This article considers with the mechanisms for merging local entities under the new provisions of the Turkish Commercial Code ("TCC"). This is not a review from a Competition Law perspective rather consideration of the basic steps required to merge two local entities under the TCC.
I. Legal Framework for the Merger
There are two types of mergers envisaged by TCC,
(a) Firstly where either entity is completely absorbed by the other entity ("Absorption") or
(b) where entities lose their separate identities and unite to form a completely new entity ("Consolidation").
In Absorption, the "absorbed" company loses its identity and becomes part of the "absorbing" entity, which retains its identity and survives the merger. Thus, the "absorbing" entity assumes all the rights, privileges, and liabilities of the merged entity. In Consolidation, the merged entities become shareholders in the new entity under which they have become united.
II. Available Options for Mergers
Turkish entities may merge through either Absorption or Consolidation. However, there is a simplified option permitted by the TCC which applies to the merging of sister companies, i.e. those owned by the same share holders or holding companies. The main requirement for such an option is that the sister companies are owned 100% by the same mother company.
However, it should be noted that benefiting from this simplified procedure is not possible if the sister companies merge through Consolidation. Therefore, it should be decided which of the sister companies is more significant from a commercial perspective and that one should be the surviving entity. The merger options should also be assessed to check which is most advantageous from a tax point of view.
III. Merger by Simplified Procedure
We have set out below the simplified procedure.
1. Pre-Merger Formalities
a. Merger Analysis Report of the Financial Advisors
The company's financial advisors should draft a merger analysis report to cover the issues such as a general tax evaluation regarding the tax implications of the simplified merger under Turkish laws and perhaps under IFRS, evaluation of the profitability of each of the merging companies so that the surviving entity could be determined, and preparation of the balance sheet on which the merger will be based. Any pre-merger financial statements to be prepared under Turkish tax laws should also be taken into account by your financial advisors.
2. Merger Formalities
a. General Information
In simplified mergers, the merger agreement can be approved by the board and not by the general assembly of the shareholders. Moreover, if the merging entities are sister companies, a summarised merger agreement, merger decision of the managing bodies of the merging entities (board decisions approving the merger agreement), and registration of the merger with the Trade Registry would suffice.
Sister companies which are merging do not have to prepare a merger report, submit such report to the review of the shareholders, and convene the general assembly in order to obtain the approval of the shareholders on the merger agreement. If the merger agreement is not submitted to the general assembly of the shareholders for the approval of the merger agreement, a notarised copy of the board decision that is approving the merger, stating that the simplified procedure is applied to the merger, and according to which provision of the TCC such procedure is applied, along with the justification, should be obtained and submitted to the Trade Registry.
The merging entities applying the simplified procedure have to obtain the board decision approving the merger simultaneously with the signing of the merger agreement. After the merger agreement has been signed by the managing bodies of the merged entities and the board decision approving the merger has been adopted, each of the merged entity's managing body should apply to the Trade Registry for the registration of the merger.
The share capital of the absorbed company would be added to the share capital of the surviving entity and therefore the surviving entity should increase its share capital accordingly.
b. Merger Agreement
In the merger agreement, the following issues need to be set out.
i. Commercial titles of the merged entities, trade registries such entities have registered with, trade registry numbers, tax numbers, and company types of the merged entities;
ii. The date on which the transactions and actions of the absorbed entity will be deemed to have been made on behalf of the surviving entity;
iii. If applicable, the exit pay that is to be disbursed to the shareholders who are leaving the partnership as a result of the merger;
iv. Special benefits granted to the managing bodies or managing shareholders of the company, if any;
v. If applicable, the names of the shareholders of the unlimited liable shareholders.
c. Announcement of the Merger:
The announcement in the form that is required by the Trade Registry must be made three times with seven day intervals. The first announcement must be published in the same Trade Registry Gazette that includes the announcement for registering the board resolution adopted for the merger.
3. Post-Merger Formalities
a. Amendment of the Articles of Association of the Surviving Entity
The Articles of Association of the surviving entity will be adopted and amended according to the requirements of the New Turkish Commercial Code. Such amendment can be limited to the urgent mandatory requirements and be made in the same general assembly to be held by the surviving entity for increasing the share capital.
b. Issuance of the Signature Circular
A new signature circular should be issued in the name of the surviving entity.
c. Assignment of the Customer Contracts
If there is a requirement for consent of any customer of the absorbed entity, such consent should be obtained.
d. Notification of the Customers
Existing customers should be informed about the merger via an appropriate letter.
e. Employment Matters
Revision of the Employment Contracts and the Working Conditions and notification to the social security institution should be made. Employee benefits including their severance period continues and is passed on to the surviving entity.
4. Exemptions on Taxes and Fees
a. Application of Corporate Tax Code
If the legal residence or headquarters of the absorbed entity and surviving entity are within the Republic of Turkey and the balance sheet values of the absorbed entity are taken over completely by the surviving entity where such values have been extracted by the surviving entity's balance sheet "as it is", such type of merger would be deemed as "take over" according to the Corporate Tax Code. Thus, only the earnings of the absorbed entity as of the date of the takeover shall be taxed; profits arising directly from the merger shall not be calculated or taxed.
The merging entities must submit to the relevant Tax Office a jointly signed statement within 30 days of the date of merger to which the takeover balance sheet shall be attached. The surviving entity needs to submit a further statement in connection with the tax debts undertaking the payment of any tax debts which have been incurred or will incur in connection with the absorbed entity. Moreover, the surviving entity will commit that it will fulfill other obligations of the absorbed entity that may arise in the future.
b. Application of Value Added Tax ("VAT") Code
According to Article 17/4-c of the Value Added Tax Code, the merger that is deemed as a takeover according to the Corporate Tax Code as mentioned above is excluded from VAT. However, the transactions related with the merger which are exempted in this respect would not benefit from VAT deductions in full. Accordingly, at the end of the merger, the VAT's imposed on and not deducted by the absorbed entity will be made by the surviving entity subject to deduction by avoiding any duplication thereof.
In practice, the general tendency of the Ministry of Finance is to include the takeover procedures within the scope of full exemption. In fact, in previous applications regarding this issue it has been noted that the Ministry has issued rulings stating that the VAT's that were not deducted by the absorbed entity will be deductible by the surviving entity. A great number of merger operations in the past have been conducted based on such rulings. However, in order to avoid any risk, a specific opinion could be obtained from the Ministry of Finance.
c. Application of Stamp Tax Code
Any document issued in relation with the merger that is contemplated according to the Corporate Tax Code is exempted from tax duty due to the Schedule (II)-Section IV paragraph (17) annexed to the Stamp Tax Code No. 488.
d. Statutory Fees
According to the Code on the Statutory Fees, the transactions related with any merger involving joint stock and limited liability entities are excluded from charges.
Based on our experience, normally, mergers under the full procedure could take up to 5 months. However, thanks to the simplified procedure, mergers may be finalised within approximately two months.