The Law of Contracts is the branch of law that regulates the contracts that form a legal bond between at least two parties and are formed by the will of mutual agreement. In Turkish Law, the principle of freedom of contract prevails in the formation of contracts. Accordingly, contracts can be freely concluded in accordance with the will of the parties as long as they do not contravene the law and morality. In Turkish law, contracts are regulated by the Turkish Code of Obligations
Mergers and acquisitions ("M&A") transactions are a critical component of today's companies' growth strategies. To summarize, merger transactions include the merger of two or more companies under the same structure within the meaning of the Turkish Commercial Code; and acquisition transactions include a series of legal and economic transactions and agreements between the seller, who transfers its shares in a commercial entity, and the buyer, who aims to acquire these shares. The buyer is often motivated to engage in M&A to increase market share, reduce costs, expand into new markets or acquire technological capabilities. The growing popularity of M&A transactions today is directly related to factors such as dynamic economic conditions, digital transformation and increased competition. Especially in recent years, these transactions have gained considerable momentum in Turkey and attracted the attention of international investors. Therefore, in addition to the realization of M&A transactions between Turkish companies, the increasing demand of international investors for economic gains on Turkish companies allows these processes to be realized on an international scale.
In brief, M&As not only generate economic gains, but also strengthen the market position of companies and help them gain a competitive advantage. However, the legal aspects of these processes contain complex elements that need to be carefully considered. At this point, it is of great importance how to conduct M&A processes within the framework of contract law and which legal elements should be taken into account.
The following is a brief overview of the processes involved in M&A projects.
1. Preparation Phase
The first stage of the M&A process begins with the parties notifying each other of their intention to buy or sell company shares. This is a critical phase where the fundamental elements for protecting the interests of the project, and the parties are established and should therefore be considered as one of the most important phases of the process. Therefore, such a phase, in which steps are taken to establish mutual trust, is crucial for a healthy negotiation environment in the following process.
During this phase, the parties will sign Non-Disclosure Agreements before starting negotiations. These agreements ensure that the parties protect each other's trade secrets, and that information shared during negotiations remains confidential. Especially in highly competitive sectors, confidentiality is of critical importance.
Once the negotiations between the parties have begun, a Letter of Intent, Memorandum of Understanding or Term Sheet is usually drafted, if the parties are progressing in a harmonious manner. These legal instruments, which are used prior to the final agreement, are non-legally binding documents that express the parties' intention to merge or acquire, but do not commit to the finalization of the legal transaction related to merger and acquisition. These documents are essentially considered as negotiation agreements and are alternatives to each other.
As mentioned, although there is no significant difference between them in terms of their legal nature, these documents set the framework for the parties' negotiations and contribute to preventing potential disputes. At this stage, the objectives and expectations of the parties are clearly defined to ensure a healthy transition to the next stages of the process. Therefore, this first stage is critical both for laying the foundations of the relationship between the parties and for minimizing potential risks.
2. Due Diligence Phase
The "Due Diligence Process", which we may call the second phase of the M&A process, can be defined as a comprehensive examination carried out by the buyer party on the seller party. This process involves an in-depth assessment by the buyer of the seller's financial, legal and operational situation. The buyer reviews the company's financial statements, existing contracts, assets and liabilities, while also analyzing potential legal risks and liabilities. Due diligence ensures that the necessary information is gathered for the buyer to make an informed decision and is of great importance in this context.
During this phase, a Due Diligence report is prepared by the Buyer's legal advisors. This report provides the buyer with a comprehensive assessment of the seller's position and provides important information on how the transaction should proceed, taking into account potential risks. The Due Diligence phase is considered a critical step for both the sustainability of the transaction and its future success. The main purpose of due diligence is to understand the general characteristics of the target company, to formulate future business and investment plans and to conduct risk analysis.
The review procedure is designed to assess whether the M&A transaction is financially profitable. During this process, existing and potential risks and the investment environment are assessed, with the aim of minimizing risk. Based on the data collected, the buyer can make an appropriate price offer. Therefore, this review ensures that the merger or acquisition decision is taken with accurate and sufficient data, and that there are no surprises regarding the acquired company after the legal transaction is realized. Moreover, if, as a result of due diligence, the buyer decides to purchase the company's shares, a share purchase and sale agreement is negotiated, in which the important matters identified in the due diligence are reflected in the agreement as representations and warranties of the seller.
3. Main Phase: Preparation of the Share Purchase Agreement
Share Purchase Agreement is the principal legal document for mergers and acquisitions. Such an agreement sets the legal framework for the transfer of shares between the buyer and seller and specifies in detail the rights and obligations of the parties.
