MERGER TRANSACTIONS UNDER TURKISH LAW

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Noyan Turunç *
MERGER TRANSACTIONS UNDER TURKISH LAW
OPERACIONES DE FUSIÓN, BAJO LA LEGISLACIÓN TURCA
Abstract
Under Turkish law, the change of control of a company is not subject to any third party consents, such as of lenders, landlords, and other co­contractors. However, if the company and a third party agree otherwise, then the terms of such agreement shall apply.
In principle, foreign buyers can engage in all activities in almost any sector in Turkey, with the exceptional restrictions set out in special laws (e.g., education) and requirements for a few special permits (e.g., tourism, real estate). Conditional approvals may be given but in practice they are unusual. On the nationality of shareholders, directors or officers of a company, there are no restrictions or requirements.
Keywords: Merger, law, Turkey.
Resumen Bajo la ley turca, los cambios de control de una compañía mercantil no están sujetos a ningún consentimiento de terceros, tales como prestamistas, dueños del terreno y otros co­contratantes. No obstante, si la compañía y una tercera parte pactan lo contrario, entonces, se aplicacrán los términos de ese acuerdo.
En principio, los compradores extranjeros pueden comprometerse en activiades de casi cualquier sector en Turquía, con las restricciones excepcionales establecidas en leyes especiales (p.e. educación) y las condiciones de unos pocos permisos especiales (p.e. turismo, servicios inmoviliarios). Pueden darse aprobaciones condicionales, pero en la práctica son inusuales. No hay restricciones en cuanto a la nacionalidad de accionistas, directores o generntes de compañías.
Palabras clave: Fusiones, Legislación, Turquía.
JEL: G34, K22, N84.
* Legal consultant for some multinational financial institutions and banks in Turkey and a rating agency. Expert witness for a Chinese bank in London; represented a UK bank in a collection proceeding. Núm. 13 (primavera 2011)
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1 Mergers of Companies
T
urkish Commercial Code (“TCC”) sets out the provisions applicable the merger of companies. Pursuant to the TCC, a merger is either (i) the formation a new company by two or more companies by way of merging them with each other (the “new company”); or (ii) merging of one or more companies into another company (the “absorbing company”).
Only companies of the same type can merge with each other. In this regard, however, collective and limited partnerships (partnership in commendam – komandit şirket), and joint stock and limited partnerships per varying shareholding (sermayesi paylara bölünmüş komandit şirket) are deemed to be the same types of companies by law. Each merging company must make a resolution independently to merge with the other merging company/companies by complying with the procedures and conditions provided in its articles of association (ana sözleşme). Each merging company must register with the Trade Registry and announce its resolution to merge. Save the following exceptional conditions, in principle, the resolution for a merger becomes effective three months after its announcement. However, provided that (i) the merging companies pay their debts before the announcement date, or (ii) the merging companies deposit the amount corresponding to their debts with the Turkish Central Bank or with a another reputable bank, which must be announced, or (iii) the creditors have consented to the merger, the resolution for merger becomes effective as of the announcement date or of such date that one of the conditions has been fulfilled. The merging companies must mutually agree on a sample form of a balance sheet and prepare their balance sheets accordingly. Each merging company that will cease to exist following the merger is obliged to announce both how to pay its debts as well as its balance sheet.
Each creditor of any merging company may object the merger at the court. The merger shall become effective if the creditor withdraws its objection, or the court rejects the objection, or the merging company places a security in an amount to be determined by the court. If no objection is made within the three­month period, the merger transaction becomes definite. The absorbing or the new company, which must be registered and announced, replaces the other merging companies that will cease to exist. The rights and obligations of the ceasing companies pass onto the absorbing or the new company. Unless otherwise provided by law, one type of a company can be converted into another type of company by complying with the provisions related to such other company so that the company whose type is changed remains to be a continuation of itself before the change.
2 Definition of a Merger
Under Turkish law, a merger is:
1. the integration of two or more commercial companies, which are merged with and into an acquiring company (merger by way of acquisition), whereby the acquired companies dissolve and the acquiring company remains to exist as the surviving company after the merger; or
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2. the consolidation of two or more commercial companies into a new company, which survives after the merger (merger in a new company).
The merging companies must be of the same type (e.g., joint stock companies can merge only with joint stock companies, limited companies with limited companies, and such).
