1. Introduction
In a merger and acquisition (M&A) transaction, comprehensive examination on the target company is crucial and have significant importance. Information obtained through the legal due diligence enables the buyer to decide whether the target company is worth the investment and thus, the future course of negotiations is shaped within this scope. Given the importance of legal due diligence review, the seller bears the responsibility to duly disclose relevant information to the buyer accurately and properly and to act in accordance with the principle of good faith during the legal due diligence phase which is also integral part of the contracting phase.
II. Culpa in Contrahendo
Culpa in contrahendo is a Latin term which literally means culpable behaviour during contract negotiations. Although there is no explicit provision directly regulating culpa in contrahendo liability under Turkish laws, it is generally accepted by the scholars and established case law that culpa in contrahendo is based on the principle of good faith. This concept essentially relies on relationship of trust and imposes liability on the parties for the pre-contract stage.
As also stated in the Court of Cassation Decision numbered 2020/4933, 2021/2006,1 culpa in contrahendo liability is a specific type of liability arising from the breach of good faith during contract negotiations. In such decisions, it has been ruled that certain obligations are undertaken by each party in line with the trust relationship established between them, and that the one party may claim the damages arising from the necessary expenditures made with the confidence that a contract will be concluded.
In light of the above, from the moment when the parties start to communicate with each other and negotiate with the intention of signing a contract for a specific purpose, the parties oblige each other to (i) ensure that contract negotiations are conducted in a honest manner and with good faith, (ii) duly exchange and disclose necessary information with utmost care, (iii) protect the other party from damages and (iv) take all necessary measures to keep each other harmless.
It is also significant to note that culpa in contrahendo liability is not a mechanism to force the parties to enter into a contract. Within the scope of freedom of contract principle, the parties are always free to conclude a contract. On the other hand, culpa in contrahendo liability comes into play when a party abuses the negotiation phase in any way and causes damages on the counter party's side before entering into the contract. For instance, in the cases where the seller maliciously and deceptively avoids entering into a contract with the buyer and this conduct of the seller causes damages on the buyer's side, the buyer may claim compensation for his damages. Such damages might involve, as the case may be, third party advisor costs, travel expenses, time spent on contract negotiations and missed possibilities to sign a contract with a third party.
III. Legal Due Diligence
Depending on scope of the contemplated deal, the M&A process may consist of many stages such as signing a term sheet and confidentiality agreement, conducting due diligence review, and entering into a shareholders' agreement, share and/or asset transfer agreement. In most cases, term sheet refers to a primary document that reflects mutual will of the parties and serves as the basis for the commencement of contract negotiations. Having said that, even in the absence of a term sheet, contract negotiations are deemed to have commenced when the parties initiate due diligence process based on a verbal meeting, an e-mail correspondence or any other means of communication that reflects the mutual intent of the parties.
Due diligence is an integral part of the M&A transactions. It basically refers to a systematic and detailed examination of the target company or asset from a legal perspective to analyse potential risks. It is possible to conduct a due diligence review in many fields such as legal, financial, tax, technical and environmental aspects.
During a legal due diligence review, the seller is obliged not to share any misleading, missing, unproper or false information with the buyer in accordance with the principle of good faith and culpa in contrahendo liability. Accordingly, based on the trust that is established during the contract negotiations, the seller should enable the buyer to conduct the due diligence review properly and based on the accurate information. In this regard, the seller should act with utmost care and attention and avoid any action that may harm the buyer during the due diligence phase. Any actions of the seller at this stage, which are contrary to good faith and honesty, may lead to compensation of the damage of the buyer provided that it is proven that the seller was at fault and such conduct of the seller led to a loss on the buyer's side.
IV. Conclusion
Legal due diligence has a great importance to complete and close the M&A deal successfully. Although no contract is concluded during the legal due diligence phase and signing of the contract is generally subject to satisfactory completion of the legal due diligence, it is accepted that the legal relationship has already been established at this stage. All in all, allowing a buyer to carry out a legal due diligence on the target imposes liability on the seller's side within the scope of the principle of good faith and culpa in contrahendo concept.
Footnote
1. Court of Cassation 11th Civil Chamber Decision numbered 2020/4933, 2021/2006 and dated 04.03.2021 https://www.lexpera.com.tr/ictihat/yargitay/e-2020-4933-k-2021-2006-t-4-3-2021 (Access Date: 30.04.2025)
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.
