Mergers In Commercial Companies

Introduction

Commercial companies are incorporated in accordance with the provisions of the Turkish Commercial Code ("TCC"), and over time, structural changes such as mergers or divisions may be preferred, generally with the aim of improving their financial condition. The TCC has incorporated the institution of company mergers within the framework of its general provisions on commercial companies. Along with this institution, two types of merger procedures have been adopted, namely merger by acquisition and merger by formation of a new company. Although there are two types of mergers, merger by acquisition is the one most often used in practice. In this article, the elements and legal consequences of mergers by acquisition will be examined. Briefly stated, merger by formation of a new company takes place through the transfer of the assets of two or more commercial companies to a newly established commercial company on the basis of universal succession; in such cases, the merging companies cease to exist but are not liquidated.

Merger

A merger refers to the acquisition by a commercial enterprise of one or more commercial companies, or the full integration of such company or companies into a commercial enterprise. The parties to the merger consist of the acquiring/joining and the transferred/joined entities. The joined company transfers all of its assets to the joining company, and the joining company ceases to exist. Article 137 of TCC provides regulations regarding the types of companies that can undergo a merger. Accordingly, capital companies, cooperatives, collective and limited partnerships may merge. However, in the case of mergers with collective and limited partnerships, these companies must be the transferred entities. Furthermore, in mergers with capital companies and cooperatives, these companies must be in the position of the acquiring company. The law does not permit an unlimited liability company to acquire a limited liability company.

Mergers of commercial companies essentially mean the combination of their assets or enterprises from an economic perspective. Therefore, in order for the merger to take place, all rights and obligations of the companies must first be consolidated into a single entity. In addition, whether it is the case of one company being absorbed by another or two companies merging to establish a new legal entity, no liquidation proceedings are initiated in respect of the dissolved companies, thereby eliminating the liquidation stage. In such a case, the assets of the companies that cease to exist are transferred as a whole to the acquiring company or to the newly established company.

Partnership Shares and Rights

TCC has set forth various provisions based on the principle of continuity of membership rights in order to safeguard the shareholders of the absorbed company following the merger of commercial companies. Pursuant to these provisions, shareholders have the right to claim shares and rights of the acquiring company of value corresponding to their existing shares and rights. Shareholders holding non-voting shares are granted non-voting or voting shares of the same value. As an exception to the continuity of membership rights, the concept of severance payment has been regulated. Accordingly, the companies participating in the merger may grant the shareholders the right to choose between shares to be acquired in the acquiring company and a severance payment corresponding to the real value of such shares.

Pursuant to Article 140 of the TCC, when valuing the assets of the companies participating in the merger, the distribution of voting rights and other significant matters must be taken into consideration. However, shareholders do not have the possibility to demand that their voting power be preserved in exactly the same manner after the merger. This is because, as a result of the merger, changes occur in the voting ratios and shareholding structures of the companies, making it virtually impossible to maintain voting rights in an identical way.

Protection of Creditors

Pursuant to Article 157 of TCC, if the creditors of the companies participating in the merger make a demand within three months from the date the merger becomes effective, the acquiring company shall provide security for such creditors' claims. However, if it is established that the other creditors will not incur any loss, the liable company may, instead of providing security, discharge the debt. Provided that the debts arose prior to the announcement of the merger resolution, the liability of the shareholders who were responsible for the debts of the absorbed company before the merger shall continue after the merger as well. However, claims relating to personal liability become time-barred three years after the date of announcement of the merger resolution. If, however, the claim becomes due after the date of announcement, the limitation period shall commence on the due date. This limitation does not apply to the liabilities of shareholders who are personally liable for the debts of the acquiring company.

Merger Procedures

• Merger Agreement and Merger Report: For a merger to take place, a merger agreement must be signed in writing. This agreement is signed by the management bodies of the companies participating in the merger and approved by their general assemblies. The authorized signing body is the board of directors in joint-stock companies and the manager or managers in limited liability companies. Mandatory elements that the merger agreement must contain, such as the trade names of the companies participating in the merger and explanations regarding shares and rights in the acquiring company, are regulated under Article 146 of the TCC. In addition, it is stipulated that the management bodies of the companies participating in the merger must prepare a report on the merger, either separately or jointly, and the essential elements to be included in this report are also provided for by law.
• Capital Increase and Interim Balance Sheet: During the merger process, the acquiring company's capital must be increased to a level necessary to protect the rights of the shareholders of the absorbed company. The capital increase serves not only the principle of continuity of the partnership but also the protection of creditors. Another obligation arises if more than six months have passed between the date of signing the merger agreement and the balance sheet date, or if there have been significant changes in the assets of the companies participating in the merger since the preparation of the most recent balance sheet. In such cases, the companies are required to prepare an interim balance sheet.
• Submission of Documents for Inspection and Changes in Assets: Each of the companies participating in the merger is obliged to make certain documents available for inspection by interested parties and other stakeholders at their headquarters and branches, and, in the case of publicly held joint-stock companies, at locations designated by the Capital Markets Board, within thirty days prior to the general assembly resolution. These documents may include:
• • The merger agreement,
  • The merger report
  • Year-end financial statements and annual activity reports for the last three years, and, if necessary, interim balance sheets.
• Copies of these documents may be requested and inspected by the relevant parties, although the companies may choose to waive the right of inspection.
• If a significant change occurs in the assets or liabilities of any of the companies participating in the merger, the management body shall notify this situation in writing to its own general assembly and to the management bodies of the other companies participating in the merger. The management bodies of all companies participating in the merger shall then examine whether it is necessary to amend the merger agreement or to abandon the merger; if they reach such a conclusion, the proposal for approval is withdrawn. The notification of significant changes is important to prevent the annulment of the merger agreement or any legal liability.
• Merger Resolution and Registration: The merger agreement is submitted to the general assembly and approved by the majorities stipulated in Article 151 of the TCC. Upon adoption of the merger resolution, the management bodies of the participating companies apply to the trade registry to register the merger. If the capital of the acquiring company has increased as a result of the merger, the amendments to the articles of association are also submitted to the trade registry. Upon registration of the merger with the trade registry, the absorbed company is dissolved.

Consequences of the Merger

For a merger to become valid, it must be registered. Upon such registration, all assets and liabilities of the absorbed company are automatically transferred to the acquiring company. The shareholders of the absorbed company become shareholders of the acquiring company. Furthermore, if the creditors of the companies participating in the merger make a claim within three months from the date the merger becomes legally effective, the acquiring company shall secure these claims. Shareholders' liability for debts remains in effect as a result of the merger. As a result, the following situations arise upon completion:

• Dissolution of the absorbed company without liquidation,
• Transfer of assets under the principle of universal succession,
• Responsibility for prior debts,
• Transfer of shareholders to the acquiring company,
• Shareholders' personal liabilities and continuation of business relations.

The institution of mergers is comprehensively regulated under the provisions of TCC, covering the procedures for the merger, which companies may engage in such mergers, the fundamental principles for the protection of shareholders and creditors, and the consequences of the merger. The institution of merger aims to strengthen the economic structures of companies and ensure corporate continuity.

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.