How an acquisition is structured often has a significant effect
on its success. Investors often establish a special purpose vehicle
(SPV) for acquisition transactions and SPVs commonly borrow funds
from banks or other financial institutions to finance these
operations. The repayment of funds (with interest) and the
performance of tax obligations require a well-planned financial
structure. One of the most well-known types of financial structure
is debt pushdown.
An acquisition structure involving debt pushdown is implemented
The investor incorporates an SPV.
Given that the SPV's sole purpose is to acquire the
target's shares, the SPV has no business operations.
The SPV borrows funds from banks or
other financial institutions to finance the costs incurred in the
acquisition of the target's shares.
Following acquisition, the SPV and
the target merge by upstream or downstream merger.1
As a result, the SPV's
receivables and liabilities are transferred to the target and the
SPV ceases to exist.
All funds borrowed from banks are
thereby pushed down to the target and the SPV's costs, debts
and interest payments incurred during and following the acquisition
of the target's shares are paid by the target.
The new Commercial Code 6102 introduced a financial assistance
prohibition. Based on the opinion that a merger in the
abovementioned scenario is part of the initial acquisition of a
target by an SPV, some Turkish scholars and legal practitioners
argue that the debt pushdown mechanism should be considered to fall
within the scope of the financial assistance prohibition and viewed
as a circumvention thereof.2
In contrast, the majority of Turkish legal scholars argue that
the upstream or downstream merger of an SPV with a target following
the acquisition of shares does not fall within the scope of the
financial assistance prohibition.3
The debt pushdown mechanism and its results are yet to be tested
in the Turkish courts. The absence of precedent gives some cause
for caution among legal practitioners advising on M&A
transactions. Given that the target provides no security to the SPV
for the acquisition of its shares, an upstream or downstream merger
involving debt pushdown cannot be considered within the scope of
the financial assistance prohibition. From a general legal
perspective, even if such a merger negatively affects the financial
status of the target, the Commercial Code's merger provisions
allow for mergers through the acquisition of insolvent companies or
companies in liquidation.
Originally published by International Law Office.
(1) If an SPV merges into a target, it is a
'downstream merger'; whereas if a target merges into an
SPV, it is an 'upstream merger'.
(2) Article 380 of the Commercial Code prohibits
transactions concerning the grant of advances, loans or security by
the target for the acquisition of the target's shares by a
(3) Leveraged Buyout ve Anonim Şirketin Finansal
Yardım Yasağı (Leveraged Buyout and Financial
Assistance Prohibition in Joint Stock Corporations), by Dr
Fatih Arıcı and Cem Veziroğlu, 2014.
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