Conversion of type is one of the corporate restructuring transactions. Conversion was regulated under a single article of the abrogated Turkish Commercial Code No. 6762, and a special provision was introduced with respect to the conversion of a joint stock company into a limited liability company without a liquidation procedure. Nonetheless, there were certain problems with regards to the conversion of limited liability companies to unlimited liability companies and vice versa, both under the Court of Cassation precedents and Trade Registry practices.
The new Turkish Commercial Code No. 61021 ("TCC") introduced detailed provisions and innovations governing conversion of type and clarified certain disputed matters. The principle of continuity of the converted company under the new type, which was accepted under the abrogated code, was preserved. A detailed explanation on conversion of type can be found in the relevant article of the Erdem&Erdem December 2011 Newsletter.
Provisions of the TCC governing conversion of type do not only regulate the conversion of type of commercial companies, but also the conversion of commercial enterprises that are not legal entities. The Trade Registry Regulation2 also introduces special and detailed provisions on the conversion of commercial enterprises.
This month's article will assess the conversion of commercial companies into commercial enterprises and the conversion of commercial enterprises into commercial companies pursuant to the relevant provisions of the TCC and the Trade Registry Regulation.
Conversion of Commercial Enterprises into Commercial Companies
The TCC defines a commercial enterprise as an enterprise that exceeds the scope of an artisanal enterprise, aims to generate profit and continuously and independently realizes its activities. Pursuant to TCC Art. 11/3, the commercial enterprise is deemed to own the assets which have been continuously allocated to its use (i.e. machinery constantly used and allocated to the activities of a factory). A commercial enterprise is an enterprise bearing the above qualifications and has no legal personality.
Pursuant to TCC Art. 194/2, a commercial enterprise may convert to a commercial company. Thus, a commercial enterprise that has no legal personality may convert to commercial company that has a legal personality. The TCC regulates that provisions governing the conversion of type by commercial companies (Articles 182 to 193) shall apply by analogy to this transaction.
Accordingly, the provisions governing the establishment of the company to which the enterprise will convert will be applicable. Therefore, the necessary documentation for the establishment of the relevant company will be prepared and relevant transactions will be executed. The provisions governing the preservation of rights, preparing a balance sheet, a conversion of type plan and report will also apply by analogy. However, as the commercial enterprise has neither a legal personality nor organs, such as a general assembly, no decision for conversion will be adopted, and the relevant provisions will not be applicable.
Similarly, the principle of continuity of the converted company under the new type will also be applicable (TCC Art. 180). Thus, the commercial company established by conversion will be considered a continuation of the former commercial enterprise.
The Trade Registry Regulation specifies that in the event a commercial enterprise is converted to a commercial company, an asset valuation report on the former must be prepared by a sworn financial auditor or independent accountant and financial auditor and submitted to the Trade Registry. Furthermore, in the event the assets of the commercial enterprise comprise certain rights or goods registered to the land registry, the registry of ships, the intellectual property registry or to other registries, a statement providing information on such rights and goods as well as on the registries in which they are registered will also be submitted to the trade registry. The goal is that the commercial enterprise and its assets are transferred as a whole to the newly established commercial company and that its unity and continuity are ensured.
Conversion of Commercial Companies into Commercial Enterprises
The TCC also enables a commercial company, bearing a legal personality, to convert to a commercial enterprise not having a personality. The legal personality will cease to exist as a result of this conversion. Both the TCC and the Trade Registry Regulation provisions hold that the commercial enterprise to be registered as a result of the conversion shall be the continuity of the commercial company.
The TCC introduces a short provision regarding this transaction (Art. 194/3). It states that all shares of the commercial company should be owned by the person or persons who will operate the commercial enterprise, and the commercial enterprise to be registered will be registered to the trade registry and announced in the name of such person(s). Thus, the shareholders of the converted commercial enterprise will be registered as the owners of the commercial enterprise. The relevant provision also specifically regulates the obligations of collective and commandite companies which will convert.
The TCC does not foresee any provisions on the liquidation of the converted company, nor on how the legal personality will cease to exist. The derived conclusion is that a new dissolution without liquidation is therefore foreseen (such as merger and demerger transactions).
The lack of provisions on liquidation is of significance, especially with regards to the protection of the creditors' rights. As there is no provision stating otherwise, the acquirers of the commercial enterprise will be personally liable for the debts of the converted company. Pursuant to the conversion of types authorized by the TCC (Art. 181), a commercial company may in principle be converted to another commercial company or a cooperative, but not to an unlimited partnership company. Nonetheless pursuant to Art. 194, regardless of their liability regime, all commercial companies (including equity companies) may convert to a commercial enterprise.
In order to prevent possible problems, the Trade Registry Regulation introduces detailed provisions and additional obligations with respect to this type of conversion. The Regulation also lists the necessary documentation for the registration of this conversion.
Pursuant to the provisions of the Trade Registry Regulation, Articles 190 and 194/3 regarding the liability of the shareholders of the converted company and obligations arising from employment agreements shall apply. Thus, it is foreseen that provisions governing conversion of type in general regarding the liability of the shareholders, and governing the obligations of collective and commandite companies shall apply to the conversion of a company to an enterprise.
In order to prevent problems arising from the fact that the commercial enterprise will be registered in the name of the shareholders of the converted company and that such persons shall be personally responsible for the company's debts, the Trade Registry Regulation introduces an additional requirement not regulated under the TCC. Accordingly, joint stock and limited liability companies who suffer capital losses or whose capital is not sufficient to cover their debts may not convert to a commercial enterprise.
The conversion of a commercial enterprise to a commercial company, and the conversion of a commercial company to a commercial enterprise are among the innovations introduced with the TCC and are regulated for the first time under both the TCC and the Trade Registry Regulation. With these provisions, in addition to the transfer of a commercial enterprise (an asset transfer), a new mechanism is introduced within the scope of restructuring transactions governing the commercial enterprise. A company that has a legal personality may convert to a commercial enterprise and vice versa, and the company or the enterprise registered as a result of such conversion of type shall be deemed the continuity of the former organism.
In practice, problems related to dissolution without liquidation, protection of creditors and liability from debts may arise from the conversion of a commercial company to a commercial enterprise.
1 Published in the Official Gazette dated February 14, 2011 and numbered 27846.
2 Published in the Official Gazette dated January 27, 2013 and numbered 28541.
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.