3 Main Principles of a Merger
The TCC defines two types of mergers: (i) by way of acquisition (Art. 451) and (ii) by way of forming a new company (Art. 452). Transfer of shares or assets as a whole, liquidation of the merging companies and continuation of the shareholding in the surviving company are the main principles of both types of mergers. 3.1. Acquisition (may also be defined as absorption merger or annexion)
In a merger by acquisition, one or more companies (merging companies) merge into another company (absorbing or acquiring company). In the merger, the merging companies dissolve and the absorbing company takes over all assets (universitas iuris) of the merging companies by way of succession and survives. However, shareholders of the merging companies ex lege become shareholders of the absorbing company by receiving shares in the absorbing company as consideration. The merging companies absorbed by another company will be dissolved without exercising a liquidation process as set forth under the TCC and the shareholders of the dissolving companies will remain as shareholders in the absorbing company. The shareholders must be given shares in the absorbing company in pro rata to their shareholding interest in the merging companies. The legal consequence of this type of merger is that all assets and liabilities of merging companies shall become assets and liabilities of the absorbing company.
3.2. Formation of a new company (may also be defined as a combination merger)
In this type of merger, a new company is formed with the purpose of effecting the merger. All merging companies will dissolve without exercising a liquidation process as set forth under the TCC. The assets of the new company will consist of the assets of the merging (i.e., dissolving) companies by way of succession/subrogation. The shareholders of the companies merged under the newly formed company will become shareholders in the new company by operation of law. The legal consequence of this type of merger is that all assets and liabilities of merging companies shall become assets and liabilities of the new company and that the former shareholders of the dissolving companies will be given shares in the new company in pro rata to their previous shareholding interests in the merging companies.
Under the provisions of Articles 451 and 452 of the TCC with respect to mergers without entering into a liquidation process, when a company is taken over by another company or when a company merges into another company, the legal existence of the merging company/ companies ends. As the legal existence of the company ends, it is deemed that the company has lost its power to be a party to a legal proceeding. After the merger, no action against the dissolved company can be taken or any action which had been already taken be continued as Núm. 13 (primavera 2011)
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the company no longer exists; therefore, it would also not be possible to address the action which has been taken against the dissolved company to the absorbing or new company. 4 Mergers Under the Code of Obligations
Article 179 of the Code of Obligations (“COO”) (Assumption an Enterprise or of its Assets and Liabilities) reads: ARTICLE 179 (Assumption of an Enterprise or of its Assets and Liabilities) Whoever assumes an enterprise with its assets and liabilities becomes liable to the creditors for the liabilities connected therewith, as soon as the assumption has been notified to the creditors by the assuming party or published in the press; however, the previous obligor remains jointly and severally liable together with the assuming party for two more years, which period starts running, for claims already due, from the notification or publication date, and for claims becoming due subsequently, from their due date.
This assumption of liabilities under this provision has the same effect as the obligations arising out of contract for assumption of an individual obligation.
5 Mergers Under the TCC
5.1 Purchase of Assets
Article 234 of the TCC (Sale in Whole) reads: TCC Article 234 (Sale in Whole)
Unless the shareholders decide unanimously, the liquidators cannot sell the assets of the company in whole.
Article 443/II of the TCC (Authorization to Sell Assets) reads: TCC Article 443/II (Authorization to Sell Assets) […] In order to sell the assets in whole, the decision of the general meeting of shareholders is required. Third and fourth paragraphs of Article 388 are applicable to such decision. (Third and fourth paragraphs of Article 388 are about quorum at the general meeting of shareholders.)
Whichever method is applied, all assets are included in a merger by law. If it is intended not to transfer or sell some assets, a practical solution would be to separate such assets from the other assets of merging companies before the merger and to sell the remaining assets in their entirety after the separation.
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(a) Immovable assets: The absorbing company acquires the immovable assets as a result of a merger by law. All that needs to be done by the absorbing company is to ask the deeds office to register the immovable assets in the name of the absorbing company.
(b) Movable assets: Based on the same principle, the absorbing company acquires the title to the movable assets at the time of the merger, even if it does not possess the assets at the time of the merger. (c) Transfer of debts: As far as the creditors of the merging companies are concerned, by virtue of the merger, they become creditors of the absorbing company, which replaces the merging companies.
(d) Transfer of receivables: Similar to the transfer of debts, receivables by the merging companies, as a result of the merger, passes onto the absorbing company, which replaces the merging companies.
