Turkey: Invalidity Risk When Using A New SPV In An Asset Or Share Acquisition Deal

Last Updated: 20 October 2017
Article by Bilge Zeynep Yilmaz and Serkan İçtem

Parties of an asset or share purchase agreement are often not aware of an inherent legal risk when structuring an acquisition deal specifically in case where a newly established special purpose company is being used as a purchaser for the target assets or shares. This article will discuss a limitation under Article 356 of the Turkish Commercial Code (the "TCC") stipulating special requirements as and when an asset or share acquisition is made by such a newly-incorporated SPV and the adverse consequence of failure to comply with such requirements.

Acquisition Made by a Newly-Incorporated Purchaser

Acquisition or lease of an enterprise or asset may in some cases create a conflict of interest in between different shareholders or shareholders as a group and creditors of a company. A managing shareholder or director may direct the company to pay a consideration exceeding the fair market value for an acquired enterprise or asset (including shares) with the purpose of generating an indirect personal benefit out of such transaction.  Consider a case where a company acting as a buyer decides to purchase an asset from a subsidiary or other company which is owned by the same person who acts as the representative of the buyer signing off on the same deal. This case would show a clear red flag in terms of a potential conflict of interest between that of the company acting as buyer and those in charge of executing such transaction on behalf of the buyer. Therefore, TCC stipulates a control mechanism with a goal to provide a protective and transparent scheme for acquisition of an enterprise, or any asset including shares of another company. Arguably, this attempt is made in a rather unsubtle way as will be discussed below and forced upon a newly established company acting as purchaser which undermines its intended purpose.

Article 356 provides that an agreement regarding acquisition or lease of an enterprise or asset1 in return of a purchase price exceeding 10% of the buyer company's paid in capital and made within two years as of the registration of such company shall not be valid unless the agreement is first approved by the general assembly of shareholders and registered with the relevant trade registry office.  All transactions made prior to the approval and registration of such agreement, including payment for closing thereof, will be invalid. Since the legal consequence is "invalidity" which clearly is the worst-case scenario that contract parties would expect to face after they agree and close a deal, it is worth looking further into this rather scary article. 

If a share or asset deal is potentially priced for more than 10% of the buyer's capital and parties are using a newly established SPV buyer for the deal, they are dealing with Article 356's limitations and potential consequences.  Using a SPV for an acquisition may be preferable for target asset related risk limitation purposes on the buyer side and a SPV is usually established with minimum or a small capital thus it will be very likely that the deal price will exceed 10% of the buyer SPV's capital in many transactions. If these conditions are met, the law requires a special and specific blessing of the buyer's shareholders to the proposed deal. This may be easy to obtain if all shareholders are aware and approve the transaction but one also needs to take into account the adverse timing and pricing implications that Article 356 will create.

In case of an acquisition or lease deal triggering Article 356 conditions, the board of directors of the buyer will first need to request the commercial court of first instance to make a valuation of the enterprise, or asset to be acquired or leased. Once an official valuation is made, such acquisition or lease deal needs to be approved by shareholders of the buyer side during a formal shareholders meeting with the presence and affirmative vote of shareholders holding at least 75% of the company's capital. The acquisition or lease deal will become valid only after registration of such affirmative shareholder resolution. Parties to and the value of the transaction will need to be registered and announced at the trade registry.

What does this all mean in the context of an asset or share purchase deal? It means that if a deal is falling under Article 356 parties will need to;

  • Revisit the timing and scheduled action plan for the proposed closing as a court supervised valuation process and a formal shareholders meeting will need to be accomplished before closing;
  • Take into account that control over the pricing of the deal will be lost as the deal is now going to be priced at or around the value determined by the court supervised third party valuation and shareholder approval will be sought based on such official pricing;
  • Be aware of the fact that essential terms of the deal will become public as it will need to be registered in the trade registry gazette.

Naturally none of the above-mentioned aspects will be pleasantly viewed by the transaction parties.  As failure to comply with any of the above-mentioned requirements will lead to invalidity of the transaction, an exception thereof becomes very important.

Exception from the Onerous Statutory Requirements

We briefly discussed above the implications in case an asset or share purchase deal falls under Article 356.  The same article also provides for an exception which states that the requested procedure will not be applicable in case the purchased enterprise or asset; (i) is acquired through compulsory legal foreclosure and enforcement process or (ii) is considered to be within the buyer's "scope of business". That being the case determination of the buyer's scope of business and whether such acquisition falls within such business scope becomes the determining factor.

Of course it is not always easy to tell the actual scope of business of a company by merely looking at its charter documents.  Such charter documents are often drafted in a way to be as broad and comprehensive as possible. Therefore, it is important to determine the actual and day to day business of the company by reference to its activities and make a determination of the main and ordinary business scope of the company. The ordinary scope of business of a company refers to operations which such company conducts on a regular and actual basis.

The argument of taking the type of the asset being acquired in determining whether acquisition thereof falls within scope of business has been discussed by scholars, and suggested that the exception covers only acquisition of assets such as inventory, tangible assets, and receivables rather than fixed assets such as real estate, license, and trademark. However, the Supreme Court, in a relatively recent decision, accepted the acquisition of a flour factory by a flour manufacturing company as falling within the scope of business of the buyer and cleared the transaction. This suggests that the type of the asset to be acquired is relatively unimportant so long as what is acquired can be directly linked with the actual and ordinary scope of business.  A flour manufacturing company should be able to buy a flour manufacturing facility (real estate and equipment) since the acquisition is directly linked with its scope of business.  Although the Supreme Court decision does not necessarily state so, the flour manufacturing company should also be able to purchase a competitor company's shares active in the same business or if a share acquisition is not preferred, a valuable trademark of such competitor or merely its fixed asset and equipment without having to go through Article 356's formalities.  

In a share acquisition, on the other hand, it was argued by some that the buyer may not benefit from such exception unless it is a holding/investment company whose actual scope of business is to participate to other companies' capital. In this sense, unless a newly established SPV is structured as a holding/investment company, then any share acquisition deal may be subject to Article 356 without being able to benefit from the exception clause.  The key then is the way in which the articles of association of a purchaser SPV is drafted, whether the SPV can effectively said to be a holding/investment vehicle in case the transaction is that of a share deal or whether any direct relevance can be established in between the actual scope of business of the SPV and the asset to be acquired.  

In conclusion, interpreting such exception in a strict sense would lead to a non-pragmatic practice such as a newly established manufacturing company not being able to purchase a real estate to establish a plant, or any other share or asset to conduct its operations without having the value of such share or asset appraised by a court and obtaining approval of shareholders first.  Completion of such formalities in each transaction would inevitably subject the company's daily operations to an inconvenient and time-consuming process which would eventually cause delays and more importantly financial loss specifically in businesses where transactions have to be realized in a quick fashion.

Footnotes

1 Article 356 does not specify any class of asset for the purpose of this clause therefore it is used in the broadest extent and interpreted as to include company share as well. Therefore, a share acquisition deal is also subject to the same requirements.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions