Turkey: Merger of Banks Under Turkish Law

The number of mergers and acquisitions has increased remarkably in the recent years due to stable economy and macroeconomic developments while finance and banking sector has been positively affected from such progress. Since the banking sector is regulated under special legislation, mainly the Banking Law No. 5411¹ (the "Banking Law"), which had replaced the Banks Law No. 4389², mergers and acquisitions in this sector are governed thereunder. In accordance with the Banking Law, the regulations issued by the Banking Regulation and Supervision Authority ("BRSA") under the Banks Law No. 4389 are to remain in force until secondary legislation is promulgated and therefore the Regulation Regarding Mergers and Acquisitions of Banks³ (the "Regulation"), which was issued under the Banks Law No. 4389, applies to mergers and acquisitions of banks until a new regulation is published by the BRSA.

As per the Regulation, an application is submitted to the BRSA, together with a feasibility report and pro forma financials, in order to start the procedure of merger or acquisition of banks. While submitting such application to the BRSA, the boards of directors of both banks are required to adopt a decision to initiate the procedure and submit the application to the BRSA. There is no certain period for the BRSA to evaluate the banks’ application whereas the permission granted by the BRSA is valid for 3 months as of the date thereof. If the parties fail to prepare necessary documentation and convene general assemblies within such period, the permission granted by the BRSA shall be void and a new application should be filed with the BRSA in order to continue merger proceedings.

In preparation of the second application to the BRSA under the Regulation, merger financials are to be prepared as of the end of the month prior to the date of the second application to the BRSA and be audited by an independent audit firm and approved by the general assembly of shareholders. Therefore, in order to submit the second application to the BRSA in January, the merger financials should be prepared as of 31 December and audited and approved by the general assembly on 31 January, at the latest. This requirement of the Regulation becomes an issue if one or more of the banks party to merger or acquisition is a large-scale or publicly held bank as preparation of audited financials as of one certain date is a lengthy task. Merger financials should also be independently audited by an audit company, which is mutually appointed by both of the banks party to merger or acquisition, under the BRSA legislation. The Regulation further requires valuation reports to be prepared by two independent audit firms in order to determine real value of banks’ shares.

The Regulation provides for particular terms and conditions to be included in the merger or acquisition agreement and the parties to the transaction need to draft an agreement to embrace requirements of the Regulation prior to final approval of the merger or acquisition by the general assemblies of both banks.

The BRSA evaluates the second application in light of its respective legislation and upon its approval, second general assemblies under the BRSA legislation which finally approve the merger, need to be held by banks party to the transaction. In relation to the quora applicable in such general assemblies, the BRSA has introduced a minimum meeting quorum of at least 2/3 of the share capital of each bank and a decision-making quorum of at least ¾ of those present, provided that a higher quorum is not included in articles of association of respective banks.

Subsequent to second general assemblies of banks, third and final application to the BRSA, including the approval of shareholders for proposed merger, should be submitted. The BRSA’s approval regarding registration of respective general assembly decision is to be published in the Official Gazette and the merger or acquisition is completed thereby.

Apart from the foregoing, in case one of the banks party to merger is a listed company, the legislation issued by the Capital Markets Board of Turkey will apply to the whole process. Due to discrepancies in the BRSA legislation and the Capital Markets Board legislation, the merger process becomes highly complex and time consuming if any of the banks is listed.

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