(e) Independent management: The principle under the provisions of the TCC is that liquidation follows dissolution. However, there is an exception to this principle with respect to mergers. A merger of the entities and assets takes place in two phases: the first phase is the merger of the entities and the second phase is the merger of assets. The TCC defines the foregoing procedure as “independent management” rather than liquidation. In either method of merger mentioned above, after the dissolution of the companies, liquidation does not immediately follow; rather, the assets of the merging company are managed independently from the assets of the absorbing company. Although the board of directors of the absorbing company acts as a liquidator for the dissolving company, instead of liquidating the assets, the board handles and manages the assets of the merging company independent from the absorbing company, and does not co­mingle its assets with the assets of the absorbing company until all the debts of the merging company are secured or paid in full. The duty of the board is to pay the debts of the merging company to the creditors. 5.2 Purchase of Shares
Articles 146, 451 and 452 of the TCC as well as Article 329 (Company acquiring its own shares) govern the purchase of shares of a company.
Article 329 (Company Acquiring its own Shares)
A company can neither own its own shares nor accept them as pledge. Contracts that provide for a company to own its own shares or to accept them as pledge are null and void. However, the following are exempted from the said principle:
1. If shares are owned [by the company] due to a reduction in capital;
2. If shares are owned [by the company] to pay the debts of the company for reasons other than forming the company or paying the participation commitment due to a capital increase;
3. If shares are passed onto the company during the assumption of an enterprise or assets and liabilities thereof;
4. If taking over or accepting as pledge of the shares are among the transactions permitted by the articles of association of the company;
5. If share certificates are pledged by the board members, managers and officers for their responsibilities; and
6. If taking over is made at no cost.
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In the event of Item 1 above, those shares that are taken over are destroyed immediately and the minutes of destruction are submitted to the trade registry. In other events, share certificates are disposed of as soon as possible.
These transactions must be disclosed in the company’s annual report. Shares owned by the company cannot be represented at the general meeting of shareholders.
6 Shareholders Following a Merger
Based on the principle of continuity of shareholding interest, the shareholders of the merging companies will become shareholders in the absorbing or the new company, as the case may be, by law. Therefore, regardless of the method of merger (i.e., by absorption or forming a new company) all shareholders of the absorbing and merging companies will be given share interests in the absorbing or new company. In other words, in a merger, while shareholders will continue to keep their shares in the absorbing company, which takes over the assets of the merging company, the shareholders of the merging companies will also become shareholders in the absorbing or new company. In order to remain as shareholders, the shareholders of the merging companies, they do not need to inject any capital or assume other obligations. This is because of the fact that the merger agreement replaces any individual commitments and covers the requirements of capital injection and assumption of other obligations by law. In this respect, the TCC sets out that the merging companies must resolve that “[…] they have merged, that the articles of association of the new joint stock company has been prepared, that all shares have been undertaken, and that the merging companies have injected their assets into the new company as capital in the merger agreement […]” (Art. 452/II). To determine the shares to be given to shareholders, the assets of the absorbing company should be evaluated and the parties have to decide on an exchange rate. Shares will be given to the shareholders of the merging companies based on the exchange rate. No money can be offered to shareholders to replace the shares to be given to them.
As mentioned above, both in a merger by way of absorption and by forming a new company, assets are acquired by way of succession. In either method, the following are the consequences of succession: (a) upon registration of the dissolution of the dissolved company to the Trade Registry, its shareholders become the shareholders of the absorbing or the new company;
(b) share certificates must be given to shareholders, including the shareholders of the dissolved company; (c) the assets of the dissolved company must be transferred to the absorbing or the new company; and
(d) each merging company must announce their balance sheets according to a sample that they will agree and a statement on how the dissolving companies will pay their debts.
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7 Conditions to Merge
7.1 At least two companies
For a merger, at least two companies must exist. While one company will survive as the absorbing company, the other(s) will dissolve. 7.2 Same­type companies
The merging companies must be of the same type, i.e., the companies involved in a merger must be all joint stock companies or all limited companies and such. If it is intended to merge different types of companies, the practical way is first to change the types of the companies by making them all the same type of and then to merge them. There are no tax consequences of changing the types of the companies. 8 Transactions for Merger
The transactions for a merger are threefold: (i) pre­merger, (ii) implementation, and (iii) execution.
