courts were shut completely, significantly adding to the existing backlog of cases. Under President Erdoğan, thousands of judges and prosecutors have been dismissed in the past few years, to be replaced by inexperienced newcomers. Approaching 50% of Turkey’s 21,000 judges and prosecutors now have three years of experience or less, according to Reuters’ analysis of data from the Turkish Ministry of Justice.
‘With the closure of the courthouses, the already busy schedule of the Turkish justice system has become strained even further,’ explains Buğra Aydın at Öncel, Aydın & Uygun Attorney Partnership. ‘We’ve seen a dramatic increase in case development times in the courts of first instance and the appeal courts.’
Karayel-Keßler broadens the point. ‘Every case is getting longer and longer because of lockdown, and clients are saying: what the hell is going on? We explain that the courts are working very slowly at the moment,’ she says. ‘Our dispute resolution team has also been busy with many family law matters: new divorce cases and inheritance issues. Normally, we are working on commercial disputes, but these are the realities of life caused by the pandemic.’