The diligent legal drafting of the Share Purchase Agreement is critical to protect the interests of the parties. The shares may be acquired in full or in partial control of the business; therefore, the agreement sets out how the transfer will be carried out and what obligations will be assumed, and should include elements such as the sale price, payment terms, closing date and the obligations of the parties.
The Agreement drafting process involves intensive negotiations between the parties. The aim of these negotiations is to create a balanced agreement, taking into account the interests of both parties. The parties shall negotiate the sale price, price adjustment mechanisms, preconditions for transfer, representations and warranties, indemnification procedures, limitations of liability, penal clauses, applicable law and dispute resolution methods before signing the share purchase agreement. In practice, there are common disputes, especially over the declarations and warranties and indemnity provisions. Representations and warranties are contractual representations by the seller to the buyer, usually concerning the condition and material characteristics of the target company, which frame the seller's liability. Due Diligence processes referred to above play a decisive role in determining the scope of these representations and warranties.
The seller, if there are exceptions to the representations and warranties, notifies the buyer of these exceptions in a Disclosure Letter and is exempted from liability unless the contract expressly states its liability for these exceptions. Indemnification provisions regulate how the seller indemnifies the buyer against damages arising from breach of representations and warranties or breach of other contractual obligations. Accordingly, the parties may determine whether the indemnification obligation covers indirect losses and lost profits. Moreover, it is also possible to limit the seller's liability temporally and financially. The parties' agreement on the Share Purchase and Sale Agreement ensures the legal validity of the transaction.
After the parties have completed the negotiation process successfully, they sign the agreement, and this date is referred to as "Signing Day" in practice. After the Signing Day, the parties proceed to the completion of the interim transactions stipulated in the agreement prior to the completion of the share transfers.
4. Interim Period Transactions: Completion of Condition Precedents
In the period between signing and closing, the parties are required to fulfill the preconditions, which are basically delaying conditions, set by the parties in the share purchase and sale agreement in order to realize the share transfer; and these are called "Interim Transactions".
In practice, these procedures include steps such as obtaining permits from the necessary institutions, preparing legal documents and eliminating potential obstacles. For example, there are obligations to obtain permits from regulatory authorities (such as the Competition Authority) or change of control permits under contracts to which the target company is a party. During this period, since the seller is still in control of the target company, certain behavioral obligations are often included in share purchase agreements in order to protect the ordinary operation of the company. These obligations may include refraining from behavior that would diminish the assets of the company or reduce the value of its shares, and not transferring the shares to third parties. Violation of such obligations may prevent the realization of the disposition transaction, i.e. closing.
5. Closing
Closing transactions represent the final stage of the merger and acquisition process and represent a period in which important legal and financial steps are taken between the parties. At the closing stage, the obligations arising under the terms of the share purchase agreement are fulfilled and the payment of the consideration for the transfer of the shares, which is defined as a "'disposal transaction", is realized.
The parties decide in the share purchase agreement which documents to prepare at closing and the necessary arrangements to determine the sequence of transactions. Accordingly, declarations are usually submitted that the pre-conditions for closing have been fulfilled. In addition, transactions such as amendments to the articles of association of the company or registration of the general assembly resolution for changes in the members of the board of directors in the trade registry should also be completed at the closing stage.
As mentioned before, all or part of the shares may be transferred. In the case of a partial acquisition of shares, a Shareholders Agreement agreed upon by the parties is also prepared and signed at closing. This agreement not only regulates the rights and obligations of the parties in relation to the share transfer, but also defines the future management structure and dividend distribution policies by establishing the partnership relationship.
6. Post-Closing Transactions
Post-closing transactions include the steps necessary to integrate the merged companies and unify operational processes after the completion of the M&A process. In this phase, issues such as the development of common strategies, brand integration, and human resources alignment are addressed. In addition, the harmonization of financial reporting and governance processes is critical to ensure the successful restructuring of the companies.
The transactions to be performed by the parties after the Closing are specified in the Share Purchase Agreements.
CONCLUSION
Under Turkish Contract Law, M&A transactions are complex and multi-stage. Each stage is critical to ensure the smooth progress of the process by determining the obligations and rights of the parties. M&A transactions offer strategic advantages to companies and have the potential to change market dynamics. Therefore, legal knowledge and experience in these processes are indispensable for a successful outcome.
In conclusion, for the successful execution of M&A transactions, the parties should be aware of their legal obligations, make detailed planning and seek professional support. Accordingly, making the best utilization of the opportunities offered by the law will ensure the successful completion of M&A processes.
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.