8.1 Pre­merger Phase
This is the negotiation phase of the economic, financial, tax, legal, and administrative issues with respect to a merger. Such issues include the valuation of the merging companies, the exchange rate, new management of the absorbing company, employee matters, etc. (a) Drafting the merger agreement: Merger negotiations are concluded by a contract (“merger agreement”). Like any other contract, it needs mutual intent of the merging parties to the merger. When drafting the merger agreement, the merging parties, amongst other provisions, include the intention of the parties, purpose and procedure of the merger. The boards of directors of each merging company must adopt a resolution approving the merger agreement. In a merger by absorption, the merger agreement can be made on the principle of freedom of contract. In other words, the TCC does not set out any specific provisions in this respect; therefore, it should even be possible to conclude the merger agreement verbally. However, there are dissenting opinions amongst the academia, with some scholars arguing that the agreement must be concluded in writing. Some of these scholars also argue that the signatures in the agreement must be authenticated through a notary public although that, too, is an unsettled issue. The merger agreement is concluded after approved at the general meeting (genel kurul) of shareholders of each company. However, it becomes effective upon the registration of the capital increase.
In a merger into a new company, pursuant to Article 452 of TCC, the merger agreement must be concluded in writing, and the signatures of the parties must be authenticated through a notary public. The merger agreement is concluded after being approved at the general Núm. 13 (primavera 2011)
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meeting of shareholders of each merging company. However, it becomes effective upon the registration of the new company.
(b) Contents of the merger agreement: Pursuant to the freedom to contract, in principle, the merging companies may include any provisions they desire in the merger agreement. However, a merger agreement must include at least the following:
1.parties to the agreement;
2.terms and conditions of the merger and dissolution of the merging companies;
3.provisions of liquidation, if applicable, depending on the type of merger;
4.injection of assets of the merging companies into the new company as the capital;
5.independent management of assets of the dissolving company by the assuming company until all of debts of the dissolving company have been guaranteed or paid; and
6.if one of the merging companies has gone bankrupt, provisions with respect to formation of a separate estate and using that estate for debt payment purposes.
(c) Parties to the merger agreement: The merging companies, represented by their board of directors, are the parties to the merger agreement. The board may sign the merger agreement before or after it has been authorized by the general meeting of shareholders. For the merger agreement to become a valid obligation of a merging company, the general meeting of shareholders of each merging company must approve the merger.
(d) Calling for the general meeting of shareholders of each merging company for approval of the merger agreement: Approval by a general meeting of shareholders is required for the effectiveness of the merger agreement. Therefore, after the boards of directors of the merging companies draft the merger agreement, the merger agreement must be approved by the general meeting of shareholders of each and every merging company. In practice, for the sake of convenience, the merging companies agree on the date to call their respective meetings of shareholders. If the general meeting of shareholders fails to convene or the shareholders do not approve the merger agreement, the merger agreement will not become effective. Except for the approval of the merger agreement by the general meeting of shareholders of each merging company, no merger documents need to be approved by a third party.
(e) Merger consideration: The merger consideration to be paid to shareholders of the merging companies in exchange for their shares are the shares of the absorbing or the new company. No consideration in the form of money can be offered to shareholders in exchange for their shares. To determine the number of shares to be given to shareholders, the assets of the absorbing or the new company should be evaluated and the parties have to decide on an exchange rate. (f) Termination of the merger agreement: The merger agreement may be terminated pursuant to the termination provisions provided for therein or in accordance with the general rules of law.
(g) Timing constraints on a merger resulting from the laws: There are no timing constraints imposed by law with respect to a merger. However, requirements such as the general meeting of shareholders, the drafting or amendment of the articles of association, expert valuations, and the permission of the Ministry of Industry and Trade for the amendment of the articles of association take time. The parties may, however, shorten the time by timely Núm. 13 (primavera 2011)
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and complete submissions and regular follow­ups. Furthermore, if applicable, the approval of the Competition Board may take some time. Timely submission and insistent follow­ups may shorten the approval period.
(h) Valuation of the merging companies and determination of the exchange rate: This may be deemed as the most important aspect of a merger as it relates to economical benefit of the transaction. The TCC is silent with respect to the method of valuation and views on the valuation method vary. It would be recommendable to determine the fair value of the assets as of the date reasonably prior to the merger. Regardless of whichever method is adopted, to provide equality between the merging companies, all merging companies must prepare a balance sheet (TCC, Art. 149) in the same format and they must use the same valuation method.
