Turkey: A Guide To Mergers Of Non-Public Companies In Turkey

1- General

Merger transactions are regulated under the Turkish Commercial Code ("TCC"). According to the TCC, a merger can be performed in two ways:

  • Acquisition of a company by another company, technically called "merger by acquisition".
  • Union of two companies under a new company, technically called "merger by formation of a new company''

A joint stock company (abbreviated as "A.S." in Turkish) and a limited liability company (abbreviated as "Ltd. Sti." in Turkish) can merge with another A.S. a Ltd. Sti. or a cooperative.

2- Specific Merger Situations

Merger transaction can be performed by company which is in the process of liquidation provided that the distribution of its assets has not yet begun and it acts as the absorbing company in the transaction.

Companies which lost half of the sum of their capital and statutory reserves due to damages, or whose liabilities exceed their assets, may merge with another company, provided that the latter is in possession of freely disposable equity sufficient to cover the capital loss of the first company or if necessary, to remedy the state of excess of liabilities over assets.

3- Procedures for the Merger

  • As the first step, a written merger agreement must be executed between the executive bodies of the companies involved in the merger. Along with the merger agreement, a merger report including the information required by the TCC must be prepared by the executive bodies of the said companies. This report can be prepared separately or together. Usually in practice, the executive bodies first adopt resolutions for the preparations of the above-mentioned merger agreement and the merger report(s). These resolutions are not required to be registered with the Trade Registry.
  • The merger agreement, merger report and also the required financial statements (year-end annual financial statements, annual reports and if necessary, interim balance sheets for the last 3 years) must be submitted to the review of all parties whose interests are affected by the merger alongside with the shareholders, within 30 days prior to the General Assembly Meetings to be held (as mentioned below), at headquarters of the companies. This invitation to the review the above-mentioned merger related documents must be published in the Trade Registry Gazette and also on the companies' websites (if the companies are under the obligation to open a web site according to the TCC).
  • In case of a merger by acquisition, the absorbing company - as a rule - is obliged to increase its capital. This necessity arises for the protection of rights of the shareholders in the merging company. However, in some cases where no shareholder is transferred from the merging company to the absorbing company (i.e., the absorbing company is the sole shareholder in the merging company), capital increase might not be necessary.
  • If a significant change has happened with respect to assets and liabilities of any of the companies involved in the merger, between the time period of the signing of the merger agreement and the relevant General Assembly meeting, General Assembly of the company in which changes occurred and the Board of Directors of the other company must be informed of this situation. In some cases, the executive bodies may decide whether or not to amend the merger agreement. This may also require preparation of an interim balance sheet.
  • The merger agreement must be approved and a merger decision must be adopted in the General Assemblies of the companies involved in the merger.
  • Once the merger decisions are adopted at the General Assemblies of both companies involved in merger, such decisions must be registered with the relevant Trade Registry along with the other application documents. These decisions are announced in the Trade Registry Gazette.
  • The merger takes effect with the registration of the merger decisions with the Trade Registry. With the registration, all (or substantial amount if certain assets are carved out) assets and liabilities of the merging company are automatically transferred to the absorbing company and the merging company is automatically terminated.

4- Quorum Needed for the Merger Resolutions

Quorum required for approving the merger agreement and adopting a merger decision in a General Assembly is as follows:

In an A.S., ¾ of the shareholders present in a General Assembly meeting (provided that they own shares that represent at least ½ of the capital of the company) must cast affirmative votes.

In a Ltd. Sti., ¾ of all shareholders (provided that they own shares that represent at least ¾ of the capital of the company) must cast affirmative votes.

Both in an A.S. or a Ltd. Sti., if the merger agreement requires a shareholder or shareholders of the merging company to exit the company due to the merger and sets out a cash exit payment to be made to such shareholder(s), 90% of all shareholders must consent to the merger in the merging company.

5- Possibility of a Simplified Merger

In accordance with the TCC, a merger transaction can be performed in a simplified procedure if all shares (with voting rights) of the merging company are owned by the absorbing company. This allows the parties to prepare a merger agreement with less content and carry out the merger without the need for a merger report and the review/examination right and even without submitting the merger agreement to the approval of the General Assembly.

Another simplified procedure can also be applied if the absorbing company owns 90% of the shares (with voting rights) of the merging company if both of the following conditions are met:

  • The minority shareholders are offered an option equal to the actual value of their shares in the absorbing company as an exit payment,
  • No additional payment, personal performance liability or personal responsibility is imposed on the minority shareholders because of the merger.

6- Protection for Shares

The shareholders of the merging company must be granted with the right to make claim on the shares and rights in the absorbing company at a value that matches the value of their existing shares in the merging company.

The shareholders may also be granted an equalization payment provided that the equalization payment does not exceed 1/10 of the actual value of the shares (taken into account within the context of the merger transaction) to be allocated to the shareholders of the merging company.

7- Exit Payment

The merger agreement may grant an option to the shareholders of the merging company to accept an exit payment (amount equivalent to the real value of the shares owned by such shareholders) instead of becoming a shareholder in the absorbing company.

Exit payment may also be mandatory in the merger agreement. In such case, shareholders who are excluded from the merger in exchange for the exit payment, may not object to such mandatory practice, but may object to the amount of the exit payment.

8- Protection of the Creditors and Personal Liability of Shareholders

In accordance with TCC, absorbing company is required to guarantee (e.g. by surety, warranty, pledge, mortgage, etc.) the receivables of the creditors of the companies involved in the merger, in case these creditors make such demand within 3 months starting from the date when the merger comes in effect. The creditors must be informed about their abovementioned right via announcement on the Trade Registry Gazette to be made three times by both companies involved in the merger and the websites of the companies (if the companies are under the obligation to open a web site according to the TCC).

Liabilities of the shareholders who are liable for the merging company's debts before the merger, will continue after the merger, on the condition that debts in question were incurred before the announcement of the merger decision or the reasons that caused these debts took place before this date. This personal liability assigned to the merging company's shareholders is subject to statute of limitations of 3 years starting from the date of announcement of the merger.

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.

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