The division process is regulated under Articles 159 to 179 of the Turkish Commercial Code (“TCC”), and no direct definition of division is provided in the law. In addition to these articles, Articles 191, 192 and 193 of the TCC, the Capital Markets Law (“CML”), the Capital Markets Board Communiqué II/23.2, and Articles 18 to 20 of the Corporate Tax Law (“CTL”) are also applicable to the division process. The division process is the exact opposite of company mergers and is specific to the law of partnerships.
Valid divisions are subject to the principle of numerus clausus under Article 160 of the TCC, and according to the article, capital companies may divide into capital companies and cooperatives, while cooperatives may divide into cooperatives or capital companies.
The division process may be carried out in different forms. In this regard, the most fundamental distinction is between full division and partial division. Furthermore, the division process may also be classified under other headings, such as where the ratios are preserved (symmetric) and where the ratios are not preserved (asymmetric), by acquisition and by new incorporation, as well as divisions that allow or do not allow the establishment of a single-shareholder company.
Through a full division, the company subject to the division process ceases to exist. Each part constituting the assets and liabilities of the divided company automatically passes, by this process, to at least two or more companies that already exist or that are newly established.
The entire assets of the fully divided company are separated into at least two parts. In return for the transferred assets of the divided company, the shareholders acquire the shares of the transferee company. The entire assets of the divided company are transferred. The fully divided company dissolves, its shares are extinguished, and its trade name is deleted from the trade registry.
In a full division, the assets and liabilities of the divided company are allocated together to the transferee companies. This process is carried out within the framework of the provisions concerning the protection of creditors under Article 176 of the TCC. If the distribution of assets and liabilities does not comply with Article 167/1(b) of the TCC, the trade registry office shall not permit the registration of the division.
Ultimately, in a full division, if a shareholder is allocated shares in the transferee company proportionally to their shares in the divided company, a division preserving ratios occurs. If the allocation of shares differs from the share ratio in the divided company, then a division not preserving ratios occurs. In a division not preserving ratios, the existing participation relations in the capital of the divided company are redesigned by establishing new balances through the division.
If the company that will acquire part of the assets of the divided company through the division is an existing company, then the division is by acquisition. However, it is also possible for the assets of the divided company to be acquired by a newly established company through the division, and this process is referred to as division by new incorporation. Article 164 of the TCC shall apply, and the part of the divided company allocated for the division shall be acquired by the company established for the division. This new company shall benefit from the facilitations set out under Article 164 of the TCC.
One of the main principles governing full division is the principle of partial universal succession. In a division, the assets of the divided company are split into parts for the transferee companies, and these parts do not pass through universal succession. It is possible to describe this as partial succession, which is a form of universal succession allocated to parts.
In the division process, the principle of separating assets first and then combining them applies, which refers to the prior determination of the assets to be transferred. The size and value of the parts into which the company's assets will be divided must be determined, and the assets and liabilities to be transferred must be explicitly listed. Pursuant to Article 167/1(b) of the TCC, each separated part must consist of both assets and liabilities. Another important point is that, in a full division, the shareholders' shares and rights are protected pursuant to Article 140 of the TCC. In this context, Article 161/1 of the TCC also refers to Article 140 and grants shareholders the right to request.
Certain preparatory works must be carried out before the division process. Pursuant to Article 165 of the TCC, an interim balance sheet must be drawn up as a basis for determining possible exchange ratios, and the amounts of capital increase and decrease required for the division. Depending on the type of division, pursuant to Article 167/1(b) of the TCC, the number of divisions to be allocated due to the division, their sizes, and the type and amount of assets and liabilities included in each part must be determined.
By agreeing on a balancing payment, it is possible to prevent potential loss of rights that may arise from the division. At this point, pursuant to Article 140/2 of the TCC, while determining the exchange ratios of the partnership shares, the parties may agree to pay balancing compensation to the shareholders of the acquired company, provided that the allocated shares do not exceed one-tenth.
As part of the preparations for the division, determining the exchange ratios of shares is also one of the required steps. This requirement is set out under Article 167/1(c) of the TCC, which regulates the content of the division agreement and division plan, and the application of Article 140 of the TCC is also possible in this respect.
Furthermore, in cases where there are privileged shares, special rights, non-voting shares, and usufruct certificates, decisions must also be taken regarding the rights to be granted or payments to be made in the transferee company, and provisions relating thereto must be included in the division documents.
The granting of a severance payment in connection with the division is not regulated in the TCC. Only in divisions by acquisition is there no obstacle to the payment of a severance payment, provided that the agreement reached between the companies participating in the division and the shareholders wishing to withdraw is included in the division agreement. However, the decision to grant a compulsory severance payment may lead to unfairness in the division, particularly since the heavy quorum stipulated in Article 151/5 of the TCC does not apply pursuant to Article 173.
Following the completion of the managerial decisions and preparatory works regarding the new corporate structure planned to be established by the division, the TCC does not prescribe a scheme regarding the subsequent steps or their timing. However, this scheme can be understood from the relevant provisions of the TCC, and it is summarized as follows:
- Negotiations among the companies participating in the division regarding the form and type of the division, and in this context, the due diligence process, preparation of the interim balance sheet, determination of exchange ratios, and resolution of disputes concerning all other determinations and calculations relating to the division,
- Depending on the type of division, a division agreement or division plan in written form, approved by the general assembly, with a minimum content regulated under Article 167 of the TCC,
- The division report, which may vary depending on the type of division, prepared separately or jointly by the management bodies of the companies participating in the division, in order to provide information to the companies and to explain the meaning and purposes of the provisions of the agreement or plan,
- Pursuant to Article 169/2(g) of the TCC, the effects of the division on employees, the areas in which these effects may occur, and, if applicable, the effects of the social plan, or an explanation that no social plan is required,
- The matter of auditing the division (in case of complaint),
- The necessary permits to be obtained, if required, at any stage of the division process,
- The right of examination to ensure that shareholders have sufficient access to information,
- The calls and actions required to protect creditors,
- Approval of the division decision by the General Assembly,
- Registration of the division decision with the trade registry.
With the completion of all these managerial and legal processes, the full division becomes effective upon registration of the decision with the trade registry, and the company dissolves.
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.