(i) Increase of capital; the articles of association of the new company:
(j) In a merger by absorption, the absorbing company must increase its capital. In order to increase the capital, first the exchange rate should be determined and the capital must be increased based on the exchange rate. This matter must be included in the merger agreement. The relevant provision of the articles of association regarding the capital must be amended accordingly. Afterwards, the absorbing company will distribute the shares arising out of the capital increase to the shareholders of the merging companies as consideration. (k) In a merger in a new company, a new company is established, the merging companies dissolve, and they merge into the new company. The capital of the new company and the share ratios of the shareholders can be determined by valuation of the assets of the merging companies and will be based on the determined exchange rate. The articles of the association of the merging companies are prepared accordingly and submitted to the general meeting of shareholders of each merging company.
8.2 Implementation Phase
(a) Merger by Absorption: The transactions are eightfold.
1- The general meeting of shareholders of each merging company convenes for the approval of the merger. In particular, the general meeting of shareholders of the absorbing company resolves the various issues concerning the capital increase, approves the merger agreement, and amends its articles of association. The general meeting of shareholders of each merging company approves the merger and the merger agreement, and resolves the dissolution of the merging company.
2- The articles of association of the absorbing company need to be amended, including the increase in the capital. In practice, an expert determination is made to evaluate the assets of the merging company.
3- The absorbing company obtains the permission of the Ministry of Industry and Trade for the amendment of its articles of association.
4- A pro forma balance sheet for the merger must be prepared.
5- Upon preparation of the balance sheet for the merger, an application needs to be made to court for determination of (1) the net assets of the merging companies, (2) the amount of Núm. 13 (primavera 2011)
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the capital to be increased by the absorbing company, and (3) the exchange unit of the shares of the merging companies.
6- An application needs to be made to the respective trade registry (ticaret sicili) of each merging company for the registration and publication of the merger.
7- Provided that no objection is raised by the creditors of the merging companies, the merger will be finalized after three months as of the registration and publication of the merger. However, if (1) the merging companies pay their debts before the announcement date, or (2) the merging companies deposit the amount corresponding to their debts with the Turkish Central Bank or with a another reputable another bank, which must be announced, or (3) the creditors have consented the merger, the resolution for merger will become effective as of the announcement date or of such date that one of the conditions has been fulfilled.
The absorbing company must manage the assets of each dissolving company independent from each other until the liabilities of each company are settled. The board members of the absorbing company are jointly and severally liable for any losses arising out of the violation of this requirement.
(b) Merger in a New Company: The transactions are ninefold.
 The boards of directors of the merging companies draft the merger agreement, sign it 
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and cause their signatures be authenticated through a notary public. Furthermore, the boards of directors draft the articles of association of the new company to be formed.
All merging companies have the status of a target. The general meeting of shareholders of each merging company convenes for approval of the merger. Each general meeting of shareholders approves both the merger agreement and the articles of association of the new company. Thereafter, procedures for incorporation of the new company follow.
An application to the court for an expert determination to evaluate the net assets of the merging companies and the capital of the new company are required.
The articles of association must be in writing and the signatures of all merging companies need to be authenticated at a notary public.
The permission of the Ministry of Industry and Trade for the adoption of the articles of association needs to be obtained.
The court must approve the incorporation of the new company.
All merging companies dissolve and the new company is announced and registered with the trade registry.
A pro forma balance sheet for the merger must be prepared.
Provided that no objection is raised by the creditors of the merging companies, the merger will be finalized after three months as of the registration and publication of the merger. However, if (1) the merging companies pay their debts before the announcement date, or (2) the merging companies deposit the amount corresponding to their debts with the Turkish Central Bank or with a another reputable another bank, Núm. 13 (primavera 2011)
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which must be announced, or (3) the creditors have consented the merger, the resolution for merger will become effective as of the announcement date or of such date that one of the conditions has been fulfilled.
The absorbing company must manage the assets of each dissolving company independent from each other until the liabilities of each company are settled. The board members of the absorbing company are jointly and severally liable for any losses arising out of the violation of this requirement.
8.3 Execution Phase
In the execution phase, things to do are fourfold:
 The new shares to all shareholders are given based on the determined exchange rate.
