With their research development activities and their export potentials, defense companies have a prominent role in Turkish economy and will continue to do so. With their unique position in Turkish economy and perception to the defense industry in Turkey, governance of corporations operating in defense industry is an important topic to discuss.

Largest companies operating in the defense industry are state-foundation corporations (owned by Turkish Armed Forces Foundation (“TAFF”) and majority of them are privately held. Only few of them are publicly-held, namely, Aselsan Elektronik Sanayi ve Ticaret Anonim Şirketi (“ASELSAN”), Tümosan Motor ve Traktör Sanayi Anonim Şirketi (“TUMOSAN”) and Otokar Otomotiv ve Savunma Sanayi Anonim Şirketi (“OTOKAR”). Like OTOKAR and TUMOSAN majority of the companies operating in defense industry are privately-held.

Public Offerings and Defense Industry

With the recent secondary-public offering of ASELSAN and public offerings in companies operating in defense industry became a topic of discussion. On 17th of April 2018, ASELSAN submitted its first offering circular to Capital Markets Board (“CMB”) and following the approval of CMB, offering period began on 31st of May until 1st of June 2019. Nominal value of the shares were TRY 23.35 and ASELSAN has sold 140 million shares to the public. Amidst the successful secondary public offering of ASELSAN due to high demand from investors, more defense companies may follow the suit.

As it has been mentioned above publicly-held companies in defense industry are uncommon and due to the nature of the industry, government has a profound influence over the industry. This may be also due to the fact that most of the business transactions related with the defense industry are conducted between companies and the government entities. This would also pose a challenge to the companies who intends to offer their shares to the public for the reasons that would be explained later.

Public offering legislation in Turkey does not prescribe a different process for companies operating in the defense industry. However, there are different challenges that companies would face during the offering process. Since most of the contracts signed with the government regarding defense industry are related with the national security, the due-diligence process and transparency could be an issue for the companies who have the aim to raise funds through public offerings.

Due-diligence may be difficult for the professionals conducting the process as they have to go through classified documents even with the non-disclosure agreements. For due-diligence virtual, data rooms are commonly used for efficiency of the process and used by auditors, financial entities, lawyers and other professionals for a thorough analysis required by the capital markets legislation especially for the preparation of an offering circular. However, use of virtual data rooms may be limited as a result of the existence of the classified documents and consequently the due-diligence process would take place in a physical data rooms and could only conducted by few professionals. This may be lengthen the process and may have an effect the contents of the offering circular.

Another challenge that defense industry may face is the transparency. Investors make their investment decisions based on the information provided to them.  Prospective investors’ decision is mostly based on economic reasons among others and would only invest in companies that would be successful in the future. Company’s success could be measured by many thing such as past performance but the information contained in an offering circular is crucial for the investors. With limited information with regards to material agreements and other information that is classified and related with national security, a potential investor may be reluctant to invest. Besides the transparency, post-public offering period may also be uncertain for shareholders regarding their right to be informed stipulated in relevant legislation. Board of directors of the company may deny shareholders’ such request based on the fact that the information they requested is classified.

Decision-making process in a public offering is also important for a process. Decisions taken regarding public offering usually are done through general assembly and board of directors’ resolutions. However, there will be an extra-layer to decision-making in state foundation corporations because some general assembly and board of directors’ resolutions have to be approved board of trustees of the TAFF. This may have an adverse impact on the process by requiring additional bureaucracy.

Considering the defense industry’s unique position in Turkey, public relations management is substantial for a successful public offering. Speculative information and fabricated news may severe the public offering process. This can be observed during the ASELSAN’s secondary public offering as some people, through social media, have slammed process as they thought that ASELSAN is in a process of privatization and some people claimed that more than 40 percent of the ASELSAN shares are being sold to foreigners. This heavy criticism shows how crucial is public relations and also shows the public’s high regard to state foundation corporations operating in defense industry.

Overall, it can be said that few public offerings were successful in defense industry as proven by the ASELSAN’s secondary public offering. This may encourage other industry giants to offer their shares to the public. This would immensely contribute to the development of the capital markets in Turkey and would be proved to be a viable and an alternative way to raise funds for the future projects and contracts.

Corporate Governance and Defense Industry

Publicly held defense industry companies, albeit a few, have to comply with the corporate governance regulation. ASELSAN, TUMOSAN and OTOKAR have similar shareholding structures post public offerings however rights they offer to shareholders and some other corporate governance features vary.

ASELSAN, TUMOSAN and OTOKAR’s publicly held shares are 25.70%, 28.7% and 30% respectively. ASELSAN’s public shares percentage increase was approximately 15% post-secondary public offering, thus its shareholding structure became similar to the privately held companies. Other than that, ASELSAN’s majority of the shares are owned by TAFF.  TUMOSAN’s and OTOKAR’s shareholding structure has similar patterns to other publicly held companies: (i) a pyramidal structure; (ii) wealthy families controls the firm through large shareholdings and/or through privileged shares and (iii) a concentrated ownership shareholding structure.

In both ASELSAN and TUMOSAN, in accordance with their articles of association, share groups exists. In ASELSAN, only Group A shares may nominate and elect members for the board of directors and considering that all publicly held shares are Group B, shareholders other than TAFF would not have a say in company affairs. As for the TUMOSAN, Group A shares have more voting power (15 each) and Group A shareholders are entitled to nominate half of the members of the board of directors. However, it is not stated in the articles of association that the remaining members shall be nominated by the Group B shareholders. With the voting powers and the shareholdings of the remaining shareholders, it is safe to say that Group A shareholders has the final say for board of directors memberships. There are no group shares in OTOKAR and no privileged shares exists. However, due to shareholding structure, it is likely that the majority shareholders will have the final say when electing the board members even without the voting privileges. Overall, cumulative voting is non-existent and minority shareholders which are powerless when it comes to electing members to the board of directors.

Board structure of ASELSAN, TUMOSAN and OTOKAR similar. However, TUMOSAN have to comply with different rules as ASELSAN and OTOKAR because ASELSAN and OTOKAR have higher market value. In compliance with the corporate governance legislation, TUMOSAN has two independent board members out of six (6). ASELSAN has three (3) independent board members out of 9 and OTOKAR has three (3) independent board members out of nine (9) as well. Majority of the board of ASELSAN and OTOKAR consist of non-executive board members whereas TUMOSAN has not provided information regarding such distinction. In accordance with the relevant legislation, number of TUMOSAN’s non-executive board members should be four (4). In addition, TUMOSAN and OTOKAR have separate persons for the positions of general manager and board chairman. In ASELSAN however, general manager and the board chairman positions are occupied by the same person.

ASELSAN, TUMOSAN and OTOKAR have all established compulsory board committees namely, Audit Committee, Corporate Governance Committee and Risk Management Committee. All committees in these companies have independent members as chairman. None of the abovementioned companies have established non-compulsory committees, namely, Nomination Committee and Remuneration Committee.

In essence, ASELSAN, TUMOSAN and OTOKAR mostly comply with the corporate governance legislation. Nevertheless, as these companies bears similar features to the other publicly-held Turkish companies, minority shareholder protection is rather weak. They do not offer more protections to the shareholders other than the ones stipulated in relevant legislation.

Author: Batuhan Ecin