The joint Communiqué of the Ministry of Finance and Ministry of Industry and Trade No. 25231 dated 16 September 2003 (the "Communiqué") is the primary regulation that governs the partial spinoff of a joint stock company or a limited liability partnership, whereas the Turkish Commercial Code (Law No. 6762) is silent on the issue. Pursuant to the Communiqué, a spin-off may only be realized by way of partial division. Accordingly, in the event of a spin-off, a portion of the assets of a joint stock corporation or limited liability partnership are transferred to the target company as capital in kind, and the shareholders of the spin-off company acquire shareholding of the target company, which may be either a newly established company or one that currently exists.
The New Turkish Commercial Code (Law No. 6102 or the "New TCC") that will become effective on 1 July 2012, on the other hand, regulates spin-off transactions in detail in comparison to the currently applicable legislation. It introduces principles concerning not only different types of spin-offs (i.e., full spin-offs and partial spin-offs) but also the liabilities of the companies that are involved in such transactions, as well as the liabilities of their shareholders. Fundamental principles of the New TCC with respect to spin-off transactions is summarized as follows:
- Share capital companies, namely, joint stock corporations, limited liability partnerships and limited partnerships, the share capital of which is divided into shares, and cooperative companies may be spun-off into share capital companies and cooperative companies. On the other hand, such companies may not be split into partnerships nor vice-versa.
- In the event of a full spin-off, all assets of a company are divided and transferred to the target companies. As a result, the spin-off company's shareholders acquire the shares and rights of the transferee companies, and the spin-off company then ceases to exist.
- In the event of a partial spin-off, a part or certain parts of a company's assets are transferred to the target companies. As a result, the spin-off company's shareholders acquire the shares and rights of the transferring companies, or the spin-off company acquires the shares and rights of the transferring companies in consideration of the transferred assets and, consequently, it establishes its own subsidiary.
- The assets subject to the spin-off are transferred on the basis of principles of general subrogation (külli halefi yet), regardless of the underlying transaction type, and no transfer of the respective assets as capital in kind occurs. Upon the establishment of a subsidiary (i.e., if the spin-off company acquires the shares and rights of the target companies in consideration of the transferred assets), however, the spin-off company transfers its assets to the transferring company as capital in kind, then the transfer of the assets is not carried out on the basis of subrogation.
Liability of the Companies Involving a Spin-Off
The liability of the companies involved in a spinoff transaction is currently a controversial topic pursuant to scholarly opinion. Accordingly, certain scholars are of the opinion that the joint liability of the transferor towards the creditors in a business transfer, for a two year-period with regard to the debts and liabilities relating to such business, must also be applicable in the event of a spin-off with respect to the spin-off company; whereas, certain other scholars argue that the liabilities are vested with the transferee.
The New TCC, on the other hand, introduces specific provisions concerning this issue. In this respect, the company to which the claims were assigned by the spin-off agreement or plan is deemed as the primarily liable company, and the other companies (the companies that are secondarily liable) are jointly and severally liable for those claims that have not been paid by the primarily liable company.
The New TCC also restricts the cases wherein creditors may make claims against companies that are secondarily liable. According to Article 176 of the New TCC, secondarily liable companies may be pursued only if:
- A claim has not been secured; and
- The primarily liable company (i) has become bankrupt, (ii) has obtained a composition moratorium or stay of bankruptcy, (iii) has been sued for debt enforcement until a final certificate or shortfall is issued, (iv) has relocated its principal office abroad and may no longer be pursued in Turkey, or (v) has relocated its principal office abroad and, as a result, a claimant's rights to pursue the enforcement of the debt are seriously affected.
Personal Liabilities of Shareholders in the event of Spin-Off
With respect to the personal liabilities of the shareholders in the event of a spin-off, the New TCC refers to the provisions applicable in the event of a merger. In light of referenced Article 158 of the New TCC, the spin-off company's shareholders, to the extent they had been personally liable for the company's debts, remain liable for any debts that were incurred prior to announcement of the spinoff resolution, or for any debts whose legal liability is established prior to that date. The statute of limitations for personal liability of the shareholders is three years from the announcement of the spin-off resolution. However, if a receivable becomes due following the announcement, then the three-year statute of limitations with respect to this receivable will begin from the due date. This limitation of personal liability does not apply to shareholders who are also personally liable for the debts of the transferee companies.
The New TCC undoubtedly will put a new face on the Turkish commercial legislation. Spin-off transactions are included in the matters that the New TCC regulates in depth to satisfy the needs of today's business and legal world, and aims to find solutions for today's debated or unanswered problems, such as liability of the companies involved in a spin-off. This Article, of course, merely reflects the wording of the New TCC, and the method through which to implement the same by the Turkish courts is yet to be tested.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.