 The creditors of the merging companies are invited to claim their receivables from the merging companies. The TCC is silent with respect to whether the creditors can object to the merger and this issue is disputed.
 The interests of the creditors have priority. In order to protect the interests of the creditors, the assets of the merging companies are managed independently of the assets of the absorbing or the new company until such time that debts of merging companies have been paid or secured. Managing independently means such assets need to be kept and maintained as a special group of separated assets. Otherwise, the directors of the board will be liable personally to the creditors for any claims against such assets.
 When debts of merging companies have been secured or paid, the board of the absorbing or the new company requests the corporate registry to delete the registration of the merging companies.
9 Protection of Creditors of the Merging Company
In a merger, no consent of creditors of a merging company needs to be sought as the absorbing or new company becomes the successor of the merging company by law (TCC, Arts. 151/II and 476/II). The absorbing or new company may become weaker financially and less trustworthy as a result of the merger; however, even in this instance, no consent by the creditors is required for the purpose of their protection. To cover the lack of need to seek the consent of creditors, however, the TCC provides provisions for the protection of the creditors of the merging companies against risks of a merger (TCC, Arts. 150 and 451). In this regard, the TCC imposes that all precautions should be taken to prevent the creditors from entering into a worse condition due to the merger (e.g., the condition of the creditors should not become worse if the merging company were to be liquidated) and that the interests of the creditors must be protected from adverse impacts that may arise due to the change of the debtor party, including the consequence that the absorbing company becomes the successor of the merging company.
The COO provides that whoever acquires substantially all of the assets and other rights of a company becomes liable to the creditors of the company for the liabilities connected therewith, Núm. 13 (primavera 2011)
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as soon as the merger or the acquisition has been notified to the creditors by either the acquiring company, the new company or the buyer, or the announcement of the merger in daily newspapers. Once the merger or acquisition takes place, the liabilities automatically, as a whole, will be transferred either to the acquiring company, the new company or the buyer. There is no limitation on the liability of the acquiring company, the new company or the buyer.
The requirement to give advance notice of the sale to the creditors of the merging companies is to provide protection to the creditors of merging companies against the risk of transferring the assets of the merging companies to the acquiring or new company, and leaving merging companies with no assets that their creditors may go after. Likewise, the protection of a seller’s creditors against the risk posed by the sale of the assets of the seller in bulk, leaving the seller with no assets that its creditors may go after, is provided by the requirement that an advance notice of the sale be given to the creditors of the seller. In the event of failure to give notice to the creditors, the acquiring or new company, as the case may be, shall be liable to the creditors of the merging companies.
10Protection of Shareholders
The shareholders must continue to hold at least the same rights that they were holding before the merger. Therefore, when entering into a merger, one of the purposes is to protect the rights of the shareholders after the merger. While maintaining these rights, the following should be respected: (i) acquired rights of the shareholders, (ii) equal treatment of shareholders, and (iii) maintaining the balance among different interest groups. In this context, the rights of shareholders to obtain information about the merger, audit, to request the nullity, voidance or cancellation of the merger, to request compensation, and to demand the termination of the company due to a just reason may be mentioned.
11Approvals/Compliance Issues for a Foreign Buyer
In principle, foreign buyers can engage in all activities in almost any sector in Turkey, with the exceptional restrictions set out in special laws (e.g., education) and requirements for a few special permits (e.g., tourism, real estate). Conditional approvals may be given but in practice they are unusual. On the nationality of shareholders, directors or officers of a company, there are no restrictions or requirements.
The directors of a company must also be shareholders in the company. If non­shareholders are elected as members to the board of directors, they must become shareholders before they can assume office. However, such shareholding may be nominal. If a legal entity is a shareholder in the company, it is not eligible as such to be a member of the board of directors; however, an individual, acting as its representative, may be elected in its place. These principles are applicable to foreign investors as well.
Except for the approvals concerning foreign buyers mentioned above and any antitrust approvals, other than in some exceptional sectors (e.g., telecom), no governmental approvals relating to a merger or acquisition is required. However, sector­specific conditions can be attached to any required approvals. There is no generic timetable for approvals; the length of Núm. 13 (primavera 2011)
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the approval process depends to the nature of the approval and the sector. The information given to the relevant authorities in obtaining such approvals is not publicly disclosed and kept confidential, unless required by law or by other official authorities.
Under Turkish law, the change of control of a company is not subject to any third party consents, such as of lenders, landlords, and other co­contractors. However, if the company and a third party agree otherwise, then the terms of such agreement shall apply.
12The Legal Consequences of a Merger
The legal consequence of merger is that all assets and liabilities of the merging companies shall become assets and liabilities of the absorbing or new company by operation of law. The former shareholders of the dissolving companies will be given shares in the new company in pro rata to their previous shareholding interests in the merging companies. Court cases and other legal actions will continue to proceed. However, the absorbing or new company may be substituted in place of the merging company for such case or action. Below are some court decisions in this regard.
12.1Merger Pursuant to Article 451/2 of the TCC
In a merger pursuant to Article 451/2 of the TCC, when a sued company mergers into a company which is not a party to the case and dissolves, all of its assets and liabilities go to the absorbing company, which will be liable for managing the assets of the dissolving company until all debts of the dissolving company have been secured or paid. As such, the decision of the court in a case will be effective and binding on the absorbing company and not the dissolving company. 12.2Assignment of Assets or an Enterprise under the COO
In an assignment pursuant to Article 179 of the COO, the entity whose assets or one of its enterprises is transferred by another entity will continue to remain liable jointly and severally together with the transferee company for two more years, starting from the notification or publication date for claims already due, and from the due date for claims becoming due subsequently. 12.3Offset of the Value Added Tax (VAT) upon a Merger
In a 2004 case, upon a merger transaction, the entity that took over another company (i) declared the VAT on the transferred goods purchased before the merger by the dissolved company as a deductible in the tax declaration given after the merger from its overall VAT due, and made an offset accordingly and (ii) made no provision for the VAT to be offset in the assets of the balance sheet for the merger. The tax office claimed that as the merger was exempt from VAT by law, the VAT on the transferred assets could not be offset. The trial court found in favor of the tax office and concluded that VAT on the transferred assets could not be offset. However, upon appeal to the Núm. 13 (primavera 2011)
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Council of State (High Administrative Court), the Court overruled the decision by stating, in brief, (i) that by virtue of Article 451 of the TCC, taking over all the assets and liabilities of a company is accepted as an “dissolution without liquidation” and (ii) that the acquisition means cessation of business for the merging (dissolving) companies, which ends the operations that caused the companies to be subject to taxation. Therefore, as the absorbing company took over the assets of the merging company, it is compliant with applicable law to make an offset of the VAT on goods purchased before the merger by the dissolved company from its overall VAT stated in its tax declaration. 13Assets and liabilities
All of the liabilities of the merging companies are retained by the acquiring or the new company following a merger. There are no liabilities of the merging companies that may be reduced or eliminated just because of the merger or acquisition. Likewise, no liabilities of the target may be reduced or eliminated just because of the merger or acquisition.
With the exception of liability to the creditors of the merging companies, in a merger, in principle, the absorbing or the new company shall not become liable for the acts and omissions of the merging companies. In an acquisition, in principle, the only liability of the buyer is the payment of its capital contribution to the company. If the capital contribution corresponding to the shares purchased by the buyer is still outstanding, the buyer will be liable for payment of such amount to the company. The buyer shall have no direct personal liability for the acts, omissions or liabilities of the company. Third parties cannot seek redress against the buyer for the acts, omissions or liabilities of the company. Unless full payment is made or their receivables are secured, the liability against the creditors of the merging companies cannot be reduced or eliminated. In a merger or an acquisition, shareholders are not personally liable to one another or third parties for the acts, omissions or liabilities of the merging companies. However, the directors of the board may have liability under the following circumstances:
13.1Liability under the TCC
In principle, the directors of a company are not personally liable for the transactions conducted on behalf of the company. However, the directors become jointly liable to the company, shareholders and its creditors for any damage incurred due to: (i) incorrect or misleading entries of capital contributions by the shareholders; (ii) incorrect declaration and payment of dividends; (iii) failure to retain company books required by law or failure to record information in compliance with law; (iv) failure, without cause, to apply the resolutions of the general meeting of shareholders; (v) failure to fulfill the duties arising from law and the company’s articles of association; and (vi) deceiving third parties by misrepresentations or lies concerning the actual financial position of the company. A director shall be liable for any loss arising out of the foregoing, unless he/she proves that he/she had no fault in connection therewith.
13.2Liability under the Law on Collection of Public Debts (the “LCPD”)
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In accordance with the LCPD, the public debts of a legal entity that cannot be totally or partially collected from the legal entity shall be collected from the legal representatives (i.e., the directors in the case of joint stock companies) of the legal entity (LCPD, Art. 35). The legal representatives may be released from such liability only if they can prove that such non­
payment has not resulted from their intentional or negligent breach of their duties.
As mentioned above, both in a merger or in an acquisition, in accordance with Article 35 of the LCPD, the legal representatives will be liable for the outstanding public debts of the company incurred when they were in office. Other than the public debts of the company, the directors or management of the merging companies will have no personal liability to third parties for the pre­merger acts or omissions or liabilities of the merging companies. However, it may be agreed in the merger agreement that the directors or management of an absorbing or new company will indemnify the merging company in case the merging company suffers any loss due to the pre­merger acts or omissions or liabilities of such merging company. Indemnity may then be claimed if a loss is suffered. Likewise, the seller and its directors and management will have no personal liability to third parties for the pre­closing acts or omissions or liabilities of the target. However, it may be agreed between the seller and the buyer that the seller or its directors or management will indemnify the company and/or the buyer in case the company suffers any loss due to the pre­
closing acts or omissions or liabilities of the target. Following a merger, the right of merging companies, or following an acquisition, the right of the target, to terminate its existing contracts will not be restricted, particularly distribution or agency agreements. However, the counter party may claim for indemnity if it suffers a loss. 13.3Merger under the TCC
Under the provisions of Articles 451 and 452 of the TCC with respect to mergers without entering into liquidation process, if a company is taken over by another company (Art. 451), the dissolved company ceases to exist. Likewise, when a company merges into another company, the merging company ceases to exist as well. As the legal entity ceases to exist, it will be deemed to have lost its power to be a party, much like a dead individual. Therefore, any claims filed against or on behalf of a dead individual should be applicable by analogy. (Prof. Dr. Baki Kuru HUMK C­l, p. 930). The Supreme Court has concluded that, after a merger, any action against the dissolved company (like a dead individual) was not possible due to non­existence of the entity and, therefore, any claims against the dissolved company must be rejected; however, it would be possible to make the claim against the absorbing or new company. Pursuant to Article 451/2 of the TCC, when a sued company merges into a company which is not a party to the case and dissolves, all assets and liabilities of the sued company are assumed by the absorbing company. The Supreme Court has ruled that the absorbing company will be liable from managing the assets of the dissolving company independently until all debts of the dissolving company have been paid or secured and that the decision of the court will be effective and binding on the absorbing company and not the dissolving company. 14 Documentation
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Except the requirement for a merger agreement (to which each merging party must be a party by law) and the new articles of association for the absorbing or new company, no document needs to be used for a merger. However, the parties are free to enter into any other contract as the Turkish legal system recognizes the principle of the freedom of contract. Each signed original copy of the merger agreement will be subject to 0.75% stamp duty.
14.1Mergers by Absorption
The general meeting of shareholders of each merging company must approve the merger agreement. Notarization of the merger agreement is not required. The merger agreement becomes effective upon the registration of the capital increase. 14.2Merger in a New Company
The signatures of the parties to the merger agreement must be authenticated through a notary public. The general meeting of shareholders of each merging company must approve the merger agreement. The merger agreement becomes effective upon the registration of the new company.
However, in practice, prior to the signature of the definitive merger agreement, particularly when a foreign buyer is involved, parties usually enter into agreements other than the merger agreement, such as a letter of intent, memorandum of understanding, heads of agreement, or a confidentiality agreement.
In practice, letters of intent are used particularly if one or more parties are foreign persons. It is possible to make only certain provisions of such agreements legally binding. The binding provisions of a letter of intent must to be negotiated in good faith, as good faith is one of the basic principles of Turkish law. However, good faith would be irrelevant for the non­binding provisions. The shareholders of a company usually enter into agreements regulating the relationships among themselves or with the company, particularly if foreign shareholders are involved. However, it should be emphasized that, under Turkish law, the articles of association of a company is a contract. Therefore, it would particularly be advisable to include any such agreements in the articles of association to the extent possible. As the articles of association is the main contract for the company and has priority over any side agreements in the event of a dispute, those provisions that could be inserted into the articles of association should not be dealt with in side agreements.
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